(Dollars in millions, except per share data)

OVERVIEW

We are a global manufacturer and marketer of beauty and related products. Our business is conducted worldwide, primarily in the direct selling channel. We presently have sales operations in approximately 66 countries and territories, including the United States, and distribute products in approximately 48 more. Our reportable segments are based on geographic operations in six regions: Latin America; North America; Central & Eastern Europe; Western Europe, Middle East & Africa; Asia Pacific; and China. We centrally manage global Brand Marketing and Supply Chain organizations. Product categories include: Beauty, which consists of cosmetics, fragrances, skin care and toiletries; Beauty Plus, which consists of fashion jewelry, watches, apparel and accessories; and Beyond Beauty, which consists of home products and gift and decorative products. Sales from Health and Wellness products and mark., a global cosmetics brand that focuses on the market for young women, are included among these categories based on product type. Sales are made to the ultimate consumer principally through approximately 5.5 million independent Representatives, who are independent contractors and not employees of Avon. The success of our business is highly dependent on recruiting, motivating and retaining Representatives.

We view the geographic diversity of our businesses as a strategic advantage. In developed markets, such as the United States, we seek to achieve growth in line with that of the overall beauty market, while in developing and emerging markets we seek to achieve higher growth targets. During 2007, approximately 80% of our consolidated revenue was derived from operations outside the U.S. When we first penetrate a market, we experience high growth rates and, as we reach scale in these markets, growth rates decline.

At the end of 2005, we launched a comprehensive, multi-year turnaround plan to restore sustainable growth. In January 2008, we announced the final initiatives of the restructuring program under our turnaround plan. In 2007, we completed the analysis of our optimal product portfolio and made decisions on exit strategies for non-optimal products under our Product Line Simplification program ("PLS"). In 2007, we also launched our Strategic Sourcing Initiative ("SSI"). We expect our restructuring initiatives to deliver annualized savings of approximately $430 once all initiatives are fully implemented by 2011-2012. We also expect to achieve annualized benefits in excess of $200 each from PLS and SSI, which would bring total annualized savings and benefits from all three programs to over $830 when fully implemented. After more than two years of implementing our turnaround plan, we believe we have repositioned Avon for long-term sustainable, profitable growth.

Revenue grew in all segments during the second quarter of 2008, as compared to second quarter of 2007. During the first six months of 2008 revenue grew in all segments except North America, which was impacted by the slowing macroeconomic environment, rising fuel prices and service problems in the first quarter of 2008. We continued to benefit from strength in developing and emerging markets around the globe that more than offset the unfavorable impact of economic softness and service problems in North America. See the "Segment Review" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in revenue by segment.

During the first six months of 2008, revenue increased 16%, and Active Representatives increased 10% (with increases in all segments), fueled by investments in advertising and the Representative Value Proposition ("RVP"). Sales from each of our product categories increased, with products in the Beauty category increasing 18%.

Operating margin increased during the first six months of 2008, reflecting gross margin gains and leverage of revenue growth while containing overhead costs, partially offset by continued investment in our brand and channel.

• We increased our investment in advertising by $19.7 or 12% during the first six months of 2008. Approximately 65% of the incremental spending was spent in China, Russia and Colombia. The incremental spending on advertising was at a rate less than revenue growth. The advertising investments supported new product launches, such as Pro-to-Go Lipstick, Anew Ultimate Contouring Eye System, Anew Ultimate Age Repair Elixir, Avon Solutions Hydra-Radiance and Supershock Mascara. Advertising investments also included advertising to recruit Representatives.

AVON PRODUCTS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions, except per share data)

• We invested approximately $53 incrementally in our Representatives (RVP) during the first six months of 2008 through continued implementation of our Sales Leadership program, enhanced incentives, increased sales campaign frequency, improved commissions and new e-business tools. This incremental investment was ahead of revenue growth. Investing in RVP will continue to be a key strategy.

• We have continued to forge alliances with celebrities, including alliances with Patrick Dempsey and Emmanuel Ungaro.

• We began to implement PLS in the U.K. during the first half of 2008 and early results appear to be favorable; however, the transition is a long process and will continue into 2009. In the second half of 2008, we will begin implementing PLS in several other large markets. As expected, we did not realize significant benefits from PLS during the first six months of 2008. We expect to realize benefits of approximately $40 and $120 for full-year 2008 and 2009, respectively, and in excess of $200 in 2010. In the prior year, we recorded PLS charges of $78.2, primarily incremental inventory obsolescence expense of $67.4. We recorded final PLS charges in the fourth quarter of 2007.

• We realized benefits of approximately $40 from SSI through the first six months of 2008. We expect to realize approximately 50% of total expected annualized benefits by the end of 2008, with annualized benefits from this initiative in excess of $200 by the end of 2009, with a full year of benefit in 2010. As a result, we expect to realize benefits of approximately $100 and $175 in 2008 and 2009, respectively, and benefits in excess of $200 in 2010.

• Costs to implement restructuring initiatives were $8.6 higher in the first six months of 2008 compared to the first half of 2007, due to higher costs associated with previously approved initiatives. Actions implemented under our restructuring initiatives resulted in savings of approximately $130 in the first six months of 2008, as compared to savings of approximately $115 in the first six months of 2007. We expect to achieve annualized savings of approximately $430 once all initiatives are fully implemented by 2011-2012. We expect the savings to reach approximately $270 in 2008 and $300 in 2009.

Additional information regarding our turnaround plan and strategic initiatives is contained in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the U.S. Securities and Exchange Commission.

OUTLOOK

We expect that our investments in both the brand and the direct-selling channel will drive sustainable, profitable growth. We expect revenue growth to average mid-single-digits over the long term. We continue to expect our incremental investment in advertising in 2008 to be more in line with revenue growth and incremental investments in RVP to be slightly ahead of revenue growth. We continue to expect full year 2008 operating margin to approach 2005's level, or approximately 14%, due to leverage from revenue growth, the expected benefits from PLS and SSI and expected savings from our restructuring initiatives. Operating margin will also benefit from decreased costs related to PLS and decreased costs to implement our restructuring initiatives. We expect a larger proportion of the benefits from PLS and SSI and savings from our restructuring initiatives to be realized in the second half of this year. Despite external pressures in North America, our broad-based geographic portfolio gives us confidence that we can achieve our company-wide revenue and operating margin targets for full-year 2008. Like most consumer products goods companies, we have experienced increases in commodity costs during 2008. The savings and benefits from our strategic initiatives, strategic price increases and holding cost growth below our revenue growth are helping to offset the higher commodity costs. Operating margin is expected to further expand in 2009.

STRATEGIC INITIATIVES

Product Line Simplification

During 2006, we began to analyze our product line, under our PLS program, to develop a smaller range of better performing, more profitable products. The overall goal of PLS is to identify an improved product assortment to drive higher sales of more profitable products. During 2007, we completed the analysis of our product portfolio, concluded on the appropriate product assortment going forward and made decisions regarding the ultimate disposition of products that will no longer be part of our improved product assortment (such as selling at a discount, donation, or destruction). During the first quarter of 2008, we began to implement PLS in the U.K. In the second half of 2008, we will begin implementing PLS in several other large markets.

AVON PRODUCTS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions, except per share data)

We expect that sales and marketing benefits will account for approximately 85% of our projected benefits. Improving our product assortment will allow us to increase exposure and improve presentation of the remaining products within our brochure, which is expected to yield more pleasurable consumer shopping experiences, easier Representative selling experiences, and greater sales per brochure page. A second source of benefits from PLS results from "transferable demand." Transferable demand refers to the concept that when products with redundant characteristics are removed from our product assortment, some demand from the eliminated products will transfer to the remaining products that offer similar or comparable product characteristics. As part of PLS, when we identify products that have sufficient overlap of characteristics, we will eliminate the products with the lowest profitability and we expect the products that we retain will generate more profit. A third source of benefits from PLS is less price discounting. As we implement operating procedures under PLS, we anticipate introducing fewer new products and lengthening the lifecycle of products in our offering, which we expect will lead to less aggressive price discounting over a product's life cycle.

In addition to the benefits above, we also expect supply chain benefits to account for approximately 15% of our projected benefits. We expect improvements to cost of sales once PLS is fully implemented, primarily from a reduction in inventory obsolescence expense as a result of better managed inventory levels, lower variable spending on warehousing, more efficient manufacturing utilization and lower purchasing costs. We also expect operating expenses to benefit from a reduction in distribution costs and benefits to inventory productivity.

Strategic Sourcing Initiative

We launched SSI in 2007. This initiative is expected to reduce direct and indirect costs of materials, goods and services. Under this initiative, we are shifting our purchasing strategy from a local, commodity-oriented approach towards a globally-coordinated effort which leverages our volumes, allows our suppliers to benefit from economies of scale, utilizes sourcing best practices and processes, and better matches our suppliers' capabilities with our needs. Beyond lower costs, our goals from SSI include improving asset management, service for Representatives and vendor relationships. During 2007, we completed an analysis, based on 2006 data, which identified approximately $4,000 of spending to be targeted for cost reductions. Additionally, during 2007, we implemented the first of three waves of this initiative, which has addressed approximately 38% of the identified spending and is expected to generate approximately 45% of the expected benefits. During the fourth quarter of 2007, we launched the second wave of this initiative, which is expected to address 45% of the identified spending and generate approximately 40% of the expected benefits.

Restructuring Initiatives

We launched our multi-year restructuring program in late 2005. In January 2008, we announced the final initiatives that are part of this program. We expect to record total restructuring charges and other costs to implement our restructuring initiatives of approximately $530 before taxes, of which we have recorded $482.4 through June 30, 2008 ($38.8 in 2008, $158.3 in 2007, $228.8 in 2006, and $56.5 in 2005). We expect to record a majority of the remaining costs by the end of 2009.

Enterprise Resource Planning System

We are in the midst of a multi-year global roll-out of an enterprise resource planning ("ERP") system, which is expected to improve the efficiency of our supply chain and financial transaction processes. We began our global roll-out in Europe in 2005 and have since implemented ERP in our European manufacturing facilities, our larger European direct selling operations and in the U.S. As part of this continuing global roll-out, we expect to implement ERP in several countries over the next several years leveraging the knowledge gained from our previous implementations.

During 2008, we will be working to improve the effectiveness of ERP in the U.S. and expect to begin implementation in the other markets within North America, as well as in certain smaller European direct selling operations. During 2008, we also expect to begin the multi-year implementation process in Latin America in one market. In Latin America, we plan to implement modules of ERP in a gradual manner across key markets over the next several years.

AVON PRODUCTS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions, except per share data)

NEW ACCOUNTING STANDARDS

New Accounting Standards Implemented

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements, ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued Staff Position 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring, nonfinancial assets and liabilities. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements. See Note 11, Fair Value, for additional information.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment to FASB Statement No. 115, ("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. We adopted SFAS 159 as of January 1, 2008. The adoption of SFAS 159 had no impact on our consolidated financial statements, as we did not choose to measure the items at fair value.

New Accounting Standards to be Implemented

In February 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133, ("SFAS 161"), which establishes, among other things, the disclosure requirements for derivative instruments and hedging activities. We will be required to provide enhanced disclosures about how and why we use derivative instruments, how they are accounted for, and how they affect our financial performance. SFAS 161 is effective January 1, 2009 for Avon.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, ("FSP EITF 03-6-1"), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share ("EPS") under the two-class method. Our grants of restricted stock and restricted stock units contain non-forfeitable rights to dividend equivalents and are considered participating securities as defined in FSP EITF 03-6-1 and will be included in computing earnings per share using the two-class method. FSP EITF 03-6-1 is effective January 1, 2009, for Avon and requires prior period EPS presented to be adjusted retrospectively. The adoption of FSP EITF 03-6-1 will not have a material impact on the calculation of basic or diluted earnings per share.

AVON PRODUCTS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions, except per share data)

RESULTS OF OPERATIONS-THREE AND SIX MONTHS ENDED JUNE 30, 2008 AS COMPARED TO
2007

Consolidated



                                          Three Months Ended June 30,                        Six Months Ended June 30,
                                                                  Favorable                                         Favorable
                                                                (Unfavorable)                                     (Unfavorable)
                                                                   %/Point                                           %/Point
                                    2008           2007            Change             2008           2007            Change
Total revenue                     $ 2,736.1      $ 2,328.8                 17 %     $ 5,237.8      $ 4,514.1                 16 %
Cost of sales                         993.4          921.1                 (8 )%      1,917.1        1,753.6                 (9 )%
Selling, general and
administrative expenses             1,368.8        1,220.8                (12 )%      2,650.6        2,335.8                (13 )%

Operating profit                      373.9          186.9                100 %         670.1          424.7                 58 %

Interest expense                       26.1           28.1                  7 %          52.2           54.6                  4 %
Interest income                        (8.6 )        (10.3 )              (17 )%        (17.8 )        (22.6 )              (21 )%
Other expense, net                     12.0            1.2               (900 )%         12.7            1.8               (606 )%

Net income                            235.6          112.7                109 %         420.3          262.7                 60 %

Diluted earnings per share              .55            .26                112 %           .98            .60                 63 %

Advertising expenses*                 102.7           93.3                (10 )%        184.3          164.6                (12 )%

Gross margin                           63.7 %         60.4 %              3.3            63.4 %         61.2 %              2.2
Selling, general and
administrative expenses as a %
of total revenue                       50.0 %         52.4 %              2.4            50.6 %         51.8 %              1.2
Operating margin                       13.7 %          8.0 %              5.7            12.8 %          9.4 %              3.4
Effective tax rate                     31.2 %         32.3 %              1.1            32.1 %         32.4 %               .3

Units sold                                                                  5 %                                               4 %
Active Representatives                                                      7 %                                              10 %

* Advertising expenses are included within selling, general and administrative expenses.

Revenue

Total revenue for the three months ended June 30, 2008, increased 17%, with foreign exchange contributing 8 percentage points to the revenue growth. Revenue grew in all segments. Revenue growth was driven by an increase of 7% in Active Representatives.

On a category basis, the increase in revenue for the three months ended June 30, 2008, was primarily driven by an increase of 19% in Beauty sales, with increases in all sub-categories of Beauty. Within the Beauty category, color grew 26%, fragrance grew 17%, skin care grew 15%, and personal care grew 17%. Beauty Plus sales increased 16% and Beyond Beauty sales increased 9%.

Total revenue for the six months ended June 30, 2008, increased 16%, with foreign exchange contributing 9 percentage points to the revenue growth. Revenue grew in all segments, except North America. Revenue growth was driven by an increase of 10% in Active Representatives.

On a category basis, the increase in revenue for the six months ended June 30, 2008, was primarily driven by an increase of 18% in Beauty sales, with increases in all sub-categories of Beauty. Within the Beauty category, fragrance grew 18%, color grew 21%, skin care grew 14%, and personal care grew 16%. Beauty Plus sales increased 13% and Beyond Beauty sales increased 10%.

AVON PRODUCTS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions, except per share data)

See the "Segment Review" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in revenue by segment.

Gross Margin

Gross margin for the three and six months ended June 30, 2008, increased 3.3 points and 2.2 points, respectively, primarily due to a decrease in inventory obsolescence provisions in 2008, which benefited gross margin by approximately 3.6 and 2.2 points, respectively, and benefits from increased pricing, which benefited gross margin by approximately .6 point in both periods of 2008. These benefits to gross margin were partially offset by supply chain impacts including higher commodity costs and unfavorable foreign exchange on product cost in Europe. The three and six months ended June 30, 2007, included incremental inventory obsolescence charges of $55.9 and $67.4, respectively, related to our PLS program. Obsolescence expense for the three and six months ended June 30, 2008, also benefited by approximately $13 from changes in estimates to our disposition plan under our PLS program.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2008, increased $148.0, primarily due to higher variable expenses such as freight from increased sales volume, higher investments in RVP and advertising of approximately $25, higher overhead primarily due to investments in infrastructure, such as information technology, and the organization, and the impact of foreign exchange. These higher costs were partially offset by lower costs incurred to implement our restructuring initiatives of $7.5.

Selling, general and administrative expenses for the six months ended June 30, 2008, increased $314.8, primarily due to higher investments in RVP and advertising of approximately $72, higher variable expenses such as freight from increased sales volume, higher overhead primarily due to investments in infrastructure, such as information technology, and the organization, higher costs incurred to implement our restructuring initiatives of $9.0, due to costs associated with previously approved initiatives, and the impact of foreign exchange.

See the "Segment Review" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in operating margin by segment.

Other Expense

Interest expense for both the three and six months ended June 30, 2008, decreased slightly, primarily due to lower interest rates. At June 30, 2008, we held interest rate swap agreements that effectively converted approximately 40% of our outstanding long-term, fixed-rate borrowings to a variable interest rate based on LIBOR.

Interest income decreased for both the three and six months ended June 30, 2008, primarily due to lower cash and cash equivalent balances during 2008 as compared to the same periods in 2007, as well as lower interest rates.

Other expense, net increased for both the three and six months ended June 30, 2008, primarily due to higher net foreign exchange losses.

Effective Tax Rate

The effective tax rate for the three and six months ended June 30, 2008, was 31.2% and 32.1%, respectively, compared to rates of 32.3% and 32.4%, respectively, for the same periods of 2007, reflecting changes in the earnings mix and statutory tax rates of our international subsidiaries. In 2008, a number of income tax returns are scheduled to close by statute and it is possible that a number of tax examinations may be completed. Depending on the number of filing positions ultimately upheld, the impact of the adjustments could be significant to the 2008 provision for income taxes.

AVON PRODUCTS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions, except per share data)

Segment Review

Latin America



                                             Three Months Ended June 30                        Six Months Ended June 30
                                                                %/Point Change                                    %/Point Change
                                                                         Local                                             Local
                                       2008         2007       US$      Currency       2008          2007        US$      Currency
Revenue                              $ 1,010.7     $ 798.1       27 %         15 %   $ 1,875.0     $ 1,454.4       29 %         17 %
Operating profit                         187.5       113.7       65 %         45 %       308.1         202.4       52 %         33 %
Operating margin                          18.6 %      14.2 %    4.4          3.8          16.4 %        13.9 %    2.5          2.0
. . .