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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

For the transition period from                          to                         

Commission File Number 001-05647

MATTEL, INC.

(Exact name of registrant as specified in its charter)

333 Continental Blvd.

El Segundo, CA 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 statements 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 June 30, 2004 was $7,561,924,657.

Number of shares outstanding of registrant’s common stock, $1.00 par value, as of March 4, 2005:

416,686,056 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Mattel, Inc. 2005 Notice of Annual Meeting of Stockholders and Proxy Statement, to be filed with the Securities and Exchange Commission (“SEC”) within 120 days after the close of the registrant’s fiscal year (incorporated into Parts II and III).

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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 wholesalers (i.e., “customers”) and directly to consumers. Mattel’s vision is to provide “the world’s premier toy brands—today and tomorrow.” Management has set six key company strategies: (i) improve execution of the existing toy business; (ii) globalize the brands; (iii) extend the brands into new areas; (iv) catch new trends, create new brands and enter new categories; (v) develop people; and (vi) improve productivity, simplify processes and maintain customer service levels.

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:

Mattel Brands—including Barbie^® fashion dolls and accessories (“Barbie^®”), Polly Pocket!^™ and Disney Classics (collectively “Other Girls Brands”), Hot Wheels^®, Matchbox^® and Tyco^® R/C vehicles and playsets (collectively “Wheels”) and Harry Potter^™, Yu-Gi-Oh!^™, Batman^™, Justice League^™, Megaman^™ and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands—including Fisher-Price^®, Little People^®, Rescue Heroes^®, BabyGear^™ and View-Master^® (collectively “Core Fisher-Price^®”), Sesame Street^®, Barney^™, Dora the Explorer^™, Winnie the Pooh, InteracTV^™ and See ’N Say^® (collectively “Fisher-Price^® Friends”) and Power Wheels^®.

American Girl Brands—including American Girl Today^®, The American Girls Collection^® and Bitty Baby^®. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers.

Mattel was incorporated in California in 1948 and reincorporated in Delaware in 1968. Its executive offices are located at 333 Continental Blvd., El Segundo, California 90245-5012, telephone number (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. The Domestic segment is further divided into Mattel Brands US, Fisher-Price Brands US and American Girl Brands. 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 Continuing 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.”

Domestic Segment

The Domestic segment develops toys that it markets and sells through the Mattel Brands US, Fisher-Price Brands US and American Girl Brands segments.

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In the Mattel Brands US segment, Barbie^® includes brands such as Barbie^® fashion dolls and accessories, My Scene^™, and Barbie^® Collector. Polly Pocket!^™ and Disney Classics are included within Other Girls Brands. Wheels is comprised of Hot Wheels^®, Matchbox^®, and Tyco^® R/C. Entertainment includes Harry Potter^™, Yu-Gi-Oh!^™, Batman^™, Justice League^™ and Megaman^™ products, as well as games and puzzles.

In 2005, Mattel expects to expand its existing products or introduce new products, including continuing to leverage content within the core brands. For example, entertainment-themed fashion dolls and accessories related to Barbie^® and The Magic of Pegasus, the first ever Fairytopia^™ full-length movie on DVD and Barbie^® American Idol^™ will be introduced in 2005. In the Wheels category, new product introductions include Hot Wheels^® AcceleRacers^™ and Tyco^® R/C Shell Shocker^™. In the Entertainment category, new Batman^™ products as well as Scene It?^™ TV Edition will be available in 2005.

The Fisher-Price Brands US segment includes Fisher-Price^®, Power Wheels^®, Sesame Street^®, Little People^®, BabyGear^™, Winnie the Pooh, Rescue Heroes^®, Barney^™, See ’N Say^®, Dora the Explorer^™, InteracTV^™ and View-Master^® brands. New product introductions for 2005 are expected to include Baby Gymtastics^™, the Star Station^™ entertainment system, Read with Me DVD, Tumble Time^™ Tigger and Shout! Elmo plush doll.

The American Girl Brands segment is a direct marketer, children’s publisher and retailer that includes the following brands: The American Girls Collection^®, American Girl Today^® and Bitty Baby^®. American Girl Brands also publishes best-selling books from American Girl Library^®, as well as the award-winning American Girl^® magazine. In 2005, American Girl Brands, in association with Warner Bros., is creating a second made-for-TV movie scheduled to air in the fall of 2005 featuring Felicity Merriman^®, a classic American Girl^® character. Product introductions include Elizabeth^™, Felicity^®’s best friend from the movie, and Marisol^™, both new American Girl^® dolls for 2005. American Girl Brands products are sold only in the US and Canada.

International Segment

Products marketed by the International segment, with the exception of American Girl Brands, are generally 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 retailers and wholesalers in Canada and most European, Asian and Latin American countries, and through agents and distributors in those countries where Mattel has no direct presence.

Mattel’s International segment revenue represented approximately 42% of consolidated gross sales in 2004. Within the International segment, Mattel operates in four regions that generated the following gross sales during 2004 (in millions):

No individual country within the International segment exceeded 6% of worldwide, consolidated gross sales during 2004.

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

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information by geographic area, see Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements.”

Manufacturing and Materials

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

Mattel’s principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia and Mexico. Mattel also utilizes third-party manufacturers to manufacture its products in the US, Europe, Mexico, Asia 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. Mattel believes that the existing production capacity at its own and its third-party manufacturers’ manufacturing facilities is 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 and forecasts, 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, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, 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 in 2002, following enactment of a bill authorizing such status upon the country’s accession to the World Trade Organization (“WTO”), which occurred in 2001. Membership in the WTO substantially reduces the possibility of China losing its NTR status, which would result in increased costs for Mattel and others in the toy industry.

All US duties on toys were completely eliminated upon implementation of the Uruguay Round WTO agreement in 1995. The European Union, Japan and Canada eliminated their tariffs on most toy categories through staged reductions that were completed by January 1, 2004. The primary toy tariffs still maintained by these countries are European Union and Japanese tariffs on dolls of 4.7% and 3.9%, respectively, and a Canadian tariff of 8.0% on children’s wheeled vehicles.

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 quality, play value and price. The Mattel Brands US and Fisher-Price Brands US segments compete with several large toy companies, including Hasbro, Inc., Jakks Pacific, Lego, Leap Frog, Bandai, MGA Entertainment and many smaller toy companies. American Girl Brands competes with toy companies in the doll category, and to a lesser extent, with children’s book publishers and retailers in the girls category. Mattel’s International segment competes with global toy companies including Hasbro, Lego, Tomy, Bandai, and other national and regional toy companies. Foreign national and

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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 during the traditional holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters of Mattel’s fiscal year 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 its fiscal 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.”

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. During 2004, 2003 and 2002, Mattel spent approximately $171 million, $167 million and $159 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.”

Additionally, 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.

Advertising and Marketing

Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes place at varying levels throughout the year and peaks during the traditional holiday 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.

During 2004, 2003 and 2002, Mattel spent approximately $643 million (12.6% of net sales), $636 million (12.8% of net sales) and $553 million (11.3% of net sales), respectively, on worldwide advertising and promotion.

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Sales

Mattel’s products are sold throughout the world. Products within the Domestic segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers by Mattel Brands US and Fisher-Price Brands US. Mattel also operates several small retail outlets, generally near or at its corporate headquarters and distribution centers as a service to its employees and as an outlet for its products. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers. Mattel has two retail stores, American Girl Place^® in Chicago, Illinois and New York, New York, each of which features children’s products from the American Girl Brands segment. American Girl Brands has a retail outlet in Oshkosh, Wisconsin that serves as an outlet for excess product. Products within the International segment are sold directly to retailers and wholesalers in Canada and most European, Asian and Latin American countries, and through agents and distributors in those countries where Mattel has no direct presence. Mattel also has retail outlets in Latin America and Europe as an outlet for its products.

During 2004, Mattel’s three largest customers (Wal-Mart at $1.0 billion, Toys “R” Us at $0.8 billion and Target at $0.5 billion) accounted for approximately 46% of consolidated net sales in the aggregate. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the US. The customers and the degree of concentration vary depending upon the region or nation. 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 11 to the Consolidated Financial Statements.”

Licenses and Distribution Agreements

Mattel has license agreements with third parties that permit Mattel to utilize the trademark, characters or inventions of the licensor in products that Mattel sells. A number of these licenses relate to product lines that are significant to Mattel’s business and operations. An important licensor is Warner Bros. Consumer Products, which has granted Mattel the master toy license for Batman^™, Superman^™ and Justice League^™, as well as the Harry Potter^™ book and movie property, for use on Mattel’s products. Mattel has also entered into license agreements with, among others: Disney Enterprises, Inc., relating to Disney characters such as Winnie the Pooh and the Disney Princesses, the new Pixar movie Cars, scheduled to be released in 2006, and all Disney films and television properties for use in Mattel’s DVD board games, such as Scene It?^™, sold in North America; Sesame Workshop relating to its Sesame Street^® properties; Viacom International, Inc. relating to its Nickelodeon^® properties including SpongeBob SquarePants^™ and Dora the Explorer^™; and Nihon Ad Systems Inc. for the master toy license to the Yu-Gi-Oh!^™ property worldwide, excluding Asia.

Royalty expense during 2004, 2003 and 2002 was approximately $204 million, $169 million and $210 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.

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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 year end 2004, Mattel had outstanding commitments for purchases of inventory, other assets and services totaling approximately $188 million in fiscal year 2005. Licensing and similar agreements with terms extending through 2013 contain provisions for future guaranteed minimum payments aggregating approximately $300 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.”

Backlog

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 that the amount of backlog orders at any given time may not accurately indicate future sales.

Financial Instruments

Currency 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 transaction exposure for the year and partially 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. 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 toy industry taken as a whole. See “Seasonality.”

Mattel maintains and periodically amends or replaces a domestic unsecured committed revolving credit facility with a commercial bank group that is used as the primary source of financing for the seasonal working

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capital requirements of its domestic subsidiaries. The agreement in effect was amended and restated during 2004 and was increased to a $1.30 billion, 3-year facility expiring in March 2007. The other terms and conditions of the amended and restated facility are substantially similar to those contained in the previous facility. Interest is charged at various rates selected by Mattel, ranging from market commercial paper rates to the bank reference rate. The domestic 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 2004. As of year end 2004, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.28 to 1 (compared to a maximum allowed of 0.50 to 1) and Mattel’s interest coverage ratio was 12.30 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.”

Mattel anticipates amending its domestic unsecured committed revolving credit facility in March 2005. The size of the facility is expected to remain at $1.30 billion, although Mattel has an option to increase the size of the facility up to $1.50 billion if there are sufficient aggregate commitments. The expiration date of the facility is expected to be extended to March 31, 2010. All other terms and conditions of the amended facility will be substantially similar to the existing facility, including the consolidated debt-to-capital and interest coverage ratios.

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. As of year end 2004, foreign credit lines total approximately $213 million, a portion of which are used to support letters of credit. Mattel expects to extend these credit lines throughout 2005.

Mattel believes its cash on hand at the beginning of 2005, 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 2005. As of year end 2004, Mattel has available borrowing resources totaling approximately $1.2 billion under its domestic unsecured committed revolving credit facility and foreign credit lines.

Mattel has a $300.0 million domestic receivables sales facility that is a sub-facility of Mattel’s 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 amount 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 Barclays Bank PLC, as co-syndication agents, and Societe Generale and BNP Paribas, as co-documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell eligible trade receivables from Wal-Mart and Target to Mattel Factoring, Inc. (“Mattel Factoring”), a Delaware corporation and wholly-owned, consolidated subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. 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 Bank Nederland N.V. 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

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used as a special purpose entity in connection with these transactions. Under the European trade 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 Bank Nederland N.V. and Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH dated July 12, 2004, and effective June 25, 2004, the commitment termination date for the European receivables facility was extended to June 24, 2005.

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 (“CPSC”) 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 CPSC may also require the recall and repurchase or repair of articles that are banned. Similar laws exist in some states and cities and in many international markets.

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 recall and the extent of the recall efforts required. A product recall could also negatively affect Mattel’s reputation and the sales of other Mattel products. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results.”

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 toward 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 subject 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 year end 2004, Mattel’s total number of employees was approximately 25,000.

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Executive Officers of the Registrant

The current executive officers of Mattel, all of who are appointed annually by and serve at the pleasure of the board of directors, 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, 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 March 2003. He served as President, Boys/Entertainment from March 1999 until March 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.

Ms. Brothers has been Executive Vice President of Mattel and President, American Girl since July 2000. From November 1998 to July 2000, she was Senior Vice President of Operations, Pleasant Company (which merged with and into Mattel on December 31, 2003, followed immediately on January 1, 2004, by an asset transfer to Mattel’s subsidiary American Girl). 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 Northrop Grumman Corporation.

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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, 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. From 1998 to 2001, he served as Executive Vice President, Finance of Premier Practice Management, Inc. Prior to that, he served as a finance officer at two public companies, FPA Medical Management, Inc. in 1998, and at the North American subsidiary of the French oil company, Total S.A. from 1991 to 1997, after serving for ten years at PricewaterhouseCoopers LLP.

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 LLP and Sullivan & Cromwell LLP.

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 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. Topham has been Vice President and Treasurer since March 2004. He served as Vice President and Assistant Controller from May 2001 to March 2004. From August 2000 to May 2001, he served as Vice President and Treasurer of Premier Practice Management, Inc. From June 1999 to August 2000, he served as Division Vice President of Dataworks, Inc., a specialized publishing company. Prior to that, he spent eight years with Total Petroleum (North America) LTD., most recently as Vice President of Human Resources.

Available Information

Mattel files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) with the SEC. The public may read and copy any materials that Mattel files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

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,

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Proxy Statements 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 approximately 335,000 square feet, which is subject to a $39.1 million mortgage, and an adjacent office building consisting of approximately 55,000 square feet. 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 Fisher-Price Brands US segment and for corporate support functions. American Girl Brands owns its headquarters facilities in Middleton, Wisconsin, consisting of approximately 180,000 square feet, a warehouse in Middleton, consisting of approximately 215,000 square feet, distribution facilities in Middleton, DeForest and Wilmot, Wisconsin, consisting of a total of approximately 948,000 square feet, and vacant property in Eau Claire, Wisconsin, consisting of approximately 47,000 square feet, all of which are used by the American Girl Brands segment.

Mattel maintains leased sales offices in California, New York, North Carolina, Arkansas and Michigan and leased warehouse and distribution facilities in California, New Jersey and Texas, all of which are used by the Domestic segment. Mattel has leased retail space in Chicago, Illinois and New York, New York for its American Girl Place^® stores and leased retail space in Oshkosh, Wisconsin, which are used by the American Girl Brands 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 segments. Internationally, Mattel has offices and/or warehouse space in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Costa Rica, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, India, Italy, Japan, Mexico, The Netherlands, New Zealand, Norway, Peru, Poland, Portugal, Puerto Rico, Romania, Singapore, South Korea, Spain, Sweden, Switzerland, the United Kingdom and Venezuela which are leased (with the exception of office space in Chile and certain warehouse space in France that is owned by Mattel) and used by the International segment. Mattel’s principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia and Mexico. See “Manufacturing and Materials.”

For leases that are scheduled to expire during the next twelve months, Mattel may negotiate new lease agreements, renew existing lease agreements or utilize alternate 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

Market Information

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 Mattel’s common stock for the last two calendar years, see Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements.”

Holders of Record

As of March 4, 2005, Mattel had approximately 42,000 holders of record of its common stock.

Dividends

In 2004, 2003 and 2002, Mattel paid a dividend per share of $0.45, $0.40 and $0.05, respectively, to holders of its common stock. The board of directors declared the dividend in November, and Mattel paid the dividend in December of each year. The payment of dividends on common stock is at the discretion of Mattel’s board of directors and is subject to customary limitations.

Securities Authorized for Issuance under Equity Compensation Plans

The information regarding Mattel’s equity compensation plans is incorporated herein by reference to Mattel’s 2005 Notice of Annual Meeting of Stockholders and Proxy Statement to be filed with the SEC within 120 days after December 31, 2004.

Recent Sales of Unregistered Securities

During the fourth quarter of 2004, Mattel did not sell any unregistered securities.

Issuer Purchases of Equity Securities

During the fourth quarter of 2004, Mattel did not repurchase any of its common stock. As of year end 2004, Mattel has $384.3 thousand available for purchases under its share repurchase program.

In July 2003, Mattel’s board of directors approved a share repurchase program of up to $250.0 million. During 2003, Mattel repurchased 12.7 million shares at a cost of $244.4 million pursuant to this program. In November 2003, the board of directors approved an increase to the share repurchase program of an additional $250.0 million, bringing the total authorized repurchases to $500.0 million. During 2004, Mattel repurchased 14.7 million shares at a cost of $255.1 million pursuant to this program. Mattel’s share repurchase program has no expiration date.

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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.

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.

Overview

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

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

Mattel Brands—including Barbie^® fashion dolls and accessories (“Barbie^®”), Polly Pocket!^™ and Disney Classics (collectively “Other Girls Brands”), Hot Wheels^®, Matchbox^® and Tyco^® R/C vehicles and playsets (collectively “Wheels”) and Harry Potter^™, Yu-Gi-Oh!^™, Batman^™, Justice League^™, Megaman^™ and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands—including Fisher-Price^®, Little People^®, Rescue Heroes^®, BabyGear^™ and View-Master^® (collectively “Core Fisher-Price^®”), Sesame Street^®, Barney^™, Dora the Explorer^™, Winnie the Pooh, InteracTV^™ and See ’N Say^® (collectively “Fisher-Price^® Friends”) and Power Wheels^®.

American Girl Brands—including American Girl Today^®, The American Girls Collection^® and Bitty Baby^®. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers.

Management believes that the business environment for Mattel in 2005 will be similar to that of 2004. Mattel expects to continue facing challenges both domestically and internationally as retailers continue to rationalize stores and prioritize inventory management. Management also expects to encounter continued cost pressures in the areas of product costs, including oil-based resin, transportation costs, and employee-related costs.

Management has established two overarching goals for 2005. The first goal is to drive growth by continuing the invigoration of the Barbie^® brand, while maintaining growth in all of its core brands by continuing to develop innovative toys. Mattel also plans on generating growth by focusing on more effectively aligning with growing retail customers and continuing to develop new channels. The second goal is to gain further efficiencies in the supply chain by implementing new spend management and e-procurement policies, procedures and information systems; and rationalizing manufacturing and vendor sourcing.

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Results of Continuing Operations

2004 Compared to 2003

Consolidated Results

Net sales for 2004 were $5.10 billion, a 3% increase compared to $4.96 billion in 2003, including a benefit from changes in currency exchange rates of 2 percentage points. Net income for 2004 was $572.7 million, or $1.35 per diluted share, as compared to net income of $537.6 million, or $1.22 per diluted share, for 2003. Gross profit, as a percentage of net sales, declined from 49.0% in 2003 to 47.2% in 2004. Sales of lower margin products, including the impact of sales mix, value enhancement initiatives, change in classification of close out sales, higher royalty costs and ongoing external cost pressures were the primary drivers for the decline in gross profit. Income generated from continuing operations before income taxes declined in absolute dollars and as a percentage of net sales in 2004 compared to 2003. Contributing to this decline was a pre-tax charge of $16.2 million, primarily related to the elimination of approximately 285 positions as a result of headcount reductions at certain domestic and international locations, and integration of the Matchbox^® and Tyco^® R/C business located in New Jersey into the Hot Wheels^® business in California to take advantage of synergies in the Wheels business. These increased costs were partially offset by gains on the sale of investments, net favorable legal settlements and a positive benefit from changes in currency exchange rates. A settlement with the US Internal Revenue Service (“IRS”) resulted in a net benefit of $65.1 million in the 2004 provision for income taxes in the consolidated statement of income. Net income for 2003 included a pre-tax charge of $26.3 million ($20.0 million after-tax) related to the financial realignment plan, which was completed in 2003. In 2003, Mattel also recognized pre-tax income of $7.9 million ($5.0 million after-tax) representing an adjustment to a reserve accrued in 1999 associated with the closure of a manufacturing facility in Beaverton, Oregon. The combined effect of these items was a net after-tax charge of $15.0 million for 2003.

Shares repurchased under Mattel’s share repurchase program resulted in a benefit to Mattel’s earnings per share in 2004 when compared to 2003, by reducing the average number of common shares outstanding. Since inception of the share repurchase program in July 2003, Mattel has repurchased 27.4 million shares, representing 6% of common shares outstanding.

In the second quarter of 2004, a major thunderstorm damaged a Mattel distribution center located in Texas, which warehouses and distributes finished product for Mattel. Mattel carried insurance for this risk and in the fourth quarter of 2004, Mattel settled its claim with its insurance carrier. This event had no material impact on the results of operations for 2004.

The following table provides a summary of Mattel’s consolidated results for 2004 and 2003 (in millions, except percentage and basis point information):

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Sales

Net sales for 2004 were $5.10 billion, a 3% increase compared to $4.96 billion in 2003, including a benefit from changes in currency exchange rates of 2 percentage points. Gross sales within the US remained flat with 2003 and accounted for 58% of consolidated gross sales in 2004 compared to 60% in 2003. In 2004, gross sales in international markets increased 7% compared to 2003, including a benefit from changes in currency exchange rates of 5 percentage points.

During the fourth quarter of 2003, Mattel changed the way certain close out sales are classified in its consolidated statement of income. Close out sales are sales of certain products that are no longer included in current product lines. These sales were previously classified as a reduction of cost of sales. Effective October 1, 2003, close out sales are reported as net sales in Mattel’s consolidated statements of income. This change in classification had no impact on gross profit, net income, net income per common share, balance sheets or cash flows for any date or period presented. For the fourth quarter of 2003, close out sales, which were included in reported net sales, were $19.2 million. In 2004, close out sales represented 80 basis points of sales growth for the year, and had a negative impact on gross profit, as a percentage of net sales, of 40 basis points. For the first three quarters of 2003, close out sales classified as a reduction of cost of sales were $38.1 million. See Item 6 “Selected Financial Data” and Item 8 “Financial Statements and Supplementary Data—Notes 1, 11 and 12 to the Consolidated Financial Statements.”

Worldwide gross sales of Mattel Brands decreased 1% to $3.2 billion in 2004 compared to 2003, including a 3 percentage point benefit from changes in currency exchange rates. Domestic gross sales decreased 5% and international gross sales increased 4%, including a 6 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Barbie^® decreased 8% from 2003, including a benefit from changes in currency exchange rates of 3 percentage points. Domestic gross sales of Barbie^® decreased 15% and international gross sales of Barbie^® decreased 3%, including a 5 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Other Girls Brands decreased 10% from 2003, including a 3 percentage point benefit from changes in currency exchange rates. Sales of new product introductions in Other Girls Brands were more than offset by declining sales of discontinued product lines. Worldwide gross sales in the Wheels category increased 3% compared to 2003, including a 3 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of the Hot Wheels^® product line increased compared to 2003, driven by double digit growth internationally resulting from new product introductions. Worldwide gross sales in the Entertainment category increased 22% compared to 2003, including a 3 percentage point benefit from changes in currency exchange rates, mainly attributable to strong sales of Scene It?^™ and the launch of Mattel’s personal video player, JuiceBox^™, and continued strength in male action entertainment properties such as Batman^™, Megaman^™, and Yu-Gi-Oh!^™.

Worldwide gross sales of Fisher-Price Brands increased 8% to $1.9 billion in 2004 compared to 2003, including a 1 percentage point benefit from changes in currency exchange rates. Domestic gross sales increased 4%, while international sales grew 18%, including a 6 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Core Fisher-Price^® increased 9% compared to 2003, including a 2 percentage point benefit from changes in currency exchange rates. Sales growth in Core Fisher-Price^® was primarily related to sales growth in infant and preschool products and continued growth in the BabyGear^™ line. Worldwide gross sales of Fisher-Price^® Friends increased 19% compared to 2003, including a 2 percentage point benefit from changes in currency exchange rates, driven by the expansion of learning-related products and strong sales growth from new product introductions featuring Dora the Explorer^™ and Winnie the Pooh.

Gross sales of American Girl Brands increased 10% to $379.1 million in 2004 compared 2003, due primarily to the success of the American Girl Place^® retail store in New York City which opened in November 2003, and increased sales of The American Girls Collection^® dolls and accessories driven by the first American Girl^® live-action, made-for-TV movie, which aired in November 2004.

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Gross Profit

Gross profit, as a percentage of net sales, was 47.2% in 2004 compared to 49.0% in 2003. The decrease in gross profit, as a percentage of net sales, resulted from sales of lower margin products, including the impact of sales mix, value enhancement initiatives, change in classification of close out sales, higher royalty costs and ongoing external cost pressures. This decline was partially offset by a benefit from changes in currency exchange rates and savings generated from continuous improvement programs. Mattel plans to continue to invest in value enhancement initiatives and expects the external cost pressures to continue. Mattel is actively pursuing cost saving actions and effective in January 2005, Mattel modestly increased the prices it charges to customers on a worldwide basis across most product lines. Cost of sales in 2003 includes a charge of $4.1 million for the financial realignment plan, primarily related to the consolidation of two of Mattel’s manufacturing facilities in Mexico.

Advertising and Promotion Expenses

Advertising and promotion expenses were 12.6% of net sales in 2004, compared to 12.8% in 2003. Mattel expects advertising spending levels for 2005 to be fairly consistent with 2004 to support its plan to invest in the business to drive long-term performance.

Other Selling and Administrative Expenses

Other selling and administrative expenses increased $34.0 million to $1.04 billion compared to $1.0 billion in 2003, with the percentage of net sales remaining flat at 20.3%. Other selling and administrative expenses increased in 2004, primarily due to the following:

The overall increase in other selling and administrative expenses was partially mitigated by reduced spending on continuous improvement initiatives, and net favorable legal settlements. Other selling and administrative expenses in 2003 included an $8.6 million financial realignment plan charge, largely related to streamlining back office functions and the termination of a licensing arrangement.

Non-Operating Items

Interest expense decreased from $80.6 million in 2003 to $77.8 million in 2004. Lower average long-term debt in 2004, as a result of the repayment of $180.0 million in long-term debt during 2003, partially offset by higher average short-term borrowings in 2004, were the primary causes of the decrease. Other non-operating (income), net was $23.5 million in 2004, comprised mainly of a $22.1 million gain from the sale of investments. Other non-operating (income), net was $16.8 million in 2003, including a $15.5 million gain from the sale of investments and a $7.8 million gain from an insurance recovery related to the shareholder litigation related to the 1999 acquisition of Learning Company that was settled in 2002, partially offset by foreign currency transaction losses of $10.0 million. Foreign currency transaction gains and losses on unhedged intercompany loans and advances are recorded as a component of other non-operating (income) expense, net in the period in which the

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exchange rate changes. See Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements” for a discussion of the shareholder litigation.

At year end 2004, the pre-tax unrealized gains on marketable securities held by Mattel were $26.1 million ($16.4 million after-tax). Prospectively, management expects to periodically sell additional marketable securities.

Provision for Income Taxes

In the fourth quarter of 2004, Mattel reached a settlement with the IRS regarding the examination of Mattel’s US federal income tax returns for the years 1998 through 2001. The settlement resulted in a net benefit of $65.1 million from changes in tax estimates, and the benefit is reflected in the 2004 provision for income taxes in the consolidated statement of income.

Business Segment Results

Mattel’s reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Brands US, Fisher-Price Brands US and American Girl Brands. Business Segment Results should be read in conjunction with Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements.”

Domestic Segment

Mattel Brands US gross sales decreased 5% in 2004 compared to 2003. Within this segment, gross sales of Barbie^® declined 15%, partially offset by strong sales growth in the Entertainment category. Management believes that Mattel Brands US segment sales continue to be negatively impacted by a continued reduction in inventory of Mattel products held by retailers and continued competitive challenges. During 2004, management developed a new strategy designed to regain relevance with girls by making improvements in the product line and launching a new brand campaign highlighting a fresher image, which resulted in improved performance at retail and increased category share. During 2005, management intends to focus on restoring retailer confidence in the Barbie^® brand by continuing to improve sell-through of Barbie^® product at retail. Mattel Brands US segment income decreased 16% to $326.3 million in 2004, primarily due to lower sales volume and a decline in gross profit resulting from increased sales of lower margin products, including the impact of sales mix, value enhancement initiatives, increased royalty costs and ongoing external cost pressures.

Fisher-Price Brands US gross sales increased 4%, reflecting an increase in sales of Core Fisher-Price^® products, mainly in the infant and preschool and BabyGear^™ lines and Fisher-Price^® Friends, driven by the expansion of learning-related products and strong sales growth from new product introductions featuring Dora the Explorer^™ and Winnie the Pooh. These sales increases were partially offset by a decrease in sales of Power Wheels^®. Fisher-Price Brands US segment income decreased 4% to $173.2 million in 2004, primarily due to increased sales of lower margin products, including the impact of sales mix, and higher product costs, including transportation and royalty costs, partially offset by higher sales volume.

American Girl Brands gross sales increased 10%, primarily as a result of the success of the American Girl Place^® retail store in New York City, which opened in November 2003, and increased sales of The American Girls Collection^® dolls and accessories driven by the first American Girl^® live-action, made-for-TV movie, which aired in November 2004. American Girl Brands segment income increased 25% to $77.5 million in 2004, driven by higher sales volume and improved gross profit, partially offset by higher overhead costs associated with its American Girl Place^® retail store in New York City.

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International Segment

The following table provides a summary of percentage changes in gross sales within the International segment in 2004 versus 2003:

International gross sales increased 7% in 2004 compared to 2003, including a benefit from changes in currency exchange rates of 5 percentage points. Gross sales of Barbie^® decreased 3%, including a benefit from changes in currency exchange rates of 5 percentage points. Gross sales in the Wheels category grew by double-digits in 2004 compared to 2003, mainly due to growth in Hot Wheels^® products, partially offset by declines in sales of Matchbox^®. Gross sales in the Entertainment category also increased by double-digits in 2004 compared to 2003, primarily due to strong sales of games and puzzles, including Scene It?^™, and the Warner Bros. properties, including Batman^™ and Harry Potter^™. Fisher-Price Brands gross sales increased 18%, including a benefit from changes in currency exchange rates of 6 percentage points, due to strong growth in Core Fisher-Price^® products, primarily infant and preschool and BabyGear^™ lines and Fisher-Price^® Friends, mainly due to new product introductions featuring Dora the Explorer^™ and Winnie the Pooh. International segment income decreased 18% to $299.2 million in 2004, as a result of a sales mix shift to lower margin products, the higher cost of value enhancement initiatives and pricing adjustments made in 2004 on certain products in Europe to remain competitive given the strength of the Euro versus the US dollar, and external cost pressures.

2003 Compared to 2002

Consolidated Results

Net sales for 2003 were $4.96 billion, a 2% increase compared to $4.89 billion in 2002, including a benefit from changes in currency exchange rates of 4 percentage points. Net income for 2003 was $537.6 million, or $1.22 per diluted share, as compared to net income of $230.1 million, or $0.52 per diluted share, for 2002. Net income for 2003 included a pre-tax charge of $26.3 million ($20.0 million after-tax) related to the financial realignment plan. In 2003, Mattel also recognized pre-tax income of $7.9 million ($5.0 million after-tax) representing an adjustment to a reserve accrued in 1999 associated with the closure of a manufacturing facility in Beaverton, Oregon. The combined effect of these items was a net after-tax charge of $15.0 million for 2003. In the first quarter of 2002, Mattel implemented SFAS No. 142 and recorded a transition adjustment of $252.2 million, net of tax, as the cumulative effect of a change in accounting principle resulting from the transitional impairment test of the American Girl Brands goodwill. In the third quarter of 2002, Mattel recorded a $27.3 million after-tax gain from discontinued operations related to the sale of Learning Company. In 2002, Mattel also incurred a pre-tax charge of $48.3 million ($31.9 million after-tax) related to the financial realignment plan. The combined effect of these items was a net after-tax charge of $256.8 million for 2002.

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The following table provides a summary of Mattel’s consolidated results for 2003 and 2002 (in millions, except percentage and basis point information):

Sales

Net sales for 2003 were $4.96 billion, a 2% increase compared to $4.89 billion in 2002. Worldwide gross sales for 2003 increased 1%, which included a benefit from changes in currency exchange rates of 3 percentage points. Gross sales within the US decreased 6% from 2002 and accounted for 60% of consolidated gross sales in 2003 compared to 64% in 2002. The decline in gross sales within the US reflects the challenging retail environment and competition in key categories. In 2003, gross sales in international markets increased 15% compared to 2002, which included a benefit from changes in currency exchange rates of 10 percentage points.

During the fourth quarter of 2003, Mattel changed the way certain close out sales are classified in its consolidated statement of income. Close out sales are sales of certain products that are no longer included in current product lines. These sales were previously classified as a reduction of cost of sales. Effective October 1, 2003, close out sales are reported as net sales in Mattel’s consolidated statements of income. This change in classification had no impact on gross profit, net income, net income per common share, balance sheets or cash flows for any date or period presented. For the fourth quarter of 2003, close out sales, which were included in reported net sales, were $19.2 million representing 1 percentage point of sales growth for the quarter and 40 basis points of sales growth for the year. For the first three quarters of 2003 and for 2002, close out sales classified as a reduction of cost of sales were $38.1 million and $112.7 million, respectively. See Item 6 “Selected Financial Data” and Item 8 “Financial Statements and Supplementary Data—Notes 1, 11 and 12 to the Consolidated Financial Statements.”

Worldwide gross sales of Mattel Brands increased 1% to $3.3 billion in 2003 compared to 2002, including a 5 percentage point benefit from changes in currency exchange rates. Domestic gross sales decreased 10% and international gross sales grew 14%, including a 10 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Barbie^® remained flat with 2002, including a 6 percentage point benefit from changes in currency exchange rates. A 17% increase in international Barbie^® gross sales was offset by a 15% decline in domestic Barbie^® gross sales. The international Barbie^® gross sales growth included an 11 percentage point benefit from changes in currency exchange rates. An increase in international sales of dolls was more than offset by declines in worldwide sales of Barbie^® accessories and lower domestic sales of dolls. Worldwide gross sales of Other Girls Brands increased 5%, including a 5 percentage point benefit from changes in currency exchange rates. The increase in gross sales of Other Girls Brands was driven by solid performances by

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Polly Pocket!^™ and ello^™. Declines in sales of Diva Starz^™ and What’s Her Face!^™ were only partially offset by the introduction of Flavas^™ in 2003. Worldwide gross sales in the Wheels category were down 2% in 2003 compared to 2002, including a 3 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of the Hot Wheels^® product line increased 3% compared to 2002 as a 23% increase in international sales was partially offset by a 7% decrease in domestic sales. The international Hot Wheels^® gross sales growth included a 10 percentage point benefit from changes in currency exchange rates. Additionally, gross sales of Matchbox^® declined in both domestic and international markets. Worldwide gross sales in the Entertainment category increased 3% in 2003 compared to 2002, including a 4 percentage point benefit from changes in currency exchange rates. The growth in this category was driven by strong gains in games and puzzles, a solid performance by Yu-Gi-Oh!^™, and the introduction of the Warner Bros. properties Batman^™ and Justice League^™, partially offset by declines in sales of Harry Potter^™ and Max Steel^™. 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 of Fisher-Price Brands increased 4% to $1.8 billion in 2003 compared to 2002, including a 2 percentage point benefit from changes in currency exchange rates. International gross sales increased 20%, while domestic gross sales decreased 1%. The international gross sales growth included a 10 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Core Fisher-Price^® products were up 5% due to a 25% increase in international sales, partially offset by a 3% decline in domestic sales. The growth in international gross sales of Core Fisher-Price^® included a 12 percentage point benefit from changes in currency exchange rates. Sales of Fisher-Price^® Friends increased in 2003 compared to 2002 in both domestic and international markets. Additionally, Mattel benefited in 2003 from launches of learning-related products, which include PowerTouch^™ and other learning toys.

Gross sales of American Girl Brands decreased 2% to $344.4 million in 2003 compared 2002. Sales declines in Angelina Ballerina^™, Bitty Baby^® and the historical Kaya^® doll launched in 2002 were partially offset by strong performances in the American Girl Today^® brand, driven by the launch of the Kailey^® doll in 2003, as well as introduction of the Hopscotch Hill School^™ brand. Additionally, the American Girl Place^® in New York City, which opened in November 2003, had a strong opening holiday season and helped mitigate the aforementioned sales declines.

Gross Profit

Gross profit, as a percentage of net sales, was 49.0% in 2003 compared to 48.3% in 2002. The gross profit improvement was due to savings realized from the financial realignment plan and supply chain initiatives (including global procurement initiatives designed to reduce costs) and lower royalty costs. The improvement in gross profit was partially offset by investments in initiatives designed to drive sales momentum, such as more open packaging to enhance value perception with consumers and packaging multiple products together at special value prices, and higher commodity and logistics costs.

Advertising and Promotion Expenses

Advertising and promotion expenses were 12.8% of net sales in 2003, compared to 11.3% in 2002. The increase in 2003 compared to 2002 was largely due to increased spending to support the launch of several new product lines and Mattel’s attempt to rebuild sales volume momentum in core brands as well as the unfavorable effect of currency exchange rate changes.

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Other Selling and Administrative Expenses

Other selling and administrative expenses were $1.0 billion, or 20.3% of net sales, in 2003 compared to $1.1 billion, or 21.5% of net sales, in 2002. The decrease in 2003 was primarily due to lower incentive compensation accruals of approximately $80 million and reduced bad debt expense of approximately $43 million, partially offset by higher employee benefit and insurance costs, spending related to continuous improvement initiatives and the unfavorable effect of changes in currency exchange rates. The decrease in bad debt expense was largely due to a $33.5 million writedown of the Kmart pre-bankruptcy accounts receivable in 2002. Other selling and administrative expenses in 2003 included an $8.6 million financial realignment plan charge, largely related to streamlining back office functions and the termination of a licensing arrangement. Other selling and administrative expenses in 2002 included a $13.3 million financial realignment plan charge, largely related to streamlining back office functions and asset writedowns and other costs associated with the closure of its manufacturing and distribution facilities in Murray, Kentucky (“North American Strategy”).

Non-Operating Items

Interest expense decreased from $113.9 million in 2002 to $80.6 million in 2003 due to lower average borrowings resulting from higher cash on hand at the beginning of the year, lower short-term interest rates and repayment of long-term debt. Other non-operating (income), net was $16.8 million in 2003, including a $15.5 million gain from the sale of investments and a $7.8 million gain from an insurance recovery related to the shareholder litigation related to the 1999 acquisition of the Learning Company settled in 2002, partially offset by foreign currency transaction losses of $10.0 million. Other non-operating expense, net was $15.9 million in 2002, including a $25.4 million charge resulting from the settlement of the shareholder litigation, partially offset by foreign currency transaction gains of $10.5 million. Foreign currency transaction gains and losses on unhedged intercompany loans and advances are recorded as a component of other non-operating (income) expense, net in the period in which the exchange rate changes. See Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements” for a discussion of the shareholder litigation.

Business Segment Results

Mattel’s reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. Prior to 2003, the Domestic segment was further divided into US Girls, US Boys—Entertainment, and US Infant & Preschool. In 2003, Mattel announced the consolidation of its US Girls and US Boys—Entertainment segments into one segment, renamed Mattel Brands US. Additionally, Pleasant Company, which was previously part of the US Girls segment, is now a separate segment for management reporting purposes. The results of Pleasant Company are now reported as American Girl Brands and US Infant & Preschool are now reported as Fisher-Price Brands US for segment reporting purposes. To facilitate the comparison of segment results for 2004 and 2003 to 2002, segment disclosures for 2002 have been restated to reflect these changes.

Domestic Segment

Mattel Brands US gross sales decreased 11% in 2003 compared to 2002. Within this segment, lower sales of Barbie^®, Diva Starz^™, What’s Her Face!^™, Wheels and Harry Potter^™ products were partially offset by growth in Polly Pocket!^™ and ello^™, and the introduction of Flavas^™ and the Warner Bros. properties Batman^™ and Justice League^™. Barbie^® gross sales decreased 15% due to declines in the accessories and doll categories and increased competition. Mattel Brands US segment income decreased 13% to $388.7 million in 2003, primarily due to lower sales volume and increased advertising spending to support the launch of several new product lines and its attempt to rebuild sales volume momentum in core brands, partially offset by higher gross profit.

Fisher-Price Brands US gross sales decreased 1%, due to declines in sales of Core Fisher-Price^® and Power Wheels^® products, partially offset by increased sales of Fisher-Price^® Friends and launches of learning-

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related products. Fisher-Price Brands US segment income decreased 4% to $180.1 million in 2003, primarily due to lower sales volume and increased overhead costs to support development of new product lines, partially offset by higher gross profit.

American Girl Brands gross sales decreased 2% as declines in Angelina Ballerina^™, Bitty Baby^® and the historical Kaya^® doll launched in 2002 were partially offset by strong performances in the American Girl Today^® brand, driven by the launch of the Kailey^® doll in 2003, as well as introduction of the Hopscotch Hill School^™ brand. American Girl Brands segment income increased 7% to $62.0 million in 2003, primarily due to higher gross profit, partially offset by increased selling and administrative expenses to support the opening of its retail store, American Girl Place^®, in New York City during the fourth quarter of 2003.

Management believes the overall decrease in Domestic segment gross sales in 2003 resulted from the impact of the challenging retail environment, competition in key categories and the shift in consumer purchases to later in the holiday season.

International Segment

The following table provides a summary of percentage changes in gross sales within the International segment in 2003 versus 2002:

International gross sales increased 15% in 2003 compared to 2002, including a benefit from changes in currency exchange rates of 10 percentage points. The increase in gross sales was due to growth across all product lines, including Barbie^®, Hot Wheels^® and Core Fisher-Price^®, combined with growth in the Entertainment category, including games and puzzles, Yu-Gi-Oh!^™ and Batman^™. International segment income increased 20% to $365.0 million in 2003, largely due to increased sales volume and gross profit improvement, partially offset by higher advertising and promotion expenses in an attempt to rebuild sales volume momentum in core brands and launch new brands.

Financial Realignment Plan

In 2003, Mattel completed its financial realignment plan, originally announced during the third quarter of 2000, which was designed to improve gross profit, other selling and administrative expenses, operating income, and cash flows. Since its inception, Mattel recorded a total pre-tax charge of $250.0 million, or approximately $171 million after-tax, of which approximately $123 million represented cash expenditures and $48 million represented non-cash asset writedowns.

Mattel exceeded the targeted initial cumulative pre-tax cost savings of approximately $200 million, achieving cumulative pre-tax cost savings of approximately $221 million by the end of 2003, of which approximately $79 million and $87 million were realized in 2003 and 2002, respectively.

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Charges relating to the financial realignment plan were recorded in the following captions in the consolidated statements of income (in millions):

In 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 US. Costs associated with this reorganization included the elimination of approximately 5% of executive-level positions, including the position of president of the Girls division. Also in 2003, Mattel substantially completed the consolidation of two of its manufacturing facilities in Mexico to streamline manufacturing within North America.

In 2002, as part of its financial realignment plan, Mattel commenced a long-term information technology strategy aimed at achieving operating efficiencies and cost savings across all disciplines. The program 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 have greater visibility to information and data on a global basis. Also in 2002, Mattel completed the closure of its manufacturing and distribution facilities in Murray, Kentucky, as part of the North American Strategy.

In connection with the financial realignment plan, Mattel recorded pre-tax restructuring charges of $37.3 million during 2002 and 2003, of which $0.1 million was not yet paid as of year end 2004. These charges were largely related to the elimination of positions at its US-based headquarters locations in El Segundo, Fisher-Price and American Girl, costs associated with the North American Strategy, closure of certain international offices, and consolidation of facilities. From the inception of the plan through 2003, Mattel terminated the employment of approximately 2,570 employees.

The components of the restructuring charge and reconciliation of the liability are as follows (in millions):

In 2003, Mattel recorded a net restructuring charge totaling $4.8 million in the consolidated statement of income, representing $12.7 million of restructuring charges related to the financial realignment plan that were partially offset by income of $7.9 million representing an adjustment to a reserve accrued in 1999 associated with the closure of a manufacturing facility in Beaverton, Oregon.

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Income Taxes

Mattel’s effective tax rate on income from continuing operations in 2004 was 17.7% compared to 27.4% in 2003. During 2004, Mattel reached a settlement with the IRS regarding the examination of Mattel’s US federal income tax returns for the years 1998 through 2001. The settlement resulted in a net benefit to Mattel of $65.1 million, which lowered Mattel’s overall effective tax rate in 2004 as compared to 2003 and 2002. This settlement did not have a significant impact on cash paid for income taxes during 2004.

Mattel’s effective tax rate on income from continuing operations increased in 2003 to 27.4% compared to 26.8% in 2002 due to goodwill, the tax benefit of deductible costs related to the financial realignment plan, and other charges. Management believes the effective tax rate applied to income earned in future periods will be more consistent with the rates in fiscal years prior to 2004.

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

The IRS has completed its examination of the Mattel, Inc. US federal income tax returns through 2001 and is currently examining the 2002 and 2003 US federal income tax returns.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Jobs Act”) was signed into law. Among its various provisions, the Jobs Act creates a temporary incentive for US corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain qualifying dividends. On December 21, 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position 109-2 (“FSP 109-2”), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. FSP 109-2 allows companies additional time beyond the financial reporting period in which the Jobs Act was enacted to evaluate the effect of the Jobs Act on a company’s plan for reinvestment or repatriation of unremitted foreign earnings for the purposes of applying SFAS No. 109, Accounting for Income Taxes. As of December 31, 2004, management had not decided on whether, or to what extent, Mattel may repatriate foreign earnings under the Jobs Act. Therefore, Mattel’s 2004 consolidated financial statements do not include any provision for income taxes on the $3.1 billion cumulative balance of unremitted foreign earnings as of year end 2004. Based on the analysis to date, Mattel may repatriate up to approximately $2.4 billion in foreign earnings with a corresponding tax liability of up to approximately $160 million. The computation of the tax liability does not include the potential favorable effects of the Tax Technical Corrections Act of 2004, which was introduced to the US Congress on November 22, 2004. It is anticipated that this bill will become law in 2005 and, when enacted, would change Mattel’s computation of the tax liability associated with the repatriation of foreign earnings under the Jobs Act. Management expects to finalize its assessment related to the Jobs Act in the first half of 2005.

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 and short-term 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 by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal financing 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.

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Capital and Investment Framework

To guide future capital deployment decisions, with a goal of maximizing shareholder value, Mattel’s board of directors in 2003 established the following capital and investment framework:

Over the long term, 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, depending on market conditions, share repurchases. However, 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 its targeted goals from investing activities.

Operating Activities

Cash flows generated from operating activities of continuing operations were $570.4 million during 2004, compared to $604.8 million in 2003 and $1.16 billion in 2002. The decrease in cash flows from operating activities in 2004 from 2003 was primarily due to higher working capital requirements caused mainly by higher accounts receivable resulting from a shift in timing of customer purchases to later in the fourth quarter, partially offset by increased income from continuing operations. The decrease in cash flows from operating activities in 2003 from 2002 was primarily due to higher working capital requirements attributable to payments made in 2003 related to year end 2002 accruals for incentive compensation and the shareholder litigation settlement. Additionally, Mattel entered 2003 with relatively lower levels of accounts receivable and inventories than in 2002 due to working capital improvements achieved during 2002.

Investing Activities

Mattel used cash flows for investing activities of continuing operations of $108.1 million during 2004, primarily to invest in tooling to support existing and new products and its long-term information technology strategy. In 2004, capital expenditures were partially offset by proceeds from the sales of investments and property, plant and equipment, primarily related to the disposal of property in Mexico that was no longer needed when manufacturing operations in Mexico were combined as part of the financial realignment plan. The decrease in cash flows used for investing activities in 2004 was mainly due to higher spending in 2003 associated with the construction of the new American Girl Place^® in New York City, and expansion of manufacturing facilities in Mexico as part of the financial realignment plan, and reduced spending in 2004 on information technology. In 2003 and 2002, Mattel used cash flows for investing activities of $180.8 million and $158.4 million, respectively, primarily to support existing and new products, its long-term information strategy, certain financial realignment plan initiatives (including the expansion of manufacturing facilities in Mexico) and the construction of the new American Girl Place^® in New York City that opened in the fourth quarter of 2003. These costs were partially offset by the sale of investments in 2003.

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Financing Activities

Cash flows used for financing activities of continuing operations decreased $88.1 million to $466.3 million in 2004 compared to 2003, primarily due to the repayment of $150.0 million of 6% senior notes in 2003, partially offset by increased dividends paid in 2004 and reduced cash from employee stock option exercises. Compared to 2002, cash flows used for financing activities in 2003 increased $160.1 million, primarily due to the purchase of treasury stock and an increase in the annual dividend rate, partially offset by lower amounts of debt maturing in 2003 compared to 2002. In 2005, Mattel intends to repay its $150.0 million of 6 ¹/8% senior notes and a $39.1 million mortgage note upon maturity.

In July 2003, Mattel’s board of directors approved a share repurchase program of up to $250.0 million. During 2003, Mattel repurchased 12.7 million shares at a cost of $244.4 million pursuant to this program. In November 2003, the board of directors approved an increase to the share repurchase program of an additional $250.0 million, bringing the total authorized repurchases to $500.0 million. During 2004, Mattel repurchased 14.7 million shares at a cost of $255.1 million pursuant to this program. Mattel’s share repurchase program has no expiration date.

In 2004, 2003 and 2002, Mattel paid a $0.45 per share, $0.40 per share and $0.05 per share dividend to holders of its common stock, respectively. The board of directors declared the dividend in November, and Mattel paid the dividend in December of each year. The dividend payments were approximately $187 million, $171 million and $22 million in 2004, 2003 and 2002, respectively.

Seasonal Financing

Mattel maintains and periodically amends or replaces a domestic unsecured committed revolving credit facility with a commercial bank group that is used as the primary source of financing for the seasonal working capital requirements of its domestic subsidiaries. The agreement in effect was amended and restated during 2004 and was increased to a $1.30 billion, 3-year facility expiring in March 2007. The other terms and conditions of the amended and restated facility are substantially similar to those contained in the previous facility. Interest is charged at various rates selected by Mattel, ranging from market commercial paper rates to the bank reference rate. The domestic 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 2004. As of year end 2004, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.28 to 1 (compared to a maximum allowed of 0.50 to 1) and Mattel’s interest coverage ratio was 12.30 to 1 (compared to a minimum allowed of 3.50 to 1). The domestic unsecured committed revolving credit facility is a material agreement and failure to comply with the financial covenant ratios may result in an event of default under the terms of the facility. If Mattel defaulted under the terms of the domestic unsecured committed revolving credit facility, its ability to meet its seasonal financing requirements could be adversely affected.

Mattel anticipates amending its domestic unsecured committed revolving credit facility in March 2005. The size of the facility is expected to remain at $1.30 billion, although Mattel has an option to increase the size of the facility up to $1.50 billion if there are sufficient aggregate commitments. The expiration date of the facility is expected to be extended to March 31, 2010. All other terms and conditions of the amended facility will be substantially similar to the existing facility, including the consolidated debt-to-capital and interest coverage ratios.

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. As of year end 2004, foreign credit lines total approximately $213 million, a portion of which are used to support letters of credit. Mattel expects to extend these credit lines throughout 2005.

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Mattel believes its cash on hand at the beginning of 2005, 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 2005. As of year end 2004, Mattel has available borrowing resources totaling approximately $1.2 billion under its domestic unsecured committed revolving credit facility and foreign credit lines.

Mattel has a $300.0 million domestic receivables sales facility that is a sub-facility of Mattel’s 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 amount 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 Barclays Bank PLC, as co-syndication agents, and Societe Generale and BNP Paribas, as co-documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell eligible trade receivables from Wal-Mart and Target to Mattel Factoring, a Delaware corporation and wholly-owned, consolidated subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. 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 Bank Nederland N.V. 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 trade 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 Bank Nederland N.V. and Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH dated July 12, 2004, and effective June 25, 2004, the commitment termination date for the European receivables facility was extended to June 24, 2005.

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

Financial Position

Mattel’s cash and cash equivalents was $1.16 billion at year end 2004, which was slightly higher than year end 2003. Accounts receivable increased by $215.1 million to $759.0 million at year end 2004, reflecting a shift in timing of sales to late in the fourth quarter of 2004 compared to 2003 and changes in currency exchange rates. Management expects to collect the majority of these receivables in the first quarter of 2005. Inventories increased

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$30.0 million to $418.6 million at year end 2004, mainly due to lower than expected sales volume during the holiday season and changes in currency exchange rates. Based on Mattel’s analysis of point of sale information, management believes that inventory levels of Mattel products at retail are lower at year end 2004 compared to 2003.

Current portion of long-term debt increased $136.9 million to $189.1 million at year end 2004 compared to year end 2003 due to the reclassification of $150.0 million of 6 ¹/8% senior notes maturing in the third quarter of 2005 and the $39.1 million mortgage note maturing in the fourth quarter of 2005 from long-term debt to current portion of long-term debt, partially offset by repayment of $50.0 million of medium-term notes in 2004. Accounts payable and accrued liabilities increased $86.5 million since year end 2003 to $1.2 billion, mainly due to changes in currency exchange rates, increased amounts due to third-party manufacturers, and higher advertising and royalty accruals, partially offset by lower receivable collections due to bank related to the European receivables facility and reduced reserves for defective returns.

A summary of Mattel’s capitalization is as follows (in millions, except percentage information):

Total long-term debt decreased $189.1 million at year end 2004 compared to year end 2003 due to the aforementioned reclassification of $150.0 million of 6 ¹/8% senior notes and the $39.1 million mortgage note maturing in 2005 to current portion of long-term debt. Mattel expects to satisfy its future long-term capital needs through the generation of corporate earnings and issuance of long-term debt instruments. Stockholders’ equity of $2.39 billion at year end 2004 increased $169.6 million from year end 2003, primarily as a result of income from continuing operations, partially offset by the purchase of treasury stock and payment of the annual dividend on common stock in the fourth quarter of 2004.

Mattel’s debt-to-capital ratio, including short-term borrowings and current portion of long-term debt, improved from 23.0% at year end 2003 to 20.6% at year end 2004 due to cash flows generated from operating activities of continuing operations combined with the repayment of medium-term notes, partially offset by the purchase of treasury stock and the payment of the annual dividend on common stock. Mattel’s objective is to continue to maintain a year-end debt-to-capital ratio of approximately 25%.

Off-Balance Sheet Arrangements

Mattel has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders.

Commitments

In the normal course of business, Mattel enters into debt agreements, contractual arrangements to obtain and protect Mattel’s right to create and market certain products, and for future purchases of goods and services to

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ensure availability and timely delivery. These arrangements include commitments for future inventory purchases and royalty payments pursuant to licensing agreements. Certain of these commitments routinely contain provisions for guaranteed or minimum expenditures during the term of the contracts.

Mattel’s commitments for debt and other contractual obligations expected to be settled in cash are summarized as follows (in millions):