To remain on course in this rapidly changing environment, our Company has established five strategic imperatives. They are our roadmap to help us stay on top of trends, meet consumers' needs, create stockholder value, achieve financial goals and remain a leader in the industry.

The Company has 26 distinct brands, including three of the top five prestige beauty brands in the U.S. Together they fill the desires of diverse consumers, run the gamut of price points and are sold in innovative ways.

Last year, we took a close look at the DNA of each of our brands and worked with some of the top trendsetters in fashion and beauty to learn how to modernize our iconic products without compromising brand equity. We examined what our consumers want on a global basis and challenged our management teams to focus our brand portfolio on those needs.

To concentrate on our successful makeup artist brands, M·A·C and Bobbi Brown, we divested stila. The stylish M·A·C brand, targeted to "All Races, All Sexes, All Ages," is our fastest-growing brand outside North America, as well as a runaway success in North America. We see Bobbi Brown resonating strongly with Asian consumers, and fast becoming a global powerhouse among women who connect with the brand's beauty philosophy-to look like who you are...only prettier. Many of our brands are poised to become affordable luxuries in emerging markets, while others are focusing on reaching out to an increasingly diverse ethnic population in North America, as well as internationally.

Our business today focuses on four major categories: skin care, makeup, fragrance and hair care. Our annual sales in both skin care and makeup have passed the $2 billion mark.

The consumer trend around the world is on attaining affordable luxuries, and our prestige skin care, makeup, fragrance and salon hair care help meet that need.

Our eight Research & Development facilities around the world are increasingly attuned to the nuances of global cosmetic needs in skin care, makeup and hair care-especially in Asia, where we have the new Shanghai Institute for Innovation.

Skin care was our most profitable category in fiscal 2006 as we continued to expand our leadership in anti-aging, protection and daily face care.

Makeup was the fastest-growing category for the prestige cosmetics business in fiscal 2006. We have three of the top five face products in U.S. department stores, and our brands are concentrating on building equity in the other key categories that draw traffic to counters-mascaras, eye shadows, lips and color collections.

To succeed in fragrances, where more than 200 new prestige scents flood the market each year, we're focusing on a select number of mega-launches while continuing to add freshness and modernity to our existing fragrances with rejuvenating new products.

In hair care, Aveda and Bumble and bumble continue to work with salon owners through education programs in salon management, styling and product development to help enhance the quality of the consumer salon experience.

The Estée Lauder Companies is headquartered in midtown Manhattan, but our reach is truly global. Our largest brands are sold in more than 130 countries and territories; many smaller brands will follow their paths. Nearly half of our sales and profits come from outside North America, and we expect our international business to drive future growth.

Our emerging markets strategy centers on China, Russia, India and Brazil. In China, which we see as the largest opportunity, we sell eight brands, including M·A·C, Bobbi Brown, La Mer, Aramis, Donna Karan and Tommy Hilfiger. In fiscal 2006, Estée Lauder and Clinique were the fastest-growing prestige brands in China, measured by same-store sales and driven by skin care and makeup.

In Japan, Clinique enjoyed an upturn, and Aveda continues to be successful. We had robust business in Russia and the Middle East, good momentum in Korea and South Africa, and established a direct affiliate in Turkey at the end of our fiscal year. Central Europe, Latin America and Vietnam promise to be influential. We currently sell nine brands in Dubai, which is a mecca for luxury goods and a destination for vacationers on shopping sprees.

Our push into untapped regions continued in fiscal 2006. Estée Lauder entered Vietnam, M·A·C opened in India, Jordan, Indonesia and Panama, and Jo Malone expanded to Thailand and opened its first free-standing store in Australia. We are exploring several foreign opportunities for BeautyBank's brands. Our exclusive brands, Bobbi Brown and Jo Malone, are expanding in international markets with a strategically managed growth plan.

North American department stores, once the mainstay of our business, now account for slightly more than one-third of sales. Our Internet business rose approximately 35 percent in fiscal 2006 and is our fastest-growing channel. This year we added transactional sites in the U.K. for Estée Lauder, Clinique, M·A·C and Origins.

Internationally, the travel retail division is fast becoming one of our largest global affiliates. It's a strategic growth area for Bobbi Brown-with the Incheon Airport in Korea soon to become the brand's best-selling door in the world.

Overall, business in fiscal 2006 proved robust in our hundreds of free-standing retail locations, in many upscale salons that sell Aveda and Bumble and bumble, and in high-end specialty stores. This year, French pharmacies stocked Origins, spas offered Darphin and Korean Air sold La Mer creams inflight.

Each year, more than one billion lipsticks, moisturizers and mascaras roll off our assembly lines. To ensure that the global manufacturing, warehousing and distribution operation is running at 21st-century speed and efficiency, we've begun a Company-wide high-tech initiative to improve and standardize our processes around the world. As part of the initiative, we will be implementing SAP software, making it easier to track an eyeliner as it moves from the factory floor to the selling floor. The improved technology, which is scheduled to be phased in in spring 2007 at Aveda, should enable divisions to communicate more effectively and create cost savings throughout the business, from concept to creation and distribution to promotion.

We've improved our manufacturing capabilities and streamlined factories, so each is a Center of Excellence for specific categories. New supplier hubs and distribution centers are part of a modernization effort that we expect will help improve financial benchmarks.

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