The following discussion should be read in conjunction with the consolidated financial information and related notes that appear in Part I, Item 1, of this Quarterly Report. Mattel's business is seasonal; therefore, results of operations are comparable only with corresponding periods.

Factors That May Affect Future Results

(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

Mattel is including this cautionary statement to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") for forward-looking statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Act.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "seeks" or words of similar meaning, or future or conditional verbs, such as "will," "should," "could," "may," "aims," "intends," or "projects." A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q. These forward-looking statements are all based on currently available operating, financial, economic and competitive information and are subject to various risks and uncertainties. The Company's actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties detailed in Item 1A. "Risk Factors" in Mattel's 2008 Annual Report on Form 10-K.

Overview

Mattel designs, manufactures, and markets a broad variety of toy products worldwide through sales to its customers and directly to consumers. Mattel's business is dependent in great part on its ability each year to redesign, restyle, and extend existing core products and product lines, to design and develop innovative new products and product lines, and to successfully market those products and product lines. Mattel plans to continue to focus on its portfolio of traditional brands that have historically had worldwide appeal, to create new brands utilizing its knowledge of children's play patterns, and to target customer and consumer preferences around the world.

Mattel's portfolio of brands and products are grouped in the following categories:

Mattel Girls & Boys Brands-including Barbie® fashion dolls and accessories ("Barbie®"), Polly Pocket®, Little Mommy®, Disney Classics, and High School Musical™ (collectively "Other Girls Brands"), Hot Wheels®, Matchbox®, Speed Racer ®, and Tyco R/C® vehicles and playsets (collectively "Wheels"), and CARS™, Radica®, Speed Racer ®, Batman®, and Kung Fu Panda® products, and games and puzzles (collectively "Entertainment").

Fisher-Price Brands-including Fisher-Price®, Little People®, BabyGear™, and View-Master® (collectively "Core Fisher-Price®"), Sesame Street®, Dora the Explorer®, Winnie the Pooh™, Go-Diego-Go!®, and See 'N Say® (collectively "Fisher-Price® Friends"), and Power Wheels®.

American Girl Brands-including Just Like You ®, the historical collection, and Bitty Baby®. American Girl Brands products are sold directly to consumers via its catalogue, website, and proprietary retail stores. Its children's publications are also sold to certain retailers.

Mattel's objective is to continue to create long-term shareholder value by generating strong cash flow and deploying it in a disciplined and opportunistic manner as outlined in Mattel's capital and investment framework (see "Liquidity and Capital Resources-Capital and Investment Framework"). To achieve this objective, management has established three overarching goals.

The first goal is to enhance innovation in order to reinvigorate the Barbie® brand, while maintaining growth in other core brands, by continuing to develop popular toys. Additionally, Mattel plans to pursue additional licensing arrangements and strategic partnerships to extend its portfolio of brands into areas outside of traditional toys.

The second goal is to improve execution in areas including manufacturing, distribution, and selling. Mattel continues to focus on improving the efficiency of its supply chain using Lean supply chain initiatives. The objective of the Lean program is to improve the flow of processes, do more with less, and focus on the value chain from beginning to end.

The third goal is to further capitalize on Mattel's scale advantage. For example, as the world's largest toy company, Mattel believes it can realize cost savings when making purchasing decisions based on a One Mattel philosophy.

Third Quarter 2009 Overview

Third quarter net sales continue to be under pressure, as expected, as Mattel continues to experience the negative effects of foreign currency exchange, reduced shipments as retailers continue to tightly manage inventories, and the fact that 2009 is a light year for Mattel entertainment-related products. Overall for the quarter, Mattel improved its margins by appropriately pricing its products, tightly managing costs, and aligning its infrastructure with realistic revenue assumptions. Additionally, Mattel has made progress on improving cash flows during the quarter, which continues to be a high priority. More specifically:

• Gross profit as a percentage of net sales increased from 46.2% in the third quarter of 2008 to 51.3% in the third quarter of 2009, primarily due to price increases, lower input costs and royalty expense, and net cost savings related to the Global Cost Leadership program, partially offset by unfavorable changes in foreign currency exchange rates.

• Operating income increased from $315.3 million in the third quarter of 2008 to $336.5 million in the third quarter of 2009, primarily due to higher gross profit as a percentage of net sales and lower advertising expense, partially offset by lower sales and higher other selling and administrative expenses.

• The Global Cost Leadership program generated net costs savings of approximately $23 million during the third quarter of 2009, and approximately $73 million during the first nine months of 2009.

• Cash flows used in operations decreased from a use of $666.6 million in the first nine months of 2008 to a use of $318.8 million in the first nine months of 2009.

• Capital expenditures decreased from $138.5 million in the first nine months of 2008 to $90.5 million in the first nine months of 2009.

On an overall basis, despite the pressures on net sales, Mattel has made progress in regaining the margins lost over the past few years, executing its Global Cost Leadership program, and tightly managing its cash and capital expenditures.

2009 and Beyond

Mattel's priorities for the remainder of the year are consistent with its goals and the progress that has been made during the first nine months of 2009: to improve profitability, improve cash flow, and strengthen its balance sheet. Mattel is managing its business based on realistic revenue assumptions and taking actions intended to meet these goals:

• Mattel implemented a modest price increase for its 2009 product line;

• Mattel is evaluating reductions to the number of stock keeping units ("SKUs") it offers;

• Mattel is reassessing its advertising spending and strategy with the expectation that 2009 advertising expense will be at the low end of its historical range of 11 to 13 percent of net sales; and

Management expects to focus on profitability and margins and conserve cash for the remainder of 2009. As a result, Mattel will continue to tightly manage its capital expenditures to a level that is more consistent with its levels of capital expenditures in 2003 through 2007. In addition, given the current volatile global economic environment, Mattel is prioritizing protecting Mattel's dividend to shareholders and minimizing strategic acquisitions and share repurchases in 2009.

Results of Operations-Third Quarter

Consolidated Results

Net sales for the third quarter of 2009 were $1.79 billion, down 8% as compared to $1.95 billion in 2008, including unfavorable changes in currency exchange rates of 3 percentage points. Net income for the third quarter of 2009 was $229.8 million, or $0.63 per diluted share, as compared to a net income of $238.1 million, or $0.65 per diluted share, for the third quarter of 2008. Net income for the third quarter of 2009 was negatively impacted by lower sales, higher other selling and administrative expenses, higher other non-operating expense, and unfavorable changes in currency exchange rates, partially offset by gross margin improvement and lower advertising and promotion expenses.

The following table provides a summary of Mattel's consolidated results for the third quarter of 2009 and 2008 (in millions, except percentage and basis point information):

                                      For the Three Months Ended September 30,
                                         2009                         2008                   Year/Year Change
                                               % of Net                     % of Net                Basis Points
                                 Amount         Sales         Amount         Sales         %        of Net Sales
Net sales                       $ 1,791.9         100.0 %    $ 1,946.3         100.0 %      -8 %              -

Gross profit                    $   918.6          51.3 %    $   900.1          46.2 %       2 %             510
Advertising and promotion
expenses                            197.1          11.0          223.8          11.5       -12 %             (50 )
Other selling and
administrative expenses             385.0          21.5          361.0          18.5         7 %             300

Operating income                    336.5          18.8          315.3          16.2         7 %             260
Interest expense                     19.3           1.1           20.4           1.0        -5 %              10
Interest (income)                    (1.5 )        -0.1           (6.0 )        -0.3       -75 %              20
Other non-operating expense
(income), net                        14.1           0.8           (6.2 )        -0.3      -327 %             110

Income before income taxes      $   304.6          17.0 %    $   307.1          15.8 %                       120

Sales

Net sales for the third quarter of 2009 were $1.79 billion, down 8% as compared to $1.95 billion in 2008, including unfavorable changes in currency exchange rates of 3 percentage points. Gross sales within the US decreased 2% in the third quarter of 2009, as compared to 2008, and accounted for 53.9% of consolidated gross sales in the third quarter of 2009, as compared to 50.7% in 2008. Gross sales in international markets decreased 14% in the third quarter of 2009, as compared to 2008, including unfavorable changes in currency exchange rates of 5 percentage points.

Worldwide gross sales of Mattel Girls & Boys Brands decreased 10% in the third quarter of 2009 to $1.08 billion, with unfavorable changes in currency exchange rates of 3 percentage points. Domestic gross sales of Mattel Girls & Boys Brands increased 1% and international gross sales of Mattel Girls & Boys Brands decreased 18%, with unfavorable changes in currency exchange rates of 6 percentage points. Worldwide gross sales of Barbie® decreased 8%, including unfavorable changes in currency exchange rates of 4 percentage points. Domestic gross sales of Barbie ® decreased less than 1% and international gross sales of Barbie® decreased 12%, with unfavorable changes in currency exchange rates of 6 percentage points. Worldwide gross sales of Other Girls products decreased 19%, including unfavorable changes in currency exchange rates of 4 percentage points, driven primarily by sales declines in High School Musical™ and Polly Pocket® products, partially offset by higher sales of Little Mommy® and Disney Princesses products domestically. Worldwide gross sales of Wheels products decreased 3%, including unfavorable changes in currency exchange rates of 4 percentage points, driven primarily by sales declines in Tyco R/C® and Speed Racer®products, partially offset by higher sales of Core Hot Wheels® products. Worldwide gross sales of Core Hot Wheels® increased 9%, including unfavorable changes in currency exchange rates of 5 percentage points. Worldwide gross sales of Entertainment products decreased 15%, including unfavorable changes in currency exchange rates of 4 percentage points, driven primarily by lower sales of Radica® and products tied to last year's three key summer movie properties: Batman®, Speed Racer®, and Kung Fu Panda®, partially offset by sales of products tied to Toy Story and Toy Story 2 and higher sales of CARS™ products domestically.

Worldwide gross sales of Fisher-Price Brands were $784.8 million, down 6% in the third quarter of 2009, including unfavorable changes in currency exchange rates of 2 percentage points. Domestic gross sales of Fisher-Price Brands decreased 6% and international gross sales decreased 5%, including unfavorable changes in currency exchange rates of 4 percentage points. Worldwide gross sales of Core Fisher-Price® decreased 4%, including unfavorable changes in currency exchange rates of 2 percentage points. Domestic gross sales of Core Fisher-Price® decreased 2% and international gross sales decreased 7%, including unfavorable changes in currency exchange rates of 5 percentage points. Worldwide gross sales of Fisher-Price® Friends decreased 13%, with no impact from changes in currency exchange rates. Domestic gross sales of Fisher-Price ® Friends decreased 21% and international gross sales increased 3%.

American Girl Brands gross sales were $82.4 million, up 4% in the third quarter of 2009, as compared to $78.8 million in the third quarter of 2008, reflecting the benefit of the November 2008 openings of the American Girl Boutique and Bistros® in Boston and Minneapolis.

Cost of Sales

Cost of sales as a percentage of net sales was 48.7% in the third quarter of 2009 as compared to 53.8% in the third quarter of 2008. Cost of sales decreased by $172.9 million, or 17%, from $1.05 billion in the third quarter of 2008 to $873.3 million in the third quarter of 2009, as compared to a 8% decrease in net sales. Cost of sales decreased primarily due to lower sales as compared to the third quarter of 2008. Within cost of sales, product costs decreased by $131.0 million, or 15%, from $851.0 million in the third quarter of 2008 to $720.0 million in the third quarter of 2009; freight and logistics expenses decreased by $29.1 million, or 26%, which included net cost savings from the Global Cost Leadership program, from $114.0 million in the third quarter of 2008 to $84.9 million in the third quarter of 2009; and royalty expense decreased $12.8 million, or 16%, from $81.2 million in the third quarter of 2008 to $68.4 million in the third quarter of 2009.

Gross Profit

Gross profit as a percentage of net sales was 51.3% in the third quarter of 2009 as compared to 46.2% in the third quarter of 2008. The increase in gross profit as a percentage of net sales was primarily due to price increases, lower input costs and royalty expense, and net cost savings related to the Global Cost Leadership program, partially offset by unfavorable changes in foreign currency exchange rates.

Advertising and Promotion Expenses

Advertising and promotion expenses, as a percentage of net sales, were 11.0% in the third quarter of 2009 as compared to 11.5% in the third quarter of 2008.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $385.0 million, or 21.5% of net sales, in the third quarter of 2009 as compared to $361.0 million, or 18.5% of net sales, in the third quarter of 2008. The absolute dollar increase in other selling and administrative expenses is primarily due to higher accrued incentive compensation, partially offset by foreign currency exchange benefit, lower litigation-related expenses of approximately $4 million, and cost savings related to the Global Cost Leadership program of approximately $22 million. The cost savings were partially offset by severance and other termination-related charges of approximately $18 million.

Non-Operating Income (Expense)

Interest expense decreased from $20.4 million in the third quarter of 2008 to $19.3 million in the third quarter of 2009, due primarily to lower average borrowings. Interest income decreased from $6.0 million in the third quarter of 2008 to $1.5 million in the third quarter of 2009, due to lower average investment rates and lower average invested cash balances. Other non-operating expense was $14.1 million in the third quarter of 2009 and primarily related to foreign currency exchange losses caused by local currency revaluation of US dollar cash balances held by Mattel's Venezuelan subsidiary. Other non-operating income was $6.2 million in the third quarter of 2008 and primarily related to foreign currency exchange gains caused by local currency revaluation of US dollar cash balances held by Mattel's Venezuelan subsidiary.

Provision for Income Taxes

Mattel's provision for income taxes was $74.8 million for the third quarter of 2009, as compared to $69.0 million for the third quarter of 2008. During the third quarter of 2009, Mattel recognized discrete tax expense of $2.2 million related to a change in previously recorded taxes based on tax return filings and recently enacted tax law.

Business Segment Results

Mattel's reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US, and American Girl Brands.

Domestic Segment

Mattel Girls & Boys Brands US gross sales were $474.8 million in the third quarter of 2009, up $3.9 million or 1%, as compared to $470.9 million in the third quarter of 2008. Within this segment, gross sales of Barbie ® products decreased less than 1%. Gross sales of Other Girls products decreased 3%, primarily due to sales declines in High School Musical ™ products, partially offset by higher sales of Little Mommy® and Disney Princesses products. Gross sales of Wheels products increased 8%, primarily due to higher sales of Core Hot Wheels ®, partially offset by sales declines in Tyco R/C® and Speed Racer®products. Gross sales of Entertainment products decreased 3%, driven primarily by lower sales of Radica® and products tied to last year's three key summer movie properties: Batman®, Speed Racer ®, and Kung Fu Panda®, partially offset by sales of products tied to Toy Story and Toy Story 2 and higher sales of CARS™ products. Mattel Girls & Boys Brands US segment income increased $37.6 million to $111.0 million in the third quarter of 2009 from $73.4 million in the third quarter of 2008, primarily due to higher gross profit.

Fisher-Price Brands US gross sales were $496.5 million in the third quarter of 2009, down $33.0 million or 6%, as compared to $529.5 million in the third quarter of 2008. Within this segment, gross sales of Fisher-Price® Friends products decreased 21% and gross sales of Core Fisher-Price® products decreased 2%. Fisher-Price Brands US segment income increased $26.0 million to $120.9 million in the third quarter of 2009 from $94.9 million in the third quarter of 2008, primarily due to higher gross margin and lower other selling and administrative expenses, partially offset by lower sales volume.

American Girl Brands gross sales were $82.4 million, up 4% in the third quarter of 2009, as compared to $78.8 million in the third quarter of 2008, reflecting the benefit of the November 2008 openings of the American Girl Boutique and Bistros® in Boston and Minneapolis. American Girl Brands had segment income of $8.4 million in the third quarter of 2009, compared to a segment loss of $0.02 million in the third quarter of 2008, primarily due to higher gross margin and lower other selling and administrative expenses.

International Segment

The following table provides a summary of percentage changes in gross sales
within the International segment for the third quarter of 2009 versus 2008:



                                                     Impact of Change
                                    % Change in        in Currency
              Non-US Regions:       Gross Sales         (in % pts)
              Total International           (14 )                  (5 )
              Europe                        (16 )                  (4 )
              Latin America                 (13 )                  (8 )
              Asia Pacific                    3                    (2 )
              Other                         (18 )                  (2 )

International gross sales decreased by 14% in the third quarter of 2009, as compared to the third quarter of 2008, including unfavorable changes in currency exchange rates of 5 percentage points. Gross sales of Mattel Girls & Boys Brands decreased 18% in the third quarter of 2009, including unfavorable changes in currency exchange rates of 6 percentage points. Gross sales of Barbie® products decreased 12%, including unfavorable changes in currency exchange rates of 6 percentage points. Gross sales of Other Girls products decreased 29%, including unfavorable changes in currency exchange rates of 5 percentage points, driven primarily by sales declines in Polly Pocket® and High School Musical™ products, partially offset by higher sales of Little Mommy® products. Gross sales of Wheels products decreased 12%, including unfavorable changes in currency exchange rates of 6 percentage points, driven primarily by sales declines in Tyco R/C® and Speed Racer® products. Gross sales of Entertainment products decreased 23%, including unfavorable changes in currency exchange rates of 6 percentage points, driven primarily by lower sales of Radica®, products tied to last year's three key summer movie properties: Batman ®, Speed Racer®, and Kung Fu Panda®, and CARS ™ products, partially offset by higher sales of products tied to Toy Story and Toy Story 2. Gross sales of Fisher-Price Brands decreased 5% in the third quarter of 2009, including unfavorable changes in currency exchange rates of 4 percentage points. Gross sales of Fisher-Price ® Friends products increased 3%, including unfavorable changes in currency exchange rates of 1 percentage points. Gross sales of Core Fisher-Price® products decreased 7%, including unfavorable changes in currency exchange rates of 5 percentage points. International segment income increased by $8.6 million from $167.7 million in the third quarter of 2008 to $176.3 million in the third quarter of 2009, primarily due to higher gross margin, lower advertising and promotion expenses, and lower other selling and administrative expenses, partially offset by lower sales volume.

Results of Operations-First Nine Months

Consolidated Results

Net sales for the first nine months of 2009 were $3.48 billion, down 13% as compared to $3.98 billion in 2008, including unfavorable changes in currency exchange rates of 4 percentage points. Net income for the first nine months of 2009 was $200.3 million, or $0.55 per diluted share, as compared to net income of $203.2 million, or $0.56 per diluted share, for the first nine months of 2008. Net income for the first nine months of 2009 was negatively impacted by lower sales, net charges for legal settlements of product liability-related litigation of $21.4 million, and lower interest income, partially offset by gross margin improvement, lower advertising and promotion expenses, and lower other selling and administrative expenses.

The following table provides a summary of Mattel's consolidated results for the first nine months of 2009 and 2008 (in millions, except percentage and basis point information):

                                       For the Nine Months Ended September 30,
                                          2009                         2008                  Year/Year Change
                                                % of Net                     % of Net               Basis Points
                                  Amount         Sales         Amount         Sales         %       of Net Sales
Net sales                        $ 3,475.7         100.0 %    $ 3,978.0         100.0 %    -13 %              -

Gross profit                     $ 1,670.5          48.1 %    $ 1,792.2          45.1 %     -7 %             300
Advertising and promotion
expenses                             371.0          10.7          443.6          11.2      -16 %             (50 )
Other selling and
administrative expenses              985.7          28.4        1,039.2          26.1       -5 %             230

Operating income                     313.8           9.0          309.4           7.8        1 %             120
Interest expense                      52.7           1.5           53.0           1.3       -1 %              20
Interest (income)                     (7.5 )        -0.2          (21.8 )        -0.5      -66 %              30
Other non-operating expense,
net                                    5.6           0.2           16.0           0.4      -65 %             (20 )

Income before income taxes       $   263.0           7.6 %    $   262.2           6.6 %                      100

Sales

Net sales for the first nine months of 2009 were $3.48 billion, down 13% as compared to $3.98 billion in 2008, including unfavorable changes in currency exchange rates of 4 percentage points. Gross sales within the US decreased 6% in the first nine months of 2009, as compared to 2008, and accounted for 52.8% of consolidated gross sales in the first nine months of 2009, as compared to 48.8% in 2008. Gross sales in international markets decreased 20% in the first nine months of 2009, as compared to 2008, including unfavorable changes in currency exchange rates of 9 percentage points.

Worldwide gross sales of Mattel Girls & Boys Brands decreased 16% in the first . . .