merchandising activities particularly during the early por- tion of fiscal 2003 (excluding purchase with purchase and gift with purchase activities, discussed as a component of cost of sales) which supported our sales growth and built momentum going into the second half of fiscal 2003. Changes in advertising, sampling and merchandising spending result from the type, timing and level of activi- ties related to product launches and rollouts, as well as the markets being emphasized. the end of fiscal 2003 by certain world events including the lingering effects of the war in Iraq and concerns asso- ciated with SARS.Excluding the impact of foreign cur- rencytranslation, Europe, the Middle East & Africa net sales increased 8%. Net sales in Asia/Pacific increased 8% or $47.2 million to $657.8 million primarily due to higher net sales in Korea, Japan, Australia and Thailand. Despite increased net sales in Japan, the country remains a difficult market due to local economic conditions and competition. Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 3%. We strategically stagger our new product launches by geographic market,which may account for differences in regional sales growth. Cost of sales as a percentage of total net sales improved to 26.1% from 26.8%, reflecting production and supply chain efficiencies and lower costs from promotional activities. We continued to emphasize sourcing initiatives and overall supply chain management which resulted in lower manufacturing costs, whereas in the prior year we experi- enced under-absorption of overhead as a result of the impact of the events of September 11, 2001. The inclusion of promotional merchandise as a com- ponent of cost of sales results in lower margins. A strategic shift to reduce these activities has contributed to the improvement in our gross profit margin for the year. The inclusion of the cost of purchase with purchase and gift with purchase merchandise as a component of cost of sales resulted from our adoption of EITF Issue No. 01-9. Since the cost of these promotional activities is a compo- nent of cost of sales and the timing and level of promo- tions vary with our promotional calendar, we have experienced, and expect to continue to experience, fluc- tuations in the cost of sales percentage. Operating expenses decreased to 64.2% of net sales as compared with 66.0% of net sales in the prior-year period. The current year results were impacted by a charge related to the pending settlement of a legal pro- ceeding of $22.0 million or 0.4% of net sales. Prior-year operating expenses included a restructuring charge of $110.4 million or 2.3% of net sales. Before considering the effect of these two charges, operating expenses increased slightly to 63.8% of net sales compared with 63.5% of net sales in the prior year. The increase in spend- ing primarily related to advertising, sampling and The following discussions of Operating Results by Product Categories and  Geographic Regions  exclude the impact of the fiscal 2003 charge related to the pending settlement of a legal proceeding and the fiscal 2002 restructuring. We believe the following analysis of oper- ating income better reflects the manner in which we conduct and view our business. The tables on pages 42 and 43 reconcile these results to operating income as reported in the consolidated statement of earnings. Net earnings and net earnings per diluted share increased approximately 67% and 80%, respectively. Net earnings improved $127.9 million to $319.8 million and net earnings per diluted share increased by $.56 from $.70 to $1.26. Absent the cumulative effect of a change in accounting principle in fiscal 2002, net earnings increased by $107.3 million or 50% and diluted earnings per com- mon share increased 62% to $1.26 from $.78 in the prior year.Before the fiscal 2003 charge related to the pend- ing settlement of a legal proceeding and the fiscal 2002 restructuring and the cumulative effect of adopting a new accounting principle, net earnings increased 15% to $333.3 million and diluted earnings per common share increased 20% to $1.32 from $1.10 in the prior year. Operating income increased 45% or $153.7 million to $495.1 million as compared with the prior-year period. Operating margins were 9.7% of net sales in the current period as compared with 7.2% in the prior-year period. These results include a charge related to the pending set- tlement of a legal proceeding of $22.0 million in the cur- rent year and a prior year restructuring charge of $117.4 million. Absent these items, operating income increased 13% or $58.3 million to $517.1 million and operating margins increased to 10.1% as compared with 9.7% in fiscal 2002. These increases in operating income and operating margin reflect sales growth, including the ben- efits from favorable foreign currency exchange rates to the U.S. dollar and gross margin improvement, as well as benefits from our prior restructurings and our continued cost containment efforts. OPERATING RESULTS COST OF SALES OPERATING EXPENSES 45 THEEST{E LAUDER COMPANIES INC.