UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

For the transition period from                          to                         

Commission File Number 001-05647

MATTEL, INC.

(Exact name of registrant as specified in its charter)

333 Continental Boulevard

El Segundo, California 90245-5012

(Address of principal executive offices)

(310) 252-2000

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  ¨

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x    No  ¨

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant calculated using the market price as of the close of business on June 28, 2002 was $9,206,740,402.

Number of shares outstanding of registrant’s common stock, $1.00 par value, as of March 21, 2003:

439,120,200 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Mattel, Inc. 2003 Notice of Annual Meeting of Stockholders and Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year (Incorporated into Part III).

MATTEL, INC. AND SUBSIDIARIES

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PART I

Item 1.    Business.

Mattel, Inc. (“Mattel”) designs, manufactures, and markets a broad variety of toy products worldwide through sales to retailers and directly to consumers.

Mattel believes its products are among the most widely recognized toy products in the world. Mattel’s portfolio of brands and products are grouped in the following categories:

Girls—including Barbie^® fashion dolls and accessories, Polly Pocket!^®, Diva Starz^™, What’s Her Face!^™, ello^™, and American Girl^®

Boys-Entertainment—including Hot Wheels^®, Matchbox^®, and Tyco^® Radio Control vehicles and playsets (collectively “Wheels”), and Nickelodeon^®, Harry Potter^™, Yu-Gi-Oh!^™, He-Man^® and Masters of the Universe^®, and games and puzzles (collectively “Entertainment”)

Infant & Preschool—including Fisher-Price^®, Power Wheels^®, Sesame Street^®, Disney preschool and plush, Winnie the Pooh, Blue’s Clues^™, Rescue Heroes^™, Barney^™, See ’N Say^®, Magna Doodle^®, Dora the Explorer^™, and View-Master^®

Mattel’s management has articulated its overall company vision: The World’s Premier Toy Brands—Today and Tomorrow. Management set five key company strategies: (i) improve execution of the existing toy business; (ii) globalize the brands; (iii) extend the brands; (iv) catch new trends; and (v) develop people.

Mattel faced several challenges during 2002, in its largest market, the US, including an uncertain retail environment, weak consumer confidence, higher unemployment, labor unrest at West Coast ports and the threat of continued terrorism and war. Mattel improved its performance despite these challenges by executing four strategic priorities: (i) strengthening core brand momentum; (ii) executing the financial realignment plan and cutting costs; (iii) improving supply chain performance; and (iv) developing people. By focusing on these priorities, Mattel achieved, among other results, improvement in inventory levels, higher gross margins and lower costs through management of the supply chain, improved development of employee talent through the introduction of several new programs and a better alignment of employee activity with Mattel’s values.

In 2002, Mattel continued to execute its financial realignment plan, originally announced during the third quarter of 2000, designed to improve gross margin; selling and administrative expenses; operating income; and cash flows. The plan will require a total pre-tax charge estimated at approximately $250 million, or $170 million, after-tax. Through December 31, 2002, Mattel had recorded pre-tax charges totaling $223.7 million or approximately $151 million, after-tax. Under the plan, Mattel is on track to deliver at least the targeted initial cumulative pre-tax cost savings of approximately $200 million over the three-year duration of the plan. Over the last two years, Mattel recognized cumulative pre-tax cost savings of approximately $142 million, of which approximately $55 million and $87 million were realized in 2001 and 2002, respectively. Mattel expects to achieve pre-tax cost savings of approximately $80 million in 2003. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Realignment Plan” and Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.”

Mattel was incorporated in California in 1948 and reincorporated in Delaware in 1968. Its executive offices are located at 333 Continental Boulevard, El Segundo, California 90245-5012, telephone (310) 252-2000.

Business Segments

“Mattel” refers to Mattel, Inc. and its subsidiaries as a whole, unless the context requires otherwise. This narrative discussion applies to all segments except where otherwise stated. Mattel’s reportable segments are separately managed business units and are divided on a geographic basis between domestic and international.

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The Domestic segment is further divided into US Girls, US Boys-Entertainment, and US Infant & Preschool. For additional information on Mattel’s business segment reporting, including revenues, segment income, and assets, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Segment Results” and Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements.” For additional information regarding geographic areas, see Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements.” For a discussion of the risks inherent in the foreign operations of Mattel, which affect each segment, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—Political Developments, including Trade Relations, and The Threat or Occurrence of War or Terrorist Activities.”

In February 2003, Mattel announced the consolidation of its US Girls and US Boys-Entertainment segments into one segment, renamed Mattel Brands. Additionally, Pleasant Company, which was previously part of the US Girls segment, is now a separate segment for management reporting purposes in 2003. Any discussion of segment information in this Annual Report on Form 10-K is based on the segments evaluated by management during 2002.

Domestic Segment

The Domestic segment develops toys that it markets and sells in the US Girls, US Boys-Entertainment and US Infant & Preschool segments.

The US Girls segment includes brands such as Barbie^® fashion dolls and accessories, Polly Pocket!^®, Diva Starz^™, What’s Her Face!^™, ello^™, and American Girl^®. In 2003, Mattel expects to expand or introduce Barbie^™ of Swan Lake, the third in a series of videos and entertainment-themed fashion dolls, My Scene^™, a new tween-targeted lifestyle brand featuring a range of fashion dolls, accessories and licensed products, Stretchy Polly Pocket!^®, an innovative new-sized stretchy and magnetic Polly Pocket!^®, and ello^™, the creation system for girls that inspires them to design and create anything that sparks their imagination.

The US Boys-Entertainment segment includes Hot Wheels^®, Matchbox^®, and Tyco^® Radio Control (collectively “Wheels”) and Nickelodeon^®, Harry Potter^™, Yu-Gi-Oh!^™, He-Man^® and Masters of the Universe^®, and games and puzzles (collectively “Entertainment”) products. New Boys-Entertainment products in 2003 are expected to include Hot Wheels^® Alien Attack^™, Hot Wheels^® Raptor Blast^™, Matchbox^® Fire Blaster^™ playset, Tyco^® R/C Whiplash^™ and Mattel games and puzzles’ Break the Safe^™ game.

The US Infant & Preschool segment includes Fisher-Price^®, Power Wheels^®, Sesame Street^®, Disney preschool and plush, Winnie the Pooh, Blue’s Clues^™, Rescue Heroes^™, Barney^™, See ’N Say^®, Magna Doodle^®, Dora the Explorer^™, and View-Master^® brands. New product introductions for 2003 are expected to include Hokey Pokey Elmo, the Learn Through Music system, Get-up-and-Bounce Tigger, PowerTouch^™ electronic learning system, Peek-a-blocks^™, Geo Trax^™, Pixter^® color, and Rescue Heroes^™ Mission Select^™.

International Segment

Generally, the products marketed by the International segment are the same as those developed and marketed by the Domestic segment, although some are developed or adapted for particular international markets. Mattel’s products are sold directly to customers in Canada and most European, Asian and Latin American countries, and through agents and distributors in those countries where Mattel has no direct presence. See “Licenses and Distribution Agreements.”

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Revenues from Mattel’s International segment represented approximately 36% of total consolidated gross sales in 2002. Within the International segment, Mattel operates in four regions that generated the following gross sales during 2002 (in millions):

No individual country within the International segment exceeded 6% of consolidated gross sales during 2002.

The strength of the US dollar relative to other currencies can significantly affect the revenues and profitability of Mattel’s international operations. Mattel enters into foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies to limit the effect of exchange rate fluctuations on its results of operations and cash flows. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Item 8 “Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements.” For financial information by geographic area, see Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements.”

Manufacturing

Mattel manufactures toy products for all segments in both company-owned facilities and through independent contractors. Products are also purchased from unrelated entities that design, develop and manufacture the products. To provide greater flexibility in the manufacture and delivery of products, and as part of a continuing effort to reduce manufacturing costs, Mattel has concentrated production of most of its core products in Mattel’s facilities and generally uses independent contractors for the production of non-core products.

Mattel’s principal manufacturing facilities are located in China, Indonesia, Malaysia, Mexico and Thailand. Mattel also utilizes independent contractors to manufacture products in the US, Europe, Mexico, the Far East and Australia. To help avoid disruption of its product supply due to political instability, civil unrest, economic instability, changes in government policies and other risks, Mattel produces many of its key products in more than one facility. In 2001, Mattel announced plans to close distribution and manufacturing facilities in Murray, Kentucky, which were closed in 2002. In January 2003, Mattel announced the consolidation of two of its manufacturing facilities in Mexico as part of the financial realignment plan. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Realignment Plan” and Item 8 “Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements.” Mattel believes that its existing production capacity at its own and its independent contractors’ manufacturing facilities are sufficient to handle expected volume in the foreseeable future. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results.”

Mattel bases its production schedules for toy products on customer orders, taking into account historical trends, results of market research and current market information. Actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products,

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marketing strategies of retailers and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess inventory in a particular product line.

The foreign countries in which most of Mattel’s products are manufactured (principally China, Indonesia, Thailand, Malaysia and Mexico) all enjoy permanent “normal trade relations” (“NTR”) status under US tariff laws, which provides a favorable category of US import duties. China’s NTR status became permanent on January 1, 2002, following enactment of a bill authorizing such status upon the country’s accession to the World Trade Organization, which occurred in December 2001. This substantially reduces the possibility of China losing its NTR status, which would result in increased costs for Mattel and others in the toy industry.

With the implementation of the Uruguay Round agreement effective January 1, 1995, all US duties on dolls and traditional toys were completely eliminated. Canada also eliminated its tariffs on dolls and most toy categories in 1995, with the exception of certain toy sets and board games that will have their duties eliminated over ten years. The European Union and Japan reduced their tariffs on dolls by 40% and 15%, respectively, as of January 1, 1999, and are in the process of phasing out their duties on several other toy categories by January 1, 2004.

Virtually all of Mattel’s raw materials are available from numerous suppliers but may be subject to fluctuations in price. Mattel has long-term agreements in place with major suppliers that allow the suppliers to pass on only their actual raw material cost increases.

Competition and Industry Background

Competition in the toy industry is intense and is based primarily on price, quality and play value.

Mattel’s US Girls, US Boys-Entertainment and US Infant & Preschool segments compete with several large toy companies, including Hasbro, Inc., Jakks Pacific, Lego, Leap Frog, Bandai, MGA Entertainment and many smaller toy companies. Mattel’s International segment competes with global toy companies including Hasbro, Lego, Tomy, Bandai, and other national and regional toy companies. Foreign national and regional toy markets may include competitors who are strong in a particular toy line or geographical area, but do not compete with Mattel and other international toy companies worldwide. Additionally, in recent years, several large retailers have offered competing products under their own private labels.

Seasonality

Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases around the traditional holiday season in the fourth quarter. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters in anticipation of such holiday buying. These seasonal purchasing patterns and requisite production lead times cause risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be able to meet demand for certain products at peak demand times, or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly from period to period.

In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of the year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements. See “Seasonal Financing.”

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Product Design and Development

Through its product design and development group, Mattel regularly refreshes, redesigns and extends existing toy product lines and develops innovative new toy product lines for all segments. Mattel believes its success is dependent on its ability to continue this activity. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results.” Product design and development are principally conducted by a group of professional designers and engineers employed by Mattel.

Independent toy designers and developers bring concepts and products to Mattel and are generally paid a royalty on the net selling price of products licensed to Mattel. These independent toy designers may also create different products for other toy companies.

For new product introductions, Mattel’s strategy is to begin production on a limited basis until a product’s initial success has been proven in the marketplace. The production schedule is then modified to meet anticipated demand. Mattel further limits its risk by generally having independent contractors manufacture new product lines in order to minimize capital expenditures associated with new product introductions. This strategy has reduced inventory risk and limited the potential loss associated with new product introductions.

Mattel devotes substantial resources to product design and development. During 2002, 2001 and 2000, Mattel spent approximately $159 million, $176 million and $180 million, respectively, in connection with the design and development of products, exclusive of royalty payments. See Item 8 “Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements.”

Advertising, Marketing and Sales

Mattel supports its product lines with extensive advertising and consumer promotions. Advertising continues at varying levels throughout the year and peaks during the Christmas season. Advertising includes television and radio commercials, and magazine and newspaper advertisements. Promotions include in-store displays, sweepstakes, merchandising materials and major events focusing on products and tie-ins with various consumer products companies. Mattel has a retail store, American Girl Place^®, in Chicago featuring children’s products from Mattel’s Pleasant Company division, is constructing a second American Girl Place^®, in New York City, and has several other smaller retail outlets at its corporate headquarters and distribution centers as a service to its employees and as an outlet for excess product.

During 2002, 2001 and 2000, Mattel spent approximately $553 million (11.3% of net sales), $544 million (11.6% of net sales) and $578 million (12.7% of net sales), respectively, on worldwide advertising and promotion.

Mattel’s products are sold throughout the world. Products within the Domestic segment are sold directly to large retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers. Mass merchandisers, such as Wal-Mart and Target, continue to increase their market share. Products within the International segment are sold directly to customers in Canada and most European, Asian and Latin American countries, and through agents and distributors in those countries where Mattel has no direct presence.

During 2002, Mattel’s three largest customers (Wal-Mart at $1.1 billion, Toys “R” Us at $0.9 billion and Target at $0.5 billion) accounted for approximately 50% of consolidated net sales in the aggregate. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results” and Item 8 “Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements.”

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In the International segment, there is also a concentration of sales to certain large customers. The customers and the degree of concentration vary depending upon the region or nation.

Licenses and Distribution Agreements

Mattel has license agreements with third parties that permit Mattel to utilize the trademark, character, or inventions of the licensor in product lines that Mattel manufactures. A number of these licenses relate to product lines that are significant to Mattel’s business and operations. An important licensor is Warner Bros., which licenses the Harry Potter^™ book and movie property for use on Mattel’s products as well as the master toy license for Batman^™, Superman^™, Justice League^™, Looney Tunes^™ and Baby Looney Tunes^™. Mattel has also entered into license agreements with, among others: Disney Enterprises, Inc., relating to classic Disney characters such as Winnie the Pooh and the Disney Princesses; Sesame Workshop relating to its Sesame Street^® properties; Viacom International, Inc. relating to its Nickelodeon^® properties including SpongeBob SquarePants^™ and Dora the Explorer^™; Nihon Ad Systems Inc. for the master toy license to the Yu-Gi-Oh!^™ property worldwide, excluding Asia; and Lyons Partnership, L.P. relating to Barney^™, the purple dinosaur, as well as Barney^™ for Baby, for infant and preschool toys, feature plush, electronic learning aids, games and puzzles.

Royalty expense during 2002, 2001 and 2000 was approximately $210 million, $220 million and $259 million, respectively. See “Product Design and Development” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.”

Mattel also licenses a number of its trademarks, characters and other property rights to others for use in connection with the sale of non-toy products that do not compete with Mattel’s products. Mattel distributes some third party finished products that are independently designed and manufactured.

Trademarks, Copyrights, and Patents

Most of Mattel’s products are sold under trademarks, trade names and copyrights and a number of those products incorporate patented devices or designs. Trade names and trademarks are significant assets of Mattel in that they provide product recognition and acceptance worldwide.

Mattel customarily seeks patent, trademark or copyright protection covering its products, and it owns or has applications pending for US and foreign patents covering many of its products. A number of these trademarks and copyrights relate to product lines that are significant to Mattel’s business and operations. Mattel believes its rights to these properties are adequately protected, but there can be no assurance that its rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged.

Commitments

In the normal course of business, Mattel enters into contractual arrangements for future purchases of goods and services to ensure availability and timely delivery, and to obtain and protect Mattel’s right to create and market certain products. Certain of these commitments routinely contain provisions for guaranteed or minimum expenditures during the term of the contracts. Current and future commitments for guaranteed payments reflect Mattel’s focus on expanding its product lines through alliances with businesses in other industries.

As of December 31, 2002, Mattel had outstanding commitments for 2003 and 2004 purchases of inventory of approximately $103 million. Licensing and similar agreements with terms extending through 2010 contain provisions for future guaranteed minimum payments aggregating approximately $369 million. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.”

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Mattel ships products in accordance with delivery schedules specified by its customers, which usually request delivery within three months. In the toy industry, orders are subject to cancellation or change at any time prior to shipment. In recent years, a trend toward just-in-time inventory practices in the toy industry has resulted in fewer advance orders and therefore less backlog of orders. Mattel believes backlog orders at any given time may not accurately indicate future sales.

Financial Instruments

Exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel seeks to mitigate its exposure to market risk by monitoring its currency exchange exposure for the year and partially or fully hedging such exposure using foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure through the selection of currencies used for international borrowings and intercompany invoicing. Mattel’s results of operations can also be affected by the translation of foreign revenues and earnings into US dollars. Mattel does not trade in financial instruments for speculative purposes.

For additional information regarding foreign currency contracts, see “International Segment” above, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Item 8 “Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements.”

Seasonal Financing

Mattel’s financing of seasonal working capital typically grows throughout the first half of the year and peaks in the third or fourth quarter, when inventories are at their highest levels in anticipation of expected second half sales volume and when accounts receivable are at their highest levels due to increased sales volume, consistent with the industry taken as a whole. See “Seasonality.” Mattel expects to finance its seasonal working capital requirements for 2003 by using existing and internally generated cash, issuing commercial paper, selling certain trade receivables, and using various short-term bank lines of credit. In addition, Mattel avails itself of individual short-term foreign credit lines with a number of banks, which will be used as needed to finance the seasonal working capital requirements of certain foreign subsidiaries.

In March 2002, Mattel amended and restated its existing domestic unsecured committed revolving credit facility into a $1.060 billion, 3-year facility that expires in 2005. Mattel’s domestic unsecured credit facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet these financial covenant ratios at the end of each fiscal quarter and fiscal year. The credit agreement for the domestic unsecured credit facility specifies the formulae to be used in calculating the ratios. Mattel was in compliance with such covenants at the end of each fiscal quarter and fiscal year in 2002. As of December 31, 2002, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.37 to 1 (compared to a maximum allowed of 0.50 to 1) and Mattel’s interest coverage ratio was 8.14 to 1 (compared to a minimum allowed of 3.50 to 1). See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Seasonal Financing” and Item 8 “Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements.”

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term foreign credit lines with a number of banks. Foreign credit lines total approximately $266 million, a portion of which is used to support letters of credit. Mattel expects to extend these credit lines throughout 2003.

Mattel believes the cash on hand at the beginning of 2003, amounts available under its domestic unsecured committed revolving credit facility, its uncommitted money market facility, and its foreign credit lines will be adequate to meet its seasonal financing requirements for 2003.

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Mattel has a $300.0 million domestic receivables sales facility which is a sub-facility of Mattel’s $1.060 billion, 3-year domestic unsecured committed revolving credit facility. The outstanding amount of receivables sold under the domestic receivables facility may not exceed $300.0 million at any given time, and the $1.060 billion available to be borrowed under the credit facility is reduced to the extent of any such outstanding receivables sold. Under the domestic receivables facility, certain trade receivables are sold to a group of banks, which currently include, among others, Bank of America, N.A. as administrative agent, Citicorp USA, Inc. and Fleet National Bank as syndication agents, and Societe Generale and BNP Paribas as documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell trade receivables from Wal-Mart and Target to Mattel Factoring, Inc. (“Mattel Factoring”), a Delaware corporation and wholly-owned subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. Mattel Factoring is a consolidated subsidiary of Mattel. Pursuant to the terms of the domestic receivables facility and simultaneous with each receivables purchase, Mattel Factoring sells those receivables to the bank group. Mattel records the transaction, reflecting cash proceeds and sale of accounts receivable on its consolidated balance sheet, at the time of the sale of the receivables to the bank group.

Mattel’s subsidiaries Mattel International Holdings B.V., a Netherlands company, Mattel France S.A.S., a French company, and Mattel GmbH, a German company, have entered into a Euro 150 million European trade receivables facility, pursuant to which Mattel France S.A.S. and Mattel GmbH may sell trade receivables to a bank, Societe Generale Nederland N.V. The receivables sales are accounted for as a sale. As with the domestic receivables facility, each sale of accounts receivable is recorded on Mattel’s consolidated balance sheet at the time of such sale. No Mattel subsidiary is used as a special purpose entity in connection with these transactions. Under the European receivables facility, the outstanding amount of receivables sold may not exceed Euro 60 million from February 1 through July 31 of each year and may not exceed Euro 150 million at all other times. Pursuant to a letter agreement between Societe Generale Nederland and Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH dated July 1, 2002, the commitment termination date for the European receivables facility was extended to June 29, 2003.

Government Regulations and Environmental Quality

Mattel’s toy products sold in the US are subject to the provisions of the Consumer Product Safety Act and the Federal Hazardous Substances Act, and may also be subject to the requirements of the Flammable Fabrics Act or the Food, Drug and Cosmetics Act, and the regulations promulgated pursuant to such statutes. The Consumer Product Safety Act and the Federal Hazardous Substances Act enable the Consumer Product Safety Commission to exclude from the market consumer products that fail to comply with applicable product safety regulations or otherwise create a substantial risk of injury, as well as articles that contain excessive amounts of a banned hazardous substance. The Consumer Product Safety Commission may also require the recall and repurchase or repair by the manufacturer of articles that are banned. Similar laws exist in some states and cities and in many international markets.

Fisher-Price’s car seats are subject to the provisions of the National Highway Transportation Safety Act, which enables the National Highway Traffic Safety Administration to promulgate performance standards for child restraint systems. Fisher-Price conducts periodic tests to ensure that its child restraint systems meet applicable standards. A Canadian agency, Transport Canada, also regulates child restraint systems sold for use in Canada. As with the Consumer Product Safety Commission, the National Highway Transportation Safety Administration and Transport Canada can require the recall and repurchase or repair of products that do not meet their respective standards. In 2002, Fisher-Price exited the car seat business.

Mattel maintains a quality control program to ensure compliance with various US federal, state and applicable foreign product safety requirements. Notwithstanding the foregoing, there can be no assurance that all of Mattel’s products are or will be free from defects or hazard-free. A product recall could have a material adverse effect on Mattel’s results of operations and financial condition, depending on the product affected by the

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recall and the extent of the recall efforts required. A product recall could also negatively effect Mattel’s reputation and the sales of other Mattel products.

Mattel’s advertising is subject to the Federal Trade Commission Act, The Children’s Television Act of 1990, the rules and regulations promulgated by the Federal Trade Commission and the Federal Communications Commission as well as laws of certain countries that regulate advertising and advertising to children. In addition, Mattel’s websites that are directed to children are subject to the Children’s Online Privacy Protection Act of 1998. Mattel is subject to various other federal, state and local laws and regulations applicable to its business. Mattel believes that it is in substantial compliance with these laws and regulations.

Mattel’s operations are from time to time the subjects of investigations, conferences, discussions and negotiations with various federal, state and local environmental agencies with respect to the discharge or cleanup of hazardous waste and compliance by those operations with environmental laws and regulations. See Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements—Environmental.”

Employees

The total number of persons employed by Mattel and its subsidiaries at any one time varies because of the seasonal nature of its manufacturing operations. At December 31, 2002, Mattel’s total number of employees, including its international operations, was approximately 25,000.

Executive Officers of the Registrant

The current executive officers of Mattel, all of which are appointed annually by the board of directors and serve at the pleasure of the board, are as follows:

Mr. Eckert has been Chairman of the Board of Directors and Chief Executive Officer since May 2000. He was formerly President and Chief Executive Officer of Kraft Foods, Inc., the largest packaged food company in North America and a subsidiary of Philip Morris Companies Inc., from October 1997 until May 2000. From 1995 to 1997, Mr. Eckert was Group Vice President of Kraft Foods, Inc. From 1993 to 1995, Mr. Eckert was President of the Oscar Mayer foods division of Kraft Foods, Inc. Mr. Eckert worked for Kraft Foods, Inc. for 23 years prior to joining Mattel.

Mr. Bousquette has been President, Mattel Brands since February 2003. He served as President, Boys/Entertainment from March 1999 until February 2003. From May 1998 to March 1999, he was Executive Vice President and General Manager—Boys Toys. From 1995 to 1998, he was General Manager—Boys Toys. He joined Mattel in December 1993 as Senior Vice President—Marketing.

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Ms. Brothers has been President, Pleasant Company and Executive Vice President since July 2000. From November 1998 to July 2000, she was Senior Vice President of Operations, Pleasant Company. From January 1997 to November 1998, she was Vice President of the Catalogue Division, Pleasant Company. She joined Pleasant Company in 1995, prior to its acquisition by Mattel in July 1998, as Vice President of Catalogue Marketing.

Mr. Debrowski has been Executive Vice President, Worldwide Operations, since November 2000. From February 1992 until November 2000, he was Senior Vice President-Operations and a director of The Pillsbury Company. From September 1991 until February 1992, he was Vice President of Operations for The Baked Goods Division of The Pillsbury Company. Prior to that, he served as Vice President and Director of Grocery Operations for Kraft U.S.A.

Mr. Eckroth has been Chief Information Officer since July 2000. From July 1998 until July 2000, he was Chief Information Officer of General Electric Company’s Medical Systems unit. From November 1995 until June 1998, he served as Chief Information Officer of General Electric Company’s Industrial Controls Systems division. Prior to that, he held several senior positions within Operations and Information Technology at the Northrop Grumman Corporation.

Mr. Farr has been Chief Financial Officer since February 2000. From September 1996 to February 2000, he was Senior Vice President and Corporate Controller. From June 1993 to September 1996, he served as Vice President, Tax. Prior to that, he served as Senior Director, Taxes from August 1992 to June 1993.

Mr. Friedman has been President, Fisher-Price Brands since March 1999. From August 1995 to March 1999, he was President-Tyco Preschool. For more than five years prior to that time, he was President of MCA/Universal Merchandising, Senior Vice President—Sales, Marketing and Design of Just Toys, Vice President and General Manager of Baby Care for Gerber Products, Executive Vice President and Chief Operating Officer of Lionel Leisure, Inc., and President of Aviva/Hasbro.

Mr. Kaye has been Senior Vice President of Human Resources since July 1997. From June 1996 to June 1997, he was President, Texas Division of Kaufman and Broad Homes, a home building company. From June 1991 to June 1996, he served as Senior Vice President, Human Resources for Kaufman and Broad Homes. Prior to that, he worked for two years with the Hay Group, a compensation consulting firm and for 12 years with IBM in various Human Resources positions.

Mr. Kerner has been Senior Vice President and Corporate Controller since April 2001, when he joined Mattel. Prior to joining Mattel, he served as Executive Vice President, Finance, of Premier Practice Management, Inc. from November 1998 to March 2001. From February to June 1998, he worked for FPA Medical Management, Inc., most recently serving as Vice President, Treasurer and Acting Chief Financial Officer. From 1991 to 1997, he worked for Total Petroleum (North America) Ltd., most recently as Vice President & Treasurer.

Mr. Normile has been Senior Vice President, General Counsel and Secretary since March 1999. He served as Vice President, Associate General Counsel and Secretary from August 1994 to March 1999. From June 1992 to August 1994, he served as Assistant General Counsel. Prior to that, he was associated with the law firms of Latham & Watkins and Sullivan & Cromwell.

Mr. Stavro has been Senior Vice President and Treasurer since May 1995. From November 1993 to May 1995, he was Vice President & Treasurer. From March 1992 to November 1993, he was Vice President & Assistant Treasurer. Prior to that, he was Assistant Treasurer for more than five years.

Mr. Stockton has been Executive Vice President, International since February 2003. He served as Executive Vice President, Business Planning and Development from November 2000 until February 2003. From April 1998 until November 2000, he was President and Chief Executive Officer of Basic Vegetable Products, the

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largest manufacturer of vegetable ingredients in the world. For more than 20 years prior to that, he was employed by Kraft Foods, Inc., the largest packaged food company in North America, and was President of Kraft North American Food Service from August 1996 to March 1998. Mr. Stockton worked for Kraft Foods, Inc. for 22 years.

Available Information

Mattel’s Internet website address is http://www.mattel.com. Mattel makes available on its Internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.

Item 2.    Properties.

Mattel owns its corporate headquarters in El Segundo, California, consisting of 335,000 square feet, which is subject to a $41 million mortgage, and an adjacent 55,000 square foot office building. Mattel also leases buildings in El Segundo consisting of approximately 327,000 square feet. All segments use these facilities. Mattel’s Fisher-Price subsidiary owns its headquarters facilities in East Aurora, New York, consisting of approximately 535,000 square feet, which is used by the US Infant & Preschool segment and for corporate support functions. Pleasant Company owns its headquarters facilities in Middleton, Wisconsin, consisting of approximately 420,000 square feet, which is used by the US Girls segment.

Mattel maintains leased sales offices in California, Illinois, New York, North Carolina, Arkansas, Michigan and Georgia used by the Domestic segment and leased warehouse and distribution facilities in California, New Jersey, Wisconsin and Texas, all of which are used by the Domestic segment. Mattel has leased retail space in Illinois for its American Girl Place^® store, which is used by the US Girls segment. Mattel also has leased office space in Florida, which is used by the International segment. Mattel leases a computer facility in Phoenix, Arizona used by all the segments. Internationally, Mattel has its principal offices and/or warehouse space in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Columbia, Costa Rica, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, India, Italy, Mexico, The Netherlands, Norway, Peru, Portugal, South Korea, Spain, Switzerland, the United Kingdom and Venezuela which are leased (with the exception of office space in Chile and certain warehouse space in France) and used by the International segment. Mattel’s principal manufacturing facilities are located in China, Indonesia, Malaysia, Mexico and Thailand. See “Manufacturing.”

For leases that are scheduled to expire during the next twelve months, Mattel may negotiate new lease agreements, renew leases or utilize alternative facilities. See Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.” Mattel believes that its owned and leased facilities, in general, are suitable and adequate for its present and currently foreseeable needs.

Item 3.    Legal Proceedings.

See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Litigation” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.”

Item 4.    Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

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PART II

Item 5.    Market for the Registrant’s Common Equity and Related Stockholder Matters.

For information regarding the markets in which Mattel’s common stock, par value $1.00 per share, is traded, see the cover page hereof. For information regarding the high and low closing prices of the common stock for the last two calendar years, see Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements.”

As of March 7, 2003, Mattel had approximately 45,500 holders of record of its common stock.

Mattel paid dividends on its common stock of $0.09 per share April, July and October of 2000. As part of its financial realignment plan, Mattel announced during the third quarter of 2000 a change in its dividend policy consisting of a reduction in the annual cash dividend from $0.36 per share to $0.05 per share. In 2002 and 2001, a $0.05 per share dividend was declared by the board of directors in November and paid in December. The payment of dividends on common stock is at the discretion of Mattel’s board of directors and is subject to statutory and customary limitations.

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Item 6.    Selected Financial Data.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Summary

The following discussion should be read in conjunction with the consolidated financial statements and the related notes. See Item 8 “Financial Statements and Supplementary Data.” Mattel’s consolidated financial statements for all periods present the Consumer Software segment as a discontinued operation. See “Discontinued Operations.” Unless otherwise indicated, the following discussion relates only to Mattel’s continuing operations. Mattel’s consolidated statements of operations for 2001 and 2000 have been restated from the prior year presentation to classify interest income and other non-operating expense, net below operating income to conform to the 2002 presentation. Additionally, Mattel’s consolidated statements of operations for 2001 and 2000 have been restated to include reclassifications of certain customer benefits and allowances to conform to the income statement requirements of Emerging Issues Task Force (“EITF”) Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer. Effective January 2002, Mattel ceased amortization of its goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. To facilitate the comparison of current year segment results to that of the prior year, the segment income was restated from prior year presentation to exclude goodwill amortization.

In February 2003, Mattel announced the consolidation of its US Girls and US Boys-Entertainment segments into one segment, renamed Mattel Brands. Additionally, Pleasant Company, which was previously part of the US Girls segment, is now a separate segment for management reporting purposes in 2003. Any discussion of segment information in this Annual Report on Form 10-K is based on the segments evaluated by management during 2002.

Mattel designs, manufactures, and markets a broad variety of toy products worldwide through sales to retailers (i.e., “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 successfully to market those products and product lines. Mattel plans to continue to focus on its portfolio of traditional brands that have historically had worldwide sustainable appeal, to create new brands utilizing its knowledge of children’s play patterns and to target customer and consumer preferences around the world. Mattel also intends to expand its core brands through the Internet, and licensing and entertainment partnerships.

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

Girls—including Barbie^® fashion dolls and accessories, Polly Pocket!^®, Diva Starz^™, What’s Her Face!^™, ello^™, and American Girl^®

Boys-Entertainment—including Hot Wheels^®, Matchbox^®, and Tyco^® Radio Control vehicles and playsets (collectively “Wheels”), and Nickelodeon^®, Harry Potter^™, Yu-Gi-Oh!^™, He-Man^® and Masters of the Universe^®, and games and puzzles (collectively “Entertainment”)

Infant & Preschool—including Fisher-Price^®, Power Wheels^®, Sesame Street^®, Disney preschool and plush, Winnie the Pooh, Blue’s Clues^™, Rescue Heroes^™, Barney^™, See ’N Say^®, Magna Doodle^®, Dora the Explorer^™, and View-Master^®

Results of Continuing Operations

2002 Compared to 2001

Consolidated Results

Income from continuing operations for 2002 was $455.0 million or $1.03 per diluted share as compared to income from continuing operations of $310.9 million or $0.71 per diluted share in 2001. Profitability in 2002 was impacted by a pre-tax charge of $48.3 million ($31.9 million after-tax) related to the financial realignment plan. Profitability in 2001 was impacted by a pre-tax charge of $50.2 million ($35.2 million after-tax) related to the

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financial realignment plan and a $5.5 million after-tax charge related to loss on derivative instruments. Included in the reported results for 2001 was a pre-tax goodwill amortization charge of $46.1 million ($34.7 million after-tax). The combined effect of these items resulted in an after-tax charge totaling $75.4 million.

Mattel faced several challenges during 2002, in its largest market, the US, including an uncertain retail environment, weak consumer confidence, higher unemployment, labor unrest at West Coast ports and the threat of continued terrorism and war. These factors caused most of Mattel’s customers to have actual sales performance below expectations and several customers announced store closures and reorganization plans. Mattel improved its performance despite these challenges by executing four strategic priorities: (i) strengthening core brand momentum; (ii) executing the financial realignment plan and cutting costs; (iii) improving supply chain performance; and (iv) developing people. As retailers continued to focus on just-in-time inventory management, Mattel improved the alignment of its shipment of product to retailers with consumer demand. This strategy resulted in a higher proportion of US shipments occurring in the second half of the year when consumer demand peaks. As in 2002, Mattel anticipates that this initiative will put downward pressure on first half 2003 US shipments, but should have no impact on full year sales. Additionally, as part of the financial realignment plan, Mattel lowered costs by closing and consolidating certain of its manufacturing and distribution facilities and reducing headcount at its US-based headquarters locations.

Mattel expects that the challenging retail and consumer environment will likely continue in 2003. To optimize its business and mitigate the impact of the aforementioned challenges, Mattel intends to continue its emphasis in 2003 on the following strategic initiatives:

The following table provides a comparison of the reported results for 2002 and 2001 along with charges related to the financial realignment plan, 2001 goodwill amortization and other nonrecurring charges (in millions):

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Net sales from continuing operations for 2002 increased 4% to $4.9 billion, from $4.7 billion in 2001. Gross sales within the US increased 1% from 2001 and accounted for 64% of consolidated gross sales in 2002 compared to 67% in 2001. In 2002, gross sales internationally increased 12% from 2001. Excluding the favorable impact of foreign currency exchange, international gross sales were up 11% compared to 2001. Mattel’s strategic focus on globalization of brands is one of the primary drivers for continued growth in the International segment. Management expects that sales growth internationally will continue to outpace US sales growth for the foreseeable future.

Worldwide gross sales in the Girls category increased 6%, or 5% in local currency, to $2.3 billion in 2002. Domestic sales declined by 2% and international sales increased by 18%, or 16% in local currency. Sales growth in Barbie^® internationally, Polly Pocket!^®, What’s Her Face!^™, and American Girl^® was partially offset by declines in US Barbie^®, Diva Starz^™ and large dolls. The discontinuation of Cabbage Patch Kids^® in 2002 contributed to the decrease in total large doll sales. Worldwide Barbie^® sales were up 6% in 2002, reflecting an increase of 16% in international sales and a decline of 2% in domestic sales. The decline in domestic sales for Barbie^® was driven by the strategic initiative to reduce shipments of adult-targeted collector and holiday dolls. Barbie^® holiday doll shipments in 2002 were approximately one-half the amount shipped in 2001. Excluding these adult-targeted lines, domestic Barbie^® sales increased 2% in 2002.

Worldwide gross sales in the Boys-Entertainment category grew 2%, to $1.3 billion. Domestic sales remained flat with 2001, while international sales increased by 6%, or 7% in local currency. The worldwide Wheels business increased 3% due to growth in Matchbox^® products and increased international sales of Hot Wheels^® and Tyco^® Radio Control brands. Domestic Wheels sales declined by 2% and international sales grew by 13%. The worldwide Entertainment business grew 2%, reflecting strong sales from licensed properties such as He-Man^® and Masters of the Universe^®, Yu-Gi-Oh!^™, and SpongeBob SquarePants^™ lines, and games and puzzles, which more than offset the elimination of Disney entertainment properties and a decline in Harry Potter^™ sales. In July 2002, Mattel and Warner Bros. Consumer Products announced comprehensive, multi-year agreements granting Mattel master toy licenses for several of Warner Bros.’ core franchises, including Looney Tunes^™, Baby Looney Tunes^™, Batman^™, Superman^™ and Justice League^™. The agreements, which took effect in January 2003, cover all global territories except Asia and include rights to market products based on any related theatrical releases or television programs that are produced during the period covered by the agreements.

Worldwide gross sales in the Infant & Preschool category increased 5%, or 4% in local currency, to $1.7 billion. Domestic sales increased by 3% and international sales were up 10%, or 7% in local currency. Growth in sales of core Fisher-Price^® and Power Wheels^® products was partially offset by a decline in licensed character brands in both domestic and international markets. Strong sales of Baby Gear, Rescue Heroes^™ and Little People^® lines contributed to the increase in core Fisher-Price^® sales.

Gross profit, as a percentage of net sales, was 48.3% in 2002 compared to 45.8% in 2001. Gross profit was positively impacted by savings realized from the financial realignment plan and supply chain initiatives. Specifically, gross profit benefited from lower commodity and logistics costs, reduced manufacturing overhead costs, lower material costs due to improved design and engineering processes, and lower product costs due to movement of production to Mexico and Asia. In 2003, Mattel expects increases in commodity and logistics costs may have a negative impact on its gross profit, mitigated in part or wholly by further progress in its supply chain and procurement initiatives. Cost of sales in 2002 includes a $10.4 million financial realignment plan charge, largely related to the closure of the Murray, Kentucky, manufacturing and distribution facilities (“North American Strategy”). Cost of sales in 2001 includes a $28.2 million financial realignment plan charge, largely related to the North American Strategy and termination of a licensing agreement.

Advertising and promotion expense was 11.3% of net sales for 2002, compared to 11.6% in 2001. The decrease in 2002 compared to 2001 was largely due to lower prices charged by media companies on a cost per rating point basis. Mattel expects advertising and promotion expense as a percentage of net sales for 2003 will rise, reflecting a combination of media prices leveling off and Mattel’s plan for increased spending to support the launch of several new product lines.

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Other selling and administrative expenses were $1.1 billion or 21.5% of net sales in 2002 compared to $964.2 million or 20.6% of net sales in 2001. Other selling and administrative expenses increased in 2002 primarily due to higher incentive compensation accruals of approximately $63 million. Mattel’s incentive compensation plans are based on net operating profit after-taxes less a capital charge, and substantial progress was made in improving this metric since 2001. Other selling and administrative expenses also increased due to financial realignment plan charges of $13.3 million in 2002 compared to $6.0 million in 2001, largely associated with streamlining back office functions and asset writedowns and other costs associated with implementing the North American Strategy. Offsetting the increase in other selling and administrative expenses were cost savings resulting from continued execution of the financial realignment plan and tight management of costs.

Total bad debt expense was $53.4 million in 2002 compared to $57.7 million in 2001. Each quarter, management evaluates Mattel’s credit exposure as it relates to all of its customers. Considering this review, Mattel recorded an additional $33.5 million adjustment in 2002 to write down the Kmart pre-bankruptcy petition accounts receivable. In the fourth quarter of 2001, Mattel recorded an initial $22.1 million charge related to the bankruptcy filing of Kmart in January 2002 and approximately $9 million in bad debt expense in the third quarter of 2001, largely related to the bankruptcy declared by another US retailer. To estimate the net realizable value of the Kmart pre-bankruptcy petition accounts receivable, management considered the current post-petition market price for the Kmart bank debt, bonds and trade receivables at the end of each quarter. In the fourth quarter of 2002, Mattel decided to sell its Kmart pre-bankruptcy petition accounts receivable and, accordingly, wrote them down to liquidation value. Mattel’s remaining pre-bankruptcy petition net accounts receivable from Kmart at December 31, 2002, after offsetting the reserve for customer benefits that were not earned by Kmart, was $2.7 million. The $2.7 million reflects Mattel’s best estimate of the net realizable value of its pre-bankruptcy petition trade claim as of December 31, 2002, considering the actual proceeds Mattel received upon the sale of this trade claim in March 2003 to an unrelated third party.

The following is a summary of the activity related to Mattel’s net Kmart pre-bankruptcy petition accounts receivable balance through December 31, 2002 (in millions):

Non-Operating Items

Interest expense was $113.9 million in 2002 compared to $155.1 million in 2001 due to lower average borrowings resulting from improvements in working capital and higher cash at the beginning of the year, repayment of approximately $422 million in long-term debt, and lower short-term interest rates. Interest income was $17.7 million in 2002 compared to $15.5 million in 2001. Other non-operating expense, net was $15.9 million in 2002 versus $9.7 million in 2001. Included in 2002 was a $25.4 million charge recorded in the fourth quarter resulting from the settlement of shareholder litigation related to the 1999 acquisition of the Learning Company. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Litigation—Litigation Related to Learning Company” and Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements.” Excluding this charge, the decrease in other non-operating expense, net was largely due to net foreign currency exchange gains totaling $10.5 million in 2002 compared to net foreign currency exchange losses totaling $8.8 million in 2001. Gains and losses on unhedged intercompany receivables and payables balances denominated in a currency other than the applicable

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functional currency are recognized as a component of other non-operating expense, net in the period in which the exchange rate changes. Additionally, other non-operating expense, net in 2001 included a $5.5 million loss on derivative instruments.

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 US Girls, US Boys-Entertainment, and US Infant & Preschool. The US Girls segment includes brands such as Barbie^®, Polly Pocket!^®, Diva Starz^™, What’s Her Face!^™, ello^™, and American Girl^®. The US Boys-Entertainment segment includes Hot Wheels^®, Matchbox^®, and Tyco^® Radio Control vehicles and playsets (collectively “Wheels”), and Nickelodeon^®, Harry Potter^™, Yu-Gi-Oh!^™, He-Man^® and Masters of the Universe^®, and games and puzzles (collectively “Entertainment”) products. The US Infant & Preschool segment includes Fisher-Price^®, Power Wheels^®, Sesame Street^®, Disney preschool and plush, Winnie the Pooh, Blue’s Clues^™, Rescue Heroes^™, Barney^™, Dora the Explorer^™, and other preschool products. The International segment sells products in all toy categories.

Effective January 1, 2002, Mattel ceased amortization of its goodwill in accordance with SFAS No. 142. To maintain a consistent basis for measuring segment performance and to facilitate a comparison of current year segment results to that of the prior year, management revised its previously reported segment information to correspond to the earnings measurements by which management currently evaluates the business segments. Accordingly, segment income for the years ended 2001 and 2000 has been restated to exclude goodwill amortization of $46.1 million and $46.6 million, respectively.

As used in this Annual Report on Form 10-K, “sales” or “gross sales” is defined as sales excluding the impact of sales adjustments, such as trade discounts or other allowances. “Net sales” includes the impact of such sales adjustments. Segment income from operations represents operating income from continuing operations. Business segment results should be read in conjunction with Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements.”

US Girls segment sales decreased by 2% in 2002 compared to 2001. Lower sales of Diva Starz^™, Barbie^®, and large dolls were partially offset by growth in Polly Pocket!^® and American Girl^®. The discontinuation of Cabbage Patch Kids^® in 2002 contributed to the decrease in total large doll sales. Domestic Barbie^® sales declined by 2% in 2002, largely due to the strategic initiative to reduce shipments of adult-targeted collector and holiday dolls. Barbie^® holiday doll shipments in 2002 were approximately one-half the amount shipped in 2001. Excluding these adult-targeted lines, domestic Barbie^® sales increased 2% in 2002. The US Boys-Entertainment business in 2002 remained relatively flat with 2001 as a 2% decrease in US Wheels sales was largely offset by a 3% increase in US Entertainment sales. The decline in the US Wheels business reflects declines in Hot Wheels^® and Tyco^® Radio Control brands, which more than offset strong sales in Matchbox^®. In the US, certain customers raised the retail price for Hot Wheels^®, which had a negative impact on sales. Sales were also negatively impacted by competition from Spider-Man^™ and Star Wars^™ product and Mattel’s own Matchbox^® brand. The improvement in the US Entertainment business was primarily due to strong sales of the newly launched He-Man^® and Masters of the Universe^®, Yu-Gi-Oh!^™, and SpongeBob SquarePants^™ lines, and increased sales of games and puzzles, which more than offset the elimination of Disney entertainment properties and a decline in Harry Potter^™ sales. US Infant & Preschool segment sales increased by 4% driven by increased sales of core Fisher-Price^® and Power Wheels^®, partially offset by decreased sales of licensed character brands.

International segment sales increased by 12% in 2002 compared to 2001. Excluding the favorable foreign currency exchange impact, sales grew by 11% due to growth across all the core brand categories—Girls, Boys-Entertainment and Infant & Preschool. The International segment realized growth in all regions in local currency. For the year, Europe sales grew by 20% (13% in local currency), Asia-Pacific sales were up 15% (12% in local currency), Latin America sales decreased by 3% (up 7% in local currency), and Canada sales grew by 5% (6% in

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local currency). The International segment continued to benefit from Mattel’s strategic focus on globalization of brands, including improved product availability, better alignment of worldwide marketing and sales plans and strong product launches.

The US Girls segment income increased by 5% to $389.8 million, largely due to improved margin, which was partially offset by lower volume. The US Boys-Entertainment segment income grew by 34% to $110.0 million, primarily due to improved margin and lower selling and administrative expenses. The US Infant & Preschool segment income increased by 19% to $187.0 million, largely due to increased volume and improved margin. All the US segments benefited from lower costs for media purchases due to lower costs per rating point. The International segment income increased by 54% to $305.0 million, mainly due to increased volume and improved margin.

2001 Compared to 2000

Consolidated Results

Net income from continuing operations for 2001 was $310.9 million or $0.71 per diluted share as compared to net income from continuing operations of $170.2 million or $0.40 per diluted share in 2000. Profitability in 2001 was impacted by a pre-tax charge of $50.2 million ($35.2 million after-tax) related to the financial realignment plan and a $5.5 million after-tax charge related to a loss on derivative instruments. Included in the reported results for 2001 was a pre-tax goodwill amortization charge of $46.1 million ($34.7 million after-tax). The combined effect of these items resulted in an after-tax charge totaling $75.4 million. Profitability in 2000 was impacted by a pre-tax charge of $125.2 million ($84.4 million after-tax) related to the initial phase of the financial realignment plan, a $53.1 million pre-tax charge ($38.4 million after-tax) for the departure of certain senior executives and an $8.4 million pre-tax charge ($5.6 million after-tax) related to losses realized on the disposition of a portion of the stock received as part of the sale of CyberPatrol. These charges were partially offset by a pre-tax $7.0 million reserve reversal ($5.3 million after-tax) related to the 1999 restructuring and other charges. Included in the reported results for 2000 was a pre-tax goodwill amortization charge of $46.6 million ($35.2 million after-tax). The combined effect of these items resulted in an after-tax charge totaling $158.3 million.

The year 2001 presented substantial obstacles for Mattel. Global economies softened; the September 11^th terrorist attacks eroded US consumer confidence; and as a result, several important US retailers cancelled holiday reorders as they intensified their focus on inventory management in light of uncertain consumer spending prospects. The difficult retail environment, combined with increased competitive pressures, resulted in a weakening in the financial strength of some major US retail industry participants. Kmart, the second largest US retailer, filed for bankruptcy in January 2002.

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The following table provides a comparison of the reported results for 2001 and 2000 along with charges related to the financial realignment plan, goodwill amortization and other nonrecurring charges (in millions):

Net sales from continuing operations for 2001 increased 3% to $4.7 billion, from $4.6 billion in 2000. Gross sales within the US decreased by 1% from 2000 and accounted for 67% of consolidated gross sales in 2001 compared to 69% in 2000. In 2001, gross sales internationally increased 10% from 2000. Excluding the unfavorable impact of foreign currency exchange, international gross sales increased 13% compared to 2000.

Worldwide gross sales in the Girls category increased 3%, or 4% in local currency, to $2.2 billion in 2001. Domestic sales declined by 4%, while international sales increased by 17%, or 20% in local currency. The growth in the Girls category was driven by Polly Pocket!^®, Diva Starz^™, What’s Her Face!^™, American Girl^® and international sales of Barbie^®. Worldwide Barbie^® sales decreased 3%. Barbie^® sales in the US declined 12% in 2001 as compared to the strong growth recorded in 2000, when sales increased 9% over 1999. The decline in US Barbie^® sales was largely due to lower shipments of Holiday Celebration^™ Barbie^® in response to lower demand at retail, lower sales of adult-targeted collector dolls resulting from a weakening retail climate for higher-priced collectible items, and continuing inventory management by retailers. International sales for Barbie^® were up 12%, or 15% in local currency, reflecting the benefit of early product availability and stronger alignment of worldwide sales and marketing plans.

Worldwide gross sales in the Boys-Entertainment category grew 6%, or 7% in local currency, to $1.3 billion. Domestic sales grew by 2%, while international sales increased by 13%, or 16% in local currency. The worldwide Wheels business increased 1% due to a 9% sales growth in Hot Wheels^® products, which was partially offset by declines in the Matchbox^® and Tyco^® Radio Control brands. The Entertainment business grew 14%, largely due to the global introduction of Harry Potter^™ products. Sales generated by the Harry Potter^™ brand more than offset the decline of the Disney entertainment business, which has been completely phased out in 2002. In the second quarter of 2001, Mattel expanded its games business through the acquisition of Pictionary, Inc., worldwide owner of the Pictionary^® game brand and associated rights. Beginning in January 2002, Mattel started manufacturing, marketing and distributing Pictionary^® to international markets. In the US and Canada, Mattel is the licensor of the property through an independent contractor.

Worldwide gross sales in the Infant & Preschool category were $1.6 billion, down 1%. Domestic sales were flat, while international sales decreased 4%, or 3% in local currency. Growth in sales of core Fisher-Price^® and Power Wheels^® products was offset by a decline in licensed character brands.

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Gross profit, as a percentage of net sales, was 45.8% in 2001 compared to 43.7% in 2000. Gross profit improvement was attributable to savings realized from the financial realignment plan and lower product costs achieved through the supply chain initiative, partially offset by the negative impact of foreign currency exchange. The supply chain initiative focuses on improving customer service levels by partnering with retailers to get the right products in the right place at the right time, lowering costs by closing and consolidating Mattel’s manufacturing and distribution facilities, and improving processes such as launching fewer new SKU’s by taking advantage of multi-lingual packaging. The multi-lingual packaging provides Mattel with increased distribution options for any given toy. In addition, cost of sales in 2001 included a $28.2 million charge, largely related to accelerated depreciation resulting from the planned closure of the Murray, Kentucky, manufacturing and distribution facilities and termination of a licensing agreement as part of the financial realignment plan. Cost of sales in 2000 includes a $78.6 million charge related to the termination of a variety of licensing agreements and other contractual arrangements and elimination of product lines that did not deliver an adequate level of profitability.

Advertising and promotion expense was 11.6% of net sales for 2001, compared to 12.7% in 2000. The decrease in 2001 compared to 2000 was primarily attributable to lower prices charged by media companies on a cost per rating point basis. Mattel’s 2001 media plan was actually stronger than in 2000 in terms of gross rating points. Advertising and promotion expense for 2001 and 2000 includes $0.3 million and $4.8 million of charges, respectively, largely related to exiting certain product lines.

Other selling and administrative expenses were $964.2 million or 20.6% of net sales in 2001 compared to $981.8 million or 21.5% of net sales in 2000. The improvement in selling and administrative expenses was largely due to a $53.1 million charge in 2000 related to termination costs for the departure of certain senior executives and lower financial realignment plan charges, partially offset by increased bad debt charges in 2001. In the fourth quarter of 2001, Mattel recorded a $22.1 million charge related to the bankruptcy filing of Kmart in January 2002. Mattel also recorded approximately $9 million in bad debt expense in the third quarter of 2001, largely related to the bankruptcy declared by another US retailer. Excluding these charges, other selling and administrative expenses, as a percentage of net sales, decreased largely due to tight management of costs, savings realized from the financial realignment plan, and a reduction in management bonuses.

Non-Operating Items

Interest expense was $155.1 million in 2001 compared with $153.0 million in 2000. The increase was due to the allocation in 2000 of $36.4 million in interest to discontinued operations. In 2001, lower average borrowing rates and lower short-term seasonal borrowings resulted in a decrease in interest expense. Interest income was $15.5 million in 2001 compared to $11.0 million in 2000. Other non-operating expense, net in 2001 was $9.7 million versus $3.2 million in 2000. The increase in other non-operating expense, net was largely due to net foreign currency exchange losses totaling $8.8 million in 2001 compared to net foreign currency exchange gains totaling $3.0 million in 2000. Gains and losses on unhedged intercompany receivables and payables balances denominated in a currency other than the applicable functional currency are recognized as a component of other non-operating expense, net in the period in which the exchange rate changes. Partially offsetting the increase in other non-operating expense, net were lower nonrecurring charges in 2001 relative to 2000. In 2001, nonrecurring charges included a $5.5 million loss on derivative instruments. In 2000, nonrecurring charges totaled $13.9 million, including $5.5 million of charges primarily related to the writeoff of certain noncurrent assets and an $8.4 million charge related to losses realized on the disposition of a portion of the stock received as part of the sale of CyberPatrol.

Business Segment Results

US Girls segment sales decreased by 4% in 2001 compared to 2000. A 12% decline in Barbie^® sales was partially offset by increased sales of Polly Pocket!^®, Diva Starz^™, What’s Her Face!^™, and American Girl^®. The decrease in US Barbie^® sales compared to 2000 was primarily due to lower shipments of Holiday Celebration^™

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Barbie^® in response to lower demand at retail, lower sales of adult-targeted collector dolls resulting from a weakening retail climate for higher-priced collectible items, and continuing inventory management by retailers. US Boys-Entertainment segment sales increased 2%. The US Entertainment business grew 6%, largely due to increased sales of Harry Potter^™ products. The US Wheels business was flat with 2000 as increased sales of Hot Wheels^® products were offset by declines in Tyco^® Radio Control and Matchbox^®. US Infant & Preschool segment sales were flat with 2000. Growth in sales of core Fisher-Price^® and Power Wheels^® products was offset by a decline in sales of licensed character brand products. Management believes the difficult retail environment, especially combined with the events of September 11, 2001, caused its retail customers to curtail their orders across all of the US segments during the fourth quarter, resulting in an 8% decline in total US sales for the fourth quarter. However, despite weaker-than-expected shipments to retailers, all of Mattel’s major brands showed strength with consumers and posted sales increases at retail. According to NPD industry data for toy sales at the consumer level, Mattel gained market share in the US in dolls, vehicles, action figures, games and puzzles and core infant and preschool categories.

International segment sales increased by 10% in 2001 compared to 2000. Excluding the unfavorable foreign currency exchange impact, sales grew by 13% due to double digit growth in Barbie^®, Polly Pocket!^®, core Fisher-Price^® and Hot Wheels^® products combined with the expansion of Diva Starz^™ and Harry Potter^™ products. On a regional basis, Europe sales grew by 11% (13% in local currency), Asia-Pacific sales were down 7% (down 1% in local currency), Latin America sales were up 16% (20% in local currency), and Canada sales grew by 6% (10% in local currency). Mattel also recorded strong market share gains outside the US, with market share growing in the five major European markets, as well as in Canada, Mexico and Australia. Improved product availability, better alignment of worldwide marketing and sales plans and strong product launches were the primary drivers for the growth in International segment sales and market share.

US Girls segment income decreased by 2% to $372.5 million, primarily due to lower sales volume. US Boys-Entertainment segment income increased by 38% to $82.1 million, primarily due to increased sales volume and improved margins. US Infant & Preschool segment income increased by 3% to $157.0 million, primarily due to improved margins, partially offset by higher selling and administrative expenses to support certain new product lines. All the US segments benefited from lower costs for media purchases due to lower costs per rating point. The International segment income grew by 29% to $198.2 million, largely due to increased sales volume and improved margins, partially offset by lower operating income in certain Latin American countries. In 2001, Mattel appointed a new management team in Latin America with the goal of converting sales growth into increased cash flows and profitability in this region.

Financial Realignment Plan

During the third quarter of 2000, Mattel initiated a financial realignment plan designed to improve gross margin; selling and administrative expenses; operating income; and cash flows. The financial realignment plan, together with the disposition of Learning Company, was part of management’s strategic plan to focus on growing Mattel’s core brands and lowering operating costs and interest expense. The plan will require a total pre-tax charge estimated at approximately $250 million, or $170 million, after-tax, of which approximately $120 million represents cash expenditures and $50 million represents non-cash writedowns. Mattel intends to fund the cash outlay from existing cash balances and internally generated cash flows from operations.

Under the plan, Mattel is on track to deliver at least the targeted initial cumulative pre-tax cost savings of approximately $200 million by year end 2003. Over the last two years, Mattel recognized cumulative pre-tax cost savings of approximately $142 million, of which approximately $55 million and $87 million were realized in 2001 and 2002, respectively. The $87 million of savings achieved in 2002 exceeded the previously expected amount by approximately $22 million, largely due to the accelerated execution of the North American Strategy. In 2003, Mattel expects to achieve pre-tax cost savings of approximately $80 million. There is no assurance, however, that Mattel will be able to successfully implement all phases of its financial realignment plan or that it will realize the anticipated cost savings and improved cash flows.

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A summary of the components of the financial realignment plan and the timeframe to complete implementation of the plan is as follows (in millions):

The charges referred to above represent expenditures for the following major initiatives:

Future pre-tax implementation costs of $26.3 million have not been accrued as of December 31, 2002. Management expects to record these remaining costs in 2003.

In February 2003, as part of its financial realignment plan, Mattel announced the consolidation of its US Girls and US Boys-Entertainment segments into one segment, renamed Mattel Brands. Additionally, Pleasant Company, which was previously part of the US Girls segment, is now a separate segment for management reporting purposes in 2003. The creation of the Mattel Brands segment will result in the streamlining and consolidating of redundant activities that supported the US Girls and US Boys-Entertainment businesses. Costs associated with this reorganization include elimination of approximately 5% of executive level positions, including the position of president of the Girls division.

In January 2002, as part of the financial realignment plan, Mattel implemented further headcount reductions of approximately 240 positions or 7% at its US-based headquarters locations through a combination of layoffs, elimination of open requisitions, attrition, and retirements. Additionally, in 2002, Mattel commenced a long-term information technology strategy aimed at achieving operating efficiencies and cost savings across all disciplines. The program is focused on simplifying Mattel’s organization by defining common global processes based on industry best practices, streamlining its organizational structure by eliminating redundancies, and upgrading its systems to provide greater visibility to information and data on a global basis.

In April 2001, as part of the financial realignment plan, Mattel announced the closure of its Murray, Kentucky, manufacturing and distribution facilities as part of the North American Strategy. Production from this

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facility has been consolidated into other Mattel-owned and operated facilities in North America. Manufacturing ceased at the Murray location at the end of May 2002. In January 2003, Mattel announced the consolidation of two of its manufacturing facilities in Mexico to further streamline manufacturing within North America. These actions are realignment measures taken to lower costs. Mattel believes these actions are necessary to maintain a competitive cost structure in today’s global marketplace.

The following table summarizes the components of restructuring charges included in the financial realignment plan table above (in millions):

In 2000, Mattel recorded a $22.9 million pre-tax restructuring charge as part of the initial phase of the financial realignment plan. This charge, combined with a $7.0 million adjustment to the 1999 restructuring plan, resulted in $15.9 million of net pre-tax restructuring and other charges in 2000. The $22.9 million charge related to the elimination of positions at headquarters locations in El Segundo, Fisher-Price and Pleasant Company, closure of certain international offices, and consolidation of facilities. During 2001, Mattel recorded a $15.7 million pre-tax restructuring charge as part of the financial realignment plan, largely related to implementation of the North American Strategy. In 2002, Mattel recorded an additional $24.6 million pre-tax restructuring charge as part of the financial realignment plan, principally related to further elimination of positions at headquarters locations in El Segundo, Fisher-Price and Pleasant Company, the North American Strategy, and consolidation of international facilities. From inception through December 31, 2002, a total of $43.3 million has been incurred related to the termination of 2,350 employees, of which 1,370 were terminated during 2002. Of the 2,350 employee terminations, approximately 1,300 related to the North American Strategy.

Income Taxes

The effective income tax rate on continuing operations was 26.8% in 2002 compared to 27.7% in 2001 and 24.5% in 2000. The difference in the overall income tax rate on continuing operations between 2001 and 2002 was caused by goodwill, financial realignment and other one-time charges. In 2001, goodwill was included in the consolidated financial statements but a portion was not deductible for income tax purposes. In addition, certain one-time charges were also not deductible in 2001. These nondeductible items resulted in a lower effective tax benefit in 2001 for these items and a higher overall effective income tax rate. In 2002, most of the financial realignment and other one-time charges were deductible for income tax purposes, resulting in a lower overall effective income tax rate for 2002 compared to 2001.

The pre-tax income (loss) from US operations includes interest expense and corporate headquarters expenses. Therefore, the pre-tax income (loss) from US operations, as a percentage of the consolidated pre-tax income, was less than the sales to US customers as a percentage of consolidated gross sales.

The Internal Revenue Service has completed its examination of the Mattel, Inc. federal income tax returns through December 31, 1997.

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Liquidity and Capital Resources

Mattel’s primary sources of liquidity over the last three years have been cash on hand at the beginning of the year, cash flows generated from continuing operations, long-term debt issuances and short-term seasonal borrowings. Cash flows from continuing operations could be negatively impacted by decreased demand for Mattel’s products, which could result from factors such as adverse economic conditions and changes in public and consumer preferences, or increased costs associated with manufacturing and distribution of products or realized shortages in raw materials or component parts. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal borrowing could be adversely affected by factors such as an inability to meet its debt covenant requirements, which include maintaining consolidated debt-to-capital and interest coverage ratios, or a deterioration of Mattel’s credit ratings. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.

Operating Activities

Operating activities generated cash flows from continuing operations of $1.156 billion during 2002, compared to $756.8 million in 2001 and $555.1 million in 2000. The increase in cash flows from operating activities in 2002 was largely due to increased income from continuing operations and improved working capital. The improvement in working capital was driven by lower accounts receivable resulting from shorter payment terms to customers and improved cash collections and lower inventory levels due to supply chain initiatives. While Mattel will continue to strive for working capital improvement in 2003, management does not expect to generate the same magnitude of cash from working capital improvements as in 2002. The increase in cash flows in 2001 compared to 2000 was primarily attributable to higher income from continuing operations and increased cash collections. In addition, the disposition of Learning Company in the fourth quarter of 2000 resulted in improved cash flows since Mattel was no longer required to fund this business.

Investing Activities

Mattel invested its cash flows during the last three years in tooling to support existing and new products, expansion of its existing North American manufacturing facilities in anticipation of the closure of the Murray, Kentucky, plant in mid-2002, and its long-term information technology strategy. In 2001, Mattel acquired Pictionary^® for approximately $29 million, of which approximately $21 million was paid in 2001, $3 million in 2002 and the remaining $5 million will be paid over the next 2 years.

Financing Activities

For the years ended 2002 and 2001, Mattel utilized cash flows from operating activities to repay both long-term debt and short-term borrowing obligations as part of its goal to improve its debt-to-capital ratio. In 2002, Mattel repaid approximately $422 million in long-term debt obligations, largely related to the $200.0 million term loan, 200 million Euro Notes and $30.0 million of medium-term notes. In 2001, Mattel utilized cash flows from operating activities to repay approximately $176 million of short-term borrowing obligations and $30.5 million of medium-term notes. In 2000, Mattel received proceeds from issuance of the aforementioned $200.0 million term loan and 200 million Euro Notes, which were used to repay its 6 ³/4% Senior Notes upon maturity and to support operating activities.

During the third quarter of 2000, Mattel announced a change in its dividend policy consisting of a reduction in the annual cash dividend from $0.36 per share to $0.05 per share when and as declared by the board of directors. The $0.05 per share annual dividend rate under the new dividend policy became effective in December 2001. The reduction of the dividend resulted in cash savings of approximately $135 million in 2002 and $132 million in 2001.

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Capital Deployment Plan

To guide future capital deployment decisions, with a goal of maximizing shareholder value, Mattel’s board of directors has established the following capital and investment framework:

In the first quarter of 2003, Mattel will use approximately $130 million of free cash flow to fund incentive compensation and the shareholder litigation settlement. In 2003, Mattel will repay approximately $180 million in long-term debt related to $30.0 million in medium-term notes maturing in May 2003 and $150.0 million in 6% senior notes maturing in July 2003. Over the long-range horizon, assuming cash flows from operating activities remain strong, Mattel plans to use its free cash flows to invest in strategic acquisitions and to return funds to shareholders through cash dividends and share repurchases. The ability to implement successfully the capital deployment plan is directly dependent on Mattel’s ability to generate strong cash flows from operating activities. There is no assurance that Mattel will continue to generate strong cash flows from operating activities or achieve the targeted goals from its investing activities. Further, Mattel’s management may alter its current plans in the future.

Seasonal Financing

Mattel expects to finance its seasonal working capital requirements for 2003 by using existing and internally generated cash, issuing commercial paper, selling certain trade receivables, and using various short-term bank lines of credit. In March 2002, Mattel amended and restated its existing $1.0 billion domestic unsecured committed revolving credit facility into a $1.060 billion, 3-year facility that expires in 2005. This facility provides short-term borrowings from a commercial bank group. Interest is charged at various rates selected by Mattel, ranging from market commercial paper rates to the bank reference rate. The unsecured committed revolving credit facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet these financial covenant ratios at the end of each fiscal quarter and fiscal year, using the formulae specified in the credit agreement to calculate the ratios. Mattel was in compliance with such covenants at the end of each fiscal quarter and fiscal year in 2002. As of December 31, 2002, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.37 to 1 (compared to a maximum allowed of 0.50 to 1) and Mattel’s interest coverage ratio was 8.14 to 1 (compared to a minimum allowed of 3.50 to 1).

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term foreign credit lines with a number of banks. Foreign credit lines total approximately $266 million, a portion of which is used to support letters of credit. Mattel expects to extend these credit lines throughout 2003. Mattel believes the cash on hand at the beginning of 2003, amounts available under its domestic unsecured committed revolving credit facility, its uncommitted money market facility, and its foreign credit lines will be adequate to meet its seasonal financing requirements in 2003.

Mattel sells certain domestic and foreign trade receivables as one of its means for financing seasonal working capital requirements. Mattel has a $300.0 million domestic receivables sales facility which is a sub-facility of Mattel’s $1.060 billion, 3-year domestic unsecured committed revolving credit facility. The outstanding amount of receivables sold under the domestic receivables facility may not exceed $300.0 million at any given time, and the $1.060 billion available to be borrowed under the credit facility is reduced to the extent of any such outstanding receivables sold. Under the domestic receivables facility, certain trade receivables are

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sold to a group of banks, which currently include, among others, Bank of America, N.A. as administrative agent, Citicorp USA, Inc. and Fleet National Bank as syndication agents, and Societe Generale and BNP Paribas as documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell trade receivables from Wal-Mart and Target to Mattel Factoring, a Delaware corporation and wholly-owned subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. Mattel Factoring is a consolidated subsidiary of Mattel. Pursuant to the terms of the domestic receivables facility and simultaneous with each receivables purchase, Mattel Factoring sells those receivables to the bank group. Mattel records the transaction, reflecting cash proceeds and sale of accounts receivable on its consolidated balance sheet, at the time of the sale of the receivables to the bank group.

Mattel’s subsidiaries Mattel International Holdings B.V., a Netherlands company, Mattel France S.A.S., a French company, and Mattel GmbH, a German company, have entered into a Euro 150 million European trade receivables facility, pursuant to which Mattel France S.A.S. and Mattel GmbH may sell trade receivables to a bank, Societe Generale Nederland N.V. The receivables sales are accounted for as a sale. As with the domestic receivables facility, each sale of accounts receivable is recorded on Mattel’s consolidated balance sheet at the time of such sale. No Mattel subsidiary is used as a special purpose entity in connection with these transactions. Under the European receivables facility, the outstanding amount of receivables sold may not exceed Euro 60 million from February 1 through July 31 of each year and may not exceed Euro 150 million at all other times. Pursuant to a letter agreement between Societe Generale Nederland and Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH dated July 1, 2002, the commitment termination date for the European receivables facility was extended to June 29, 2003.

The outstanding amounts of accounts receivable that have been sold under these facilities and other factoring arrangements, net of collections from customers, and have been excluded from Mattel’s consolidated balance sheets are summarized as follows (in millions):

Financial Position

Mattel’s cash and short-term investments increased by $650.4 million to $1.267 billion at year end 2002 compared to $616.6 million at year end 2001. The increase was primarily due to cash flows generated from operating activities and reductions in working capital, partially offset by repayment of long-term debt. Accounts receivable, net decreased by $175.0 million to $490.8 million at year end 2002, reflecting shorter payment terms to customers and improved cash collections, partially offset by lower factoring of accounts receivable. Inventories decreased by $148.9 million to $338.6 million at year end 2002. Inventory levels were positively impacted by the execution of the supply chain initiatives and the elimination of pre-built inventory related to the closure of the Murray, Kentucky, plant, which was completed in the second quarter of 2002. While Mattel will continue to strive for working capital improvement through its supply chain initiatives and focus on cash collections in 2003, management does not expect to generate the same magnitude of cash from working capital improvements as in 2002 considering the current level of its accounts receivable and inventories. Property, plant and equipment, net decreased $27.1 million to $599.6 million at year end 2002, largely due to depreciation, partially offset by capital spending. Goodwill decreased by $386.2 million to $703.2 million at year end 2002, largely due to the one-time $400.0 million pre-tax transition adjustment resulting from the implementation of

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SFAS No. 142. Other assets increased $36.1 million to $767.9 million, principally due to increased noncurrent deferred tax assets resulting from the transition adjustment made in connection with implementation of SFAS No. 142, partially offset by tax asset reductions associated with income from continuing and discontinued operations.

Short-term borrowings decreased $12.9 million to $25.2 million at year end 2002 compared to $38.1 million at year end 2001, due to the repayment of debt. Current portion of long-term debt decreased by $27.8 million to $182.3 million at year end 2002, largely due to the repayment of the 200 million Euro Notes, partially offset by the reclassification of $150.0 million of 6% senior notes from long-term debt to current portion of long-term debt since they mature in July 2003.

A summary of Mattel’s capitalization is as follows (in millions):