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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
______________________

FORM 10-Q


(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
_ Exchange Act of 1934

For the quarterly period ended December 31, 2003

OR

_ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission file number 1-14064


The Estee Lauder Companies Inc.
(Exact name of registrant as specified in its charter)


Delaware 11-2408943
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)


767 Fifth Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code 212-572-4200



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
- -
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
- -
At January 23, 2004, 122,608,756 shares of the registrant's Class A Common
Stock, $.01 par value, and 105,910,533 shares of the registrant's Class B Common
Stock, $.01 par value, were outstanding.

THE ESTEE LAUDER COMPANIES INC.

Index
Page
Part I. Financial Information

Item 1. Financial Statements............................................... 2

Consolidated Statements of Earnings --
Three Months and Six Months Ended December 31, 2003 and 2002...... 2

Consolidated Balance Sheets --
December 31, 2003 and June 30, 2003............................... 3

Consolidated Statements of Cash Flows --
Six Months Ended December 31, 2003 and 2002........................ 4

Notes to Consolidated Financial Statements........................... 5

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 13


Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 26

Item 4. Controls and Procedures.............................................. 26

Part II. Other Information....................................................27

THE ESTEE LAUDER COMPANIES INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)


Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
(In millions, except per share data)

Net Sales........................................................ $1,619.1 $1,407.4 $2,965.7 $2,643.2
Cost of sales.................................................... 412.7 368.9 776.8 723.3
-------- -------- -------- --------
Gross Profit..................................................... 1,206.4 1,038.5 2,188.9 1,919.9
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative........................... 980.3 861.5 1,828.8 1,622.7
Related party royalties....................................... 7.1 5.8 11.4 10.4
-------- -------- -------- --------
987.4 867.3 1,840.2 1,633.1
-------- -------- -------- --------
Operating Income................................................. 219.0 171.2 348.7 286.8

Interest expense, net............................................ 7.2 2.2 14.9 5.1
-------- -------- -------- --------
Earnings before Income Taxes, Minority Interest
and Discontinued Operations..................................... 211.8 169.0 333.8 281.7

Provision for income taxes....................................... 80.7 56.7 124.8 94.7
Minority interest, net of tax.................................... (4.8) (2.1) (5.0) (2.8)
-------- -------- -------- --------
Net Earnings from Continuing Operations.......................... 126.3 110.2 204.0 184.2

Discontinued operations, net of tax.............................. (30.6) (0.6) (31.3) (1.2)
-------- -------- -------- --------
Net Earnings .................................................... 95.7 109.6 172.7 183.0

Preferred stock dividends........................................ - 5.8 - 11.7
-------- -------- -------- --------
Net Earnings Attributable to Common Stock........................ $ 95.7 $ 103.8 $ 172.7 171.3
======== ======== ======== ========

Basic net earnings per common share:
Net earnings attributable to common stock from
continuing operations...................................... $ .55 $ .45 $ .89 .74
Discontinued operations..................................... (.13) (.00) (.13) (.01)
-------- -------- -------- --------
Net earnings attributable to common stock................... $ .42 $ .45 $ .76 .73
======== ======== ======== ========

Diluted net earnings per common share:
Net earnings attributable to common stock from
continuing operations...................................... $ .54 $ .44 $ .88 $ .73
Discontinued operations..................................... (.13) (.00) (.13) (.00)
-------- -------- -------- --------
Net earnings attributable to common stock................... $ .41 $ .44 $ .75 $ .73
======== ======== ======== ========

Weighted average common shares outstanding:
Basic....................................................... 228.6 233.1 228.3 234.2
Diluted..................................................... 231.6 235.0 231.1 236.2

Cash dividends declared per common share......................... $ .30 $ .20 $ .30 $ .20


See notes to consolidated financial statements.

THE ESTEE LAUDER COMPANIES INC.

CONSOLIDATED BALANCE SHEETS




December 31 June 30
2003 2003
---- ----
(Unaudited)
(In millions)
ASSETS
Current Assets
Cash and cash equivalents............................................................... $ 869.9 $ 364.1
Accounts receivable, net................................................................ 767.8 634.2
Inventory and promotional merchandise, net.............................................. 574.3 599.0
Prepaid expenses and other current assets............................................... 242.5 247.6
Assets held for sale.................................................................... 4.2 -
-------- --------
Total current assets............................................................... 2,458.7 1,844.9
-------- --------
Property, Plant and Equipment, net...................................................... 621.7 607.7
-------- --------
Other Assets
Investments, at cost or market value.................................................... 14.0 14.0
Deferred income taxes................................................................... 33.4 38.7
Goodwill, net .......................................................................... 671.2 695.3
Other intangible assets, net............................................................ 69.8 65.4
Other assets, net....................................................................... 101.4 83.9
-------- --------
Total other assets................................................................. 889.8 897.3
-------- --------
Total assets.............................................................. $3,970.2 $3,349.9
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt......................................................................... $ 4.9 $ 7.8
Accounts payable........................................................................ 232.9 229.9
Accrued income taxes.................................................................... 120.8 111.9
Other accrued liabilities............................................................... 953.2 704.0
Liabilities related to assets held for sale............................................. 3.2 -
-------- --------
Total current liabilities.......................................................... 1,315.0 1,053.6
-------- --------
Noncurrent Liabilities
Long-term debt.......................................................................... 828.4 283.6
Other noncurrent liabilities............................................................ 222.2 216.8
-------- --------
Total noncurrent liabilities....................................................... 1,050.6 500.4
-------- --------
Cumulative Redeemable Preferred Stock, at redemption value.............................. - 360.0
-------- --------
Minority Interest....................................................................... 16.4 12.3
-------- --------
Stockholders' Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares
issued: 136,583,947 at December 31, 2003 and 133,616,710 at June 30, 2003;
240,000,000 shares Class B authorized; shares issued and outstanding: 105,910,533
at December 31, 2003 and 107,462,533 at June 30, 2003................................ 2.4 2.4
Paid-in capital......................................................................... 330.7 293.7
Retained earnings....................................................................... 1,717.8 1,613.6
Accumulated other comprehensive loss.................................................... (10.1) (53.1)
-------- --------
2,040.8 1,856.6
Less: Treasury stock, at cost; 14,190,360 Class A shares at December 31, 2003
and 13,623,060 Class A shares at June 30, 2003....................................... (452.6) (433.0)
-------- --------
Total stockholders' equity......................................................... 1,588.2 1,423.6
-------- --------
Total liabilities and stockholders' equity................................ $3,970.2 $3,349.9
======== ========


See notes to consolidated financial statements.



THE ESTEE LAUDER COMPANIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


Six Months Ended
December 31
----------------


2003 2002
---- ----
(In millions)
Cash Flows from Operating Activities
Net earnings............................................................................... $ 172.7 $ 183.0
Adjustments to reconcile net earnings to net cash flows provided by
(used for) operating activities from continuing operations:
Depreciation and amortization.......................................................... 91.8 85.1
Deferred income taxes.................................................................. (0.3) 17.8
Minority interest...................................................................... 5.0 2.8
Non-cash stock compensation............................................................ 3.1 (1.6)
Discontinued operations................................................................ 31.3 -
Other.................................................................................. 0.4 -
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................................... (103.5) (56.9)
Decrease in inventory and promotional merchandise, net................................. 38.8 17.0
Increase in other assets, net.......................................................... (16.2) (6.9)
Decrease in accounts payable........................................................... (6.4) (17.3)
Increase in accrued income taxes....................................................... 18.5 15.7
Increase in other accrued liabilities.................................................. 126.2 116.4
Increase in other noncurrent liabilities............................................... 20.8 16.8
-------- --------
Net cash flows provided by operating activities of continuing operations............. 382.2 371.9
-------- --------
Cash Flows from Investing Activities
Capital expenditures....................................................................... (87.7) (71.1)
Acquisition of businesses, net of cash acquired............................................ (3.7) (0.4)
Proceeds from the disposition of long-term investments..................................... - 1.6
Purchases of long-term investments......................................................... (0.1) -
-------- --------
Net cash flows used for investing activities of continuing operations................ (91.5) (69.9)
-------- --------
Cash Flows from Financing Activities
Increase (decrease) in short-term debt, net................................................ (2.1) 0.3
Proceeds from the issuance of long-term debt, net.......................................... 197.3 -
Debt issuance costs........................................................................ (1.8) -
Proceeds from the net settlement of treasury lock agreements............................... 15.0 -
Repayments of long-term debt............................................................... (2.0) (2.8)
Net proceeds from employee stock transactions.............................................. 23.8 1.2
Payments to acquire treasury stock......................................................... (19.6) (165.9)
Dividends paid to stockholders............................................................. - (23.6)
Distributions made to minority holders..................................................... (2.8) (1.9)
-------- --------
Net cash flows provided by (used for) financing activities of continuing operations.. 207.8 (192.7)
-------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................................. 6.9 (1.4)
-------- --------
Cash flows provided by discontinued operations................................................ 0.4 -
-------- --------

Net Increase in Cash and Cash Equivalents.................................................. 505.8 107.9
Cash and Cash Equivalents at Beginning of Period........................................... 364.1 546.9
-------- --------
Cash and Cash Equivalents at End of Period................................................. $ 869.9 $ 654.8
======== ========

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 17.6 $ 9.2
======== ========
Income taxes........................................................................... $ 87.7 $ 58.8
======== ========
Non-cash items:
Tax benefit from exercise of stock options............................................. $ 10.2 $ 0.3
======== ========

See notes to consolidated financial statements.

THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -- Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of The
Estee Lauder Companies Inc. and its subsidiaries (collectively, the "Company")
as continuing operations with the exception of the results of its reporting unit
that sells jane brand products which are reflected as discontinued operations
(see Note 5). All significant intercompany balances and transactions have been
eliminated.

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations of any interim period are not necessarily indicative of
the results of operations to be expected for the fiscal year. For further
information, refer to the consolidated financial statements and accompanying
footnotes included in the Company's annual report on Form 10-K for the year
ended June 30, 2003.

Certain amounts in the consolidated financial statements of prior periods have
been reclassified to conform to current period presentation for comparative
purposes.

Net Earnings Per Common Share

For the three and six month periods ended December 31, 2003, net earnings per
common share ("basic EPS") is computed by dividing net earnings, which includes
preferred stock dividends (see "Recently Issued Accounting Standards"), by the
weighted average number of common shares outstanding and contingently issuable
shares (which satisfy certain conditions). For the three and six month periods
ended December 31, 2002, net earnings per common share ("basic EPS") is computed
by dividing net earnings, after deducting preferred stock dividends on the
Company's Cumulative Redeemable Preferred Stock, by the weighted average number
of common shares outstanding and contingently issuable shares (which satisfy
certain conditions). Net earnings per common share assuming dilution ("diluted
EPS") is computed by reflecting potential dilution from the exercise of stock
options.

A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:


Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Numerator:
Net earnings from continuing operations............................... $ 126.3 $ 110.2 $ 204.0 $ 184.2
Preferred stock dividends............................................. - 5.8 - 11.7
-------- -------- -------- --------
Net earnings attributable to common stock from continuing operations.. 126.3 104.4 204.0 172.5
Discontinued operations, net of tax................................... (30.6) (0.6) (31.3) (1.2)
-------- -------- -------- --------
Net earnings attributable to common stock............................. $ 95.7 $ 103.8 $ 172.7 $ 171.3
======== ======== ======== ========

Denominator:
Weighted average common shares outstanding - Basic.................... 228.6 233.1 228.3 234.2
Effect of dilutive securities: Stock options.......................... 3.0 1.9 2.8 2.0
-------- -------- -------- --------
Weighted average common shares outstanding - Diluted.................. 231.6 235.0 231.1 236.2
======== ======== ======== ========

Basic net earnings per common share:
Net earnings from continuing operations............................... $ .55 $ .45 $ .89 $ .74
Discontinued operations, net of tax................................... (.13) (.00) (.13) (.01)
-------- -------- -------- --------
Net earnings.......................................................... $ .42 $ .45 $ .76 $ .73
======== ======== ======== ========

Diluted net earnings per common share:
Net earnings from continuing operations............................... $ .54 $ .44 $ .88 $ .73
Discontinued operations, net of tax................................... (.13) (.00) (.13) (.00)
-------- -------- -------- --------
Net earnings.......................................................... $ .41 $ .44 $ .75 $ .73
======== ======== ======== ========



THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2003 and 2002, options to purchase 11.3 million and 21.7
million shares, respectively, of common stock were not included in the
computation of diluted EPS because the exercise prices of those options were
greater than the average market price of the common stock. The options were
still outstanding at the end of the applicable period.

Dividends

On November 5, 2003, the Board of Directors declared an annual dividend of $.30
per share on Class A and Class B Common Stock, payable on January 6, 2004 to
stockholders of record at the close of business on December 16, 2003. On October
30, 2002, the Board of Directors declared an annual dividend of $.20 per share,
payable on January 3, 2003 to stockholders of record at the close of business on
December 12, 2002. At December 31, 2003 and 2002, $68.5 million and $46.5
million of dividends payable were included in accrued liabilities.

Employee Stock-Based Compensation

As of December 31, 2003, the Company had established a number of share incentive
programs as discussed in more detail in our annual report on Form 10-K for the
year ended June 30, 2003. The Company applies the intrinsic value method as
outlined in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for stock
options and share units granted under these programs. Under the intrinsic value
method, no compensation expense is recognized if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant. Accordingly, no compensation cost has been recognized.
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," requires that the Company provide pro forma
information regarding net earnings and net earnings per common share as if
compensation cost for the Company's stock option programs had been determined in
accordance with the fair value method prescribed therein. The Company adopted
the disclosure portion of SFAS No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" requiring quarterly SFAS No. 123 pro forma
disclosure. The following table illustrates the effect on net income and
earnings per share as if the fair value method had been applied to all
outstanding awards in each period presented.



Three Months Ended Six Months Ended
December December
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions, except per share data)
Net earnings attributable to common stock, as reported................ $ 95.7 $ 103.8 $ 172.7 $ 171.3
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects................................... (8.9) (5.2) (17.2) (10.8)
-------- -------- -------- --------
Pro forma net earnings, attributable to common stock.................. $ 86.8 $ 98.6 $ 155.5 $ 160.5
======== ======== ======== ========

Earnings per common share:
Basic - as reported................................................ $ .42 $ .45 $ .76 $ .73
======== ======== ======== ========
Basic - pro forma.................................................. $ .38 $ .42 $ .68 $ .69
======== ======== ======== ========

Diluted - as reported.............................................. $ .41 $ .44 $ .75 $ .73
======== ======== ======== ========
Diluted - pro forma................................................ $ .37 $ .42 $ .67 $ .68
======== ======== ======== ========


Accounts Receivable

Accounts receivable is stated net of the allowance for doubtful accounts and
retail customer deductions of $31.5 million and $31.8 million as of December
31, 2003 and June 30, 2003, respectively.

THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventory and Promotional Merchandise

Inventory and promotional merchandise only include inventory considered saleable
or usable in future periods, and are stated at the lower of cost or market, with
cost being determined on the first-in, first-out method. Promotional merchandise
is charged to expense at the time the merchandise is shipped to the Company's
customers.



December 31 June 30


2003 2003
---- ----
(Unaudited)
(In millions)
Inventory and promotional merchandise consists of:
Raw materials......................................... $ 104.0 $ 137.7
Work in process....................................... 27.7 34.1
Finished goods........................................ 306.9 296.6
Promotional merchandise............................... 135.7 130.6
-------- --------
$ 574.3 $ 599.0
======== ========


Property, Plant and Equipment

Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. For financial statement purposes, depreciation is provided
principally on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 40 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the expected useful
life of those improvements.



December 31 June 30


2003 2003
---- ----
(Unaudited)
(In millions)

Land ................................................... $ 13.7 $ 13.5
Buildings and improvements.............................. 158.8 152.7
Machinery and equipment................................. 722.1 676.7
Furniture and fixtures.................................. 100.3 95.3
Leasehold improvements.................................. 587.5 538.6
-------- --------
1,582.4 1,476.8
Less accumulated depreciation and amortization.......... 960.7 869.1
-------- --------
$ 621.7 $ 607.7
======== ========


Depreciation and amortization of property, plant and equipment was $43.5 million
and $38.6 million during the three months ended December 31, 2003 and 2002,
respectively, and $84.5 million and $74.8 million during the six months ended
December 31, 2003 and 2002, respectively.

Restructuring Accrual

During the six-month period ended December 31, 2003, the Company paid $8.8
million against its restructuring accrual of which $6.8 million related to the
fiscal 2002 charges and $2.0 million related to the fiscal 2001 charges,
bringing the restructuring accrual balance at December 31, 2003 to $15.7
million. Of the amount paid during the six-month period ended December 31, 2003,
approximately $6.4 million related to severance payments. There have been no
material changes to the restructuring plans since June 30, 2003.

Management Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses
reported in those financial statements. These judgements can be subjective and
complex, and consequently actual results could differ from those estimates and
assumptions. The Company's most critical accounting policies relate to revenue
recognition; concentration of credit risk; inventory; pension and other
postretirement benefit costs; goodwill and other intangible assets; income
taxes; and derivatives.

THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Standards

On January 12, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," ("FSP No. 106-1") in response to a new law regarding prescription drug
benefits under Medicare ("Medicare Part D") as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. Currently, SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
("SFAS No.106") requires that changes in relevant law be considered in current
measurement of postretirement benefit costs. However, certain accounting issues
related to the federal subsidy remain unclear and significant uncertainties may
exist which impair a plan sponsor's ability to evaluate the direct effects of
the new law and the ancillary effects on plan participants' behavior and
healthcare costs. Due to these uncertainties, FSP No. 106-1 provides plan
sponsors with an opportunity to elect to defer recognizing the effects of the
new law in the accounting for its retiree health care benefit plans under SFAS
No. 106 and to provide related disclosures until authoritative guidance on the
accounting for the federal subsidy is issued and clarification regarding other
uncertainties is resolved. The Company has elected to defer recognition while
evaluating the new law and the pending issuance of authoritative guidance and
their effect, if any, on the Company's results of operations, financial position
and financial statement disclosure. Therefore, any measures of the accumulated
postretirement benefit obligation or the net periodic postretirement benefit
cost do not reflect the effects of the new law and issued guidance could require
the Company to change previously reported information.

In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about
Pensions and other Postretirement Benefits," ("SFAS No. 132") establishing
additional annual disclosures about plan assets, investment strategy,
measurement date, plan obligations and cash flows. In addition, the revised
standard established interim disclosure requirements related to the net periodic
benefit cost recognized and contributions paid or expected to be paid during the
current fiscal year. The new annual disclosures are effective for financial
statements with fiscal years ending after December 15, 2003 and the interim-
period disclosures are effective for interim periods beginning after December
15, 2003. The Company will adopt the annual disclosures for its fiscal year
ending June 30, 2004 and the interim disclosures for its fiscal quarter ending
March 31, 2004. The adoption of the revised SFAS No. 132 will have no impact on
the Company's results of operation or financial condition.

The Company has adopted SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," ("SFAS No.
150"). SFAS No. 150 established standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. Among
other things, it specifically requires that mandatorily redeemable instruments,
such as redeemable preferred stock, be classified as a liability. Initial and
subsequent measurements of the instruments differ based on the characteristics
of each instrument and as provided for in the statement. Based on the provisions
of this statement, the Company has classified the Cumulative Redeemable
Preferred Stock as a liability and the related dividends thereon have been
characterized as interest expense. Restatement of financial statements for
earlier years presented was not permitted. The adoption of this statement has
resulted in the inclusion of the dividends on the preferred stock (equal to $4.3
million in the current quarter and $10.1 million year-to-date) as interest
expense. While the inclusion has impacted net earnings, net earnings
attributable to common stock and earnings per common share were unaffected.
Given that the dividends are not deductible for income tax purposes, the
inclusion of the preferred stock dividends as interest expense has caused an
increase in the effective tax rate. The adoption of SFAS No. 150 had no impact
on the Company's financial condition.



THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2 - Long-Term Debt

At December 31, 2003, the Company's long-term debt of $828.4 million included:
(i) $360.0 million of Cumulative Redeemable Preferred Stock, which shares have a
mandatory redemption of June 30, 2015 (see "Recently Issued Accounting
Standards"); (ii) $243.2 million of 6% Senior Notes due January 2012 consisting
of $250.0 million principal, unamortized debt discount of $0.9 million and a
$5.9 million reduction to reflect the fair value of an outstanding interest rate
swap; (iii) $197.3 million of 5.75% Senior Notes due October 2033 consisting of
$200.0 million principal and unamortized debt discount of $2.7 million; and (iv)
a 3.0 billion yen term loan (approximately $27.9 million at current exchange
rates), which is due in March 2006.

On July 1, 2003, the Company completed the adoption of SFAS No. 150 and,
accordingly, has classified the $360.0 million Cumulative Redeemable Preferred
Stock as long-term debt. This standard requires the classification of the
Cumulative Redeemable Preferred Stock as a liability without restatement, and,
as such, the Company did not restate the consolidated financial statements for
earlier periods presented.

In September 2003, the Company issued and sold $200.0 million of 5.75% Senior
Notes due October 2033 ("5.75% Senior Notes") in a public offering. The 5.75%
Senior Notes were priced at 98.645% with a yield of 5.846%. Interest payments
will be made semi-annually on April 15 and October 15 of each year, commencing
April 15, 2004. In anticipation of the issuance of the 5.75% Senior Notes, in
May 2003 the Company entered into a series of treasury lock agreements on a
notional amount totaling $195.0 million at a weighted average all-in rate of
4.53%. The treasury lock agreements were settled upon the issuance of the new
debt and the Company received a payment of $15.0 million that will be amortized
against interest expense over the life of the 5.75% Senior Notes. As a result of
the treasury lock agreements, debt discount and debt issuance costs, the
effective interest rate on the 5.75% Senior Notes will be 5.395% over the life
of the debt.

In December 2003, the Company and the holders of the Cumulative Redeemable
Preferred Stock agreed to exchange all of the outstanding shares of $6.50
Cumulative Redeemable Preferred Stock due June 30, 2005 for a newly issued
series of Cumulative Redeemable Preferred Stock with a mandatory redemption date
of June 30, 2015 ("2015 Preferred Stock"). The exchange occurred on December 31,
2003. Dividends on the 2015 Preferred Stock will be payable at a rate per annum
of 4.75%, payable quarterly, until June 30, 2005, down from 6.5% during that
period, and thereafter will be payable at a rate set semi-annually and equal to
the after-tax yield on six-month U.S. Treasuries. The 2015 Preferred Stock may
be put to the Company under certain circumstances, and may be called for
redemption by the Company under certain similar circumstances; however, in each
case the puts or calls may not occur until after the passing of Mrs. Estee
Lauder. For the shares held by one holder (which holds $68.4 million of the
principal amount of the shares of 2015 Preferred Stock after the exchange), the
Company's call right will not be exercisable until the thirteenth-month
anniversary of Mrs. Lauder's passing. However, if the Company calls and pays for
the other shares of the 2015 Preferred Stock prior to June 30, 2005, then the
dividend rate on the shares held by that holder, or its transferees, will
automatically switch to the one based on six-month U.S. Treasuries upon Mrs.
Lauder's passing even if prior to June 30, 2005. In connection with the
exchange, the holders of the 2015 Preferred Stock agreed to accept a reduced
dividend rate for the quarter ended December 31, 2003.



THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Comprehensive Income

The components of accumulated other comprehensive income ("OCI") included in the
accompanying consolidated balance sheets consist of net unrealized investment
gain (loss), net gain or (loss) on derivative instruments designated and
qualifying as cash-flow hedging instruments, net minimum pension liability
adjustments and cumulative translation adjustments as of the end of each period.

Comprehensive income and its components, net of tax, are as follows:




Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions)

Net earnings..................................................... $ 95.7 $ 109.6 $ 172.7 $ 183.0
-------- -------- -------- --------
Other comprehensive income:
Net unrealized investment gain (loss)....................... - (0.2) - (1.5)
Net derivative instruments gain (loss)...................... (2.2) 0.4 5.3 4.0
Net minimum pension liability adjustments................... - - 0.5 (0.3)
Translation adjustments..................................... 52.1 17.4 37.2 11.0
-------- -------- -------- --------

Other comprehensive income (loss)........................... 49.9 17.6 43.0 13.2
-------- -------- -------- --------

Comprehensive income............................................. $ 145.6 $ 127.2 $ 215.7 $ 196.2
======== ======== ======== ========


The accumulated net gain (loss) on derivative instruments consists of the
following:



Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions)

OCI - derivative instruments, beginning of period................ $ 6.0 $ (5.5) $ (1.5) $ (9.1)
-------- -------- -------- --------
Gain (loss) on derivative instruments....................... (10.7) (1.9) 0.5 0.3
Reclassification to earnings of net loss during the period.. 7.4 2.6 8.7 6.0
Provision for deferred income taxes......................... 1.1 (0.3) (3.9) (2.3)
-------- -------- -------- --------

Net derivative instruments gain (loss)...................... (2.2) 0.4 5.3 4.0
-------- -------- -------- --------
OCI - derivative instruments, end of period...................... $ 3.8 $ (5.1) $ 3.8 $ (5.1)
======== ======== ======== ========



Of the $3.8 million, net of tax, derivative instrument gain recorded in OCI at
the end of the current-year period, $9.1 million, net of tax, related to the
proceeds from the settlement of the treasury lock agreements upon issuance of
the 5.75% Senior Notes which will be reclassified to earnings as an offset to
interest expense over the life of the debt and was offset by a $5.3 million
loss, net of tax, related to forward and option contracts which the Company will
reclassify to earnings during the next six months. At the end of the prior-year
period the $5.1 million, net of tax, derivative instrument loss recorded in OCI
related to forward contracts.



THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Acquisition of Business

In July 2003, the Company acquired the Rodan & Fields skin care line. The
initial purchase price, paid at closing, was funded by cash provided by
operations, the payment of which did not have a material effect on the Company's
results of operations or financial condition. The Company may be required to
make additional payments between fiscal 2007 and 2011 based on certain
conditions.

Note 5 - Discontinued Operations and Assets Held For Sale

On December 22, 2003, the Company committed to a plan to sell the assets and
operations of its reporting unit which sells jane brand products and to actively
market the brand. As a result of this decision and other factors related to the
Company's business in mass outlets, including an understanding of the market for
these assets, circumstances warranted that the Company conduct an assessment of
the tangible and intangible assets of this business. Based on this assessment,
the Company determined that the carrying amount of these assets as reflected
on the Company's consolidated balance sheets exceeded their estimated fair
value. Accordingly, the Company recorded an after-tax charge to discontinued
operations of $30.6 and $31.3 million for the three months and six months ended
December 31, 2003, respectively. The charge represents the impairment of
goodwill in the amount of $26.4 million; the reduction in value of other
tangible assets held for sale of $1.2 million, net of tax; and the operating
loss of $3.0 million and $3.7 million, net of tax, for the three months and six
months ended December 31, 2003, respectively. Included in the operating losses
of both periods were additional direct costs associated with the sale and
discontinuation of the business. All statement of earnings information for prior
periods has been restated for comparative purposes, including the restatement of
the makeup product category and the Americas region data presented in Note 6.

The assets and liabilities of the jane brand are presented in the consolidated
balance sheet under captions "Assets held for sale" and "Liabilities related to
assets held for sale." The carrying amounts of the major classes of these assets
and liabilities were as follows:





December 31
2003
----
(Unaudited)
(In Millions)
Assets:
Accounts receivable, net..................... $ 0.5
Inventory and promotional merchandise, net... 3.0
Prepaid expenses and other current assets.... 0.1
Property, plant and equipment, net........... 0.6
Goodwill, net................................ -
--------
Assets held for sale.............................. $ 4.2
========

Liabilities:
Accounts payable.............................. $ 0.7
Other accrued liabilities..................... 2.5
--------
Liabilities related to assets held for sale....... $ 3.2
========



THE ESTEE LAUDER COMPANIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Segment Data and Related Information

Reportable operating segments include components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker (the "Chief Executive") in deciding how to
allocate resources and in assessing performance. Although the Company operates
in one business segment, beauty products, management also evaluates performance
on a product category basis. Performance is measured based upon net sales and
operating income. Operating income represents earnings before income taxes and
net interest expense. The accounting policies for each of the reportable
segments are substantially the same as those for the consolidated financial
statements, as described in the segment data and related information footnote
included in the June 30, 2003 annual report on Form 10-K. The assets and
liabilities of the Company are managed centrally and are reported internally in
the same manner as the consolidated financial statements, thus no additional
information is produced for the Chief Executive or included herein. There has
been no significant variance in the total or long-lived asset value associated
with each segment since June 30, 2003.



Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
(In millions)
SEGMENT DATA
Net Sales:
Skin Care........................................................ $ 572.1 $ 479.3 $1,035.0 $ 900.8
Makeup........................................................... 527.1 471.5 1,016.1 932.8
Fragrance........................................................ 446.4 386.3 777.5 682.8
Hair Care........................................................ 63.0 60.2 117.8 110.6
Other............................................................ 10.5 10.1 19.3 16.2
-------- -------- -------- --------
$1,619.1 $1,407.4 $2,965.7 $2,643.2
======== ======== ======== ========
Operating Income:
Skin Care........................................................ $ 118.2 $ 84.4 $ 157.8 $ 130.4
Makeup........................................................... 64.5 58.6 110.0 97.5
Fragrance........................................................ 27.1 21.3 66.3 50.0
Hair Care........................................................ 8.8 4.8 13.5 8.6
Other............................................................ 0.4 2.1 1.1 0.3
-------- -------- -------- --------
219.0 171.2 348.7 286.8
Reconciliation:
Interest expense, net......................................... 7.2 2.2 14.9 5.1
-------- -------- -------- --------
Earnings before income taxes, minority interest and
discontinued operations....................................... $ 211.8 $ 169.0 $ 333.8 $ 281.7
======== ======== ======== ========


REGIONAL DATA
Net Sales:
The Americas..................................................... $ 804.7 $ 778.2 $1,656.2 $1,559.2
Europe, the Middle East & Africa................................. 586.7 438.0 914.5 742.5
Asia/Pacific..................................................... 227.7 191.2 395.0 341.5
-------- -------- -------- --------
$1,619.1 $1,407.4 $2,965.7 $2,643.2
======== ======== ======== ========
Operating Income:
The Americas..................................................... $ 59.4 $ 72.1 $ 178.5 $ 138.4
Europe, the Middle East & Africa................................. 128.8 73.4 136.5 118.0
Asia/Pacific..................................................... 30.8 25.7 33.7 30.4
-------- -------- -------- --------
$ 219.0 $ 171.2 $ 348.7 $ 286.8
======== ======== ======== ========



THE ESTEE LAUDER COMPANIES INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations


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
130 countries and territories. The following is a comparative summary of
operating results for the three and six months ended December 31, 2003 and 2002,
and reflects the basis of presentation described in Note 1 to the consolidated
financial statements 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 Six Months Ended
December 31 December 31
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
(In millions)
Net Sales
By Region:
The Americas............................................... $ 804.7 $ 778.2 $1,656.2 $1,559.2
Europe, the Middle East & Africa........................... 586.7 438.0 914.5 742.5
Asia/Pacific............................................... 227.7 191.2 395.0 341.5
-------- -------- -------- --------
$1,619.1 $1,407.4 $2,965.7 $2,643.2
======== ======== ======== ========

By Product Category:
Skin Care.................................................. $ 572.1 $ 479.3 $1,035.0 $ 900.8
Makeup..................................................... 527.1 471.5 1,016.1 932.8
Fragrance.................................................. 446.4 386.3 777.5 682.8
Hair Care.................................................. 63.0 60.2 117.8 110.6
Other...................................................... 10.5 10.1 19.3 16.2
-------- -------- -------- --------
$1,619.1 $1,407.4 $2,965.7 $2,643.2
======== ======== ======== ========

Operating Income
By Region:
The Americas............................................... $ 59.4 $ 72.1 $ 178.5 $ 138.4
Europe, the Middle East & Africa........................... 128.8 73.4 136.5 118.0
Asia/Pacific............................................... 30.8 25.7 33.7 30.4
-------- -------- -------- --------
$ 219.0 $ 171.2 $ 348.7 $ 286.8
======== ======== ======== ========

By Product Category:
Skin Care.................................................. $ 118.2 $ 84.4 $ 157.8 $ 130.4
Makeup..................................................... 64.5 58.6 110.0 97.5
Fragrance.................................................. 27.1 21.3 66.3 50.0
Hair Care.................................................. 8.8 4.8 13.5 8.6
Other...................................................... 0.4 2.1 1.1 0.3
-------- -------- -------- --------
$ 219.0 $ 171.2 $ 348.7 $ 286.8
======== ======== ======== ========




THE ESTEE LAUDER COMPANIES INC.


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



Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------


2003 2002 2003 2002
---- ---- ---- ----
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 25.5 26.2 26.2 27.4
----- ----- ----- -----
Gross profit..................................................... 74.5 73.8 73.8 72.6
----- ----- ----- -----
Operating expenses
Selling, general and administrative........................... 60.6 61.1 61.6 61.4
Related party royalties....................................... 0.4 0.5 0.4 0.4
----- ----- ----- -----
61.0 61.6 62.0 61.8
----- ----- ----- -----

Operating income................................................. 13.5 12.2 11.8 10.8
Interest expense, net............................................ 0.4 0.2 0.5 0.2
----- ----- ----- -----

Earnings before income taxes, minority interest and discontinued
operations.................................................... 13.1 12.0 11.3 10.6
Provision for income taxes....................................... 5.0 4.0 4.2 3.6
Minority interest, net of tax.................................... (0.2) (0.2) (0.2) (0.1)
----- ----- ----- -----

Net earnings from continuing operations.......................... 7.8 7.8 6.9 6.9
Discontinued operations.......................................... (1.9) (0.0) (1.1) (0.0)
----- ----- ----- -----
Net earnings..................................................... 5.9% 7.8% 5.8% 6.9%
===== ===== ===== =====



Second Quarter Fiscal 2004 as Compared with Second Quarter Fiscal 2003

Net Sales

Net sales increased 15% or $211.7 million to $1,619.1 million reflecting growth
in all product categories and geographic regions. Product category increases
resulted from new and recent product launches and solid sales from certain
makeup artist brands. Net sales in Europe, the Middle East & Africa improved
following a difficult retail environment in certain countries during the first
quarter and were led by double-digit growth in the United Kingdom and from our
travel retail business. Net sales in the current quarter were positively
impacted by the weakening of the U.S. dollar. Excluding the impact of foreign
currency translation, net sales increased 9%.

Product Categories

Skin Care
Net sales of skin care products increased 19% or $92.8 million to $572.1
million, reflecting both brand and geographic diversification. First quarter
results had been impacted by extreme heat in continental Europe this past
summer. The current quarter benefited primarily from the shipment of delayed
orders and an improved retail environment in that region. New and recently
launched products include Idealist Micro-D Deep Thermal Refinisher and Hydra
Complete Multi-Level Moisture products by Estee Lauder and Pore Minimizer
products by Clinique. The increase was also supported by strong sales of
Re-Nutriv Intensive Lifting products by Estee Lauder and the Repairwear line of
products from Clinique, as well as the addition of the Darphin line of products.
Partially offsetting these increases were lower net sales of certain existing
products such as Advanced Stop Signs by Clinique and A Perfect World Collection
for Face and Body products by Origins. Excluding the impact of foreign currency
translation, skin care net sales increased 12%.

THE ESTEE LAUDER COMPANIES INC.

Makeup
Makeup net sales increased 12% or $55.6 million to $527.1 million. Strong growth
in our makeup artist lines, primarily M.A.C and Bobbi Brown, contributed to the
category results. Increased net sales also reflected the recent launches of
Ideal Matte Refinishing Makeup SPF 8, MagnaScopic Maximum Volume Mascara and
Artist's Lip and Eye Pencils by Estee Lauder, and High Impact Mascara by
Clinique. Offsetting these increases were lower net sales of certain existing
products such as Eye Defining Duo by Clinique and Virtual Youth by Prescriptives
which launched during the prior-year's quarter as well as So Ingenious Multi-
Dimension Liquid Makeup and Loose Powder from Estee Lauder. Excluding the impact
of foreign currency translation, makeup net sales increased 7%.

Fragrance
Net sales of fragrance products increased 16% or $60.1 million to $446.4
million. The increase in net sales was primarily attributable to recent launches
of Estee Lauder Beyond Paradise, Aramis Life, Clinique Happy Heart and Clinique
Simply. The increase in net sales also benefited from improved results from our
travel retail business. These net sales increases were partially offset by lower
net sales of Beautiful and Intuition by Estee Lauder, Lauder Pleasures for Men
and certain Tommy Hilfiger products. Excluding the impact of foreign currency
translation, fragrance net sales increased 9%.

Hair Care
Hair care net sales increased 5% to $63.0 million. This increase was primarily
the result of sales from Bumble and bumble products including the launch of the
Curl Conscious line of products and expanded distribution. Partially offsetting
these increases were lower sales from Clinique's Simple Hair Care System.

The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.

Geographic Regions
Net sales in the Americas increased 3% or $26.5 million to $804.7 million
primarily reflecting growth from most of our developing brands, the success of
new and recently launched products as well as strong performance at our
freestanding retail stores. This increase follows the 9% increase experienced in
the first quarter of the current fiscal year which reflected initial shipments
of new products and holiday orders.

In Europe, the Middle East & Africa, net sales increased 34% or $148.7 million
to $586.7 million. We benefited from higher net sales in our travel retail
business, the United Kingdom, Spain and Greece, as well as from the addition of
Darphin, and the effects of favorable foreign currency exchange rates to the
U.S. dollar. As discussed in our first quarter report on Form 10-Q, retailer
negotiations and adverse weather conditions in the early part of the fiscal year
resulted in lost or delayed shipments in this region. The current quarter
results reflect the recovery of a portion of those sales in the affected
markets. Excluding the impact of foreign currency translation, net sales in
Europe, the Middle East & Africa increased 20%.

Net sales in Asia/Pacific increased 19% or $36.5 million to $227.7 million. This
increase reflected higher net sales in Japan, Australia, Taiwan and China
including the effects of favorable foreign currency exchange rates. Excluding
the impact of foreign currency translation, Asia/Pacific net sales increased 8%.

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

Cost of Sales

Cost of sales as a percentage of total net sales improved to 25.5% from 26.2%,
primarily reflecting production and supply chain efficiencies including the
effect of currency, and lower costs from promotional activities of approximately
40 basis points each. Partially offsetting this improvement was a higher cost of
goods percentage generated from increased travel retail sales of approximately
10 basis points. Travel retail has a higher cost of goods because of its heavy
fragrance mix coupled with its margin structure. We continued to emphasize
sourcing initiatives and overall supply chain management, which resulted in
lower manufacturing costs.

A strategic shift from promotions to advertising, as well as a shift in the
timing of certain promotions from quarter to quarter, contributed to the
improvement in our gross profit margin for the current-year quarter. Since the
cost of these promotional activities is a component of 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.



THE ESTEE LAUDER COMPANIES INC.

Operating Expenses

Operating expenses decreased to 61.0% of net sales as compared with 61.6% of net
sales in the prior-year quarter. The decrease in operating expenses as a
percentage of net sales reflects the higher growth rate in sales, particularly
in the travel retail business and other cost containment efforts to maintain
expenses in line with our business needs and the shift in the timing of certain
expenditures to the second half of the fiscal year. Higher levels of
advertising, sampling and merchandising in the first quarter have contributed to
the sales growth in this quarter. Offsetting the favorability in the current
period were operating expenses related to spending behind BeautyBank, the higher
operating costs associated with newly acquired brands and expenses to comply
with new regulatory requirements (such as those arising under the Sarbanes-Oxley
Act of 2002).

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 Income

Operating income increased 28% or $47.8 million to $219.0 million as compared
with the prior-year quarter. Operating margins were 13.5% of net sales in the
current period as compared with 12.2% in the prior-year quarter. The increase in
operating margin reflects sales growth coupled with improvements in the
components of cost of sales and operating expenses.

Product Categories
Operating income increased 40% to $118.2 million in skin care due primarily to
the strength of new and recently launched products that benefited from
advertising and promotional spending in the first quarter. Operating income
increased in the fragrance business by 27% to $27.1 million which continued to
be strong, reflecting improved results from our travel retail business and the
success of several new product launches, partially offset by increased support
spending. Operating income increased 10% to $64.5 million in makeup and
increased 83% to $8.8 million in hair care reflecting sales gains and targeted
support spending.

Geographic Regions
Operating income in the Americas decreased 18% or $12.7 million to $59.4 million
following an 81% increase experienced during the first quarter of the current
fiscal year, which on a combined basis generated 29% growth in the first half of
the current fiscal year. The current year quarter compared to the same quarter
of the prior year reflects the small increase in sales and increased spending
support behind first and second quarter product launches. In Europe, the Middle
East & Africa, operating income increased 76% or $55.4 million to $128.8 million
primarily due to the significant increase in our travel retail business and
operating result improvements in a number of markets led by the United Kingdom,
Greece, Italy and Spain. These results were also positively affected by the
recovery of sales lost or delayed during the current-year first quarter arising
from the adverse weather conditions in continental Europe in July and August. In
Asia/Pacific, operating income increased 20% or $5.1 million to $30.8 million
reflecting improved results in Taiwan, Australia and Japan. At the same time, we
continued to invest in the region to support new brand expansion and business
opportunities in developing markets such as China.

Interest Expense, Net

Net interest expense was $7.2 million as compared with $2.2 million in the
prior-year period. The increase in net interest expense was due primarily to the
inclusion of the preferred stock dividends of $4.3 million as interest expense
in the current period. This change in reporting resulted from a change in
accounting standards which prohibits us from restating the prior period results
(see "Recently Issued Accounting Standards"). To a lesser extent, interest
expense was also affected by higher average net borrowings offset by a lower
effective interest rate provided by the interest rate swap on the 6% Senior
Notes.

Provision for Income Taxes

The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the three months ended
December 2003 was 38.1% as compared with 33.5% in the prior-year period.
These rates differ from statutory rates reflecting the effect of state and local
taxes, tax rates in foreign jurisdictions and certain nondeductible expenses.
The increase in the effective income tax rate was attributable to the inclusion
of the preferred stock dividends as interest expense which are not deductible
for income tax purposes and the anticipated full-year mix of global earnings.
The prior-period rate included benefits derived from certain favorable tax
negotiations. Currently, we expect the full year rate to be 37.4% which is up
from 36.0% that was reported at the end of the current year first quarter. The
increase reflects first half results and revised estimates of our full year mix
of earnings and to a lesser extent the timing of tax planning initiatives.

THE ESTEE LAUDER COMPANIES INC.

Discontinued Operations

On December 22, 2003, we committed to a plan to sell the assets and operations
of our reporting unit which sells jane brand products and to actively market the
brand. As a result of this decision and other factors related to our business in
mass outlets, including an understanding of the market for these
assets, circumstances warranted that we conduct an assessment of the tangible
and intangible assets of this business. Based on this assessment, we determined
that the carrying amount of these assets as reflected on our consolidated
balance sheets exceeded their estimated fair value. Accordingly, we have
recorded an after-tax charge to discontinued operations of $30.6 million for the
three months ended December 31, 2003. The charge represents the impairment of
goodwill in the amount of $26.4 million; the reduction in value of other
tangible assets held for sale of $2.1 million, net of tax; and the operating
loss of $3.0 million, net of tax, for the three month period ended December 31,
2003. Included in the operating loss of the period were additional costs
associated with the sale and discontinuation of the business. All statement of
earnings information for prior periods has been restated for comparative
purposes, including the restatement of the makeup product category and the
Americas region data.

Six Months Fiscal 2004 as compared with Six Months Fiscal 2003

Net Sales

Net sales increased 12% or $322.5 million to $2,965.7 million, reflecting growth
in all product categories and all geographic regions. Product category results
were led by skin care, and our regions were led by Europe, the Middle East &
Africa, primarily reflecting improvements in the travel retail business.
Excluding the impact of foreign currency translation, net sales increased 8%.

Product Categories

Skin Care
Net sales of skin care products increased 15% or $134.2 million to $1,035.0
million. This increase in net sales was primarily attributable to newly and
recently launched products such as Idealist Micro-D Deep Thermal Refinisher,
DayWear Plus and Hydra Complete Multi-Level Moisture products by Estee Lauder
and Pore Minimizer products by Clinique. The increase was supported by strong
sales of Perfectionist Correcting Serum for Lines/Wrinkles and Re-Nutriv
Intensive Lifting products by Estee Lauder, and the Repairwear line of products
from Clinique and products in Clinique's 3-Step Skin Care System, as well as the
addition of the Darphin line of products. Partially offsetting these increases
were lower net sales of certain existing products such as Advanced Stop Signs by
Clinique and Resilience Lift by Estee Lauder. Excluding the impact of foreign
currency translation, skin care net sales increased 10%.

Makeup
Makeup net sales increased 9% or $83.3 million to $1,016.1 million. In addition
to strong sales of certain of our makeup artist lines, the increase in net sales
reflected the recent launches of Ideal Matte Refinishing Makeup SPF 8, Artist's
Lip and Eye Pencils, MagnaScopic Maximum Volume Mascara, and Pure Color Lip
Vinyl by Estee Lauder, and High Impact Mascara and Glossware for Lips Cream
Shines by Clinique. Offsetting these increases were lower net sales of certain
existing products such as So Ingenious Multi-Dimension Liquid Makeup and Loose
Powder and Pure Color Velvet Lipstick and Nail Lacquer from Estee Lauder.
Excluding the impact of foreign currency translation, makeup net sales increased
5%.

Fragrance
Net sales of fragrance products increased 14% or $94.7 million to $777.5
million. The increase in net sales was primarily attributable to recent
launches of Estee Lauder Beyond Paradise, Aramis Life, Clinique Happy Heart and
Clinique Simply. The increase in net sales also benefited from improved results
from our travel retail business. These net sales increases were partially offset
by lower net sales of Estee Lauder pleasures, Beautiful and Intuition by Estee
Lauder. Excluding the impact of foreign currency translation, fragrance net
sales increased 9%.

Hair Care
Hair care net sales increased 7% to $117.8 million. This increase was primarily
the result of sales from Bumble and bumble products including the launch of the
Curl Conscious line of products and expanded distribution, as well as increased
sales of Aveda products. Partially offsetting these increases were lower sales
from Clinique's Simple Hair Care System.

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 ESTEE LAUDER COMPANIES INC.

Geographic Regions
Net sales in the Americas increased 6% or $97.0 million to $1,656.2 million
primarily reflecting growth from our newer brands as well as the success of new
and recently launched products and an improving retail environment.

In Europe, the Middle East & Africa, net sales increased 23% or $172.0 million
to $914.5 million primarily reflecting higher net sales from our travel retail
business, the United Kingdom, Spain, South Africa and Greece as well as the
addition of Darphin. We also benefited from the effects of favorable foreign
currency exchange rates to the U.S. dollar. Excluding the impact of foreign
currency translation, net sales in Europe, the Middle East & Africa increased
12%.

Net sales in Asia/Pacific increased 16% or $53.5 million to $395.0 million. This
increase reflected higher net sales in Australia, Japan, Taiwan, Korea, and
China. Excluding the impact of foreign currency translation, net sales in Asia/
Pacific increased 8%.

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

Cost of Sales

Cost of sales as a percentage of total net sales improved to 26.2% from 27.4%,
primarily reflecting lower costs from promotional activities, and production and
supply chain efficiencies including the effects of currency of approximately 90
basis points and 40 basis points, respectively. Partially offsetting this
improvement was a higher cost of goods percentage generated from increased
travel retail sales of approximately 10 basis points. Travel retail has a higher
cost of goods because of its heavy fragrance mix coupled with its margin
structure. We continued to emphasize sourcing initiatives and overall supply
chain management, which resulted in lower manufacturing costs.

A strategic shift from promotions to advertising, as well as a shift in the
timing of certain promotions, contributed to the improvement in our gross profit
margin for the current-year period. Since the cost of these promotional
activities is a component of 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.

Operating Expenses

Operating expenses increased to 62.0% of net sales as compared with 61.8% of net
sales in the prior-year period. The increase in spending primarily related to
advertising, merchandising and sampling activities to support our product
launches, to promote brand building and to support future sales growth as well
as to build momentum during the holiday selling season. Other operating expenses
reflect spending behind BeautyBank, the higher operating costs associated with
newly acquired brands and expenses related to compliance with new regulatory
requirements (such as those arising under the Sarbanes-Oxley Act of 2002). We
continue to control our other operating expenses in line with our business
needs.

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

Operating Income

Operating income increased 22% or $61.9 million to $348.7 million as compared
with the prior-year period. Operating margins were 11.8% of net sales in the
current period as compared with 10.8% in the prior-year period. The increase in
operating margin reflects sales growth coupled with the improvement in the
components of cost of sales as well as our continued control of non-business
building expenses.

Product Categories
Operating income increased 33% to $66.3 million in fragrance due primarily to
improved results from our travel retail business and strong results from our
recently launched products. Operating income increased 21% to $157.8 million in
skin care, 13% to $110.0 million in makeup and 57% to $13.5 million in hair care
reflecting overall sales growth and successful new product introductions.



THE ESTEE LAUDER COMPANIES INC.

Geographic Regions
Operating income in the Americas increased 29% or $40.1 million to $178.5
million. This region's profitability reflects more historical levels, similar
to fiscal 2000 and 2001, when the region was not affected by a slow retail
environment as it has been for the last few of years. Contributing to the
current-year period increase were strong product launches, as well as the timing
of certain promotional events and efficiencies in cost of sales. In Europe, the
Middle East & Africa, operating income increased 16% or $18.5 million to $136.5
million primarily due to the significantly increased results generated from our
travel retail business as well as improved operating results in the United
Kingdom. In Asia/Pacific, operating income increased 11% or $3.3 million to
$33.7 million. This increase reflects improved results in Taiwan, Australia, and
Japan.

Interest Expense, Net

Net interest expense was $14.9 million as compared with $5.1 million in the
prior-year period. The increase in net interest expense was due to the inclusion
of the preferred stock dividends of $10.1 million as interest expense in the
current period. This change in reporting resulted from a change in accounting
standards which prohibits us from restating the prior period results (see
"Recently Issued Accounting Standards").

Provision for Income Taxes

The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for the six months ended
December 2003 was 37.4% as compared with 33.5% in the prior-year period. These
rates differ from statutory rates reflecting the effect of state and local
taxes, tax rates in foreign jurisdictions and certain nondeductible expenses.
The increase in the effective income tax rate was attributable to the inclusion
of the preferred stock dividends as interest expense which are not deductible
for income tax purposes and the anticipated full-year mix of global earnings.
The prior-period rate included benefits derived from certain favorable tax
negotiations. Currently, we expect the full year rate to be 37.4%, which is up
from 36.0% that was reported at the end of the current year first quarter. The
increase reflects first half results and revised estimates of our full year mix
of earnings and to a lesser extent the timing of tax planning initiatives.

Discontinued Operations

On December 22, 2003, we committed to a plan to sell the assets and operations
of our reporting unit which sells jane brand products and to actively market the
brand. As a result of this decision and other factors related to our business in
mass outlets, including an understanding of the market for these
assets, circumstances warranted that we conduct an assessment of the tangible
and intangible assets of this business. Based on this assessment, we determined
that the carrying amount of these assets as reflected on our consolidated
balance sheets exceeded their estimated fair value. Accordingly, we recorded an
after-tax charge to discontinued operations of $31.3 million during the
six-month period ended December 31, 2003. The charge represents the impairment
of goodwill in the amount of $26.4 million; the reduction in value of other
tangible assets held for sale of $1.2 million, net of taxes; and the operating
loss of $3.7 million, net of tax, for the six month period ended December 31,
2003. Included in the operating loss of the period were additional costs
associated with the sale and discontinuation of the business. All statement of
earnings information for prior periods has been restated for comparative
purposes, including the restatement of the makeup product category and the
Americas region data.

THE ESTEE LAUDER COMPANIES INC.

Financial Condition
- -------------------
Liquidity and Capital Resources

Our principal sources of funds historically have been cash flows from operations
and borrowings under our commercial paper program, borrowings from the issuance
of long-term debt and committed and uncommitted credit lines provided by banks
in the United States and abroad. At December 31, 2003, we had cash and cash
equivalents of $869.9 million compared with $364.1 million at June 30, 2003.

At December 31, 2003, our outstanding borrowings of $833.3 million included:
(i) $360.0 million of Cumulative Redeemable Preferred Stock, which shares have a
mandatory redemption date of June 30, 2015 (see "Recently Issued Accounting
Standards"), (ii) $243.2 million of 6% Senior Notes due January 2012 consisting
of $250.0 million principal, unamortized debt discount of $0.9 million and a
$5.9 million reduction to reflect the fair value of an outstanding interest rate
swap; (iii) $197.3 million of 5.75% Senior Notes due October 2033 consisting of
$200.0 million principal and unamortized debt discount of $2.7 million; (iv) a
3.0 billion yen term loan (approximately $27.9 million at current exchange
rates), which is due in March 2006; and (v) $4.9 million of other short-term
borrowings.

In December 2003, we and the holders of the Cumulative Redeemable Preferred
Stock agreed to exchange all of their outstanding shares of $6.50 Cumulative
Redeemable Preferred Stock due June 30, 2005 for a newly issued series of
Cumulative Redeemable Preferred Stock with a mandatory redemption date of June
30, 2015 ("2015 Preferred Stock"). The exchange occurred on December 31, 2003.
Dividends on the 2015 Preferred Stock will be payable at a rate per annum of
4.75%, payable quarterly, until June 30, 2005, down from 6.5% during that
period, and thereafter will be payable at a rate set semi-annually and equal to
the after-tax yield on six-month U.S. Treasuries. The 2015 Preferred Stock may
be put to us under certain circumstances, and may be called for redemption by us
under certain similar circumstances; however, in each case the puts or calls may
not occur until after the passing of Mrs. Estee Lauder. For the shares held by
one holder (which holds $68.4 million of the principal amount of the shares of
2015 Preferred Stock after the exchange), our call right will not be exercisable
until the thirteenth-month anniversary of Mrs. Lauder's passing. However, if we
call and pay for the other shares of the 2015 Preferred Stock prior to June 30,
2005, then the dividend rate on the shares held by that holder, or its
transferees, will automatically change to the rate based on six-month U.S.
Treasuries upon Mrs. Lauder's passing even if prior to June 30, 2005. The
benefits from the reduced dividend rate amount to $1.6 million per quarter and,
assuming the preferred stock remains outstanding for the balance of fiscal 2004,
we expect to save approximately $4.7 million in preferred stock dividends for
the full fiscal year.

In September 2003, we issued and sold $200.0 million of 5.75% Senior Notes due
October 2033 ("5.75% Senior Notes") in a public offering. The 5.75% Senior Notes
were priced at 98.645% with a yield of 5.846%. Interest payments will be made
semi-annually on April 15 and October 15 of each year, commencing April 15,
2004. In May 2003, in anticipation of the issuance of the 5.75% Senior Notes, we
entered into a series of treasury lock agreements on a notional amount totaling
$195.0 million at a weighted average all-in rate of 4.53%. The treasury lock
agreements were settled upon the issuance of the new debt and we received
payment of $15.0 million that will be amortized against interest expense over
the life of the 5.75% Senior Notes. As a result of the treasury lock agreements,
the debt discount and debt issuance costs, our effective interest rate on the
5.75% Senior Notes will be 5.395% over the life of the debt. The net proceeds
from the sale of the 5.75% Senior Notes will be used for general corporate
purposes, including but not limited to the eventual redemption of our
outstanding redeemable preferred stock. We issued these fixed-rate notes to lock
in long-term liquidity at historically low prevailing market rates and to
mitigate future interest rate volatility.

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 negative outlook by Standard & Poor's and A1 with a stable outlook by
Moody's. At December 31, 2003, we had no commercial paper outstanding. We also
have an effective shelf registration statement covering the potential issuance
of up to an additional $300.0 million in debt securities. As of December 31,
2003, we had an unused $400.0 million revolving credit facility, expiring on
June 28, 2006, and $173.7 million in additional uncommitted credit facilities.

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 the revolving credit facility.



THE ESTEE LAUDER COMPANIES INC.

Total debt as a percent of total capitalization was 34% at December 31, 2003 as
compared with 14% at June 30, 2003. This increase primarily reflects the
reclassification of the redeemable preferred stock to long-term debt as well as
the issuance of the 5.75% Senior Notes.

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.

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 and capital expenditures on both a near-term and long-term
basis.

Cash Flows
Net cash provided by operating activities was $382.2 million during the six
months ended December 31, 2003 as compared with net cash provided by operating
activities of $371.9 million in the prior-year period, reflecting improved
profitability and decreased levels of inventory partially offset by increased
levels of accounts receivable. The decrease in inventory reflects our continued
efforts to maintain such levels in line with anticipated demand for our
products. Increased accounts receivable levels reflect a seasonal increase in
the quarter corresponding to increased holiday shipments. Net cash used for
investing activities was $91.5 million during the six months ended December 31,
2003, which primarily reflects capital expenditures. Net cash provided by
financing activities of $207.8 million primarily related to the issuance of the
5.75% Senior Notes.

Dividends
On November 5, 2003, the Board of Directors declared an annual dividend of $.30
per share on our Class A and Class B Common Stock, payable on January 6, 2004
to stockholders of record at the close of business on December 16, 2003. Common
Stock dividends declared for the quarter ended December 31, 2003 and 2002 were
$68.5 million and $46.5 million, respectively. Dividends declared on the
Cumulative Redeemable Preferred Stock for the six months ended December 31, 2003
and 2002 were $10.1 million and $11.7 million, respectively. The decrease
reflects an agreement to reduce the dividend of the preferred stock made in
connection with the exchange of the preferred shares in December 2003. The
Cumulative Redeemable Preferred Stock dividends declared for the six months
ended December 31, 2003 have been characterized as interest expense (see
"Recently Issues Accounting Standards").

Share Repurchase Program
We are authorized by the Board of Directors to repurchase up to 18.0 million
shares of Class A Common Stock in the open market or in privately negotiated
transactions, depending on market conditions and other factors. As of December
31, 2003, the cumulative total of acquired shares pursuant to the authorization
was 14.4 million reducing the remaining authorized share repurchase balance to
3.6 million. During the first six months of fiscal 2004, we purchased 0.6
million shares for $19.6 million as outlined in the following table:




Total Number of Maximum Number
Shares Purchased as of Shares that May
Total Number of Average Price Part of Publicly Yet Be Purchased
Period Shares Purchased Paid Per Share Announced Program(1) Under the Program
- -------------- ---------------- -------------- -------------------- ------------------
July 2003 0 0 0 4,160,500
August 2003 350,000 $33.60 350,000 3,810,500
September 2003 15,000 34.00 15,000 3,795,500
October 2003 0 0 0 3,795,500
November 2003 202,300 36.25 202,300 3,593,200
December 2003 0 0 0 3,593,200
------- ------ ------- ---------
Year-to-date 567,300 $34.56 567,300 3,593,200
======= ====== ======= =========


(1) The publicly announced repurchase program was last increased by 10 million
shares on October 30, 2002. The initial program covering the repurchase of
8 million shares was announced in September 1998.



THE ESTEE LAUDER COMPANIES INC.


Commitments and Contingencies
The 2015 Preferred Stock may be put to us under certain circumstances and may be
called for redemption by us under certain similar circumstances; however, in
each case the puts or calls may not occur until after the passing of Mrs. Estee
Lauder. If shares of the 2015 Cumulative Redeemable Preferred Stock are put to
us, we would have up to 180 days after notice to purchase such shares. For the
shares held by one holder (which holds $68.4 million of the principal amount of
the shares), our call right will not be exercisable until the thirteenth-month
anniversary of Mrs. Lauder's passing.

Certain of our business acquisition agreements include "earn-out" provisions.
These provisions generally require that we pay to the seller or sellers of the
business additional amounts based on the performance of the acquired business.
The payments typically are made after a certain period of time and our next
"earn-out" payment is expected to be made after the end of fiscal 2005. Since
the size of each payment depends upon performance of the acquired business, we
do not expect that such payments will have a material adverse impact on our
future results of operations or financial condition.

Contractual Obligations
In July 2003, we signed a new lease for our principal offices at the same
location. Our rental obligations under the new lease will commence in fiscal
2005 and expire in fiscal 2020. Obligations pursuant to the lease in fiscal
2005, 2006, 2007, 2008 and thereafter are $5.9 million, $23.6 million, $23.6
million, $24.1 million and $324.2 million, respectively. There have been no
other significant changes to our contractual obligations since June 30, 2003.

Business Acquisitions
During the first quarter of fiscal 2004, we acquired the Rodan & Fields skin
care line. The initial purchase price, paid at closing, was funded by cash
provided by operations, the payment of which did not have a material effect on
our results of operations or consolidated financial condition. We may make
additional payments between fiscal 2007 and 2011 based on certain conditions.

Derivative Financial Instruments and Hedging Activities
We address certain financial exposures through a controlled program of risk
management that includes the use of derivative financial instruments. We
primarily enter into foreign currency forward exchange contracts and foreign
currency options to reduce the effects of fluctuating foreign currency exchange
rates. We also enter into interest rate derivative contracts to manage the
effects of fluctuating interest rates. We categorize these instruments as
entered into for purposes other than trading.

For each derivative contract we enter into where we look to obtain special hedge
accounting treatment, we formally document the relationship between the hedging
instrument and hedged item, as well as its risk-management objective and
strategy for undertaking the hedge. This process includes linking all
derivatives that are designated as fair-value, cash-flow, or foreign-currency
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. We also formally assess, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items. If it is determined that a derivative is
not highly effective, then we will be required to discontinue hedge accounting
with respect to that derivative prospectively.

Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge anticipated transactions as
well as receivables and payables denominated in foreign currencies for periods
consistent with our identified exposures. The purpose of the hedging activities
is to minimize the effect of foreign exchange rate movements on our costs and on
the cash flows that we receive from foreign subsidiaries. Almost all foreign
currency contracts are denominated in currencies of major industrial countries
and are with large financial institutions rated as strong investment grade by a
major rating agency. We also enter into foreign currency options to hedge
anticipated transactions where there is a high probability that anticipated
exposures will materialize. The forward exchange contracts have been designated
as cash-flow hedges. As of December 31, 2003, these cash-flow hedges were highly
effective, in all material respects.



THE ESTEE LAUDER COMPANIES INC.


As a matter of policy, we only enter into contracts with counterparties that
have at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions. We do not have significant exposure
to any one counterparty. Our exposure to credit loss in the event of
nonperformance by any of the counterparties is limited to only the recognized,
but not realized, gains attributable to the contracts. Management believes risk
of loss under these hedging contracts is remote and in any event would not be
material to the consolidated financial results. The contracts have varying
maturities through the end of October 2004. Costs associated with entering into
such contracts have not been material to our consolidated financial results. We
do not utilize derivative financial instruments for trading or speculative
purposes. At December 31, 2003, we had foreign currency contracts in the form of
forward exchange contracts and option contracts in the amount of $425.7 million
and $25.9 million, respectively. The foreign currencies included in forward
exchange contracts (notional value stated in U.S. dollars) are principally the
Euro ($132.3 million), British pound ($69.0 million), Swiss franc ($64.5
million), Canadian dollar ($32.0 million), Australian dollar ($30.0 million),
Japanese yen ($28.6 million) and South Korean won ($22.1 million). The foreign
currencies included in the option contracts (notional value stated in U.S.
dollars) are principally the Canadian dollar ($13.9 million) and Swiss franc
($7.8 million).

Interest Rate Risk Management
We enter into interest rate derivative contracts to manage the exposure to
fluctuations of interest rates on our funded indebtedness and anticipated
issuance of debt, as well as cash investments, for periods consistent with the
identified exposures. All interest rate derivative contracts are with large
financial institutions rated as strong investment grade by a major rating
agency.

We have an interest rate swap agreement with a notional amount of $250.0 million
to effectively convert fixed interest on the existing $250.0 million 6% Senior
Notes to variable interest rates based on LIBOR. We designated the swap as a
fair-value hedge. As of December 31, 2003, the fair-value hedge was highly
effective, in all material respects.

Additionally, in May 2003, in connection with the anticipated issuance of debt,
we entered into a series of treasury lock agreements on a notional amount
totaling $195.0 million at a weighted average all-in rate of 4.53%. These
treasury lock agreements were used to hedge the exposure to the rise in interest
rates prior to the September 2003 issuance of debt. The agreements were settled
upon the issuance of the 5.75% Senior Notes and we realized a gain in other
comprehensive income of $15.0 million that will be amortized against interest
expense over the life of the 5.75% Senior Notes.

Market Risk
Using the value-at-risk model, as discussed in our annual report on Form 10-K
for the fiscal year ended June 30, 2003, our average value-at-risk, calculated
for the most recent twelve months, is $7.4 million related to our foreign
exchange contracts. As of December 31, 2003, our average value-at-risk related
to our interest rate contracts for the six month period for which these
contracts were outstanding was $14.7 million. There have been no significant
changes in market risk since June 30, 2003 that would have a material effect on
our calculated value-at-risk exposure, as disclosed in the annual report on Form
10-K for the fiscal year ended June 30, 2003.

Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations
or other relationships with unconsolidated entities that would be expected to
have a material current or future effect upon our financial condition or results
of operations.

Critical Accounting Policies

As disclosed in the annual report on Form 10-K for the fiscal year ended June
30, 2003, the discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventory; pension and other
postretirement benefit costs; goodwill and other intangible assets; income
taxes; and derivatives. Since June 30, 2003, there have been no changes in our
critical accounting policies and no significant changes to the assumptions and
estimates related to them.



THE ESTEE LAUDER COMPANIES INC.

Recently issued Accounting Standards

On January 12, 2004 the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," ("FSP No. 106-1") in response to a new law regarding prescription drug
benefits under Medicare ("Medicare Part D") as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. Currently, Statement of
Financial Accounting Standard No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS No. 106") requires that changes in relevant
law be considered in current measurement of postretirement benefit costs.
However, certain accounting issues related to the federal subsidy remain unclear
and significant uncertainties may exist which impair a plan sponsor's ability to
evaluate the direct effects of the new law and the ancillary effects on plan
participants' behavior and healthcare costs. Due to these uncertainties, FSP
No. 106-1 provides plan sponsors with an opportunity to elect to defer
recognizing the effects of the new law in the accounting for its retiree health
care benefit plans under SFAS No. 106 and to provide related disclosures until
authoritative guidance on the accounting for the federal subsidy is issued and
clarification regarding other uncertainties is resolved. We have elected to
defer recognition while evaluating the new law and the pending issuance of
authoritative guidance and their effect, if any, on our results of operations,
financial position and financial statement disclosure. Therefore, any measures
of the accumulated postretirement benefit obligation or the net periodic
postretirement benefit cost do not reflect the effects of the new law and issued
guidance could require us to change previously reported information.

In December 2003, the Financial Accounting Standards Board revised Statement of
Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions
and other Postretirement Benefits," ("SFAS No. 132") establishing additional
annual disclosures about plan assets, investment strategy, measurement date,
plan obligations and cash flows. In addition, the revised standard established
interim disclosure requirements related to the net periodic benefit cost
recognized and contributions paid or expected to be paid during the current
fiscal year. The new annual disclosures are effective for financial statements
with fiscal years ending after December 15, 2003 and the interim-period
disclosures are effective for interim periods beginning after December 15, 2003.
We will adopt the annual disclosures for our fiscal year ending June 30, 2004
and the interim disclosures for our fiscal quarter ending March 31, 2004. The
adoption of the revised SFAS No. 132 will have no impact on our results of
operation or financial condition.

We have adopted Statement of Financial Accounting Standard No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 established standards for classifying and
measuring certain financial instruments with characteristics of both liabilities
and equity. Among other things, it specifically requires that mandatorily
redeemable instruments, such as redeemable preferred stock, be classified as a
liability. Initial and subsequent measurements of the instruments differ
based on the characteristics of each instrument and as provided for in the
statement. Based on the provisions of this statement, we have classified the
Cumulative Redeemable Preferred Stock as a liability and the related
dividends thereon have been characterized as interest expense. Restatement of
financial statements for earlier years presented was not permitted. The adoption
of this statement has resulted in the inclusion of the dividends on the
preferred stock (equal to $4.3 million in the current quarter and $10.1 million
year-to-date) as interest expense. While the inclusion has impacted net
earnings, net earnings attributable to common stock and earnings per common
share were unaffected. Given that the dividends are not deductible for income
tax purposes, the inclusion of the preferred stock dividends as an interest
expense has caused an increase in our effective tax rate. The adoption of SFAS
No. 150 had no impact on our financial condition.



THE ESTEE LAUDER COMPANIES INC.


Forward-Looking Information
We and our representatives from time to time make written or oral forward-
looking statements, including statements contained in this and other filings
with the Securities and Exchange Commission, in our press releases and in our
reports to stockholders. The words and phrases "will likely result," "expect,"
"believe," "planned," "will," "will continue," "may," "could," "should,"
"anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, our expectations regarding sales, earnings or other future financial
performance and liquidity, product introductions, entry into new geographic
regions, information systems initiatives, new methods of sale and future
operations or operating results. Although we believe that our expectations are
based on reasonable assumptions within the bounds of our knowledge of our
business and operations, actual results may differ materially from our
expectations. Factors that could cause actual results to differ from
expectations include, without limitation:

(1) increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses, some of which have greater
resources than we do;

(2) our ability to develop, produce and market new products on which
future operating results may depend;

(3) consolidations, restructurings, bankruptcies and reorganizations in
the retail industry causing a decrease in the number of stores that sell
our products, an increase in the ownership concentration within the
retail industry, ownership of retailers by our competitors and ownership
of competitors by our customers that are retailers;

(4) shifts in the preferences of consumers as to where and how they shop
for the types of products and services we sell;

(5) social, political and economic risks to our foreign or domestic
manufacturing, distribution and retail operations, including changes in
foreign investment and trade policies and regulations of the host
countries and of the United States;

(6) changes in the laws, regulations and policies that affect, or will
affect, our business, including changes in accounting standards, tax
laws and regulations, trade rules and customs regulations, and the
outcome and expense of legal or regulatory proceedings;

(7) foreign currency fluctuations affecting our results of operations
and the value of our foreign assets, the relative prices at which we and
our foreign competitors sell products in the same markets and our
operating and manufacturing costs outside of the United States;

(8) changes in global or local economic conditions that could affect
consumer purchasing, the willingness of consumers to travel, the
financial strength of our customers, the cost and availability of
capital, which we may need for new equipment, facilities or
acquisitions, and the assumptions underlying our critical accounting
estimates;

(9) shipment delays, depletion of inventory and increased production
costs resulting from disruptions of operations at any of the facilities
which, due to consolidations in our manufacturing operations, now
manufacture nearly all of our supply of a particular type of product
(i.e. focus factories);

(10) real estate rates and availability, which may affect our ability to
increase the number of retail locations at which we sell our products
and the costs associated with our other facilities;

(11) changes in product mix to products which are less profitable;

(12) our ability to acquire or develop e-commerce capabilities, and
other new information and distribution technologies, on a timely basis
and within our cost estimates;

(13) our ability to capitalize on opportunities for improved efficiency,
such as globalization, and to integrate acquired businesses and realize
value therefrom; and

(14) consequences attributable to the events that are currently taking
place in the Middle East, including further attacks, retaliation and
the threat of further attacks or retaliation.

We assume no responsibility to update forward-looking statements made herein or
otherwise.

THE ESTEE LAUDER COMPANIES INC.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is set forth in Item 2 of this Quarterly
Report on Form 10-Q under the caption "Liquidity and Capital Resources - Market
Risk" and is incorporated herein by reference.

Item 4. Controls and Procedures

Our disclosure controls and procedures (as defined in Rules13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) are designed to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. The Chief Executive
Officer and the Chief Financial Officer, with assistance from other members of
management, have reviewed the effectiveness of our disclosure controls and
procedures as of December 31, 2003 and, based on their evaluation, have
concluded that the disclosure controls and procedures were effective as of such
date.

There has been no change in our internal control over financial reporting (as
defined in Rules13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the second quarter of fiscal 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.



THE ESTEE LAUDER COMPANIES INC.

PART II. OTHER INFORMATION


Item 1. Legal Proceedings

We are involved in various routine legal proceedings incident to the ordinary
course of business. In management's opinion, the outcome of pending legal
proceedings, separately and in the aggregate, will not have a material adverse
effect on our business or consolidated financial condition.

In July 2003, we entered into a settlement agreement with the plaintiffs, the
other Manufacturer Defendants (as defined below) and the Department Store
Defendants (as defined below) in a consolidated class action lawsuit that had
been pending in the Superior Court of the State of California in Marin County
since 1998. In connection with the settlement, the case has been refiled in the
United States District Court for the Northern District of California on behalf
of a nationwide class of consumers of prestige cosmetics in the United States.
The settlement requires Court approval and, if approved by the Court, will
result in the plaintiffs' claims being dismissed, with prejudice, in their
entirety. There has been no finding or admission of any wrongdoing by the
Company in this lawsuit. We entered into the settlement agreement solely to
avoid protracted and costly litigation. In connection with the settlement
agreement, the defendants, including the Company, will provide consumers with
certain free products and pay the plaintiffs' attorneys' fees. To meet its
obligations under the settlement, the Company took a special pre-tax charge of
$22.0 million, or $13.5 million after-tax, equal to $.06 per diluted common
share in the fourth quarter of fiscal 2003. The charge did not have a material
adverse effect on the Company's financial condition. In the federal action, the
plaintiffs, purporting to represent a class of all U.S. residents who purchased
prestige cosmetics products at retail for personal use from eight department
stores groups that sold such products in the United States (the "Department
Store Defendants"), alleged that the Department Store Defendants, the Company
and eight other manufacturers of cosmetics (the "Manufacturer Defendants")
conspired to fix and maintain retail prices and to limit the supply of prestige
cosmetics products sold by the Department Store Defendants in violation of state
and federal laws. The plaintiffs sought, among other things, treble damages,
equitable relief, attorneys' fees, interest and costs.

In 1998, the Office of the Attorney General of the State of New York (the
"State") notified the Company and ten other entities that they are potentially
responsible parties ("PRPs") with respect to the Blydenburgh landfill in Islip
New York. Each PRP may be jointly and severally liable for the costs of
investigation and cleanup, which the State estimates to be $16 million. While
the State has sued other PRPs in connection with the site (including Hickey's
Carting, Inc., Dennis C. Hickey and Maria Hickey, collectively the
"Hickey Parties"), the State has not sued the Company. The Company and certain
other PRPs are in discussions with the State regarding possible settlement of
the matter. On September 9, 2002, the Hickey Parties brought contribution
actions against the Company and other Blydenburgh PRPs in the State's lawsuit
against the Hickey Parties in the U.S. District Court for the Eastern District
of New York. These actions seek to recover, among other things, any damages for
which the Hickey Parties are found liable in the State's lawsuit against them,
and related costs and expenses, including attorneys' fees. The Company intends
to defend the contribution claim vigorously. While no assurance can be given as
to the ultimate outcome, management believes that the Blydenburgh matters will
not have a material adverse effect on the Company's consolidated financial
condition.

In 1998, the State notified the Company and fifteen other entities that they are
PRPs with respect to the Huntington/East Northport landfill. The cleanup costs
are estimated at $20 million. No litigation has commenced. The Company and other
PRPs are in discussions with the State regarding possible settlement of the
matter. While no assurance can be given as to the ultimate outcome, management
believes that the matter will not have a material adverse effect on the
Company's consolidated financial condition.

In January 2004, the Company settled an employment lawsuit filed in June 2003 in
the U.S. District Court, Eastern District of New York. The settlement will not
have a material adverse effect on the Company's consolidated financial
condition.



THE ESTEE LAUDER COMPANIES INC.

PART II. OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities

The information required by this item is set forth in Item 2 of this Quarterly
Report on Form 10-Q under the caption "Liquidity and Capital Resources - Share
Repurchase Program" and is incorporated herein by reference.

Item 4. Submission of matters to a vote of security holders

(a) The Annual Meeting of Stockholders of the Company was held on November 5,
2003.

(b) The following directors were elected at the Annual Meeting of
Stockholders: Rose Marie Bravo, Irvine O. Hockaday, Jr. and Fred H.
Langhammer, as Class I Directors for a term expiring at the 2006 Annual
Meeting. The Class II Directors, whose terms expire at the 2004 Annual
Meeting, are Lynn Forester de Rothschild, William P. Lauder and Richard D.
Parsons. The Class III Directors, whose terms expire at the 2005 Annual
Meeting, are Charlene Barshefsky, Leonard A. Lauder, Ronald S. Lauder and
Marshall Rose.

(c) (i) Each person elected as a director at the Annual Meeting received the
number of votes (shares of Class B Common Stock are entitled to ten
votes per share) indicated beside his or her name:

Name Votes For Votes Withheld
---- --------- --------------
Rose Marie Bravo 1,160,230,434 4,344,110
Irvine O. Hockaday, Jr. 1,159,594,388 4,980,156
Fred H. Langhammer 1,157,805,569 6,768,975

(ii) 1,159,431,196 votes (shares of Class B Common Stock are entitled to
ten votes per share) were cast for and 4,703,163 votes were cast
against the approval of the Executive Annual Incentive Plan. There
were 440,175 abstentions and 10 broker nonvotes.

(iii) 1,162,326,356 votes (shares of Class B Common Stock are entitled to
ten votes per share) were cast for and 1,990,080 votes were cast
against the ratification of the appointment of KPMG LLP as independent
auditors of the Company for the 2003 fiscal year. There were 258,108
abstentions and no broker nonvotes.

(d) Not applicable.

Item 5. Other Information

On January 6, 2004, the Company announced that Fred H. Langhammer would be
retiring as President and Chief Executive Officer and as a director of the
Company on June 30, 2004. After such time, William P. Lauder will become Chief
Executive Officer.



THE ESTEE LAUDER COMPANIES INC.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits --


Exhibit Description
Number
- -------
3.1 Certificate of Designation for the Series A Cumulative Redeemable
Preferred Stock.
10.1 Exchange Agreement, dated as of December 19, 2003, among the Corporation
and the holders of the $6.50 Cumulative Redeemable Preferred Stock.
10.2 Fourth Amendment to Registration Rights Agreement.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CEO).
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CFO).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (CEO). (furnished)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (CFO). (furnished)

(b) Reports on Form 8-K --

On October 28, 2003, we filed a Current Report on Form 8-K. Pursuant to Item 9
of Form 8-K, we announced a strategic alliance to create a new cosmetics
department for Kohl's Department Stores.

On October 28, 2003, we filed a Current Report on Form 8-K. Pursuant to Item 12
of Form 8-K, we reported our fiscal 2004 first-quarter results.

On December 19, 2003, we filed a Current Report on Form 8-K. Pursuant to Item 5
of Form 8-K, we reported an agreed upon restructuring of our outstanding
redeemable preferred stock.



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


THE ESTEE LAUDER COMPANIES INC.



Date: January 29, 2004 By: /s/Richard W. Kunes
----------------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)