Dear Stockholders:

Tastes and styles are evolving on a world scale, greatly influenced by what is happening in America. Improving global economies are making available and affordable products once reserved for a privileged few. The baby boom has come roaring into middle age with money to spend and a determination to fight the effects of growing older. U.S. teenagers have exploded into a major demographic group with a reported $122 billion in spending power. Growing, shifting populations are creating exciting new marketing opportunities.

We haven't built just a business, we've built a family of businesses - a carefully-constructed portfolio that gives us balance.

It really is a new world of opportunity. And the best news for us and for our stockholders is that Estée Lauder has spent the past 50 years preparing for it. We haven't built just a business, we've built a family of businesses. It's a carefully constructed portfolio that gives us balance - in the brands we own, in the markets where we do business and in the diversity a global company needs to protect itself from the ebb and flow of world economies. This balance gives us competitive strength and consumer appeal.

Broader Portfolio Our product balance offers brands like Estée Lauder, Clinique, and Aramis - the "rule makers" that set the tone and the direction of the entire prestige industry. But it also includes "rule breakers" - newer brands like Origins, Tommy Hilfiger, Bobbi Brown essentials, and M·A·C - that have formed whole new platforms for growth in taking prestige products to new consumers. We have products for those who prefer classic brands, as well as those on the forward edge of fashion. We have brands which appeal for their advanced use of technology, and others which are chosen based on lifestyle.

Fiscal 1998 was a very important year in our drive to enhance our balance. We bought the remaining shares of M·A·C, the industry's original professional makeup artist line. We acquired two companies and obtained a license that will allow us to attract new consumers through new brands and new channels.

Our acquisition of Aveda, which manufactures and markets pure plant- and flower-based beauty products - mainly in the hair segment - takes us into a new category, a new distribution channel through professional hair salons and a new set of consumers, attracted by Aveda's distinct lifestyle positioning.

The addition of Sassaby, Inc. gives us jane, a fast growing line of cosmetics targeted at teenagers, and sold in 12,000 stores in the U.S. It's our first entry into the self-select channel.

Our licensing agreement with Donna Karan International gives us a name instantly identified with style, quality, and innovation. It also gives us the powerful growth opportunity to develop full lines of beauty products under the Donna Karan New York and DKNY banners - both in the U.S. and around the world.

For all of these moves: new consumers, new distribution, new ways to grow.

Launching Strong We are also growing through one of our signature abilities in new product development - launching strong and staying strong. That ability was very clear during the year in the growth of our fragrance business, particularly the successful launches of Pleasures For Men and Clinique happy, and the continued strength of "tommy" and "tommy girl," which were originally launched more than two years ago.

In skin care and makeup, we also launched several successful new products. Estée Lauder introduced Minute Makeup, Two-in-One Eyeshadow, Uncircle, and Diminish. New from Clinique were Superbalanced Makeup, Superlast Cream Lipstick, Moisture In-Control and All About Eyes. Exact Matchstick was a new foundation from Prescriptives and Origins added a whole range of skin care and Sensory Therapy products.

Market Strength Combine our existing and newer products, and you quickly see why our sales growth is impressive. Our brands accounted for approximately 46% of the U.S. prestige cosmetics business in 1997*. Our position in the latest rankings of prestige cosmetics is also very strong: Estée Lauder pleasures, Beautiful, Clinique happy, "tommy" and "tommy girl" are the top five prestige fragrances in U.S. department stores; we have seven of the top 10 prestige makeup products. And in prestige skin care we have nine of the top 10 products, with such leaders as Clinique's Dramatically Different Moisturizing Lotion and Estée Lauder's new Diminish Retinol Treatment.

We have a 22% share in Europe in the doors that carry our brands, with Estée Lauder and Clinique ranking number one and two in the doors where they're sold. In Japan, Clinique is the prestige leader in our distribution, followed by a local competitor and Estée Lauder is third, giving us a 33% share.

Our acquisition of Aveda takes us into a new category, a new distribution channel and a new set of consumers.

Growth Strategies We are very proud of who we are and what we've done. But in any competitive business, the most important question we can ask is - what's next? We've established five marketing strategies that we believe will answer that question emphatically and provide continued opportunities for growth.

Keep the new products coming. . .The new product success that has defined this company will continue to be a big factor in our future. Estée Lauder, Aramis, Clinique, Prescriptives, and Origins all came out of our own labs and marketing groups. And we've added to that home-grown power with acquisitions and licensing agreements. Right now, our R&D facilities are working on 60 makeup, 45 hair care, and 100 skin care products - most pushing new limits in our knowledge of skin and use of advanced ingredients.

Reach more consumers through new concepts. . . In our marketing success, a companion driver to successful new products is innovative ways to get them to consumers. This industry has many companies that make a good product and understand consumers, and by those measures we believe we are the very best in the business. But we also believe - and our growth supports - that we bring something more to the marketplace in our strength at point-of-sale. We are leaders in designing innovative ways of selling that are right for each brand. For example, we are on the leading edge of the concept of assisted selling at Estée Lauder, Clinique, and Aramis counters around the world. Assisted selling makes our products easily accessible to the consumer, yet makes sure a beauty expert is on hand when needed. We also pioneered the store-within-a-store concept for Origins, whose unique lifestyle appeal is showcased dramatically in this type of environment. MAC just opened its first MAC Pro Shop in New York City, a resource, education and shop concept created exclusively for professional makeup artists. And Estée Lauder opened its second freestanding store in the Americana on Long Island, one of the premier shopping centers in America. We are also moving quickly to exploit the vast possibilities of the World Wide Web.

Grow fragrance. . . Fragrance is an estimated 40% of the global prestige cosmetics business and 27% of our product mix. Do the math. We have a major opportunity here, which we intend to pursue. The marketing excitement is in our ability to match fragrance and brand. Clinique happy is a perfect fit with Clinique's simple but sophisticated positioning. flirt goes hand in hand with the edgy urban image of Prescriptives.

Expand globally. . .Few companies today will admit to being anything less than global. But few can back that claim with the base and presence that we bring to international competition. International sales already account for nearly 43% of our total revenue. Most of that volume is concentrated in Western Europe and Japan. As economies expand, so do opportunities in Asia, Eastern Europe and Latin America. We have a disciplined but aggressive approach to expanding our presence in these areas. As always, our philosophy is to have demand precede supply.

The past year has been an excellent example of this strategy, which we will continue to follow. For example, our international distribution of "tommy" more than doubled in 1997, and in 1998, we began to move "tommy girl" through the same distribution. We also launched MAC in Milan, Zurich, Tokyo, Taipei, and added a second store in Paris. Bobbi Brown essentials entered Thailand, Singapore, Japan, France, and Malaysia - all markets where we have solid distribution and proven know-how. Our newest brands, Donna Karan, jane, and Aveda also have clear potential for international expansion.

Our brands accounted for approximately 46% of the U.S. prestige cosmetics business in 1997.

International growth, of course, brings with it a degree of risk. We're seeing that now in Asia. However, we also see the tremendous opportunity that lies beyond the current economic turmoil. While companies are pulling back on their expansion plans in the region, the fundamental strength of our business and our geographic diversity allow us to accelerate ours. We see the current period of economic difficulty as an opportunity to build brand awareness and increase market penetration. We are continuing to introduce new products and take our newer brands into new markets, confident our actions now will pay off in the future.

Pursue growth opportunities. . .When we add names like jane and Aveda, we do it for a reason. We want unique business opportunities that complement - not cannibalize - our brands. We want fast growth, high margins and the potential for long-term growth both in the U.S. and internationally. And we particularly want a management team that is passionate about what they do and dedicated to doing it better than the competition.

We are a company with more than 45 consecutive years of sales growth, with 1998 earnings up a healthy 20%.

Solid Team Guiding us in these strategies is what, I believe, is the best, most experienced management team in any industry. They are tested, proven and have a track record of winning. In fiscal 1998, a strong team became even stronger. We named Jeanette Sarkisian Wagner, President of Estée Lauder International, Inc. to the newly-created position of Vice Chairman of The Estée Lauder Companies. After leading the International Division to both growth and profitability, she will now oversee the development of our newer brands, specifically jane and Aveda.

Succeeding Mrs. Wagner as President of the International Division is Patrick Bousquet-Chavanne, an outstanding international executive who headed our Travel Retail Division during its rapid growth in the early 1990s. We are delighted to have him back.

Dan Brestle, who developed Clinique into one of our largest profit contributors, takes over as President of Estée Lauder USA & Canada. William Lauder, who launched and developed Origins into our fastest growing brand, moves into Clinique as President. Succeeding William Lauder at Origins is Lynne Greene, a well-rounded executive with 20 years of experience in the cosmetics industry.

Where We Want to Be We are heading into 1999 in a position at the top of the beauty industry - the leading company in our field - with a fast-flowing stream of innovative new products, a solid balance sheet, global presence and the best management team anywhere.

As we detail in the following review of operations, we are also a company with a phenomenal record of performance: more than 45 consecutive years of sales growth, including our first billion-dollar quarter in 1998. Strong sales, solid productivity gains and effective cost controls have nearly doubled our net income over the past three years, with 1998 earnings up a healthy 20%. In short, we are exactly where we want to be.

With the much-appreciated support of our stockholders and the contributions of our employees around the world, I am convinced that what we've built in past years, all the financial success we've had, are just steps toward more accomplishments to come. In fact, the most exciting chapters in the Estée Lauder story are still to be written.

Sincerely,

Leonard A. Lauder
Chairman and Chief Executive Officer