FISCAL 2006 AS COMPARED WITH FISCAL 2005

NET SALES
Net sales increased 3%, or $183.8 million, to $6,463.8 million due to growth in our makeup, skin care and hair care product categories, which was partially offset by lower sales in our fragrance product category. The net increase reflected sales growth in all geographic regions. Excluding the impact of foreign currency translation, net sales increased 4%.

Product Categories
Skin Care Net sales of skin care products increased 2%, or $48.7 million, to $2,400.8 million primarily due to new product launches. The fiscal 2006 launches of Resilience Lift Extreme Ultra Firming Cremes and Re-Nutriv Ultimate Lifting Serum by Estée Lauder, and Turnaround Concentrate Visible Skin Renewer and Turnaround 15-Minute Facial by Clinique generated incremental sales of approximately $123 million, combined. Perfectionist [CP+] by Estée Lauder and products in Clinique's 3-Step Skin Care System, bolstered by the introduction of Liquid Facial Soap, contributed approximately $78 million to the increase. These improvements were offset by approximately $157 million of decreases in sales of existing products in certain of our core brands as well as declines in our BeautyBank brands, which completed their initial rollout during fiscal 2005. Excluding the impact of foreign currency translation, skin care net sales increased 3%.

Makeup Makeup net sales increased 6%, or $137.4 million, to $2,504.2 million reflecting growth from our makeup artist brands of approximately $179 million. This growth was partially offset by approximately $72 million of lower sales from certain existing products, reflecting challenges experienced by certain of our core brands, and declines in our BeautyBank brands, which completed their initial rollout during fiscal 2005. Excluding the impact of foreign currency translation, makeup net sales increased 7%.

Fragrance Net sales of fragrance products decreased 4%, or $47.3 million, to $1,213.3 million as we continued to be challenged in this product category, particularly in the Americas region. Estée Lauder Beyond Paradise and various fragrances from Clinique and Tommy Hilfiger generated approximately $106 million of lower sales. Also contributing to the decrease were lower sales of approximately $28 million of True Star by Tommy Hilfiger and Lauder Beyond Paradise Men by Estée Lauder as we anniversaried the initial shipments of those products in fiscal 2005. These decreases were partially offset by the fiscal 2006 launches of True Star Men by Tommy Hilfiger and Unforgivable by Sean John, which collectively contributed approximately $49 million to the category, and higher sales of approximately $47 million of DKNY Be Delicious and Estée Lauder pleasures. Excluding the impact of foreign currency translation, fragrance net sales decreased 2%.

Hair Care Hair care net sales increased 16%, or $44.8 million, to $318.7 million, primarily due to sales growth from Bumble and bumble and Aveda products. Bumble and bumble sales benefited from sales growth due to new points of distribution, increases in sales of core products and the launches of Shine and Powder products. Aveda net sales increases benefited from the fiscal 2006 launch of Damage Remedy hair care products, strong demand for color products and from the acquisition of a distributor. Excluding the impact of foreign currency translation, hair care net sales increased 17%.

Geographic Regions
Net sales in the Americas increased 3%, or $95.3 million, to $3,446.4 million. The increase was led by growth in the United States of approximately $190 million from our makeup artist and hair care brands, our internet distribution, and the introduction of the Unforgivable fragrance by Sean John. Partially offsetting this growth was approximately $122 million related to weaknesses in certain of our core brands as a result of challenges from competitive pressures and business disruptions at certain key retailers, and lower sales from our BeautyBank brands, which completed their initial rollout during fiscal 2005. Net sales growth in Canada, Latin America and Mexico contributed an additional $48 million to the increase.

In Europe, the Middle East & Africa, net sales increased 2%, or $38.6 million, to $2,147.7 million, reflecting higher net sales of approximately $64 million from our travel retail and distributor businesses, Russia and the United Kingdom, with all benefiting from the success of the DKNY Be Delicious franchise and the sale of M·A·C products. These increases were partially offset by decreases of approximately $26 million in Spain and Italy. Spain's net sales were adversely affected by changes to our distribution policy and a difficult retail environment. Net sales in Italy were negatively impacted by changes to our distribution policy and, to a lesser extent, the balancing of inventory levels at its retailers. On a local currency basis, net sales in Europe, the Middle East & Africa increased 5%.

Net sales in Asia/Pacific increased 6%, or $49.9 million, to $869.7 million. Strategic growth in China combined with positive results in Korea and Hong Kong, contributed approximately $57 million to sales growth in this region. These increases were partially offset by decreases in Japan and Australia of approximately $18 million. Japan's results were negatively impacted due to the strengthening of the U.S. dollar against the Japanese yen. The decrease in Australia reflected slower sell-through in a difficult retail environment, particularly in the fragrance category, as well as the balancing of inventory levels at a major retailer. On a local currency basis, net sales in Asia/Pacific increased 7%.

We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.

COST OF SALES
Cost of sales as a percentage of total net sales increased to 26.1% as compared with 25.5% in fiscal 2005. This change reflected an increase in obsolescence charges of approximately 40 basis points, the net change in the mix of our business within our geographic regions and product categories of approximately 20 basis points, a charge related to unutilized tooling of approximately 10 basis points and 20 basis points related to commodity material prices. Partially offsetting these increases were favorable changes in promotional activities of approximately 30 basis points. The higher price of oil resulted in price increases in certain oil-based chemicals, which had a slight adverse effect on our cost of sales margin.

Since certain promotional activities are a component of net sales or cost of sales and the timing and level of promotions vary with our promotional calendar, we have experienced fluctuations in the cost of sales percentage.

OPERATING EXPENSES
Operating expenses increased to 64.3% of net sales as compared with 62.9% of net sales in fiscal 2005. The fiscal 2006 operating expense margin was negatively impacted by charges related to the implementation of our cost savings initiative of approximately $92.1 million or approximately 140 basis points, costs related to stock-based compensation as a result of the fiscal 2006 adoption of SFAS No. 123(R) of approximately 60 basis points, and the estimated impact of both the merger of Federated Department Stores, Inc. and The May Department Stores Company and the hurricanes that affected the southern United States of approximately 40 basis points. Partially offsetting these incremental costs were operating expense margin improvements of approximately 90 basis points primarily resulting from net sales growth in brands and channels with lower advertising, merchandising and sampling cost structures as well as an overall reduction in this type of spending. Overall operating expenses reflected savings achieved during fiscal 2006 from our cost savings initiative.

Changes in advertising, sampling and merchandising spending result from the type, timing and level of activities related to product launches and rollouts, as well as the markets being emphasized.

During fiscal 2006, we recorded special charges associated with a cost savings initiative that was designed to support our long-term financial objectives. As part of this multi-faceted initiative, we identified savings opportunities that include streamlined processes and organizational changes. The principal component of the initiative was a voluntary separation program offered primarily to North America-based employees. During the fourth quarter of fiscal 2006, involuntary separations were communicated to certain employees. Under this initiative, we incurred expenses related to one-time termination benefits for 494 employees, of which 28 were involuntary, which benefits were based principally upon years of service.

In addition, we identified other cost savings opportunities to improve efficiencies in our distribution network and product offerings and to eliminate other nonessential costs. These charges primarily related to employee severance for facilities that are closing, contract cancellations, counter and door closings and product returns.

For the year ended June 30, 2006, aggregate expenses of $92.1 million were recorded as special charges related to the cost savings initiative in the accompanying consolidated statement of earnings.

The following table summarizes the costs and expected savings associated with our cost savings initiative, which impacted, and will continue to impact, our operating expenses and cost of sales:

OPERATING RESULTS
Operating income decreased 15%, or $107.2 million, to $619.6 million. Operating margin was 9.6% of net sales in fiscal 2006 as compared with 11.6% in fiscal 2005. These results were negatively impacted by the effects of special charges related to our cost savings initiative of $92.1 million, or 1.4% of net sales. In addition to the special charges, net sales growth was more than offset by the increases in our cost of sales and operating expense margins as previously discussed.

The following discussions of Operating Results by Product Categories and Geographic Regions exclude the impact of special charges related to the implementation of our cost savings initiative. We believe the following analysis of operating results better reflects the manner in which we conduct and view our business.

Product Categories
Operating income declined 79%, or $28.1 million, to $7.7 million in the fragrance product category reflecting lower sales and, to a lesser extent, expenses incurred related to development of new products and brands, partially offset by a shift in spending in certain of our core brands to other product categories. Skin care operating income decreased 5%, or $19.4 million, to $346.4 million primarily reflecting lower than anticipated net sales in certain of our core brands. Operating income increased 9%, or $28.3 million, to $329.4 million in the makeup product category primarily reflecting sales growth from our makeup artist brands, partially offset by declines in certain of our core brands. Hair care operating income increased 16%, or $3.7 million, to $26.5 million reflecting worldwide sales growth. In fiscal 2006, the merger of Federated Department Stores, Inc. and The May Department Stores Company had a negative impact on the operating results of our skin care, makeup and fragrance product categories, while incremental operating expenses associated with new accounting rules for stock-based compensation negatively impacted all of our product categories.

Geographic Regions
Operating income in the Americas decreased 6%, or $22.1 million, to $344.1 million, primarily reflecting challenges experienced by certain of our core brands, due in part to competitive pressures and retailer consolidations, and incremental operating expenses of approximately $33 million associated with new accounting rules for stock-based compensation. The ongoing success of our makeup artist and hair care brands and our internet distribution partially offset these challenges.

In Europe, the Middle East & Africa, operating income decreased 3%, or $7.8 million, to $297.5 million. This decrease was primarily due to lower results in Spain, Benelux (Belgium, the Netherlands and Luxembourg) and Italy of approximately $20 million, collectively. These decreases were partially offset by improvements of approximately $12 million in France, our travel retail business and Central Europe (Hungary, Poland and Czech Republic).

In Asia/Pacific, operating income increased 27%, or $14.8 million, to $70.1 million. This increase reflects improved results of approximately $16 million in Korea, Japan and China, partially offset by lower results in Taiwan and Thailand of approximately $4 million, collectively. As China is an emerging market for us, we have invested, and plan to continue to invest, in new brand expansion and business opportunities there.

INTEREST EXPENSE, NET
Net interest expense was $23.8 million as compared with $13.9 million in fiscal 2005. The increase in net interest expense was primarily due to higher average interest rates and, to a lesser extent, higher average debt balances due to outstanding commercial paper during the year. The increased expense was partially offset by increased interest income related to higher investment interest rates.

PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local income taxes. The effective rate for income taxes for fiscal 2006 was 43.6% as compared with 41.2% in fiscal 2005. The effective rate differs from statutory rates due to the effect of state and local taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. The Company's effective tax rate will change from year to year based on non-recurring and recurring factors including, but not limited to, the geographic mix of earnings, enacted tax legislation, state and local taxes, tax audit findings and settlements and the interaction of various global tax strategies.

On July 13, 2006, we announced a settlement with the Internal Revenue Service ("IRS") regarding its examination of our consolidated Federal income tax returns for the fiscal years ended June 30, 1998 through June 30, 2001. The settlement resolves previously disclosed issues raised during the IRS's examination, including transfer pricing and foreign tax credit computations. The settlement of these issues resulted in a tax charge of approximately $46 million in the fourth quarter of fiscal 2006 and represents the aggregate earnings impact of the settlement through fiscal 2006. In addition, during the fourth quarter of fiscal 2006, we completed the repatriation of foreign earnings through intercompany dividends as required under the provisions of the American Jobs Creation Act of 2004 (the "AJCA"). In connection with the repatriation, we updated the computation of the related aggregate tax impact, resulting in a favorable adjustment of approximately $11 million. The tax settlement, coupled with the AJCA favorable tax adjustment, resulted in a net increase to our fiscal 2006 income tax provision of approximately $35 million.

The increase in the effective income tax rate was attributable to the tax settlement charge of approximately 770 basis points, an increase of approximately 60 basis points resulting from our foreign operations and an increase in nondeductible expenses of approximately 30 basis points. These increases were partially offset by the net reduction in the incremental tax charge relative to the repatriation of foreign earnings pursuant to the AJCA of approximately 570 basis points, as well as a reduction of approximately 50 basis points for miscellaneous items.

DISCONTINUED OPERATIONS
On April 10, 2006 (the "Effective Date"), we completed the sale of certain assets and operations of the reporting unit that marketed and sold Stila brand products to Stila Corp. (the "Purchaser"), an affiliate of Sun Capital Partners, Inc., for consideration of $23.0 million. The sale price included cash of $9.3 million, a promissory note with a notional value of $13.3 million and a fair value of $11.0 million and convertible preferred stock with an aggregate liquidation preference of $5.0 million and a fair value of $2.7 million. As additional consideration for the purchased assets, and subject to the terms and conditions of the sale agreement, the Purchaser will pay us an amount equal to two percent of the annual net sales of the acquired business during the period commencing on the Effective Date and ending August 20, 2019. We will use these proceeds to satisfy our commitment under the 1999 agreement pursuant to which we originally purchased the Stila business. The Purchaser immediately assumed responsibility for all decisions regarding the operations of the Stila business and we agreed to divest ourselves of continuing involvement in the Stila business, except as described below.

In fiscal 2006, we recorded charges of $80.3 million (net of $43.3 million tax benefit) to discontinued operations, which reflected the loss on the disposition of the business of $69.9 million, net of tax, and adjustments to the fair value of assets sold, the costs to dispose of those assets not acquired by the Purchaser and other costs in connection with the sale. The charges also included the operating losses of $10.4 million, net of tax, for the fiscal year ended June 30, 2006. Net sales associated with the discontinued operations were $45.1 million for the fiscal year ended June 30, 2006. All statements of earnings information for previous years has been restated for comparative purposes, including the restatement of the makeup product category and each of the geographic regions presented in Note 17 of Notes to Consolidated Financial Statements - Segment Data and Related Information.

In order to facilitate the transition of the Stila business to the Purchaser, we agreed to provide certain information systems, accounting and other back office services to the Purchaser in exchange for monthly service fees designed to recover the estimated costs of providing these transition services. We also agreed with the Purchaser to provide certain distribution and online services. In both cases, the services concluded in fiscal 2007. In addition, we agreed to manufacture and sell to the Purchaser a limited range of products for a period of up to four months following the Effective Date and, in the case of one product, of up to two years.

NET EARNINGS
Net earnings as compared with fiscal 2005 declined $161.9 million or 40% to $244.2 million and diluted net earnings per common share decreased 37% from $1.78 to $1.12. Net earnings from continuing operations as compared with fiscal 2005 decreased by $85.4 million, or 21%, to $324.5 million and diluted net earnings per common share from continuing operations decreased 17% from $1.80 to $1.49.

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