OPERATING RESULTS Geographic Regions INTEREST EXPENSE, NET Product Categories PROVISION FOR INCOME TAXES Operating income decreased 31% or $154.2 million to $341.4 million as compared with the prior year. Operating margins were 7.2% of net sales in fiscal 2002 as com- pared with 10.6% in the prior year. The decrease in oper- ating margin was primarily due to restructuring expenses, lower than expected sales levels, increased support spending and new distribution channel costs. This was par- tially offset by the exclusion of amortization expense due to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” in fiscal 2002 and the November 2000 expiration of amortization related to purchased royalty rights. Operating income reflected the inclusion of restructuring and special charges of $117.4 million and $63.0 million in fiscal 2002 and 2001, respectively. Before consideration of the restructuring and special charges, operating income decreased 18% to $458.8 million and operating margins were 9.7% in fiscal 2002 as compared with 11.9% in fiscal 2001. Net earnings and net earnings per diluted share decreased approximately 37% and 39%, respectively. Net earnings declined $113.3 million to $191.9 million and net earnings per diluted share was lower by $.46 per diluted share from $1.16 to $.70. On a comparable basis, before restructuring and special charges, before the cumulative effect of adopting a new accounting princi- ple, and excluding goodwill amortization in fiscal 2001, net earnings were $289.4 million, representing a decrease of 20% over the prior year, and diluted earnings per com- mon share decreased 21% to $1.10 from $1.39 in the prior year. The following discussions of Operating Results by Product Categories and  Geographic Regions exclude  the impact of restructuring and special charges. We believe the following analysis of operating income better reflects the manner in which we conduct and view our business. The tables on page 43 reconcile these results to operating income as reported in the consolidated state- ment of earnings. Operating income decreased 79% to $13.4 million in fragrance, 14% to $183.2 million in makeup and 7% to $248.4 million in skin care, primarily due to lower than anticipated sales levels, coupled with continued advertis- ing and promotional spending to promote new and recentlylaunched products. Hair care operating income increased 5%, from a smaller base, to $13.7 million, primarily due to sales growth from Aveda and Bumble  and bumble. Operating income in the Americas decreased 26% or $77.0 million to $222.9 million, primarily due to lower sales attributable to weakness in the U.S. economy and continued advertising and promotional spending. In Europe,the Middle East & Africa, operating income decreased 11% or $21.9 million to $179.9 million, prima- rily due to the significant decrease in our travel retail busi- ness. Partially offsetting the decrease were improved operating results in Italy, the United Kingdom, Spain and Germany. We also benefited from the inclusion of oper- ating results from our majority-owned joint venture in Greece. In Asia/Pacific, operating income decreased slightly to $56.0 million due to lower income in China and Hong Kong offset by higher results in Korea, in Australia, where we benefited from a change in retailer arrange- ments, and in Japan, where we were able to reduce operating expenses. Net interest expense was $9.8 million as compared with $12.3 million in the prior year. The decrease in net interest expense resulted from a lower effective interest rate com- pared with the prior year. This was primarily due to our interest rate risk management strategy that relied on com- mercial paper and variable-rate term loans. In January 2002, we took advantage of prevailing market rates and issued fixed rate long-term notes to replace our variable- rate debt. The Company’s effective tax rate will change from year to year based on non-recurring and recurring factors includ- ing, but not limited to, the geographical mix of earnings, the timing and amount of foreign dividends, state and local taxes, tax audit settlements and the interaction of various global tax strategies. The provision for income taxes represents Federal, for- eign, state and local income taxes. The effective rate for income taxes for fiscal 2002 was 34.5% compared with 36% in the prior year. These rates reflect the effect of state and local taxes, changes in tax rates in foreign jurisdic- tions, tax credits and certain non-deductible expenses. The decrease in the effective income tax rate was attrib- utable to ongoing tax planning initiatives, as well as a decrease in non-deductible domestic royalty expense and the elimination of certain non-deductible goodwill amor- tization resulting from the implementation of SFAS  No. 142, “Goodwill and Other Intangible Assets.” 49 THEEST{E LAUDER COMPANIES INC.