In our financial results and our strategic progress, fiscal 1998 was another outstanding year for Estée Lauder.

Financially, it was another year of double-digit increases in our operating income, net earnings and earnings per share. Strategically, we strengthened the breadth and depth of our brand portfolio, increasing our appeal to more consumers in more markets. We added new products and new companies. We continued to build our brand equity with aggressive, well-funded marketing programs. We added new distribution channels. And we moved quickly to build our presence in high-opportunity areas. Our outstanding success in fragrance is just one example.

SALES AND EARNINGS - THE RECORDS CONTINUE The Records Continue Our growth record has now reached more than 45 years of consecutive annual sales increases. In fiscal 1998, net sales increased 7% to $3.6 billion. Excluding the impact of foreign currency rate changes, which amounted to approximately $135 million, our net sales increased 11%.

We had an even stronger year in operating results. Increased sales combined with lower comparative operating costs produced an improvement in our operating margins of 70 basis points to 11.3%. We achieved this while investing more than $1 billion in advertising and promotional activities. Operating income improved 14% to $409.1 million, and net earnings were up a strong 20% to $236.8 million.

Our cost improvement came from a worldwide drive to be the most efficient company in the industry in marketing, sourcing, distribution and manufacturing. Reduced sourcing costs, focus factories, and the use of advanced information technology have made dramatic improvements in our cost base and our productivity.

That effort moved another important step forward in 1998 with the opening of a state-of-the-art warehouse and distribution center in Lachen, Switzerland, which will concentrate all distribution for our travel retail and local Swiss markets. The new center gives us a substantial increase in capacity while allowing us to close four smaller and older warehouses that have served these markets.

GROWTH AROUND THE WORLD Here are some of the highlights by geographic area of the performance that contributed to our outstanding 1998.

THE AMERICAS In the Americas we had a stellar year, generating a 14% increase in net sales over the previous year to $2.2 billion. Operating income increased $58.1 million to $248 million. Growth came from the success of new products in all categories - makeup, skin care, fragrance and hair care - as well as solid performances by many existing products.

While new makeup and skin care products, like Clinique's Superbalanced Makeup and Estée Lauder's Diminish, contributed strongly to the sales increase, our fragrances took center stage this year. The outstanding success of the new Pleasures For Men and Clinique happy, the consistently strong performances of "tommy" and "tommy girl" and the continuing appeal of Estée Lauder's classic fragrances - pleasures and Beautiful - took our fragrance business to a new level.

We also benefited from the ongoing success of Bobbi Brown essentials and the inclusion of sales from jane and Aveda, which we acquired during the second quarter of the year.

We continued to develop innovative marketing programs and new ways of selling - key elements of our commitment to brand equity. For example, Origins' catalog business, which reaches nearly one million consumers; Clinique's Website, clinique.com, which has over 300,000 registered users; and Estée Lauder's growing spa business - a powerful showcase for our broad product line - all contributed to our strategy of attracting new consumers to our brands.

It was another year of double-digit increases in our operating income, net earnings and earnings per share.

EUROPE, THE MIDDLE EAST & AFRICA In Europe, the Middle East & Africa, net sales increased 13% during the year, excluding the impact of foreign currency rate changes, and 6% on a reported basis to $960.8 million. In local currency, the company achieved solid sales performances in virtually all markets, with particularly strong net sales growth in the United Kingdom, Spain, Germany and Italy. Three of our newer brands, MAC, Bobbi Brown essentials and Origins, which increased their distribution in the region, all had double-digit sales growth during the year.

Operating income increased $8.6 million to $131.3 million. This was somewhat affected by declines in our travel retail business, primarily reflecting a decrease in tourism from Asia.

As in the Americas, our fragrances paced the region's performance, led by the launch of "tommy" in Germany and Italy, as well as the rollout of "tommy girl" into markets such as the U.K. and Spain. Clinique happy was launched in more than 20 European markets, and, following the successful launch of Kiton men's fragrance last year, Aramis introduced Kiton Donna for women in six major European markets.

In skin care and makeup, both established and new products performed well throughout the region. We extended the successful Re-Nutriv Intensive Lifting product line to include Re-Nutriv Intensive Lifting Eye Creme and Re-Nutriv Intensive Lifting Series, a unique 14-day treatment for dehydrated skin. This reinvigorated the whole Re-Nutriv business, which is one of Estée Lauder's classic lines. Estée Lauder's new Uncircle became a best-seller in nearly all markets where it was launched, and makeup products from Estée Lauder and Clinique continued to do extremely well, particularly Estée Lauder's Double Wear Stay-in-Place Makeup and Clinique's Superbalanced Makeup.

Continuing our strategy of increasing our international presence through the newer brands, Bobbi Brown essentials opened a studio at Galeries Lafayette in Paris; MAC opened new stores in Zurich, Glasgow, Dublin, Berlin and Milan and a second freestanding store in Paris. Origins increased its presence in the U.K. with three new doors.

ASIA/PACIFIC The difficult economy continued to affect our business in Asia. On a local currency basis, net sales decreased 3% versus the prior period. Double-digit sales increases in Thailand and Malaysia and improved results in most other markets in the region were offset by lower sales in Japan and Hong Kong. Reflecting the strong dollar, reported net sales decreased 15% to $452.5 million. Operating income decreased $16.7 million to $29.8 million, reflecting the lower sales in Japan and some other markets and the incremental cost of launching Bobbi Brown essentials and MAC.

We expect Asia to continue to experience economic difficulty for some time. Fortunately, we are a company with a very broad geographic scope which allows us to approach this market as an opportunity to increase both brand awareness and market penetration.

Skin care continued to be the major category in Asia, with Estée Lauder's Uncircle and Advanced Night Repair Whitening Recovery Complex - a product created exclusively for the Asian market - both doing well. Clinique maintained its #1 position in Japan in our distribution, as a result of its established reputation as a skin care authority. In the makeup category, Estée Lauder's seasonal makeup collections and Clinique's Long Last Soft Shine Lipstick were also well received.

As in Europe, we expanded the geographic reach of our newer brands in the Asia/Pacific region. We launched Bobbi Brown essentials in Japan, Singapore, Malaysia and Thailand, where the brand was universally well received. In the Emporium in Bangkok, a major retailer, Bobbi Brown essentials became the #1 brand soon after its launch. MAC entered Japan, Taiwan, and Thailand, also to enthusiastic response, and Origins, which has been in Asia since 1995, became the top-selling brand in Isetan, Tokyo's largest department store, and opened six new doors in Japan. We also launched "tommy girl" in Japan in September.

LOOKING AHEAD In summary, we entered fiscal 1998 as a strong, balanced company. We ended it even stronger, with our balance enhanced. We move into fiscal 1999 with solid earnings momentum, global distribution, powerful brand franchises, hundreds of innovative new products, and a track record of successful, contributing acquisitions. Combined, these advantages are a formidable engine for future growth and stockholder value.

We also move ahead with the single most important asset: the best marketing organization in the business, which is made up of every one of our employees around the world. To them, once again, we express our sincere gratitude for another record year of achievement.

Sincerely,

Leonard A. Lauder Chairman and Chief Executive Officer	Fred H. Langhammer President and Chief Operating Officer