RESULTS OF OPERATIONS

We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories which are distributed in over 140 countries and territories. The following is a comparative summary of operating results for the three months ended September 30, 2008 and 2007, and reflects the basis of presentation described in Note 1 of Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies for all periods presented. Sales of products and services that do not meet our definition of skin care, makeup, fragrance or hair care have been included in the "other" category.

                                                       Three Months Ended
                                                          September 30
                                                        2008        2007
                                                         (In millions)
NET SALES
By Region:
The Americas                                         $    939.0   $   898.9
Europe, the Middle East & Africa                          641.5       551.2
Asia/Pacific                                              323.0       260.0
                                                     $  1,903.5   $ 1,710.1

By Product Category:
Skin Care                                            $    716.8   $   619.5
Makeup                                                    742.9       663.1
Fragrance                                                 327.8       313.0
Hair Care                                                  98.8       102.6
Other                                                      17.2        11.9
                                                     $  1,903.5   $ 1,710.1
OPERATING INCOME (LOSS)
By Region:
The Americas                                         $     56.5   $    52.4
Europe, the Middle East & Africa                            7.6         9.0
Asia/Pacific                                               28.5        16.8
Special charges related to cost savings initiative         (0.1 )      (0.3 )
                                                     $     92.5   $    77.9

By Product Category:
Skin Care                                            $     43.5   $    35.8
Makeup                                                     54.4        41.1
Fragrance                                                  (5.5 )      (5.0 )
Hair Care                                                  (1.0 )       7.4
Other                                                       1.2        (1.1 )
Special charges related to cost savings initiative         (0.1 )      (0.3 )
                                                     $     92.5   $    77.9

                        THE ESTÉE LAUDER COMPANIES INC.



The following table presents certain consolidated earnings data as a percentage
of net sales:



                                                       Three Months Ended
                                                          September 30
                                                       2008         2007

Net sales                                                100.0 %      100.0 %
Cost of sales                                             26.3         26.7
Gross profit                                              73.7         73.3

Operating expenses:
Selling, general and administrative                       68.9         68.8
Special charges related to cost savings initiative           -            -
                                                          68.9         68.8

Operating income                                           4.8          4.5
Interest expense, net                                      0.8          1.0

Earnings before income taxes and minority interest         4.0          3.5
Provision for income taxes                                 1.4          1.2
Minority interest, net of tax                              0.1            -

Net earnings                                               2.7 %        2.3 %

In order to meet the demands of consumers, we continually introduce new products, support new and established products through advertising, sampling and merchandising and phase out existing products that no longer meet the needs of our consumers. The economics of developing, producing, launching and supporting products influence our sales and operating performance each period. The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

The recent challenges and uncertainties in the economies of certain key countries, including the United States, are likely to impact consumer demand, which may have an adverse impact on the financial strength of our customers that are retailers. These will likely affect our future net sales and operating results. We are reviewing our plans and taking actions to mitigate the impact of these conditions. Our future net sales and operating results may also be impacted by changes in foreign currency exchange rates. The dramatic strengthening of the U.S. dollar subsequent to September 30, 2008 will likely have a negative impact on our results during the fiscal second quarter. If the current exchange rates persist or the U.S. dollar continues to strengthen, there will be an adverse impact on our results for the full fiscal year.

First Quarter Fiscal 2009 as Compared with First Quarter Fiscal 2008

NET SALES

Net sales increased 11%, or $193.4 million, to $1,903.5 million, primarily led by net sales growth in our skin care and makeup product categories. Our fragrance product category experienced modest net sales growth while hair care net sales declined slightly. Net sales grew in every geographic region, led by Asia/Pacific and Europe, the Middle East & Africa. Excluding the impact of foreign currency translation, net sales increased 10%.

Product Categories

Skin Care

Net sales of skin care products increased 16%, or $97.3 million, to $716.8 million. The recent launches of Perfectionist [CP+] Wrinkle Lifting Serum and Cyber White EX from Estée Lauder and Moisture Surge Extended Thirst Relief, Superdefense SPF 25 Age Defense Moisturizer, Even Better Skin Tone Corrector and Redness Solutions from Clinique contributed incremental sales of approximately $68 million, combined. Net sales increases from products in Clinique's 3-Step Skin Care System, as well as Advanced Night Repair and Resilience Lift Extreme Ultra Firming products from Estée Lauder, totaled approximately $28 million. These improvements were partially offset by approximately $22 million of lower sales from other existing products in the Perfectionist line from Estée Lauder and Moisture Surge and Superdefense lines from Clinique. Excluding the impact of foreign currency translation, skin care net sales increased 14%.

Makeup

Makeup net sales increased 12%, or $79.8 million, to $742.9 million reflecting increases from our makeup artist brands of approximately $38 million, particularly driven by strong growth internationally. The recent launches of High Impact Lip Colour SPF 15 and reformulated Superfit Makeup from Clinique and Estée Lauder Signature Blush and Sumptuous Bold Volume Lifting Mascara from Estée Lauder contributed incremental sales of approximately $44 million, combined. This growth was partially offset by approximately $15 million of lower sales of existing Superfit Makeup products and Superbalm Moisturizing Gloss from Clinique and Estée Lauder Signature Silky Eyeshadow Duo from Estée Lauder. Excluding the impact of foreign currency translation, makeup net sales increased 11%.

Fragrance

Net sales of fragrance products increased 5%, or $14.8 million, to $327.8 million. The recent launches of Estée Lauder Sensuous and DKNY Delicious Night collectively contributed approximately $31 million to the category. Higher net sales of approximately $8 million of various Tom Ford and Jo Malone fragrances also contributed to the increase. Partially offsetting the growth in this category were lower sales of Sean John Unforgivable, Estée Lauder pleasures, DKNY Be Delicious and DKNY Red Delicious Women of approximately $28 million, collectively. While current year sales levels compared favorably to the prior-year period, we anticipate continued challenges due to competitive pressures in this product category, primarily in the United States. Excluding the impact of foreign currency translation, fragrance net sales increased 3%.

Hair Care

Hair care net sales decreased 4%, or $3.8 million, to $98.8 million. Net sales from Bumble and bumble declined primarily as a result of the conclusion of its hotel amenities program in the third quarter of fiscal 2008 and, to a lesser extent, a softer salon retail environment in the United States. These declines were partially offset by higher sales from Aveda, primarily as a result of the launch of Dry Remedy Shampoo and Conditioner and the acquisition of an independent distributor in Australia. Excluding the impact of foreign currency translation, hair care net sales decreased 4%.

Geographic Regions

Net sales in the Americas increased 4%, or $40.1 million to $939.0 million. Higher net sales from certain of our core brands, as well as our makeup artist brands, in the United States contributed approximately $19 million to the increase. Net sales growth in Latin America and Canada contributed an additional $13 million to the increase. We believe that current economic conditions in this region, particularly in the department store channel, as well as competitive pressures, have negatively impacted certain of our businesses.

In Europe, the Middle East & Africa, net sales increased 16%, or $90.3 million, to $641.5 million. Net sales increases of approximately $61 million were driven by our travel retail business, Russia, the United Kingdom, Germany and Italy, as well as in the Middle East, which converted from a distributor market to an affiliate in the prior year. The performance in these countries primarily reflected net sales growth in our makeup artist brands and certain of our core brands. While net sales increased in virtually all countries in the region, net sales growth rates are anticipated to slow in certain key countries due to current economic conditions. Excluding the impact of foreign currency translation, net sales in Europe, the Middle East & Africa increased 14%.

Net sales in Asia/Pacific increased 24%, or $63.0 million, to $323.0 million, reflecting growth in all countries in the region. This increase reflected higher net sales of approximately $55 million in China, Japan, Hong Kong, Korea and Australia. Despite the softening of certain retail environments in this region, most brands delivered double-digit net sales growth. Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 21%.

We believe the economic conditions that are currently having a negative impact on the global economy will likely have an adverse impact on our future financial performance. We cannot predict with certainty the magnitude of the impact or how it will vary across each of our geographic regions.

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 decreased to 26.3% as compared with 26.7% in the prior-year period. Cost of sales as a percentage of net sales reflected a favorable change in the mix of our business of approximately 40 basis points, a decrease in the level and timing of promotional activities of approximately 30 basis points and a positive effect of exchange rates of approximately 20 basis points. Partially offsetting these improvements was an increase in obsolescence charges of approximately 50 basis points.

Since certain promotional activities are a component of sales or cost of sales and the timing and level of promotions vary with our promotional calendar, we have experienced, and expect to continue to experience, fluctuations in the cost of sales percentage. In addition, future cost of sales mix may be impacted by the inclusion of new brands which have margin and product cost structures different from those of our existing brands.

OPERATING EXPENSES

Operating expenses increased to 68.9% of net sales as compared with 68.8% of net sales in the prior-year period. Company-wide cost containment and contingency plan efforts to maintain expenses in line with our business needs resulted in an operating expense margin improvement of approximately 140 basis points. These initiatives were offset by net losses from foreign exchange transactions of approximately 110 basis points and incremental costs of global information technology systems and infrastructure of approximately 50 basis points.

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.

OPERATING RESULTS

Operating income increased 19%, or $14.6 million, to $92.5 million as compared with the prior-year period. Operating margin improved to 4.8% of net sales as compared with 4.5% in the prior-year period, reflecting the increase in our gross margin partially offset by the increase in our operating expense margin, as previously discussed.

Product Categories

Makeup operating income increased 32%, or $13.3 million, to $54.4 million, primarily reflecting improved results from certain of our core brands and from our makeup artist brands. Skin care operating income increased 22%, or $7.7 million, to $43.5 million, primarily reflecting improved results from certain of our core brands driven by increased net sales from new launches. Fragrance operating results declined 10%, or $0.5 million, primarily reflecting lower net sales of designer fragrance products, partially offset by favorable results related to launches of new Estée Lauder fragrances. Hair care operating results declined over 100%, or $8.4 million, primarily reflecting lower sales of Bumble and bumble products due to the conclusion of its hotel amenities program and an increase in selling and marketing expenses related to the positioning of the Ojon brand for future growth.

Geographic Regions

Operating income in the Americas increased 8%, or $4.1 million, to $56.5 million, driven by higher sales from certain of our core brands and our makeup artist brands, coupled with cost containment and contingency plan efforts. These favorable results were partially offset by difficulties experienced by our hair care brands in the United States and incremental costs of information technology systems and infrastructure as previously discussed.

In Europe, the Middle East & Africa, operating income decreased 16%, or $1.4 million, to $7.6 million. This decrease reflected lower results of approximately $20 million in Russia, Spain and France, inclusive of additional provisions for receivables and inventory. Partially offsetting these decreases were improved results from our travel retail business, the United Kingdom and Germany of approximately $19 million, collectively.

In Asia/Pacific, operating income increased 70%, or $11.7 million, to $28.5 million, primarily reflecting improved results in Japan, Korea, Hong Kong and China of approximately $10 million, collectively. Partially offsetting these improvements were lower results in Taiwan and New Zealand of approximately $1 million, combined.

INTEREST EXPENSE, NET

Net interest expense was $15.3 million as compared with $18.4 million in the prior-year period. This decrease primarily resulted from lower average borrowing rates and lower average balances of outstanding commercial paper.

PROVISION FOR INCOME TAXES

The provision for income taxes represents Federal, foreign, state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax audit settlements and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

The effective rate for income taxes for the three months ended September 30, 2008 was 35.8% as compared with 35.5% in the prior-year period. The increase in the effective income tax rate of 30 basis points was primarily attributable to a net increase in the gross amount of unrecognized tax benefits and related interest accruals.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At September 30, 2008, we had cash and cash equivalents of $328.8 million compared with $401.7 million at June 30, 2008.

At September 30, 2008, our outstanding borrowings were as follows:

                                                     Long-term     Short-term
                                                        Debt          Debt        Total Debt
                                                                  (In millions)

6.00% Senior Notes, due May 15, 2037 ("2037 Senior
Notes") (1)                                          $    296.2   $          -   $      296.2
5.75% Senior Notes, due October 15, 2033 ("2033
Senior Notes") (2)                                        197.5              -          197.5
5.55% Senior Notes, due May 15, 2017 ("2017 Senior
Notes") (3)                                               313.7              -          313.7
6.00% Senior Notes, due January 15, 2012 ("2012
Senior Notes") (4)                                        242.5              -          242.5
$13.5 million promissory note due August 31, 2012
(5)                                                        15.6              -           15.6
$7.0 million promissory note due July 31, 2009 (6)            -            8.0            8.0
Commercial paper maturing through November 2008
(2.16% average interest rate)                                 -          299.7          299.7
Turkish lira overdraft facility                               -           17.7           17.7
Other borrowings                                           16.5           24.5           41.0
                                                     $  1,082.0   $      349.9   $    1,431.9

We have a $750.0 million commercial paper program under which we may issue commercial paper in the United States. Our commercial paper is currently rated A-1 by Standard & Poor's and P-1 by Moody's. Our long-term credit ratings are A with a stable outlook by Standard & Poor's and A2 with a stable outlook by Moody's. At September 30, 2008, we had $299.7 million of commercial paper outstanding, which we may refinance on a periodic basis as it matures at then-prevailing market interest rates. We also have $207.1 million in additional uncommitted credit facilities, of which $31.3 million was used as of September 30, 2008.

We have an undrawn $750.0 million senior unsecured revolving credit facility that expires on April 26, 2012. This facility may be used primarily to provide credit support for our commercial paper program, to repurchase shares of our common stock and for general corporate purposes. Up to the equivalent of $250 million of the credit facility is available for multi-currency loans. The interest rate on borrowings under the credit facility is based on LIBOR or on the higher of prime, which is the rate of interest publicly announced by the administrative agent, or ½% plus the Federal funds rate. We incurred costs of approximately $0.3 million to establish the facility which will be amortized over the term of the facility. The credit facility has an annual fee of $0.4 million, payable quarterly, based on our current credit ratings. As of September 30, 2008, we were in compliance with all related financial and other restrictive covenants, including limitations on indebtedness and liens.

As part of the purchase price related to the July 2007 acquisition of Ojon Corporation, we have (i) an outstanding promissory note due July 31, 2009 with a notional value of $7.0 million and capitalized interest of $0.7 million (present value of $8.0 million at September 30, 2008), bearing interest at 10.00% due at maturity and (ii) an outstanding promissory note due August 31, 2012 with a notional amount of $13.5 million (present value of $15.6 million at September 30, 2008), bearing interest at 10.00% payable annually on July 31. The notes due in 2009 and 2012 were recorded in the accompanying consolidated balance sheet at present value using effective rates of 5.11% and 5.42%, respectively.

We have a fixed rate promissory note agreement with a financial institution pursuant to which we may borrow up to $150.0 million in the form of loan participation notes through one of our subsidiaries in Europe. The interest rate on borrowings under this agreement is at an all-in fixed rate determined by the lender and agreed to by us at the date of each borrowing. At September 30, 2008, no borrowings were outstanding under this agreement. Debt issuance costs incurred related to this agreement were de minimis.

We have an overdraft borrowing agreement with a financial institution pursuant to which our subsidiary in Turkey may be credited to satisfy outstanding negative daily balances arising from its business operations. The total balance outstanding at any time shall not exceed 30.0 million Turkish lira. The interest rate applicable to each such credit shall be up to a maximum of 175 basis points per annum above the spot rate charged by the lender or the lender's floating call rate agreed to by us at each borrowing. There were no debt issuance costs incurred related to this agreement. The outstanding balance at September 30, 2008 of 21.9 million Turkish lira ($17.7 million at the exchange rate at September 30, 2008) is classified as short-term debt in our consolidated balance sheet.

We have a 3.0 billion Japanese yen revolving credit facility that expires on March 24, 2009. The interest rate on borrowings under the credit facility is based on TIBOR (Tokyo Interbank Offered Rate) and a 10 basis point facility fee is incurred on the undrawn balance. The outstanding balance at September 30, 2008 of 200.0 million Japanese yen ($1.9 million at the exchange rate at September 30, 2008) is classified as short-term debt in our consolidated balance sheet.

Our business is seasonal in nature and, accordingly, our working capital needs vary. From time to time, we may enter into investing and financing transactions that require additional funding. To the extent that these needs exceed cash from operations, we could, subject to market conditions, issue commercial paper, issue long-term debt securities or borrow under our revolving credit facilities.

Total debt as a percent of total capitalization was 45% at September 30, 2008 and 42% at June 30, 2008.

The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher selling prices or increase selling prices sufficiently to offset cost increases, which have been moderate.

Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support currently planned business operations, information systems enhancements, capital expenditures, stock repurchases, commitments and other contractual obligations on both a near-term and long-term basis.

Cash Flows

Net cash used for operating activities was $196.2 million during the three months ended September 30, 2008 as compared with net cash used of $132.8 million in the prior-year period. The change in operating cash outflows in the first quarter of this fiscal year, as compared with the first quarter of the prior fiscal year, was primarily impacted by the timing of payments and costs related to accrued advertising merchandising and sampling activities and employee compensation as well as an increase in pension contributions in support of required funding obligations of a particular affiliate related to a previously disclosed plan amendment. The increase in the use of cash also reflected higher payments for income taxes and higher global inventory levels to support our previously forecasted sales activity.

Net cash used for investing activities was $138.9 million during the three months ended September 30, 2008 compared with $195.3 million in the prior-year period. Investing activities during the fiscal 2009 quarter primarily reflected cash payments related to counters and leasehold improvements, global information technology systems and infrastructure, as well as the acquisitions of Applied Genetics Incorporated Dermatics and businesses engaged in the wholesale distribution and retail sale of Aveda products. Additional cash used for investing activities in the prior-year period was related to the purchases of Ojon Corporation and an Aveda distributor.

. . .