Toy giant Mattel Inc. (NYSE: MAT) released better 1Q 2007 earnings, but the company is still headed in the wrong direction because Barbie is losing her luster.

The good news is that sales revenue was$940.3 million, up 19% from 1Q 2006. Operating income was actually income for the quarter, totaling $20.6 million, compared with an operating loss of $32 million in 1Q 2006. The bad news is that net profit for the quarter fell 60% to $12 million. Much of the decline is explained by a $57 million tax benefit in 1Q 2006. Mattel showed a profit of $0.03 per share for 1Q 2007, compared to $0.08 per share in 1Q 2006, a 62.5 % decrease.

U.S. total sales were up 10% for the quarter, 29% worldwide. Much of this increase was driven by toys for the pre-school market. Fisher-Price toy sales increased 27%. Sales of Hot Wheels (mainly for boys) increased 15%.

Unfortunately, Barbie sales account for 20% of total company sales, and 30% of total company profits. Barbie revenue plunged 21% in the U.S. and increased just 2% worldwide. To counteract this development, Mattel will launch BarbieGirls.com on April 26th, a worldwide social networking site for all things Barbie. Mattel is hoping to build an online community where girls (and boys) can chat and design customized Barbie adventures. Mattel will also bring out Island Princess Barbie later this year.

Prices of toys manufactured in China, 80% of the total toy manufacturing market, have increased along with the price of raw materials. Mattel is betting heavily that youth electronics will offer larger growth prospects rather than dolls, actions figures and board games.