Statement on Philosophy of Executive Compensation

In establishing and evaluating the effectiveness of compensation programs for executive officers, as well as other senior executives of Mattel, the Compensation Committee is guided by three basic principles:

Mattel benchmarks its total compensation levels by comparing itself to other large, global, consumer product companies, in order to make Mattel’s compensation opportunities competitive with what other leading companies are providing. Mattel compares its pay to leading companies because Mattel wants to attract and retain talented employees who will lead Mattel to greater business success. Mattel generally intends for its overall executive compensation packages to be at or above the average for global consumer product companies, but Mattel does not target a specific percentile for benchmarking purposes.

Compensation Consultants

The Board of Directors has adopted a charter for the Compensation Committee which provides, among other things, that the Compensation Committee may, at its discretion, utilize an independent compensation consultant or other professional or expert. The retention and, where appropriate, the termination of such compensation consultant are at the sole discretion of the Compensation Committee without the participation of any officer or other member of management of Mattel. The Compensation Committee has retained The Hay Group as its independent compensation consultant. In 2003, the independent compensation consultant assisted the Compensation Committee with regard to

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comparative market data regarding compensation, aspects of compensation paid to senior executives of Mattel, incentive concepts, financial and other performance measures and equity incentive plans.

Base Salaries

The Compensation Committee establishes the base salaries of executive officers at levels it determines are appropriate in light of the duties and scope of responsibilities of each officer’s position. The Compensation Committee reviews executive officer salaries regularly, usually at least once every 12 months, and makes adjustments as warranted to reflect continued individual contributions, sustained performance and competitive market factors. The Compensation Committee measures individual contributions and performance against total annual compensation, including incentive awards, rather than against base salary alone. During the year 2003, the Compensation Committee did not increase the base salary of Mr. Eckert. Based upon a review of the competitiveness of their respective overall compensation packages, the Compensation Committee increased the annual base salaries of Mr. Bousquette, Mr. Farr, Mr. Neil Friedman and Mr. Stockton in March 2003. In doing so, the Compensation Committee reviewed competitive data regarding base salary levels in comparative companies, relied upon the advice of the Compensation Committee’s independent compensation consultant and exercised its business judgment, taking into consideration, among other things, increased employment responsibilities as a result of organizational changes announced in February 2003. These changes included the consolidation of the Girls and Boys/Entertainment business units into the new Mattel Brands business unit; the promotion of Mr. Bousquette into the position of President, Mattel Brands; the creation of the new position of Executive Vice President, International and the promotion of Mr. Stockton into that position; and the elimination of the position of Executive Vice President, Business Planning and Development and the redistribution of the responsibilities of that former position among other executive officers.

Annual Incentives

At the 2002 Annual Meeting of Stockholders, Mattel’s stockholders approved the 2002 Mattel Incentive Plan (the “MIP”) and the material terms of its performance goals. The MIP replaced the Management Incentive Plan (the “Prior MIP”), which was an earlier annual incentive program. Employees of Mattel and its subsidiaries are eligible to participate in the MIP. The performance objectives used to determine payments under the MIP may be based on one or more of a variety of different financial business criteria with respect to (1) Mattel, (2) Mattel’s worldwide operations, regional operations, country specific operations and/or subsidiaries, business units, affiliates, corporations, divisions, groups, functions or employees and/or (3) Mattel’s brands, groups of brands or specific brands. Each year, the Compensation Committee establishes specific targets that must be achieved before incentive payments are paid, as well as maximum levels for participants, which provide a ceiling on the total amount payable. The performance objectives for named executive officers are based on objective formulae or standards, as required to qualify for the exception from Internal Revenue Code Section 162(m) for performance-based compensation. For other employees, the Compensation Committee has the discretion to establish performance objectives based on other standards, including individual performance objectives, business and personal contributions and management discretion.

In March 2003, the Compensation Committee established performance goals and formulae for the year 2003 under the MIP based on (a) for Mr. Eckert, the overall corporate financial performance of Mattel, (b) for Mr. Bousquette and Mr. Neil Friedman, the overall corporate financial performance of Mattel and the financial performance of the executive’s respective business unit, (c) for Mr. Farr, the overall corporate financial performance of Mattel and the financial performance of the business units and (d) for Mr. Stockton, the overall corporate financial performance of Mattel, the financial

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performance of the International division and the financial performance of the business units. The performance goals with respect to the overall corporate financial performance of Mattel were based upon net operating profit after taxes less a capital charge. The performance goals with regard to the financial performance of each business unit were based on the business unit’s U.S. operating profit less an inventory charge and the business unit’s international operating profit at planned overhead less an inventory charge. The performance goals with respect to the International division were based upon international operating profit less a working capital charge. At the time they were set, the 2003 performance goals were substantially uncertain to be achieved. The goals were set at threshold, target and maximum levels. For 2003, the maximum amounts that named executive officers were eligible to receive under the MIP ranged from 90% to 200% of base salary; in determining these amounts, the Compensation Committee reviewed competitive data regarding annual incentive levels in comparative companies, relied upon the advice of the Compensation Committee’s independent compensation consultant and exercised its business judgment. With regard to the year 2003, the Mattel Brands business unit did not achieve the financial performance goals at the threshold level; however, Mattel, the Fisher-Price Brands business unit and the International division achieved the financial performance goals at levels between threshold and target. Annual incentive payments under the MIP to Mr. Eckert, Mr. Bousquette, Mr. Farr, Mr. Neil Friedman and Mr. Stockton were calculated and paid accordingly.

In addition, in recognition of Mr. Bousquette’s achievement in regard to the consolidation and integration of the former Girls and Boys/Entertainment business units into the new Mattel Brands business unit, Mr. Bousquette was awarded a Special Achievement Award with regard to the year 2003 in the amount of $200,000. In determining this award, the Compensation Committee relied upon the advice of the Compensation Committee’s independent compensation consultant and exercised its business judgment.

Long-Term Incentive Plan

At the 2003 Annual Meeting of Stockholders, Mattel’s stockholders approved the Mattel, Inc. 2003 Long-Term Incentive Plan (the “LTIP”), which replaced an existing long-term incentive plan. Awards under the LTIP are based on Mattel’s financial performance over the cycle relative to performance targets relating to its long-range financial goals and are paid in the quarter following the end of the performance cycle. In March 2003, the Compensation Committee established the performance targets for the January 1, 2003-December 31, 2006 performance cycle. For the 2003-2006 performance cycle, the Compensation Committee based the performance targets on net operating profit after taxes less a capital charge. In March 2003, the Compensation Committee established the level of each executive’s participation and threshold, target and maximum levels for the performance criteria that had to be achieved before incentive payments would be awarded under the LTIP at the threshold, target and maximum payout levels. These performance criteria included criteria for an interim payment based upon financial performance during the January 1, 2003-December 31, 2004 portion of the 2003-2006 performance cycle. At the time that they were set, the goals that the Compensation Committee established were substantially uncertain to be achieved. It is unknown at this time whether any payments will be made with regard to the 2003-2006 cycle.

Equity-Based Incentive Compensation

The Amended and Restated Mattel 1996 Stock Option Plan (the “1996 Plan”) authorizes the Compensation Committee to make grants and awards of stock options, stock appreciation rights, restricted stock and other stock-based awards. Stock options are granted under the 1996 Plan with an exercise price equal to the market price of Mattel’s common stock on the date of grant and generally vest semi-annually over three years. This approach is designed to motivate management to increase stockholder value over the long-term because the full benefit of the compensation package cannot be realized unless stock price

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appreciation occurs over a number of years. In determining the number of options awarded, the Compensation Committee considers competitive practices, the duties and scope of responsibilities of each executive’s position and the amount and terms of options already held by management.

By its terms, the 1997 Premium Price Stock Option Plan (the “PPO Plan”) terminated on December 31, 2002, except with respect to stock options then outstanding.

In 2003, Mr. Eckert, Mr. Bousquette, Mr. Farr, Mr. Neil Friedman and Mr. Stockton were granted options to purchase 375,000, 250,000, 125,000, 250,000 and 125,000 shares of Mattel common stock, respectively, pursuant to the 1996 Plan. The exercise price per share of the options is equal to the closing price per share of Mattel common stock on the date of grant. The options vest and become exercisable as follows: as to 10% of the shares six months after the grant date, as to an additional 10% of the shares one year after the grant date, and as to an additional 20% of the shares every six months thereafter, with the options becoming fully exercisable on the third anniversary of the grant date. The options expire ten years from the date of grant. The primary basis for the Compensation Committee’s granting of such options was to recognize the executives as key leaders of the company and to provide them with strong incentives to increase Mattel’s stockholder value during the term of the options. The Compensation Committee reviewed competitive data regarding equity incentive levels in comparative companies, relied upon the advice of the Compensation Committee’s independent compensation consultant and exercised its business judgment in determining the number of options to grant, taking into account, among other things, increased employment responsibilities as a result of organizational changes announced in February 2003 and more fully described above under “Base Salaries.”

The Compensation Committee believes that significant equity interests in Mattel held by its executives more closely align the interests of stockholders and management. In light of this belief, Mattel has established stock ownership guidelines that apply to the named executive officers and certain other executive officers. Those executive officers to whom the guidelines apply have up to five years to attain target minimum levels of stock ownership, based on an ascending scale commensurate with their level in Mattel. Compliance with these guidelines, while not mandatory, is taken into consideration when the Compensation Committee grants stock options.

Compensation of the Chief Executive Officer

Mr. Eckert’s Employment Agreement dated as of October 18, 2000, effective as of May 16, 2000, established the terms and conditions of his employment with Mattel, including a minimum base salary, minimum levels of participation in incentive plans, the minimum benefits to which he was entitled under the compensation plans available to Mattel’s executive officers and payments or benefits to which he would be entitled upon termination of his employment. See “Employment Agreements” below. The Compensation Committee typically reviews the base salary of the Chief Executive Officer at least every 12 months pursuant to the same policies the Compensation Committee uses to evaluate the base salaries of the other executive officers. Mr. Eckert’s compensation was reviewed by the Compensation Committee during the year 2003 and was not increased, based upon an assessment of the competitiveness of his total compensation package and the existing economic environment.

Multiple components of Mr. Eckert’s compensation are tied directly to Mattel’s financial performance. Mr. Eckert’s stock options and deferrable restricted stock units are tied to Mattel’s financial performance in that the value of these equity securities is directly determined by the market value of Mattel’s stock. In 2003, the Compensation Committee awarded to Mr. Eckert an option under the 1996 Plan to purchase 375,000 shares of Mattel common stock. The purpose of this award was to provide Mr. Eckert with a continuing incentive to increase Mattel’s stock value during the term of the option. The Compensation Committee reviewed competitive data regarding equity incentive levels for board chairs

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and chief executive officers of comparative companies, relied upon the advice of its independent compensation consultant and exercised its business judgment in making this grant to Mr. Eckert.

Mr. Eckert also participates in Mattel’s annual incentive plan, the MIP. As explained above, the Compensation Committee met in March 2003 to establish performance goals under the MIP for the year 2003. Mr. Eckert’s performance goals were based exclusively upon Mattel’s corporate financial performance, specifically Mattel’s net operating profit after taxes less a capital charge. The goals were set at threshold, target and maximum levels; consistent with the terms of Mr. Eckert’s employment agreement, if the goals were achieved at the target level, his annual bonus opportunity was 100% of his base salary, and if the goals were achieved at the maximum level, his bonus opportunity was 200% of his base salary. Achievement below the threshold level would have resulted in no annual bonus payment to Mr. Eckert, and achievement at the threshold, target or maximum levels would have resulted in annual bonus payments of $625,000, $1,250,000 or $2,500,000, respectively. With regard to the year 2003, Mattel achieved corporate financial performance between the threshold and target levels, and as a result Mr. Eckert received an annual bonus of $663,998.

Mr. Eckert also participates in the LTIP. In March 2003, the Compensation Committee established goals under the LTIP for a plan cycle that began January 1, 2003 and ends on December 31, 2006. As explained above, Mr. Eckert’s performance goals under the LTIP are based exclusively upon Mattel’s corporate financial performance, specifically Mattel’s net operating profit after taxes less a capital charge. The goals were set at threshold, target and maximum levels; under the criteria established by the Compensation Committee, achievement of financial performance below the threshold level would result in no LTIP payment to Mr. Eckert, and achievement at the threshold, target or maximum levels would result in payments of $3,000,000, $6,000,000 or $12,000,000, respectively. The criteria established by the Compensation Committee included criteria for an interim payment based upon Mattel’s corporate financial performance during the January 1, 2003-December 31, 2004 portion of the 2003-2006 performance cycle. It is unknown at this time whether any payment will be made with regard to the 2003-2006 cycle.

Internal Revenue Code Section 162(m)

As one of the factors in its review of compensation matters, the Compensation Committee considers the anticipated tax treatment to Mattel and to its executives of various payments and benefits. The deductibility of some types of compensation payments depends upon the timing of an executive’s vesting or exercise of previously granted rights or on whether such compensation qualifies for the exemption for “performance-based” compensation under the provisions of Internal Revenue Code Section 162(m). Furthermore, interpretations of and changes in the tax laws and other factors beyond the Compensation Committee’s control also affect the deductibility of compensation. For these and other reasons, the Compensation Committee will not necessarily limit executive compensation to the amount deductible under Internal Revenue Code Section 162(m). The Compensation Committee will consider various alternatives to preserve the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with its other compensation objectives.

COMPENSATION COMMITTEE

John L. Vogelstein (Chair)

Eugene P. Beard

Dr. Andrea L. Rich

G. Craig Sullivan

March 12, 2004

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