Perfumes and Cosmetics

     In December 2002, LVMH sold its interests in Hard Candy and Urban Decay. In May 2003, LVMH sold its Michael Kors fragrance and beauty products business and related license agreement to Aramis Inc., a subsidiary of Estee Lauder and signed a contract to sell its Marc Jacobs and Kenneth Cole fragrance and beauty products businesses and related license agreements to Coty Inc.

Other Activities

     In accordance with an agreement dated May 2002, LVMH reduced its interest in Phillips from 75% to 27.5%, transferring its controlling interest to the company’s former managers, Daniella Luxembourg and Simon de Pury. In February 2003, LVMH sold its remaining 27.5% investment in Phillips for a symbolic one U.S. dollar. This operation had no additional impact other than the ones already recorded for 2002.

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Principal Capital Expenditures

     Since the end of 2002, LVMH has made no significant capital expenditures. Capital expenditures realized during the first quarter of 2003 mainly relate to renewal of the LVMH retail network and the opening of new stores.

     In 2002, LVMH continued to develop its retail network and production facilities, LVMH operating investments represented a cash outlay of EUR 559 million (including acquisitions of intangible assets of EUR 80 million and of tangible assets of EUR 479 million), compared with EUR 984 million in 2001 (including acquisition of intangible assets of EUR 80 million and of tangible assets of EUR 904 million). The 43% decrease from last year reflects the fact that non-recurring real estate acquisitions in 2001 were not renewed, as well as increased selectivity in investments and focus on LVMH key brands, starting with Louis Vuitton. In 2002, LVMH financed its capital expenditures with cash generated from operating activities.

     The Fashion and Leather business group assumes its own retailing on an exclusive basis for Louis Vuitton products and partially for other brands. At the end of 2002, the distribution network of Louis Vuitton included 299 exclusive stores. Over the year, the brand increased its presence in all regions of the world. Seven new stores were opened during the second half, including a “global store” in Kobe (Japan) and an exceptional store on the Omotesando (Tokyo), the largest ever opened by Louis Vuitton in Japan. The company inaugurated its first stores in Israel (Tel Aviv), Russia (Moscow), and the Netherlands (Amsterdam), and continued its expansion in China. At the same time, the continual renovation (expansion and relocation of stores) of the network continued. In 2002, forty stores were renovated notably in France, Italy and Japan.

     Production facilities purchased in 2002 are evenly spread out through all LVMH business groups, excluding the Selective Distribution business group.

     In 2001, LVMH pursued the development of its distribution network and undertook a particular effort to increase the production capacity of Louis Vuitton Malletier. New production facilities were constructed in Ducey and Saint-Florence, France and in Barcelona, Spain. LVMH operating investments resulted in net cash outflow of EUR 984 million. These investments represent primarily the costs for upgrading the production capacities of Louis Vuitton, developing the DFS and Louis Vuitton retail networks, and property investments.

     In 2000, LVMH operating investments constituted outlays of EUR 857 million (including the acquisition of tangible assets of EUR 794 million and intangible assets of EUR 63 million). These investments were made primarily to develop the DFS, Louis Vuitton and Sephora retail networks, and to expand Louis Vuitton’s production facilities.

BUSINESS OVERVIEW

(1) Wines and Spirits

     The activities of LVMH in the Wines and Spirits business group are divided between two groups: the champagne and wines activities and the cognac and spirits activities. LVMH’s strategy is focused on the premium segments of the global wine and spirits market. In 2002, the Wines and Spirits business group posted sales of EUR 2,266 million, or 18% of LVMH’s net sales.

     The following table shows consolidated net sales of the Wines and Spirits business group by geographical area (in EUR millions), as of December 31:

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(a)  Champagne and Wines

      In 2002, net sales for champagne and wines were EUR 1,411 million (91% of which were from champagne sales), representing 11% of LVMH’s net sales.

      (i) Champagne and wine brands

     LVMH produces and sells a broad range of high quality champagne. In addition to champagne, LVMH prepares and/or distributes a group of premium sparkling and still wines from other well-known wine regions (Europe, California, Argentina, Brazil, Australia and New Zealand).

     LVMH holds a leading portfolio of champagne brands, which benefit from complementary market positions. Dom Pérignon is a prestigious vintage which has been produced by Moët & Chandon since 1936. Moët & Chandon (founded in 1743), a leading wine grower and exporter of champagne, and Veuve Clicquot Ponsardin (founded in 1772), which ranks second in the industry, are two premium quality internationally-known brands. Mercier (founded in 1858), the number one brand sold in France, Canard-Duchêne (founded in 1868) and Ruinart (the oldest of the champagne houses, founded in 1729) have a development strategy focused primarily on Europe. Krug (founded in 1843 and acquired by LVMH in January 1999) is a world famous brand, specializing exclusively in premium vintages. The Pommery brand, owned by LVMH since January 1991, was sold in 2002. Statements with respect to the competitive position of LVMH champagne brands are based on information (which LVMH believes to be reliable) obtained from the Comité Interprofessionnel des Vins de Champagne (“CIVC”), an official French organization.

     The Chandon brand (created in 1973 in California) includes the Moët Hennessy wines developed in California, Argentina, Australia and Spain by Chandon Estates. LVMH also owns a number of prestigious wines coming from the New World: Cape Mentelle and Cloudy Bay produced in Australia and New Zealand, respectively, Pacific Echo and Newton in California; and MountAdam in Australia which joined LVMH at the end of 2000.

     Château d’Yquem, which joined LVMH in 1999, is the most prestigious of the Sauternes wines. It owes its excellent international reputation to its 110 hectare (approximately 272 acres) vineyard located on exceptional soils and to the great care taken in its preparation throughout the year.

The following table shows total champagne and wines sales volume for the past three years:

     (ii) Market share in champagne

     LVMH is the world leader in champagne. Based on information (which LVMH believes to be reliable) obtained from CIVC and on data maintained by LVMH with respect to its sales, in 2002 LVMH was the leading producer and

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exporter of champagne from the Champagne region, with 18.4 % of total shipments. The second largest producer, Marne et Champagne, represents 34% of the volume of LVMH.

     The principal champagne markets for LVMH (in millions of bottles, which for champagne contain 750 milliliters), the amounts shipped by the industry and LVMH in such markets (in millions of bottles) and LVMH’s percentage market shares thereof are shown in the table below.

     The following table shows the geographical breakdown of LVMH’s champagne sales for the last three years (as a percentage of LVMH’s total champagne sales, expressed in number of bottles):

     (iii) The champagne production method

     The name Champagne covers a defined area classified A.O.C. (Appellation d’origine contrôlée), which covers the 86,832 acres that can be legally used for production. In 2002, 76,234 acres were under production. Only three varieties of grape are authorized for the production of champagne: chardonnay, pinot noir and pinot meunier. The preparation method used for wines produced outside such region, using the champagne winemaking techniques, is called the “méthode champenoise.”

     In addition to its effervescence, the primary characteristic of champagne is that it is the result of blending wines from different years and/or different varieties and harvests. The best brands are distinguished by their masterful blend and constant quality due to the talent of their wine experts.

     Weather conditions significantly influence the grape harvest from one year to the next. The production of champagne also requires aging in cellars for two years or more for the “premium” vintages, which are the vintages sold at more than 110% of the average sale price. To protect themselves against crop variations, to manage changes in demand and to ensure constant quality over the years, the LVMH champagne houses adjust the quantities available for sale in order to keep reserve wines in stock. Since poor harvests can impact sales for two or three years, or on rare occasions, even more, LVMH maintains, at all times, significant champagne inventories in its cellars. As of December 31, 2002, these inventories represented approximately 216 million bottles, the equivalent of 3.8 years of sales.

     (iv) LVMH supply sources

     LVMH owns 3,690 acres under production, which provide approximately 25% of its annual needs. In addition, LVMH purchases grapes and wines from growers and cooperatives under multi-year agreements.

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     Until 1996, the champagne industry published prices for grapes; to these were added specific premiums negotiated individually between the growers and the merchants. After the first four-year agreement signed in 1996, a new industry agreement was signed between the producers and the growers of the Champagne region in the spring of 2000 covering the four harvests from 2000 through 2003 and confirming the desire to limit variations in grape prices. This agreement has not prevented the appearance of specific premiums, although the base price for grapes from the 2002 harvest remained stable at EUR 4.10 as compared to EUR 4.00 for the harvests of 2000 and 2001.

     Approximately ten years ago, growers and producers created a qualitative reserve, allowing them to cope with variations in harvests. The surplus inventories “stockpiled” this way can be sold in poor harvest years. At the end of 2002, these accumulated surplus inventories represented, in total, approximately 50% of a normal harvest. These wines held in reserve provide a certain security for future years.

(b) Cognac and Spirits

     In 2002, the net sales of cognac and spirits were EUR 855 million, or 7% of LVMH’s net sales.

     LVMH holds strong positions in the cognac sector with the Hennessy brand. Hennessy, founded in 1765, has an extensive product line and according to the Bureau National de l’Industrie du Cognac (“BNIC”), ranks first among cognac makers.

     In June 2003, LVMH sold its interest in Hine which specializes in the rarest qualities of cognac.

     LVMH sold 42.4 million bottles of cognac in 2002, 40.1 million in 2001 and 38.0 million in 2000.

     (ii) Cognac market share

     According to statistics of BNIC, LVMH is the world leader in cognac, with 37.7% of non-bulk shipments in 2002, an increase of 0.3 percentage point as compared to 2001. Its position is particularly strong in the United States and Japan.

     The following table shows the principal markets for the cognac industry and LVMH (in millions of bottles):

     The following table shows the geographical breakdown of LVMH’s cognac sales for the last three years (as a percentage of LVMH’s total cognac sales, expressed in number of bottles).

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     (iii) The cognac production method

     The Cognac region is located around the Charente basin in France. The vineyards, which cover nearly 185,250 acres consist almost exclusively of white ugni grapes, which produce a wine resulting in the best brandies. In 2002, 182,286 acres were under production, down 0.7% from 2001.

     The Cognac region is divided into six areas, each having its own particular qualities: Grande Champagne, Petite Champagne, Borderies, Fins Bois, Bons Bois and Bois Ordinaires. Hennessy selects its eaux-de-vie from wines produced in the first four, which are more suitable to the preparation of its cognacs.

     Distillation in the Charente region is unique, taking place in two stages, a first distillation (première chauffe) and a second distillation (seconde chauffe). The eaux-de-vie obtained are aged in oak barrels. An eau-de-vie at full maturity is not yet a good cognac. Cognac results from the gradual blending of eaux-de-vie selected on the basis of vintage, origin and age.

     (iv) LVMH supply sources

     Hennessy owns 440 acres. LVMH’s vineyard remained stable in 2001 and 2002, after 148 acres of vineyards were cleared in 1999 as part of an industry plan implemented in 1998. The objective of the plan was to reduce the production area through premiums offered for clearing and assistance given to the wine growers to encourage them to produce wines other than those used in the preparation of cognac.

     Most of the wines and eaux-de-vie needed by Hennessy for its production are purchased from a network of approximately 2,500 independent producers, with whom Hennessy ensures the maintenance of exceptional wine quality. Purchase prices for wine and eaux-de-vie are established between the company and each producer based on market prices. The price of new wines and eaux-de-vie has remained stable since 2000.

     With sufficient inventories of eaux-de-vie, LVMH copes with price changes by adjusting its purchases from year to year.

     In 2002, Hennessy continued to stabilize its purchase commitments for the year’s harvest, and diversified its relationships with growers in order to anticipate its future expansion in the various cognac markets.

     (c)  Wines and spirits distribution

     LVMH wines and spirits are distributed on the world’s principal markets primarily through a network of international subsidiaries, some of which are joint ventures with the spirits group Diageo. In 2002, 75% of champagne sales and 90% of cognac sales were made through this channel.

     Beginning in 1987, LVMH and Guinness signed agreements leading to the creation of 17 joint ventures for the distribution of their top brands, including MH-UDV in France and Schieffelin & Somerset in the United States. This joint network strengthens the position of the two groups, improves distribution control, enhances customer service, and increases profitability by sharing distribution costs. This distribution network currently covers the Asia-Pacific region, the United States, Mexico, France and Ireland.

     Following the merger of the Guinness and GrandMet groups in December 1997, which led to the birth of the Diageo group, the distribution of a certain number of GrandMet brands, particularly Smirnoff vodka and J&B whisky were included, in the activity of several joint ventures, notably in the United States, Japan and France. Diageo has a 34% interest in Moët Hennessy. LVMH’s interest in Diageo (11% on December 31, 1998, reduced to 6.9% in April 1999, then to 2.9% in June 2000) was sold in 2001.

     Veuve Clicquot products are distributed through this distribution network in France, Germany, Switzerland, Asia and Latin America, through its own subsidiaries in the United Kingdom, Japan, Belgium, and the United States, and through independent distributors in the rest of the world.

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     (d)  2002 Highlights

     Despite continued weak economic conditions, the overall performance of the Wines and Spirits business group, with improvement in all key indicators, was in line with the objectives set for 2002. A 7% increase from 2001 in volumes sold confirmed the expected recovery.

     The rebound in champagne consumption continued throughout the year in 2002, particularly in the United States, the United Kingdom and Japan. Sales volumes were up 14% on a constant structural basis (excluding the impact of the sale of the Pommery brand).

     As a result of the rapid implementation of effective action plans, volumes of still and sparkling wines sold in Argentina and Brazil grew 6% despite the economic crisis in these countries.

     Hennessy’s growth continued, as it again consolidated its market share in the premium market segment, supported by a 6% increase in sales volumes. The stagnant economic situation in Japan was offset by the continued dynamic success of Hennessy cognacs in the United States and other Asian countries, particularly China.

     Moët Hennessy and its subsidiaries, forming the Wines and Spirits business group of LVMH, actively continued to strengthen their distribution network, a priority for 2002. In order to generate greater marketing synergies for its products in the United States, Moët Hennessy consolidated the distribution of its brands and those of Diageo within a single distributor in certain key states, such as New York, Florida, Texas and California. The sales team assigned exclusively to this portfolio will accelerate the development of the brands and will ensure a proactive response to the needs of retailers and demand from American consumers. In Germany, Switzerland, Asia and Latin America, the Veuve Clicquot distribution networks were merged with those of Moët & Chandon and Hennessy.

     To enhance its portfolio of premium spirits, Moët Hennessy acquired 40% of Millennium, the producer of the high-end vodkas Belvédère and Chopin. Millennium owns the distribution rights for these brands in the United States, a market where they have recorded very strong growth, and full ownership of these brands in the rest of the world.

      (i) Champagne and wines

     After two difficult years, the champagne markets resumed their growth in 2002. The LVMH champagne houses, leaders in their category, were the first to benefit from this rebound because of the reputation of their brands and the strength of their distribution networks. Sales volumes rose by 14% on a constant structural basis (excluding the impact of the sale of the Pommery brand), from 2001 to 2002.

     The 2002 harvest in the Champagne region was slightly larger than the previous year with a harvest of 4,860 kilograms of “champagne-grade” grapes per acre. Although many French and European wine regions suffered from very turbulent weather conditions, the Champagne region enjoyed sunny conditions very favorable to maturation, a factor that complements efforts to achieve controlled grape production. Thus, the Champenois are expecting a very good vintage. As a precaution, a portion of this harvest was set aside in a qualitative reserve to protect the local industry from later risks. With their extensive vineyards, together with contracts signed with many growers and cooperatives, the 2002 harvests ensured a supply in line with sales for LVMH’s champagne houses.

     LVMH continued its firm pricing policy, a guarantee of present and future quality of its products, the development of its brands, and the value of the wines of the Champagne region.

     In the United States, 2002 was distinguished by the remarkable performance of all LVMH brands, the result of a high rate of consumption and inventories maintained at normal levels. The rebound in this market drove a 33% increase in sales. In the United Kingdom, LVMH brands also benefited from the market’s recovery and ended the year with strong growth. Results for the other major champagne importing countries were mixed. In Japan, LVMH brands continued to grow, while in Germany the market continued to suffer from the slowing economy.

     Moët & Chandon

     Continuing to assert its leadership in champagne, Moët & Chandon reaped the full benefits of the rebound in demand in most of the major consuming countries and strong momentum in the emerging markets. The brand posted double digit growth in sales volumes in 2002. Its inventory position is healthy in all markets, suggesting a strong outlook in 2003.

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      A new presentation was adopted for the Impériale line of products and the Millésimes in 2002.

     Two major campaigns sharply increased the brand’s global potential in late 2002: the launching of a press and display advertising campaign in Europe and in the United States, as well as the participation in the Louis Vuitton Cup and America’s Cup.

     Dom Pérignon

     Dom Pérignon’s appeal, its reputation for excellence and its pursuit of perfection generated strong demand, particularly in the United States. The 1995 vintage was enthusiastically received. The OEnothèque wine connoisseur program, which offers exclusive access to the brand via a selection of rare vintages at the peak of perfection, was also highly successful.

     Mercier

     Mercier consolidated its performance and its benchmark status, reporting a profitability exceeding that of its very competitive segment. The brand continued to expand in the traditional restaurant segment through its Les Lieux de Toujours program, which it developed with a selection of partner establishments.

     Ruinart

     The oldest champagne house continued to grow, setting an historical sales record in the French market and strengthening its position in its principal export markets. Ruinart Blanc de Blancs, the new cuvée introduced in 2001, was so successful in 2002 that demand could not be met.

     Veuve Clicquot

     In 2002, Veuve Clicquot posted exceptional growth in sales volumes and net sales, surpassing the 1999 records on the eve of the millennium. This performance was driven by the quality of its products, innovative marketing, special attention paid to customers, and promotional efforts. These assets recognized by attentive consumers, combined with sustained price levels, contribute to Veuve Clicquot’s position as an “accessible luxury brand.” The house increased its communications and promotional investments as compared to previous years: press advertising; new products and special events like the roll-out of Paint-Box, an exclusive concept inspired by the House’s color; the 30th anniversary of the prestigious Businesswoman of the Year Award; and the continued success, particularly in France and Japan, of the Clicquot Ice Box.

     Sales in key markets, the United States, France, the United Kingdom, Italy, and Japan, grew strongly, driven by brisk consumer demand. The launching of the Rosé 1996 vintage in September 2002 enhanced the success of the house’s vintages.

     Canard-Duchêne

     Canard-Duchêne posted a strong performance in 2002, particularly in France, where the brand is well established with a strong brand image, as well as in England and the French Antilles.

     An active promotional campaign was initiated in key markets to meet more intense competition in 2002. These special events were targeted both at the retail market, a preferred channel for Canard-Duchêne, and at the restaurant sector, where the brand is implementing a policy of targeted distribution.

     Krug

     Despite the international economic situation in 2002, Krug posted strong growth, particularly in such high-potential markets as the United States, Japan and Asia. The year 2002 was highlighted by two events that ensured targeted and powerful media coverage for Krug.

     The new advertising campaign “Krug by…” made its first appearance in England, the United States, Japan, and in media selected for their international coverage. The second highlight was the celebration of forty years of great

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winemaking by Henri Krug, the fifth generation of a great wine family, in London, New York, Paris, Florence, Rome and Tokyo by major designers representing the various crafts partnered with Henri Krug.

     Chandon Estates

     Sales for Chandon Estates were affected by the economic crisis and currency devaluation in Argentina, its largest market. Careful management of the product portfolio and the effective implementation of a restructuring program reduced the impact of these events on earnings, and the year ended with higher sales volumes than 2001.

     Sales of the Terrazas line of still wines on the international market were brisk, as were sales of Chandon California and Chandon Australia, with both domains posting their best year since the beginning of the millennium.

     Finally, 2002 marked the elaboration of a new strategy for sparkling wines and a notable improvement in the performance indicators for all brands.

      New world vintages

      Benefiting from the arrival on the market of a harvest recognized for both size and quality, sales of the Sauvignon Blanc from Cloudy Bay, New Zealand’s famous vineyard, were exceptionally strong, reflecting both its increased global presence and its continuing prestige.

     Cape Mentelle confirmed its status as a great label from Australia’s Margaret River, and was marked by growing success in the United States.

     Newton, a California vineyard and MountAdam, an Australian estate, continued with the consolidation program stabilized when they joined LVMH at the beginning of 2001.

     Château d’Yquem

     In 2002, Château d’Yquem commercially introduced a beautiful 1996 vintage which was an instant success, and a 1997 vintage with great future potential.

     In 2002, after weather conditions made growers fear the worst for their harvest, Château d’Yquem’s grapes were literally saved by a dry eastern wind. The growers’ skill and the great care taken to sort the good grapes at the right time took care of the rest. LVMH expects 2002 to be a good vintage for Yquem.

     (ii) Cognac and spirits

     The distillation of eaux-de-vie from the 2002 harvest rose slightly from that of the 2001 harvest and is very close to current yields from the region (at around 400,000 hectoliters of pure alcohol).

     The region’s inventories of cognac are being drawn down, but still do not structurally match demand. Inventories of aged cognacs are still too high. Hennessy’s inventories are well suited to the “quality mix” of its shipments.

     The vineyards from the Cognac region, with around 185,250 acres under cultivation, are still too large to provide both cognac yields and sufficient revenue per acre for growers. The restructuring of the Charente vineyard is proceeding very slowly, and the French government, the region and the cognac industry will be required to take structural stimulation measures to reduce the area covered by the Cognac region’s vineyards to appropriate levels.

     Hennessy

     In a spirits market that was generally stable in 2002, the premium segment continued to enjoy strong growth. Hennessy gained market share in this segment thanks to the extremely high quality of its products and the fundamental values that distinguish its brand and form the cornerstone of its success.

     With a 6% growth in sales volume, Hennessy consolidated its position as the world’s leader. Against a difficult economic backdrop, increased investments in advertising and promotion, among other factors, contributed to this performance. The top commercial successes were recorded in the United States, Asia and Europe.

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     In 2002, Hennessy introduced its new Fine de Cognac, in most European countries, backed by a major advertising campaign in France and Germany late in the year. Elegant and harmonious, this cognac was created by the cellar master from eaux-de-vie from the four finest vintages of the Cognac region to meet the expectations of European consumers. The rapid delivery to distribution channels and the initial success with consumers suggest a promising future for this cognac. This major initiative should prove to be a strong growth driver for LVMH in the future.

     Sales continued to climb in the United States in a difficult economic context, confirming the brand’s strong presence and its appeal to American consumers. While maintaining its leadership in the V.S. segment, Hennessy significantly increased its presence in the V.S.O.P. segment. It also launched new initiatives to reach Hispanic consumers. This momentum was sustained by the introduction of two new advertising campaigns at the end of the year.

     Sales of the Prestige line, Private Reserve, Paradis Extra and Richard Hennessy, continued to expand rapidly in all markets, confirming the success of the turnaround effort initiated in 2001 and reinforcing Hennessy’s position in this profitable market segment.

     The strong sales growth in Asia confirmed Hennessy’s strategic choices. The sharp growth of sales in China strengthened the brand’s position in a key market crucial to its growth in the region. Following China’s entry in the World Trade Organization, sales were particularly high, particularly sales for high quality spirits. Moreover, the 2002 reduction in customs duties had a beneficial effect on Hennessy’s results.

     In Taiwan, sales were up despite a sharp downturn in the market. In other markets like Hong Kong, Malaysia and Singapore, Hennessy maintained its positions. In Japan, in a generally sluggish market, Hennessy continued to dominate the premium segment. Its sales of aged grades have expanded sharply, demonstrating the strength of the brand, which remains an uncontested benchmark among luxury drinks.

     Hennessy’s business in Korea and Indochina continued to grow rapidly. The brand was extremely successful with younger customers, which should ensure future growth.

     Sales continued to climb steadily in Ireland, a traditional bastion for the brand, and the homeland of founder Richard Hennessy.

     The brand is growing in all European markets, with the success of Hennessy Fine de Cognac and sales of superior grades (X.O. and the Prestige line of products).

     In Russia and the Commonwealth of Independent States, Hennessy’s sales rose sharply in 2002 across the product lines.

     Hine

     Throughout 2002, Hine implemented a strategic and production plan designed to streamline its product lines, enhance the brand’s image and reduce overhead and capital employed. The new positioning, enhanced by a new visual identity, brought a renewed freshness to the brand that made it stand out from its competitors at all levels. The new launch in September 2002 was enthusiastically received by distributors, and was considered a success by experts and trade publications.

     In June 2003, LVMH sold its entire interest in Thomas Hine & Co. to Angostura, a French subsidiary of the CL Financial Group, a Caribbean Group active in the production and distribution of various spirits, for a global price of EUR 15 million.

     (2) Fashion and Leather Goods

     Together with Louis Vuitton, the world’s leading luxury brand, the Fashion and Leather Goods business group includes fashion houses Givenchy and Christian Lacroix, as well as Céline, Loewe, Berluti, StefanoBi, Kenzo, Marc Jacobs, Fendi, Pucci, Thomas Pink, and Donna Karan. This exceptional group employs over 15,000 men and women and has 20 workshops and 793 stores worldwide. While maintaining the identity and the strategy of its brands, the business group offers them a powerful infrastructure and shared resources. LVMH has implemented a group of synergies that take various forms: joint use of territorial structures, implementation of “back offices” and

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shared services, streamlining of production equipment and logistics centers and volume savings on purchases. This organization allows each brand to allocate more resources to its core business: design and marketing strategies to establish and enhance its image.

     The following table shows consolidated net sales for the Fashion and Leather Goods business group by geographical area (EUR millions):

(a)  The brands of the Fashion and Leather Goods business group

     In the Fashion and Leather Goods business group, LVMH holds a group of brands, primarily French, but also Spanish, Italian, British and American.

     Louis Vuitton Malletier (founded in 1854), the star brand of this business group, first focused its development around the art of traveling, creating trunks, rigid or flexible luggage items and innovative, practical and elegant bags and accessories, before expanding its geographic reach and its expertise into other product areas. For over 150 years, its product line has continuously expanded with new travel or city models and with new materials, shapes and colors. Famous for its originality and the high quality of its creations, Louis Vuitton is today the world leader in luxury goods and, since 1998, has offered its international customer a full range of products: leather goods, ready-to-wear for men and women, shoes and accessories. In 2002, the brand also launched its first watch collection, a new segment in which it intends to establish a lasting presence.

     The principal leather goods lines of Louis Vuitton are:

     Loewe, the Spanish company created in 1846 and acquired by LVMH in 1996, originally specialized in high quality leather work. Today it is present in leather goods, ready-to-wear and perfumes.

     Céline, founded in 1945 and owned by LVMH since 1996, is developing a ready-to-wear line, leather goods, shoes, accessories and perfumes.

     Berluti (a bootmaker since 1895) designs and markets very high quality men’s shoes, both custom made and ready-to-wear.

     StefanoBi, an Italian manufacturer of luxury shoes located in Ferrara since 1991, was acquired by Louis Vuitton Malletier in 1996.

     Marc Jacobs, created in New York in 1984, is the brand name of Louis Vuitton’s artistic director. Since 1997, LVMH has owned a majority interest in Marc Jacobs, which is expanding rapidly in fashions for men and women.

     Kenzo has rapidly become successful worldwide since its formation in 1970, having joined LVMH in 1993. Today, the company operates in the areas of ready-to-wear for men and women, fashion accessories, leather goods and home furnishings. Its perfume business is part of the LVMH Perfumes and Cosmetics business group.

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     Givenchy, founded in 1952 by Hubert de Givenchy, is a company rooted in a tradition of excellence in haute couture, and is also known for its collections of men and women’s ready-to-wear and its fashion accessories. The Givenchy perfumes are integrated within the LVMH Perfumes and Cosmetics business group.

     Christian Lacroix, created in 1987, is one of the newest French fashion houses. Its haute couture collections are complemented by two lines of ready-to-wear for women and a line of fashion accessories. Its growth is also based on licensing agreements signed with the best designers notably for perfumes, footwear and tableware.

     Thomas Pink (formed in 1984) is a recognized specialist in high-end shirts in England. Since joining LVMH in 1999, the brand has accelerated its international growth.

     Fendi, founded in Rome in 1925, is one of the flagship brands of Italian fashion. In July 2000, LVMH acquired an interest in Fendi together with the Italian company Prada. In December 2001, LVMH bought Prada’s interest, increasing its share in Fendi to 51%. LVMH further increased its share to 84% in February 2003. Particularly famous for its expertise and designs in furs, the brand is present in the ready-to-wear, leather goods and accessories segments.

     Emilio Pucci, an Italian brand founded in 1948, is a symbol of casual fashion in luxury ready-to-wear, a synonym of escape and refined leisure. Emilio Pucci was acquired by LVMH in February 2000.

     Donna Karan was founded in New York in 1984, and LVMH has owned 89% of the company since December 2001. Its ready-to-wear lines, Donna Karan New York, the luxury line, and DKNY, a more casual alternative, meet the needs of a very modern and international lifestyle.

(b)  LVMH Market Share

     In the fashion and leather goods sector, LVMH is the undisputed world leader because of the number of brands managed; net sales; activities ranging from haute couture, ready-to-wear, shoes, leather goods and accessories and; finally, a network of directly owned stores. In Japan, the Louis Vuitton brand alone ranks first in the leather goods market with a market share of 21%, ahead of Gucci with 5%, and Burberrys, Hermès and Prada, which each hold 3% (Source: Yako Institute and Merrill Lynch estimates).

(c) Design

     Whether they belong to the world of haute couture or luxury fashion, LVMH brands have founded their success primarily on the quality, authenticity and originality of their designs, which are renewed with each season and each collection. Thus, a strategic priority is to strengthen the creation teams, ensure the collaboration of the best designers and adapt their talent to the spirit of each brand.

     LVMH believes that one of its essential assets is its ability to attract a large number of internationally recognized designers. Christian Lacroix, who celebrated the 15 year anniversary of the creation of his house in 2002, was named as artistic director of the ready-to-wear and accessory collections of Emilio Pucci in the same year. Marc Jacobs has designed the Louis Vuitton ready-to-wear collections since 1998, supervises the creation of shoes and is successfully recreating the great classics of the brand in leather goods. Michael Kors, the well-known American designer and founder of his own signature brand in 1981, joined Céline in 1997. The young designer Julien MacDonald is now the artistic director for Givenchy’s haute couture, women’s ready-to-wear and accessories. José Enrique Ona Selfa presented his first women’s ready-to-wear collection for Loewe in March 2002. Gilles Rosier for women and Christophe Blondin for men direct design for the Kenzo collections. Donna Karan continues to create the lines of the company that bears her name. Olga Berluti, the heir of the expertise acquired by her predecessors, continues the unique style and quality of Berluti shoes.

(d)  Distribution

     Controlling the distribution of its products is a core strategic goal for LVMH, particularly in the Fashion and Leather Goods business group. This control allows LVMH to keep the distribution profits, and ensures strict control of the brands’ images and the commercial investment that they require. It also gives LVMH closer contacts with its customers so that it can anticipate their expectations.

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     In order to meet these objectives, LVMH created the first international network of exclusive boutiques under the banner of its fashion and leather goods brands. This network included 793 stores as of December 31, 2002, up from 765 at the end of 2001 and 566 at the end of 2000: as of December 31, 2002, 299 stores were exclusive Louis Vuitton boutiques.

(e)  Supply Sources and Subcontracting

     In the Fashion and Leather Goods business group, the manufacturing capacities and the use of subcontracting vary significantly, depending on the brand.

     The thirteen manufacturing facilities of Louis Vuitton, ten in France, two in Spain and one in the United States, provide most of the brand’s production. Louis Vuitton uses third parties only to supplement its manufacturing and achieve production flexibility.

     The optimization of the industrial capacities of Louis Vuitton continued in 2002, which achieved a 6% production increase over 2001. Three new workshops began operations during the year, in Ducey (opening of a workshop after the opening of the temporary shop in 2001), in Barbera del Valles, Catalonia (opening of a second workshop), and Condé (placed in operation simultaneously with the closing of the Issoudun I workshop).

     Fendi and Loewe also have leather goods workshops but they cover only a portion of their production needs. Generally, the subcontracting used by the business group is diversified in terms of the number of subcontractors and is located primarily in the country of origin of the brand, France or Italy, with the exception of Donna Karan with most of its subcontractors in Asia.

     Worldwide, the use of subcontractors for the Fashion and Leather Goods business group totaled EUR 354 in 2002, representing 28% of the cost of sales.

     Louis Vuitton Malletier depends on outside suppliers for most of the leather and raw materials used in manufacturing its products. Even though a significant percentage of its raw materials are purchased from a fairly small number of suppliers, Louis Vuitton believes that these supplies could be obtained from other sources. After diversification efforts initiated in 1998 towards Norway and Spain, the portfolio of LVMH suppliers was expanded to Italy in 2000.

     The situation for Fendi is similar, except for some exotic leathers for which suppliers are rare. Finally, for the various companies, the fabric suppliers are often Italian, but without any exclusivity. The designers and style departments of each company enable manufacturing that does not generally depend on patents or exclusive expertise owned by third parties.

(f)  2002 Highlights

     While economic conditions significantly affected the general fashion and leather goods market, Louis Vuitton, LVMH’s star brand and the world leader in luxury goods, again succeeded in growing earnings and operating margin.

     Despite the drop in tourism, particularly in the first half, and the bad economic outlook in certain markets, the other brands, which are more sensitive to the economic context, generally demonstrated their capacity to actively respond and meet the various challenges that they faced. In 2002, Donna Karan and Fendi completed their restructuring. In order to consolidate their newer, high-end strategy, the fashion brands of the LVMH Fashion Group have initiated a new positioning strategy that will offer greater resistance to economic conditions, and will allow them to target investments based on profitability and to take full advantage of the economic recovery when it occurs

     Louis Vuitton

     Taking advantage of very strong demand from its Western and Japanese local customers, Louis Vuitton recorded balanced growth in all geographic regions and again gained market share. Its performance was particularly remarkable in Japan, where sales grew by 15% in yen, and in North America where sales grew by 12% in dollars. During the fourth quarter of 2002, Louis Vuitton achieved global growth of 23% on a constant currency basis. Illustrating the excitement they generated among customers, the new Louis Vuitton products contributed 11% to net sales for the year, without compromising the growth of traditional products that continue to perform.

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     The new Tambour line of watches, a major innovation, sold since mid-September 2002, opens up a new promising segment. Available in 60 stores in 2002, with over 6,500 items sold, over 5,000 more watches have been ordered. The Monogram Mat collection, launched in July, met with immediate success. Louis Vuitton also created the full LV Cup line to celebrate the elimination regattas of the America’s Cup, and a collection of Monogram Vernis Fluo bags developed with designer Bob Wilson.

     At the end of 2002, the distribution network of Louis Vuitton included 299 exclusive stores. Over the year, the brand increased its presence in all regions of the world. Seven new stores were opened during the second half, including a “global store” in Kobe (Japan) and an exceptional store on the Omotesando (Tokyo), the largest ever opened by Louis Vuitton in Japan. The company inaugurated its first stores in Israel (Tel Aviv), Russia (Moscow), and the Netherlands (Amsterdam), and continued its expansion in China. At the same time, the continual renovation (expansion and relocation of stores) of the network continued. In 2002, forty stores were renovated notably in France, Italy and Japan.

     To keep up with sales growth, Louis Vuitton further increased its manufacturing capacities, with the opening of a second workshop in Barbera del Valles in Spain, and continued the construction of a second unit in Ducey on the English Channel. These developments in manufacturing were supplemented by the implementation of a program to improve distribution logistics that will optimize the delivery of LVMH’s products worldwide.

     In March 2003, Monogram Multicolore, a collection of bags and leather goods, designed by Marc Jacobs with Japanese artist Takashi Murakami and backed by a strong advertising campaign, appeared in stores with immediate success. Among other new products, Louis Vuitton will also launch a new line of bags in goat leather, a very soft leather highly prized by connoisseurs. Distribution of the Tambour watch will be expanded to 60 additional stores.

     Early this year Louis Vuitton opened its first store in India, in New Delhi, and is planning major new stores in all the regions of the world, specifically in Paris, the United States, China and Korea.

     Loewe

     In 2002, Loewe demonstrated a certain resistance to weak tourist markets and continued its growth in Japan, one of its priority markets. The first collections from new designer Jose Enrique Ona Selfa were well received. Taking advantage of its Spanish roots and its exceptional expertise in working the best leathers, the brand is focusing its growth strategy on leather goods and leather ready-to-wear items.

     Céline

     Céline’s image continues to benefit from the design work of Michael Kors. The brand is intensifying its strategy in leather goods, a very profitable segment where it continues to grow year after year. After the success of its new products in 2002, especially the event lines and the Boogie bag, Céline launched the Poulbot bag and is working on Macadam, a full collection with a very Parisian inspiration.

     Berluti

     Berluti is one of the leading houses in luxury shoes, both custom made and ready-to-wear. Berluti has posted steady growth, which was particularly strong in 2002. The House launched the new Dandy Sauvage line during the year, opened a second boutique in London and a store in Kobe, Japan.

     Kenzo

     In 2002, Kenzo’s activities were affected by the difficulties of the Japanese, American and European markets. The creation of the Kenzo Homme collections is now under the direction of Christophe Blondin. A new store concept was inaugurated in Paris on the Boulevard de la Madeleine. This initiative will be followed in 2003 with a new brand store presenting the Kenzo universe on four floors at Pont Neuf in Paris, a rapidly growing commercial district.

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     Givenchy

     The first collections of Julien MacDonald, who continues to update the haute couture and ready-to-wear lines from Givenchy, were well received in 2002. In a difficult economy, the house expanded its activity with European customers, while the slowdown in tourism impacted sales related to “travel retail”.

     Christian Lacroix

     The haute couture collections from Christian Lacroix earned excellent press reviews in 2002. The business of the company grew in line with its objectives. In particular, it successfully continued its expansion in Japan, where it now has over twenty stores.

     Marc Jacobs

     The company named after Marc Jacobs, the designer of the Louis Vuitton collections, posted strong growth on the American market in 2002, driven by the considerable success of the Marc by Marc Jacobs line created in September 2000. In 2002, Marc Jacobs was named designer of the year in New York. The brand also confirmed its dynamic appeal in Japan, and opened a “global store” as a franchise in Tokyo. The development of a retail network in Asia, notably in Hong Kong, has recently been initiated.

     Fendi

     After the successful restructuring of its activities in Italy and the purchase of its retail network in Southeast Asia, Fendi has now established, as a result of these intense capital investments, a solid basis for its future growth.

     The house has initiated a strong strategy that capitalizes on its aura as a Roman brand, its recognized design, its unique style, its emblematic leather products and its unmatched expertise in furs. This strategy included reinforcing the quality of its retail network (84 stores end of 2002) with a very significant renovation program for the next two years. Fendi is also planning to open a free standing store on Tokyo’s Omotesando in 2003.

     Thomas Pink

     This emblematic British company combines innovation and quality, against a backdrop of the traditional values on which its reputation has been built. Specializing primarily in shirts and accessories for men, it has recently begun to expand its activity by designing collections for women, for whom the new “Slim Fit” shirt has been created.

     Pucci

     The appointment of Christian Lacroix as artistic director for Pucci and the presentation of his first collection generated excellent press coverage, as well as the very encouraging commercial success of the strategy to relaunch Pucci’s famous Florentine house, an icon from the 50’s to the 70’s.

     One of Pucci’s priorities is the development of its retail network. In 2002, a flagship store was opened in Paris on the Avenue Montaigne, and the company is planning a new store in Saint Tropez in the spring of 2003.

     Donna Karan

     Since it joined LVMH, Donna Karan has focused on a profound restructuring of its activities, especially in the retail area. Its strategy is now refocused on its core activity, the Donna Karan collections and the DKNY line, a more casual alternative. This groundwork has established a basis for profitable growth, backed by the development of the Donna Karan style: a modern and international life style, symbolized by the city of New York, the birthplace of the label and the source of its inspiration. The presentation of its collection in February 2003 was unanimously well received.

     Donna Karan continues to improve its American retail network, and is preparing itself to enter the Japanese market.

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     (3) Perfumes and Cosmetics

     LVMH is historically present in the perfumes and cosmetics sector through the great French houses Christian Dior, Guerlain, Givenchy and Kenzo. To complete this group of internationally established brands, the symbols of timeless luxury, the Perfumes and Cosmetics business group acquired in 1999 several innovative cosmetics companies: three young American companies, Bliss, BeneFit and Fresh, that target younger customers, and the French brand Make Up For Ever, specializing in professional make-up products. In October 2001, LVMH acquired a 50% interest in the Italian company Acqua di Parma.

     The presence of a broad spectrum of brands within the business group generates synergies and represents a significant success opportunity. The volume effect means that advertising space can be purchased at better prices and better locations can be negotiated in department stores. In research and development, the group brands have pooled their resources since 1997 with a joint center in Saint Jean de Braye (France) at the Parfums Christian Dior industrial site. The use of shared services by international subsidiaries increases the effectiveness of support functions for all brands and facilitates the expansion of the newest brands. These economies of scale permit larger investments in design and advertising and promotion, the two key factors for success in the perfumes and cosmetics sector.

     With the exception of the products and services of the Laflachère group, the LVMH brands are sold in selective retailing circuits (as opposed to general retailing and drugstores).

     LVMH ranks third worldwide in the selective perfume segment, behind Shiseido and Estée Lauder, first in Europe, and first in France with a market share of 20% (Source: European Forecast and Société d’Etudes de la Consommation, de la Distribution et de la Publicité (“Sécodip”)).

     The table below sets forth the breakdown of net sales (as a percentage of the net sales of the Perfumes and Cosmetics business group) of perfumes, cosmetics and skin care:

     The following table shows consolidated net sales of the Perfumes and Cosmetics business group by geographical area and including each area’s duty free sales:

(a)  The brands of the Perfumes and Cosmetics business group

     The company Parfums Christian Dior was born in 1947, the same year as the fashion house, with the introduction of the Miss Dior perfume. While developing its lines of perfumes for men and women and secondary products over the years, Parfums Christian Dior expanded its activity to the cosmetics sector in 1955, and to skincare products in 1973. Today, Dior allocates 4% of its sales in cosmetics to research and development and is on the cutting edge of the industry’s innovations. The brand is the leader in France in the selective market for perfumes and cosmetics and number five worldwide (Source: European Forecast and Sécodip).

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     The leading LVMH perfumes for women are: Miss Dior, Poison, Dune, Dolce Vita, J’Adore and Dior Addict. Eau Sauvage, Jules, Eau Sauvage Extrême, Fahrenheit, Dune Jour Homme, and Higher are the best known fragrances for men.

     Dior’s top cosmetics lines are: Capture, Move, Prestige, Snow, Bikini for skincare products, and Dior Addict for make-up.

     Guerlain, founded in 1828 by Pierre François Pascal Guerlain, has created more than 600 perfumes since its inception. The brand has an exceptional image in the perfume universe and many of its creations have enjoyed remarkable longevity. Today it is also known for its make-up and skincare lines. Guerlain has a network of 24 boutiques dedicated exclusively to the sale of its products.

     Jicky, l’Heure Bleue, Mitsouko, Shalimar, Samsara, Aqua Allegoria, and Aroma Allegoria for women and Habit Rouge and Vetiver for men are the ambassadors for the brand. Guerlain’s leading cosmetics lines are Issima for skincare products, and Terracota and Divinora for make-up.

     Parfums Givenchy, founded in 1957, completes its presence in the world of fragrances for men and women (Amarige, Organza, Eau Torride, Pi, Givenchy pour Homme, etc.) with its activity in cosmetics through the Swisscare skincare products and the make-up line Miroir launched in 1999.

     Parfums Kenzo appeared in 1988, and recorded strong growth after the success of Flower by Kenzo, launched in 2000. In 2001, the company began to diversify its activities in the “well-being” segment by launching the Kenzoki line based on plant fluids.

     Bliss is an American spa and cosmetics company based in New York that has posted strong growth since it was formed in 1996. After joining LVMH in 1999, Bliss has developed its presence in England and France.

     BeneFit Cosmetics (created in 1995 in San Francisco and acquired by LVMH in 1999) owes its rapid success to the substantial nature of its beauty and make-up products, coupled with a true sense of pleasure, enhanced by the playful aspect of the product names and packaging. In addition to the sales recorded by its four exclusive boutiques in the San Francisco Bay, the brand is currently distributed in more than one hundred points of sale in the United States, France, and the United Kingdom.

     Fresh (created in 1991 and acquired by LVMH in September 2000) initially built its reputation on creating body care products inspired by ancestral beauty recipes and entirely natural and high quality fragrances, before expanding its format to make-up and hair care products. The company owns five boutiques in the United States.

     Make Up Forever (created in 1989) joined LVMH in November 1999. The brand specializes in professional make-up and its applications for consumers. Its products are distributed in its exclusive boutique in Paris and in various selective retailing circuits in France, the United States, Canada and Japan.

     Urban Decay (formed in 1996) offers lines of make-up and accessories geared toward teenagers and young urban teens. Urban Decay joined LVMH in February 2000 and has an international presence in over twenty countries.

     Hard Candy joined LVMH in May 1999. The Los Angeles-based company, formed in 1995, is designed for young customers to whom it offers a full line of make-up products in bold colors.

     Urban Decay and Hard Candy were sold at the end of 2002.

     Acqua di Parma (founded in 1916 in Palermo, Italy) is a prestigious perfume brand and symbol of Italian style. LVMH acquired 50% of Acqua di Parma in September 2001. The brand specializes in perfumes and aromatherapy, and has diversified its product line range with scents and linens for the home. Now based in Milan, Acqua di Parma relies on an exclusive retailing network, including a brand store in Milan. Following its integration within LVMH, the company is planning a program to open stores in the world’s major capitals.

     The Laflachère group, whose principal asset is the La Brosse et Dupont company, is the French leader in hygiene and beauty products. It was acquired by LVMH at the end of 1998. It has a strong presence in the retail circuits in France and Europe.

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(b)  Research in perfumes and cosmetics

     Research plays a major role in the growth strategy of the Perfumes and Cosmetics business group. The brands of this group now enjoy the advantages provided by combining their teams within the LVMH laboratories.

     This combination is the result of successive events. In 1983, an economic interest group (GIE) was formed, which gathered together the researchers of Parfums Christian Dior and Roc (a brand that left LVMH in 1993). In 1997, the teams of Parfums Christian Dior welcomed the GIE researchers to the Saint Jean de Braye site. In 1999, the research and development teams of Parfums Givenchy and Guerlain merged with those of Parfums Christian Dior to form the LVMH laboratories in Saint Jean de Braye. Since 2000, these laboratories have also placed their expertise in the service of the LVMH’s American brands. Over 230 scientists, researchers, doctors, chemists, biologists and pharmacists now work in Saint Jean de Braye on all developments of skincare, make-up and perfume products of Christian Dior, Guerlain and Givenchy. The LVMH laboratories also provide product developments services for Parfums Kenzo and the young American companies, Bliss, BeneFit, Fresh and Hard Candy and Urban Decay (until their sale at the end of 2002), and provide regulatory coordination for all products.

     This combination of expertise and concentration of resources offer many advantages: they allow LVMH to conduct, together with French and foreign partners, particularly European or American universities, major applied research projects that benefit all LVMH brands. The researchers can also work on areas that would have been too costly if they had been focused on a single brand. A larger pool of technical innovations that can fuel all the projects is available to the marketing teams of the business group. Finally, the combination of related services (toxicology, regulations, etc.) means that LVMH can provide all the Perfumes and Cosmetics brands with a well recognized expertise, especially in the area of product safety.

     Overall, research expenses in the Perfumes and Cosmetics business group represent approximately 1.5% of sales, while 61% of those sales revenues is earned by the sale of scented products.

     In 2002, the LVMH research teams continued their work in their key areas of expertise, sensual appeal, pleasure, product safety and performance and their advances in biology, molecular biology and natural substances, particularly research in new plant substances.

     In skincare, the leading research areas are currently anti-aging (prevention and correction), the body, and bleaching products for Asian customers. In make-up, researchers are focusing on the interactions between skin, light and matter, and the new polymers.

     The latest success stories coming from the LVMH laboratories are: in skincare products with Bikini (Dior) for body slimming, Hydra Move (Dior) for hydration, Successlaser (Guerlain) and No Surgetics (Parfums Givenchy) for wrinkle treatment; and in make-up with the Dior Addict line, the Maximeyes mascara and Diorskin foundation for Parfums Christian Dior, and the Divinora line for Guerlain.

(c)  Supply sources and subcontracting

     The five French production centers of Guerlain, Givenchy and Dior provide all production for the four major French brands, including Kenzo, both in fragrances, and in the areas of make-up and beauty products. Make Up For Ever also has sufficient manufacturing capacities in France to cover its own needs. Only the newer American companies, as well as Loewe perfumes, subcontract most of the manufacturing of their products.

     The dry materials, such as bottles, stoppers and any other items that form the containers or packaging, are acquired from suppliers outside of LVMH, as are the raw materials used in the finished products. In certain cases, these materials are available only from a limited number of French or foreign suppliers.

     The product formulas are developed primarily in the Saint Jean de Braye laboratories, but LVMH can also acquire or develop formulas from specialized companies, particularly for perfume essences.

(d) 2002 Highlights

     In 2002, net sales for the Perfumes and Cosmetics business group rose 5% in euro (8% on a constant currency basis). The growth was particularly remarkable in Asian markets (Japan, Korea and China) and in Europe, including

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Russia, a market where the significant growth confirmed its potential. The problems encountered by the department stores in the United States, however, limited sales growth in this market.

     Loewe perfumes, previously integrated within the Fashion and Leather Goods business group, joined Perfumes and Cosmetics in 2002, which strengthened its positions in Spain, where the brand is a leader in the selective market. In order to focus investments on its core and most profitable businesses, LVMH sold the American start-up companies Urban Decay and Hard Candy.

     Despite strong exposure in the United States, all of the new cosmetics companies posted substantial growth in net sales. The American brands BeneFit and Fresh and the French company Make Up For Ever recorded double-digit growth.

     Growth in the American licenses more than doubled with the successful extension of the Marc Jacobs line and the year-end introduction of the first perfumes from designer Kenneth Cole.

     Parfums Christian Dior

     Parfums Christian Dior again improved its sales performance. This growth is based on its successful innovations and on the continued outstanding performance of its blue chip brands. J’adore perfume posted a remarkable performance, comparable to the year before, confirming its status as a best seller and a classic among women’s fragrances.

     The innovative new products of 2002 included the launching of Hydra Move skincare products and the body slimming line Bikini. The second half of 2002 was marked by the very successful introductions of Dior Addict, a women’s perfume, Diorskin foundation and the Maximeyes eye make-up line.

     In 2002, Parfums Christian Dior focused on its skincare products to improve the unity of the product lines, focus its offer, and enhance product displays.

     In 2003, Parfums Christian Dior will focus on continued expansion in Europe and the high-growth Asian markets in 2003.

     As in previous years, LVMH expects sales in 2003 to be driven by a number of innovations, particularly in skincare and make-up products. Early in 2003, Parfums Christian Dior launched Capture R60/80™, a line of skincare products that representing a decisive advance in the fight against aging, the culmination of a major project for its laboratories. Dior Addict should continue to grow.

     Parfums Givenchy

     Parfums Givenchy performed well, with a significant increase in net sales and a particularly strong improvement in profitability.

     In order to intensify visibility and impact, Givenchy developed a new presentation, designed in close collaboration with the fashion house, and renovated the décor for its sales counters in department stores. The two initiatives will support the brand’s international objectives.

     The year 2002 was highlighted by the successful introduction of two new perfumes, Eau Torride for women in the first half of 2002 and Givenchy pour Homme in September which, in just a few months, earned an outstanding sales score in the men’s category.

     For 2003, Parfums Givenchy will continue to renew its product line, notably with the relaunch of L’Interdit, its trademark perfume, and the extension of the Amarige line. It will also introduce a major new women’s perfume. The brand also plans to intensify its promotional efforts in the make-up segment.

     Guerlain

     Guerlain devoted 2002 to the general reorganization of its operations and to a strategic refocusing on its historical values of very high quality and modernism. This in-depth work is the foundation for future growth. The brand posted strong growth in Japan which, like France, is one of its priority markets.

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     In the absence of any major new perfumes in 2002, Guerlain concentrated on expanding its Issima skincare line with the addition of two new products, Success Laser, a powerful wrinkle reducer, and Happylogy, a line developed with a brand new approach.

     Guerlain has begun the renovation of its Institut des Champs Elysées in Paris and will introduce a major new women’s perfume in September 2003.

     Parfums Kenzo

     In 2002, Parfums Kenzo maintained its new momentum and continued to improve income from operations. The brand continued to enjoy high sales of its Flower perfume and the selective expansion of its Kenzoki line of care products. The house also successfully reintroduced its Parfum d’Eté line with newly reformulated components—essence, bottle, packaging and advertising.

     Kenzo will introduce a new men’s fragrance in 2003.

     (4) Watches and Jewelry

     LVMH’s newest business group, Watches and Jewelry, created in late 1999, includes TAG Heuer, Ebel and Zenith, three well-known Swiss watch makers, and Christian Dior Watches, also made in Switzerland. It also includes Chaumet and Fred, two of the crown jewels of French jewelry. It now includes the joint venture De Beers LV, created in July 2001, which opened up its first store in 2002. Omas, the famous Italian designer of writing instruments acquired in 2000, completes this portfolio and enhances the pen activity already initiated by Christian Dior and Chaumet.

     In 2002, the Watches and Jewelry business group posted net sales of EUR 552 millions, which represents 4% of the net sales of LVMH.

(a)  The Brands of the Watches and Jewelry business group

     TAG Heuer (founded in 1860 in Saint-Imier in the Swiss Jura region, acquired by LVMH in November 1999) is the uncontested benchmark for luxury watches and the world leader in sports chronographs. Associated with sports, competition and its values of high performance, the brand is famous for the quality and precision of its watches, as well as for their cutting-edge design. It continued to grow steadily during the last few years, and ranked fourth worldwide in luxury watches in 2002 (Source: Goldman Sachs research report, March 19, 2003). Its most successful models are the 2000, Kirium and Link series in “professional sport watches,” the Carrera, Monaco, Monza, Calibre 36 models in classic watches and chronographs, and Alter Ego for the models designed specifically for women. In 2002, TAG Heuer launched TAG Heuer Sportvision, a line of licensed sports eyewear.

     Zenith (founded 1865 and established in Le Locle in the Swiss Jura region) belongs to the very limited circle of watch movement manufacturers. In the watch making sector, the term “manufacture” designates a company that provides the design and manufacturing of mechanical movements. The two master movements of Zenith, the automatic chronograph El Primero and the automated extra-flat movement Elite, absolute benchmarks for Swiss watch making, are present in the watches sold under this brand: the Chronomaster, Class and Port Royal lines. Zenith jointed LVMH in November 1999, and began to modernize its production workshops in 2001.

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     Ebel (founded in 1911 in La Chaux-de-Fonds, acquired by LVMH in November 1999) is today one of the leading luxury watch brands. Its success is founded on the alliance of watch making expertise and elegant design found in the watches for men and women assembled in its shops, particularly the Classic Wave, Beluga, 1911, E-type and Joyaux de l’Océan models.

     Christian Dior Watches, for which LVMH holds an exclusive license, belong to the category of fashion watches. They are manufactured in Switzerland by the Ateliers Horlogers. The Ateliers Horlogers resulted from the 2001 merger of Benedom and PLD, a department of Ebel specialized in “private labels”. The collections of Christian Dior Watches, especially the Riva, Chris 47 and Malice lines, in a style designed to harmonize perfectly with the creative force of the fashion house, are currently experiencing strong growth.

     Chaumet, a jeweler established in 1780, has maintained its prestigious expertise for two centuries, imposing a style that is deliberately modern and is reflected in all its designs, whether luxury jewelry pieces, or jewelry or watch collections. LVMH acquired Chaumet in November 1999.

     Fred Paris (founded in 1936) is present in high jewelry, jewelry and watch making. In 1995, LVMH acquired a 71% interest in the company, which it increased to 100% in 1996. Since joining LVMH, Fred has completely revamped its design, image and distribution. This revival can be seen in the bold contemporary style of its creations.

     Omas, the Italian house founded in 1925 and acquired by LVMH in May 2000, is a manufacturer of luxury pens. Famous for its craftsmanship, and for the design and quality of its products, Omas completes its traditional lines, which are benchmarks in the world of writing instruments, with original collections in limited series designed for collectors.

     De Beers LV is a joint venture of LVMH and De Beers created in July 2001. The goal of this company, headquartered in London, is to establish a global network of boutiques offering jewelry under the De Beers name. It approaches the diamond market from an original angle, both in its creative jewelry design and its concept of points of sale.

(b)  Organization and strategy

     Since its recent formation within LVMH, the Watches and Jewelry business group has worked to lay the foundation for profitable growth. It now benefits from the stronger managerial expertise and improved positioning and product lines of each of the companies and the implementation of appropriate operational synergies.

     The watch making and jewelry houses of LVMH pursue two strategic goals, which can penalize net sales in the short term, but will drive growth in the future.

     The first is the implementation of more selective and higher quality distribution by establishing closer relations with the best specialized retailers. This policy is designed to achieve better control of brand images. To complete their presence with these carefully selected retailers, the TAG Heuer, Fred and Chaumet brands also have their own exclusive boutiques, ten for TAG Heuer, nine for Fred, and 18 for Chaumet. The second strategic goal is the reduction of previous manufacturing and retailing activities for non-LVMH brands.

     This business group has already expanded its international presence, strengthened the coordination and pooling of its administrative resources, expanded its sales and marketing teams, and begun to establish a network of post-sale multi-brand services worldwide to improve customer satisfaction. At the end of 2001, LVMH Watches and Jewelry reached all European markets, the American continent, northern Asia, Japan, and the Asia-Pacific region.

     Since 2001, this segment has implemented industrial coordination through the use of shared resources, such as prototype design capacities, and by sharing the best methods for preparing investment plans, improving productivity and negotiating purchasing terms with suppliers.

(c)  Supply sources and subcontracting

     With its four Swiss workshops or manufactures, located in Le Locle and in La Chaux de Fonds, LVMH provides almost the entire assembly of the watches and chronographs sold under the TAG Heuer, Ebel, Zenith, Christian Dior, Chaumet and Fred Paris brands. In its watch making shop, Zenith also designs and manufactures the mechanical movements that made this brand famous.

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     Because of the very high quality requirements, the components assembled are obtained from a limited number of suppliers, primarily Swiss, with the exception of the leather for the watch bands. In this respect, the business group has a certain autonomy, with Artelink in Italy, the former metallic watch band division of Morellato Sfa acquired by TAG Heuer in 2001, and the company Artekad, which specializes in the manufacture of dials at La Chaux de Fonds.

     Even though LVMH may, in certain cases, use third parties to design its models, most of them are designed in its own studios.

(d)  2002 Highlights

     In 2002, LVMH Watches and Jewelry brands posted net sales in line with 2001 (up in local currencies), in a difficult global luxury watch market. The business group continued to withdraw from certain production and distribution operations that were handled for third parties.

     The business group continued to generate synergies between the companies and the Ateliers Horlogers. These developments optimized technical investments and operational efficiency. The birth of Louis Vuitton’s Tambour collection in the Ateliers Horlogers is one example of the success of this strategy.

     The creativity promoted in all the brands was reflected in the launch of very innovative products in line with the positioning defined for each brand.

     In an intensely competitive market, the goal of the Watches and Jewelry business group is to become a major player in this segment that is still new for LVMH, while continuing to sustain its growth through carefully targeted capital and marketing expenditures. The brands and distribution networks will strive to boost productivity at the same time.

     TAG Heuer

     Following the refocusing carried out in 2001 to improve distribution selectivity and achieve better image control, TAG Heuer returned to growth in 2002 as a world leader in luxury watches and sport chronographs. Significant gains in market share in the United States, Asia excluding Japan, Italy and Eastern Europe confirm the relevance of the strategic decisions made since TAG Heuer joined LVMH. In addition, the brand successfully opened its first stores in China and in India in 2002.

     While reaping the benefits of the growth in its core line, which includes 2000 Exclusive and the celebrated Kirium F1 introduced in 2001, TAG Heuer demonstrated its ability to innovate and move toward luxury products.

     The brand’s innovation earned it the 2002 Geneva Watch making Grand Prix, in the design category, for the Micrograph F1, which measures time to one-thousandth of a second. The sale of this product will be launched in 2003. The year 2002 marked the rollout of Aquagraph, an automatic diving chronograph with a performance confirmed at a depth of 500 meters.

     TAG Heuer achieved a spectacular move upscale that also benefited its Monza, Monaco and Carrera classic models and others, in gold models with prestigious movements like the Calibre 36, developed with Zenith Manufacture.

     TAG Heuer continued its partnership with the sports world as the official timekeeper of the Formula 1 championship and the world alpine ski championship. In 2002, the brand was also highlighted with its partnership with the Oracle sailboat in the Louis Vuitton Cup.

     Continuing its policy of exclusive boutiques in major international cities, TAG Heuer opened its sixth sales outlet and first American showroom in the heart of New York’s Soho neighborhood in March 2002, following openings in Tokyo, Kuala Lumpur, Singapore, Sydney and London. Two showrooms were also opened in Bangkok and Beijing in October 2002.

     Within its selective retail network, TAG Heuer continued its intense efforts to install “corners” and display cases that improve the presentation of its product lines.

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     Christian Dior Watches

     The momentum created by the new strategy of Christian Dior Watches in 2001 intensified in 2002, generating even greater growth for the brand. Despite a difficult economic situation for fashion watches, all the lines in all countries contributed to the strong performance.

     The reasons for this rapid expansion reside in the creative design and the high quality of the Swiss watches manufactured in LVMH’s workshops in very close collaboration with the Christian Dior Couture design studios. The style of the watches, the materials used in the bands, and the colors of the dials are designed to harmonize with the fashion collections.

     The brand had significant advertising support in its priority markets with a campaign focused on the Riva Sparkling watch, a steel model with a very unique diamond setting designed by John Galliano, the designer for the Christian Dior collections.

     A new interpretation of the Chris 47 watch, created by John Galliano, was unveiled at the Basle trade show in April 2003. The fall season will see the roll-out of another women’s line designed by Victoire de Castellane, Dior’s top jewelry designer.

     The brand’s development will be supported by a number of advertising visuals for the Riva and Chris 47 watches, and by the installation of a new generation of “corners” and display cases.

     Zenith

     Since Zenith was acquired by LVMH in 1999, the watchmaker, famous for its Elite and El Primero movements, has continued its repositioning and modernization.

     In 2002, Zenith redesigned most of its product line, making many esthetic and functional improvements, while remaining faithful to the company’s classic style. More upscale products, the introduction of new movements from the El Primero and Elite foundations, the use of precious metals and very limited and large-size original designs strongly increased the visibility of the brand in the world of fine watch making.

     As a result of the improvements made to its products, Zenith’s revenues rose in 2002 with a sharp increase in its average sale price. Revenue growth was especially rapid in Asia.

     In 2003, investments in the manufacturing plant will be continued in order to increase capacities and develop movements for the Zenith brand and for other LVMH companies such as Louis Vuitton and TAG Heuer.

     Major innovations and original complications, faithful to the spirit of Zenith Manufacture, were unveiled at the Basle trade show in April.

     Ebel

     After refocusing its collections in 2001, Ebel deployed its unique creativity in 2002, illustrating both the excellence of its watch making expertise and the elegance of its design. One of the year’s major events was the introduction of a high-end jeweled watch collection, Les Joyaux de l’Océan, whose commercial success exceeded forecasts. Some of the designs in this collection have been chosen to develop steel versions at more affordable prices.

     Ebel recorded its best sales growth in Asia, Japan, the Middle East, and the United Kingdom.

     In 2003, Ebel will launch a number of long-awaited innovations. The Tarawa watch, from the Joyaux de l’Océan line, will make its appearance in steel. Large chronographs, with a unique square shape, will enhance the 1911 line. A “mini” model in the Classic Wave line, tailored to the taste of Asian customers will be unveiled.

     Chaumet

     In 2002, Chaumet posted sharp growth in sales in its network of shops located primarily in France, Japan and Korea. This very encouraging performance was the first result of the strategic refocusing conducted in 2001, backed by the resumption of a very targeted communications program and the roll-out of a few new products such as the

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Liens ring. Chaumet opened two new boutiques in September 2002 in Tokyo, one in the Ginza district, the other one in the Omotesando district, inaugurating a new concept designed by the architect Jean-Michel Wilmotte. In March 2003, Chaumet unveiled a new Luxury Jewelry collection—Frisson, an initiative crucial for its reputation as a famous jeweler in Place Vendôme. In order to enhance its collection, Chaumet also presented two new timepieces at the 2003 Basle trade show. The new architectural concept of the Chaumet boutiques will be gradually expanded to the entire network including the Place Vendôme boutique in Paris. In May 2003, Chaumet entered into a joint venture with its Korean agent. Chaumet’s future projects include, a new store in Geneva, and several boutiques in Japan.

     Fred Paris

     Fred Paris posted considerable growth in its sales in 2002, despite the closing of a store in Houston in the United States. This advance is due primarily to the brand’s continued expansion in Japan and the success of its new watch line Move One. The Success and Mouvementée lines of rings confirmed their status as the brand’s best sellers.

     Omas

     In 2002, this company, based in Bologna, Italy, modernized its workshops and revamped its product lines. It focused its sales efforts on Italy, the United States and France, the leading markets for writing instruments. Two original creations were unveiled during the year. One was the limited Atlantide series and the other the Ingegno Scrittorio, in solid gold or silver, designed in honor of Leonardo da Vinci.

     In 2003, the legendary lines 360 and Arte Italiano will be enriched with new versions, particularly the development of a highly-awaited line of cartridge pens and the introduction of a new color—“Venetian blue”. A corner format developed to highlight the Omas product offer will be installed in the best retail outlets.

     De Beers LV

     The joint venture formed by LVMH and diamond group De Beers opened its first shop on November 21, 2002 in London, at the corner of Piccadilly and Old Bond Street. With a creative approach heavily inspired by its Anglo-African origins, the brand made a remarkable entrance in the jewelry market. The first piece, a “rainfall” necklace, was auctioned by the actress Sharon Stone for the benefit of AIDS charities. The highly luminous store concept enhances the purity and brilliance of the diamonds used in the most unique creations.

     In 2003, De Beers will open several retail outlets in various department stores in Japan. Other new stores are in the planning stages and will open in 2004.

     (5) Selective Retailing

     The purpose of the Selective Retailing business group is to create a sales environment that promotes the image and status of luxury brands. LVMH’s selective retailing operations are located in Europe, the United States and Asia where they are present in two segments: travel retail (the sale of luxury products to international travelers), which is the business of DFS and Miami Cruiseline; and the specialized selective retailing formats represented by Sephora and the department store division, which now consists of Le Bon Marché and La Samaritaine, two prestigious Parisian establishments.

     In 2002, the Selective Retailing business group posted net sales of EUR 3,337 millions, or 26% of the total net sales of LVMH.

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     As of December 31, 2002, the Selective Retailing business group operated 648 stores, as compared to 656 at the end of 2001 and 643 at the end of 2000.

(a)  Travel Retail

     DFS

     DFS joined LVMH in 1997 after LVMH acquired 61.25% of the company in December 1996 and February 1997. This American group based in San Francisco is the pioneer and one of the world leaders in the sale of luxury products to international travelers. Its activity is closely linked to tourism cycles. Since it was founded in 1961 as a duty-free concession in the Kai Tak airport in Hong Kong, DFS has acquired an in-depth knowledge of the needs of traveling customers, built solid partnerships with Japanese and international tour operators, and has significantly expanded its business, particularly in the tourist destinations in the Asia Pacific region. DFS had 152 points of sale as of December 31, 2002.

     Faced with the current increase in the cost of airport concessions, the strategy of the DFS group is now focused on the development and promotion of its city-center Galleria stores, which account for most of its sales. With an area of 3,000 to 17,000 square meters, the 12 Gallerias are located in the urban centers of major airline destinations in the Asia-Pacific region and in the United States. Each space combines in one site, close to the hotels where travelers are lodged, three different, but complementary commercial spaces: a general luxury product offer (perfumes and cosmetics, fashion and accessories, etc.), a gallery of prestigious boutiques (Louis Vuitton, Hermès, Bulgari, Tiffany, Christian Dior, Chanel, Prada, Fendi, Céline, etc.), and a recreational and souvenir complex.

     While focusing on the development of its Gallerias which are its main source of growth, DFS maintains its strategic interest in the airport concessions that can be obtained or renewed under good financial terms. DFS is now present in 22 international airports in the Asia-Pacific region and in the United States.

     Miami Cruiseline

     Miami Cruiseline, acquired by LVMH in January 2000, is an American company founded in 1963 and is the world leader in the sale of duty-free luxury items on board cruise ships. It provides services to over 100 ships representing 26 cruise lines. It also organizes auctions and prepares product catalogs that are available on board or during stopovers.

     The acquisition of Miami Cruiseline gave the travel retail activity better organization of its geographic presence and a more diversified customer base, which was previously primarily Asian, and which is now supplemented by American and European cruise customers. There are also excellent synergies between the activities of DFS and those of Miami Cruiseline in the areas of management and merchandising.

     The years 2000 and 2001 were devoted to the integration of the activities of Miami Cruiseline. A more effective organization was implemented. Concurrently Miami Cruiseline focused its efforts on improving the quality of its product offer and adapting its product line to each cruise ship in order to increase the average expenditure per traveler. Particular emphasis is being given to watches and jewelry, which offer good opportunities for future growth.

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(b)  Selective Retailing

     Sephora

     The Sephora brand, founded in 1970, has developed over time a perfume retailing format that combines direct access and customer assistance. This concept led to a new generation of stores with a sober and luxurious architecture, designed in three spaces dedicated to perfumes, make-up and skincare. Based on the quality of this concept, Sephora has gained the confidence of selective perfume and cosmetics brands. The brand has also offered products sold under its own brand name since 1995.

     Since it was acquired by LVMH in July 1997, Sephora has recorded rapid growth in Europe by opening new stores and acquiring companies that operated perfume retail chains, including Marie-Jeannne Godard and the Italian companies Laguna, Boidi and Kharys. Sephora has 404 stores in Europe today, located in 10 countries.

     The Sephora concept also crossed the Atlantic in 1998 and the brand now has 74 stores in the United States, plus an internet site www.sephora.com.

     Le Bon Marché

     Established in 1852, Le Bon Marché was a pioneer of modern marketing in the 19th century. The sole department store located on the left bank in Paris, it was acquired by LVMH in 1998.

     Le Bon Marché has a food store, La Grande Epicerie de Paris. Since 1995, it has also owned Franck et Fils, located on rue de Passy in the sixteenth district of Paris.

     In recent years, a fundamental overhaul that included the renovation and remodeling of its sales spaces, together with moving to a more upscale product offer, have brought back to Le Bon Marché its strong identity anchored in the modern world. Famous for its very demanding inventory and service policy, Le Bon Marché is now the most exclusive and creative department store in Paris.

     La Samaritaine

     Founded in 1870, La Samaritaine is, like Le Bon Marché, one of the first and most emblematic department stores in Paris. Located between the Louvre and Notre Dame de Paris, in a high-growth strategic district, it attracts both local customers and has a high potential with international visitors.

     LVMH acquired 55% of La Samaritaine in January 2001. With its help, La Samaritaine has developed a new growth strategy and started repositioning itself in the fashion and accessories sector, all in order to increase the franchise’s appeal to younger customers with strong purchasing power and at the leading edge of fashion trends.

     The adoption of a new visual identity and a campaign under the signature “Magasin Evolutes” are the first initiatives to be implemented, together with the preparation of vast sales plan that will ensure steady growth for La Samaritaine beginning in 2003.

(c)  2002 Highlights

     The 5% decline from 2001 to 2002 in total net sales for the Selective Retailing business group hides contrasting trends. The “travel retail” business was penalized by the decline in tourism in 2002, while Sephora continued to grow in Europe and the United States.

     In 2003, in a still troubled economy, each of the selective retailing companies continues to improve its performance, effectively face the coming challenges and prepare for a potential economic recovery.

     DFS

     DFS sales for the full year in 2002 were down slightly, despite a slight increase in the fourth quarter of 2002, a period comparable to the difficult year-end suffered by the “travel retail” segment in 2001. Even though tourist travel slowly resumed throughout the year, travel flows are still well below 2000 levels.

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     The efforts made by DFS to increase the competitiveness of its products proved effective. The company returned to break-even at the operating level as a result of strict measures to cut overhead expenses and the closing of under performing stores. The performance in Asia, which was better than projected, offset the loss centers in the United States.

     In order to expand its presence in tourist destinations, DFS has just opened a new Galleria in Singapore and one at Japan’s Okinawa airport. It also renewed its airport concessions on Guam and in New Zealand.

     Miami Cruiseline

     Benefiting from the strong performance of the cruise market, Miami Cruiseline increased both sales and income from operations as a result of the progress made in logistics and merchandising, combined with effective cost cutting measures.

     Sephora

     Sephora successfully continued its policy of selective growth, giving priority to raising its profitability and marketing effectiveness. In 2002, the brand achieved net sales growth of 10%, excluding Japan and at constant exchange rates. This performance is noteworthy in the context of a deliberate slowdown in new store openings on both sides of the Atlantic.

     For Sephora Europe, the year 2002 was marked by implementation of measures aimed at improving its operations.

     With its top priority being the improvement of its existing network, Sephora limited the number of its net store openings in 2002 to 15 stores located in countries with the best prospects for long-term growth. Sephora opened its first branded store in Athens, Greece and its first three stores in Prague in the Czech Republic. The success of these new stores, in terms of both sales and profits, confirms the remarkable potential of the Sephora concept in Eastern Europe.

     For the second consecutive year, Sephora performed well above the average for the selective retailing segment. After the 14% growth in sales on a constant store basis in 2001, the 25% increase recorded in 2002 demonstrates the commercial success of the Sephora concept in a market where selective retailing recorded only weak growth.

     In a move to streamline its network, Sephora USA closed the Rockefeller Center store, but strengthened its presence in Manhattan with new stores and the renovation of the Times Square store, both in New York City.

      Sephora exceeded its targets for improved income from operations in the United States.

     Sales at the sephora.com website rose steadily, and reported excellent results for the year-end holiday season. Sephora.com by far the largest American online beauty store, continues to expand its consumer base and the services it offers.

     For 2003, Sephora will continue to expand its network selectively and improve the quality of its organization and stores to better serve customers. Its strategic priorities continue to be to improve profitability and to concentrate store openings in the cities and countries where the Sephora concept offers the greatest potential. A flagship store will open on the rue de Rivoli in Paris sometime in the first half of 2003.

     Le Bon Marché

     To leverage its image as an exceptional store, Le Bon Marché opened additional sales space to new luxury brands in 2002, and expanded its Christian Dior and Louis Vuitton boutiques. Net sales continued to rise significantly despite a sluggish economy. The fashion accessories sector and La Grande Epicerie de Paris performed extremely well. The year 2003 will see the start of the renovation and expansion of the women’s fashion department. This large-scale project, to be completed over a three-year period, will be one of the primary growth drivers for the store.

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     La Samaritaine

     In 2002, the foundations which will allow the relaunch of La Samaritaine were laid, notably by closing the “do-it-yourself” department, which generated heavy losses. This closing impacted net sales in 2002, but it will allow reallocation of the space to the ready-to-wear apparel lines in 2003.

     La Samaritaine is totally redefining its identity. From a store heavily geared to everyday products with a largely male customer base, La Samaritaine is being transformed into a quality department store focused on fashion and female customers. This transformation will anchor both its product offer and its image within a dynamic commercial environment and attract affluent customers with strong purchasing power and leading-edge tastes.

     In addition, the logistic procedures will be completely revised in 2003 to make them more efficient and more cost effective. The restructuring of the sales and logistical organizations should continue until 2005.

     (6) Other Activities

     In 2002, Other Activities included the media division managed by the D.I. group (ex Desfossés International), and Etude Tajan.

      D.I group includes the press titles La Tribune, Investir, Connaissance des Arts, Le Monde de la Musique and Défis, as well as Radio Classique and System TV, an audio-visual production company. D.I. group sold its 33% interest in LV & Co in 2002 and disposed of the Jazzman magazine in 2003.

      Etude Tajan is the leading French auction house.

RISK MANAGEMENT POLICY

     LVMH has a dynamic overall risk management policy based primarily on the following:

• systematic identification and documentation of risks;
• organized risk prevention and safety at work and protection of industrial assets;
• implementation of international crisis management systems and contingent plans;
• a comprehensive insurance program to reduce the financial consequences of major events on LVMH’s financial statements; and
• worldwide coordination of “master” insurance programs.

     LVMH’s global approach is chiefly based on transferring its risks to the insurance markets under reasonable financial terms, within the parameters of the conditions available in those markets in terms of scope of coverage and limits. The extent of coverage is directly linked to the constraints of the insurance market.

     Compared with LVMH’s financial capacity, the level of self-insurance it assumes is not significant. The deductibles retained by LVMH’s business entities reflect an optimized balance between coverage and total cost of risk. Insurance costs paid by LVMH entities are less than 0.4% of consolidated revenues. The financial ratings of LVMH’s main insurance partners are reviewed on a regular basis. The main insurance programs coordinated by LVMH are designed to cover property damage, business interruption, marine, third party liability and product recall.

     Most of LVMH’s manufacturing operations are covered under a consolidated international insurance program for property damage and subsequent operating losses. Other business operations are covered under programs coordinated at the corporate level. Property damage insurance limits are in line with asset values. Business interruption insurance limits reflect gross margin exposures of LVMH’s business entities for a period of indemnity extending from 12 to 24 months based on actual exposures. Coverage for “natural events” granted under LVMH’s international damage insurance program is limited to EUR 50 million per claim and EUR 150 million per year. These levels are in line with LVMH business units exposures.

     LVMH has implemented a liability and product recall insurance program for all its subsidiaries on a worldwide basis. This program is designed to provide the most comprehensive coverage to respond to LVMH identified risks, given the capacity and coverage available in the international insurance market. Coverage levels are in line with

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those of companies with comparable business activities. Risks related to the environment and accidental pollution are covered under this program.

     In countries such as in the United States where no state insurance schemes are available for work-related accidents, specific insurance policies have been implemented. Coverage levels are in line with the various states legal requirements.

     To identify, analyze and treat industrial and environmental risks, LVMH relies on a combination of outside experts and qualified professionals working together with business units, particularly with staff in charge of safety, quality and environmental issues. The business of LVMH’s companies is such that special attention is paid to exposures relating to storage and shipment of raw materials and finished products.

     LVMH’s policy for industrial risk prevention aims to apply the highest safety standards. Working with its insurers, LVMH applies HPR (Highly Protected Risks) standards and has established an incentive program for risk prevention investments. These amounts are taken into account by underwriters in their risk assessment process. This approach is combined with a program to survey industrial and environmental risks. In 2002, engineering consultants devoted 170 auditing days to the program. In addition, prevention and protection schemes include contingent planning to ensure business continuity.

     In addition to industrial safety, LVMH companies are also working to achieve greater product safety and traceability. The HACCP method (Hazard Analysis Critical Control Point) is used by the companies in the Wines and Spirits and Perfumes and Cosmetics business groups. The purpose of this approach is primarily to increase LVMH’s ability to anticipate and respond in the event of a product recall.

ORGANIZATIONAL STRUCTURE

     The following is a simplified organizational chart, showing LVMH, its key subsidiaries and their relationship to the key holding companies in the group as of March 31, 2003:

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Significant Subsidiaries

The following is a list of LVMH’s significant subsidiaries (as defined in rule 1-02(w) of Regulation S-X):

PROPERTY, PLANTS AND EQUIPMENT

Wines and Spirits

     In addition to its inventories, much of LVMH’s assets in this business group consist of its vineyards, particularly in the Champagne region of France, where LVMH is the largest land owner. LVMH owns the following approximate acreage:

     In the above table, the difference between the two columns represents areas which are planted but not yet productive, areas that are not planted and areas that cannot be used to grow grapes.

     LVMH also owns office and industrial buildings, wineries, cellars and public relation centers linked to each of its main brands and its production operations in France, California, Argentina, Australia, Brazil, New Zealand, and Spain, as well as Cognac distilleries and warehouses. All together these properties represent approximately 773,000 square meters in France and 137,000 square meters outside of France. LVMH leases the offices of the Wines and Spirits business group in the world’s largest cities.

Fashion and Leather Goods

     Louis Vuitton Malletier owns the premises (of approximately 56,000 square meters) that house its offices and workshops at the Pont Neuf in Paris and the company’s headquarters, through its subsidiary La Belle Jardinière. Part of these premises are leased to third parties as offices and shops. La Belle Jardinière also owns an office block on the rue du Pont Neuf in Paris, which it leases to Céline.

     Louis Vuitton’s retail outlets can be found in prime locations in the world’s largest cities, and are generally leased from local owners. However, Louis Vuitton owns the freehold of its stores in Kobe, Japan, as well as in Hawaii, Guam, Seoul, and Sydney, and it finance-leases its store located on avenue Montaigne in Paris.

     In 2002, the Louis Vuitton network expanded through seven new shops, including four new global stores, which brought the total network of global stores to 40.

     LVMH owns thirteen Louis Vuitton manufacturing and warehousing facilities which are primarily located in France, although significant LVMH-owned manufacturing facilities are also located near Barcelona, Spain and in

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San Dimas, California. LVMH owns its Louis Vuitton warehouses in France and leases those in Hawaii, Asia and Oceania. Altogether these properties represent a total of 115,000 square meters.

     Céline owns an office building on avenue Montaigne in Paris, which it leases out and commercial property on rue François Premier in Paris which it leases to Fendi. Its retail stores, located in major cities worldwide, are leased from local owners. Céline also owns its production and distribution facilities near Florence, Italy and leases warehouses from owners in Hong Kong.

     The premises of Loewe stores are leased, with the exception of its shop located at 46 avenue Montaigne in Paris, which is owned by LVMH. The Barcelona, Villaverde, and Getafe workshops in Spain, which manufacture Loewe products and accessories for other LVMH brands, are leased. Loewe leases its head office facilities in Madrid.

     Fendi owns its production site near Florence, Italy. Its administrative and marketing functions are centralized in Rome, and are finance-leased. All Fendi stores worldwide are leased.

Berluti leases its stores. Its subsidiary, StefanoBi owns a shoe production facility in Ferrara, Italy.

     Kenzo, Givenchy, and Christian Lacroix lease their executive offices, workshops and store spaces located in Paris, and their retail stores throughout the world.

     Kenzo leases distribution facilities near Tours in France, which serve the Kenzo, Christian Lacroix, Céline, and Givenchy fashion businesses.

     Thomas Pink leases all of the premises it uses, including its offices and warehouses in London and stores throughout the world.

Perfumes and Cosmetics

     Parfums Christian Dior maintains its production and distribution facilities on LVMH-owned land near Orléans in France. In addition, Parfums Christian Dior occupies, as its headquarters, on a sale-leaseback arrangement with an option to purchase, a building located in the center of Paris. The building in Paris and its offices in Orléans, serve as Parfums Christian Dior’s executive offices.

     Parfums Christian Dior also owns offices in Germany, Spain and Italy, and rents offices and warehouses in many cities in the world.

     The two Guerlain production centers are located on plots of land owned by LVMH at Orphin and Chartres, in France. Guerlain’s headquarters in Levallois, near Paris, are rented.

     Parfums Givenchy maintains its executive offices in leased premises in Levallois, France and owns factory and storage facilities in Beauvais and Vervins in France. Both Givenchy and Kenzo perfume product lines are produced at the Vervins factory.

     In addition, Parfums Christian Dior, Guerlain and Parfums Givenchy lease together offices and distribution and retail facilities in New York, Tokyo, London and in other countries throughout the world.

     La Brosse et Dupont (a more than 99% owned subsidiary of Laflachère) owns five plants in France and leases five others in France and one in Spain. La Brosse et Dupont also runs four distribution sites in France, four of which are leased. Offices are leased in France, in various European countries and in Hong Kong.

      Bliss leases its offices and the premises used for a spa in New York City.

      The Make Up For Ever headquarters located in the Paris region is lease-financed; the shop premises are leased.

      BeneFit Cosmetics leases its retail stores and offices in California.

Watches and Jewelry

     TAG Heuer leases studios and warehouses in Switzerland in La-Chaux-de-Fonds and in St-Imier as well as office space, including its headquarters in Neuchâtel. TAG Heuer also leases offices and distribution centers in the

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United States, Canada, Asia, Australia, and in several European countries. Its subsidiary Cortech, manufacturer of watch cases, owns workshops and office premises in Cornol, Switzerland.

      Fred leases office space in Paris as well as stores in France, Monaco, Japan, and in the United States.

      Les Ateliers Horlogers, formerly Benedom, leases its offices and a factory in La-Chaux-de-Fonds, Switzerland.

     Ebel owns an industrial building complex in La Chaux-de-Fonds, Switzerland, which includes warehouses, office space and La Villa Turque, Ebel’s public relations center. Ebel also owns a rental building in Basle, Switzerland.

     Zenith owns the plant where it manufactures its movements and watches in Locle, Switzerland. Its warehouses and commercial premises located throughout Europe are leased.

     Chaumet leases its offices in Paris, as well as the premises of its retail stores and the offices of its subsidiaries worldwide.

     Omas owns a building located in Bologna, Italy where LVMH’s manufacturing facilities and headquarters are centralized.

Selective Retailing

     DFS leases its executive offices, with the exception of its office facilities in Guam, which it owns. DFS also leases its retail stores, with the exception of its stores in Waikiki (Hawaii), Guam (Tumon Bay Gallerie) and Saipan, which it owns.

      LVMH owns a commercial property in Saipan, and a building in Guam where it has set up its leisure activities.

     Sephora leases its offices in Boigny, near Orléans, in the Paris region, and in San Francisco in the United States. In the countries where Sephora is present, its shops and warehouses are leased. The premises of the Champs Elysées store were acquired by LVMH in 1998 and resold by it in 2002.

     Le Bon Marché owns three buildings in Paris (with a surface of approximately 85,000 m²), most of which are used for its stores and offices, and a portion of which are rented out as offices to third parties. Le Bon Marché leases its storage facilities in Bagneux near Paris.

     Franck et Fils owns two buildings in Paris which it uses as stores; a portion of these buildings are also rented out to third parties as apartments.

     La Samaritaine owns several buildings in Paris with offices and shops, representing approximately 129,000 m². Parts of these buildings are rented to third parties. La Samaritaine also owns storage facilities in Marne La Vallée near Paris.

Other Activities

     D.I. Group, including D.I. Régie, rents offices in Paris. Sid Editions rents offices in Paris and in Poitiers, France. Radio Classique rents offices in Paris.

     LVMH headquarters which were previously housed in a building on avenue Hoche in Paris owned by LVMH (but since transferred), have moved to two buildings on avenue Montaigne in Paris and avenue Edouard Vaillant in Boulogne Billancourt which are leased by LVMH.

     LVMH owns a building in New York on 57th Street which also houses the United States offices of Parfums Christian Dior, Céline, Guerlain, Parfums Givenchy, Parfums Kenzo and Louis Vuitton Malletier. In 2001, LVMH acquired a building on 57^th Street, in New York which will house a Louis Vuitton store and offices.

     Tajan rents a building on rue des Mathurins in Paris, where it has set up L’espace Tajan, which includes the company’s offices, and auction rooms.

      LVMH believes its manufacturing and storage facilities are adequate for its present needs.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OPERATING RESULTS

General

     LVMH’s business consisted in 2002 of five principal business groups: Wines and Spirits (which is comprised of champagne and wines, and cognac and spirits), Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewelry and Selective Retailing. In addition, LVMH has interests in business and financial media companies and in auction art sales, included under “Other Activities”. The Watches and Jewelry business group was created in 1999 and was included in “Other Activities” in 1999. It has reported as a separate business group since the beginning of 2000.

     The consolidated financial statements of LVMH have been prepared in compliance with the French Law of January 3, 1985 and the new French regulation 99.02 enacted by the Comité de Réglementation Comptable, published in June 22, 1999, effective as of January 1, 2000. Regulation 99.02, has had no material impact on stockholders’ equity and earnings of LVMH. French Accounting Standards vary in certain respects from accounting principles generally accepted in the United States (“United States GAAP”). For a reconciliation with United States GAAP, see Item 17 – “Financial Statements” – Note 34 of the Notes to the Consolidated Financial Statements.

Basis for Presentation

     Critical Accounting Policies

     The preparation of the LVMH consolidated financial statements requires the use of estimates and assumptions. Those estimates and assumptions are based on historical experience and other factors deemed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

     LVMH believes that of its significant accounting policies, the following may involve a higher degree of judgment or complexity:

     Brands and Goodwill

     LVMH’s brands and trademarks are of key and crucial importance to LVMH’s business.

     Notwithstanding that the brands and goodwill amounts recognized in the consolidated financial statements are significant (their combined net book values represent 36.6% of the December 31, 2002 total assets), the amounts initially recorded are subject to LVMH management’s highly sensitive estimates and assumptions as well as to a high degree of judgment, present at several levels

     The recognition of the initial values of brands and goodwill from acquired businesses in the consolidated financial statements is based upon management’s allocation of the purchase price of acquired businesses to all identified assets acquired and liabilities assumed, at fair value. The asset allocation includes management’s determination that the acquired brand is well-known and individually identifiable, with measurable value development over time. Management’s estimates are subject to the selection of the most appropriate assumptions related to prospects in terms of economic growth, potential of the acquired businesses, strategic plans, and other matters, which inherently include a high degree of complex judgment and uncertainty.

     Under French GAAP, goodwill is amortized over its estimated useful life. The useful life is estimated at the time the assets are acquired and is based on historical experience with similar assets or estimates of the period that the asset will generate revenue. For United States GAAP purposes, goodwill amortization was discontinued on January 1, 2002 in accordance with the adoption of SFAS No. 142.

     Goodwill and brands with an indefinite life are tested for impairment at each reporting unit level, on an annual basis at least and whenever changes in circumstances indicate that goodwill and brand amounts may not be recoverable. Under United States GAAP, the impairment analysis of goodwill and brands with an indefinite life is performed using the two-step approach prescribed by SFAS No. 142. The first step consists of comparing the fair value and book value of the reporting units. Fair value is assessed using the discounted future cash-flow method. When fair value is less than book value, LVMH engages in the second step which requires a valuation of the

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reporting unit assets and liabilities, including brands, to determine an implied fair value of the associated goodwill. This valuation is performed by external or in-house experts and if the experts’ valuation indicates that the implied fair value of the reporting unit’s goodwill is less than the carrying value of the goodwill, an impairment loss equal to the difference is recorded through the income statement.

     Under French and United States GAAP, when indicators of impairment exist, brands are tested for impairments. When the fair value of the brands is below their carrying value, an impairment loss is recognized for the difference.

     Determination of fair values is generally based on a discounted cash-flow analysis that involves a high degree of judgment and is based on sensitive assumptions for future operating performance, discount rates, economic growth, competitive conditions, and other matters. When necessary, discounted cash-flow results are reviewed and validated by external experts.

     LVMH’s net income in any given financial period may be materially impacted by a non-recurring impairment charge.

     Deferred tax assets

     The deferred tax assets recognized in the consolidated balance sheet result primarily from tax losses carried forward and temporary differences between the carrying amounts of assets and liabilities and their valuation for tax purposes.

     Recoverability of deferred tax assets recognized in the consolidated financial statements is assessed by management periodically using taxable profit forecasts and tax planning strategies as well as considering the likelihood that such forecasts will be realized. Management assumptions and historical experiences are taken into account in making these assessments.

     Should assumptions differ from actual results, LVMH’s net income in any given financial period would be materially impacted by a non-recurring allowance of deferred tax assets. On the contrary, should management determine that deferred tax assets which it previously characterized as non-recoverable may in fact be recoverable after a review of assumptions, LVMH’s net income would be impacted by a non-recurring profit.

     Investment securities

     LVMH has investments in equity securities of both public and private companies where it does not have the ability to exercise significant influence over the investee’s business.

     Under French GAAP, LVMH's policy is the same for all investments in the equity securities of both public and private companies. Investments in both public and private companies are carried at cost. If management determines that the investment is impaired, the decline in fair value is recognized in the consolidated statement of income. In estimating fair value, LVMH considers market conditions, offering prices, trends of earnings/losses, price multiples, financial position, new financing and other key measures. LVMH believes its estimates result in a reasonable reflection of the fair values of these investments.

     Under United States GAAP, investments in public companies are carried at fair value based on quoted market prices with changes in fair value recorded through the “other comprehensive income” component of stockholders’ equity, unless determined to be an other than temporary decline in the fair value, in which case the decline in fair value is recognized in the consolidated statement of income. Investments in private companies are recorded at cost unless determined to have an other than temporary decline in the fair value, in which case the decline in fair value is recognized in the consolidated statement of income.

     In the case of either investment type, for United States GAAP purposes, declines in the fair value of the investments are reviewed to determine whether they are other than temporary in nature in accordance with interpretations of SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities” and SEC Staff Accounting Bulletin No. 59 “Accounting for Noncurrent Marketable Equity Securities”. For public company investments, absent any other indications of a decline in value being other than temporary in nature, the LVMH’s policy is to treat a decline in the investment’s quoted market value that has lasted for more than six months as an other than temporary decline in value. LVMH’s policy is the same for private company investments, however, their fair values are estimated. In estimating fair value, LVMH considers market conditions, offering prices, trends of

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earnings/losses, price multiples, financial position, new financing and other key measures. LVMH believes its estimates result in a reasonable reflection of the fair values of these investments.

Consolidated Operations – 2002 as compared to 2001

     Consolidated sales for the year 2002 climbed to EUR 12,693, up 4% from the previous year. This figure only partially reflects what really occurred, since currency fluctuations against the euro, particularly the drop in the yen and then the U.S. dollar, limited the increase, which amounted to 9% at constant exchange rates.

     Net sales of the Wines and Spirits business group increased by 2%. Excluding the impact of the Pommery disposal in the first half of 2002 and at constant exchange rates, the actual growth was 11%. These figures reflect the strong recovery in demand for champagne, notably in the United States and in Europe, as well as further expansion of cognac sales in Asia, excluding Japan, and in the United States. They do not include LVMH’s interest in Millennium Import LLC which was acquired in July 2002 and accounted for using the equity method.

     In 2002, net sales for the Fashion and Leather Goods business group increased 16%, a performance chiefly reflecting 7% rise in Louis Vuitton sales at constant exchange rates, notably in Japan and in the United States. The overall change in Fashion and Leather Goods sales includes the effects of the Donna Karan consolidation as of January 1, 2002 and the full consolidation of Fendi, which had been consolidated on a proportionate basis at 50% in 2001. Sales were up 5%, after excluding the effects of changes in consolidation and at constant exchange rates.

     The Perfumes and Cosmetics business group’s net sales rose 5% in 2002, or 8% at constant exchange rates and taking into account the integration of Loewe perfumes in 2002. This increase in sales reflects the success of recent new products and increased sales in all markets, particularly in Europe. Only the United States reported a decline in sales.

     Net sales of the Watches and Jewelry business group rose 1% in 2002, or 3% at constant exchange rates, with significant advances in Japan and other Asian countries. This performance occurred against a backdrop of revamped product lines, market repositioning and a shutdown of LVMH manufacturing and distribution activities on behalf of other brands.

     In 2002, Selective Retailing net sales declined 4% overall. However, this figure masks very different situations among the individual companies. Sales at DFS fell 9% at constant exchange rates. The continued effects of the terrorist attacks of September 11, 2001, and the decline in Japanese tourist travel caused by the unfavorable parity between the yen and the dollar, negatively impacted DFS sales. Sephora’s sales rose 7% in local currencies, with the United States recording a 28% increase. Miami Cruiseline sales increased by 7% in local currencies and Le Bon Marché reported a 4% increase in sales in 2002, while net sales at La Samaritaine were down owing to a thorough revamping of the product range and disruption caused by renovation work.

     In 2002, net sales from media and art and auction businesses (included under Other Activities) were EUR 163 million, down from EUR 244 million in 2001, essentially due to the deconsolidation of Phillips at year-end 2001.

     Changes in the scope of LVMH’s consolidation, its businesses and in the monetary environment during 2002, caused a slight shift in the contribution of each business group to total net sales at current exchange rates. Selective Retailing’s share fell from 29% to 26% of the total while Fashion and Leather Goods rose from 29% to 33%. The percentages of the other business groups remained stable, with Wines and Spirits at 18%, Perfumes and Cosmetics at 18% and Watches and Jewelry at 4%. For details with respect to changes in LVMH’s consolidation, see Item 17 – “Financial Statements” – Note 3 to the Consolidated Financial Statements.

     Changes in net sales by geographic region along with changes in consolidation scope described in Item 17 – “Financial Statements” – Note 3 to the Consolidated Financial Statements (i.e. the disposal of Pommery, the consolidation of Donna Karan and full consolidation of Fendi), kept the breakdown of net sales by currency practically unchanged, even though the yen and U.S. dollar weakened against the euro. In 2002, breakdown remained as follows with the euro at 32%, the U.S. dollar at 33%, the yen at 16% and other currencies at 19%, including 5% for the Hong Kong dollar.

     Gross margin was EUR 8,130 million, representing 64% of net sales, a 2 percentage point increase from 2001 due to the favorable effect of currency hedges.

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     Marketing and selling expenses rose 3% to EUR 4,705 million, a figure that changes little on a comparable structural and currency basis. This figure reflects LVMH’s increasing selectivity in its advertising campaigns and a relative decline in the number of new store openings, compared with 2001.

     In 2002, general and administrative expenses declined 2% from 2001 to EUR 1,417 million, and 4% on a comparable structural and currency basis.

     Income from operations grew 29% to EUR 2,008 million. This increase, which far exceeds that of net sales, stems from LVMH’s improved gross margin and its control of marketing and administrative expenses as mentioned above.

     Income from operations for the Wines and Spirits business group climbed 11% to EUR 750 million, a confirmation of growing volumes and margins.

     Income from operations for the Fashion and Leather Goods business group rose 2% to EUR 1,297 million after climbing 9% in 2001. Sales were adversely affected for several months in the wake of the September 11th, 2001 terrorist attacks, making any comparisons with the previous year appear unfavorable.

     The Perfumes and Cosmetics business group reported an 8% increase in income from operations to EUR 161 million. This upward trend, which occurred mainly in the second half of the year, confirms the success of new products launched over this period.

     The Watches and Jewelry business group reported a EUR 13 million loss from operations, due primarily to the aforementioned shutdown of manufacturing and distribution activities on behalf of other brands and the cost of advertising campaigns, supporting new product launches.

     The Selective Retailing business group earned a EUR 20 million income from operations versus a EUR 213 million loss in 2001. This improvement was due to the lower break-even point at DFS, which has now returned to breakeven at an operating level, the closing of Sephora in Japan and Germany, and the sharp turnaround in Sephora’s results in the United States, which are now close to break-even.

     The Other Activities business group posted a EUR 207 million operating loss in 2002, an improvement from the EUR 353 million loss reported in 2001. This includes the results from the press and media businesses, which recorded a loss due to the abrupt decline in financial advertising revenue, results from the e-Luxury.com website whose business is growing rapidly while still being unprofitable and LVMH’s central expenses. These activities also included operating losses at Phillips in 2001.

     Net financial expenses were reduced to EUR 294 million in 2002 from EUR 459 million in 2001. The decrease reflects lower interest rates, the positive cash flow generated from the disposal of LVMH’s equity stake in Gucci in 2001, asset sales conducted in 2002 and the strong increase in cash flow provided by operating activities compared to 2001.

     Other income and expenses primarily include the following items: a EUR 55 million gain from the disposal of Pommery, Hard Candy and Urban Decay as well as various properties and equity stakes in Fininfo and Grand Marnier; an additional EUR 200 million provision for the depreciation of the equity stake in Bouygues; EUR 116 million in non-recurring asset depreciation, which included EUR 41 million for inventory and EUR 55 million for intangible assets; EUR 17 million net gain from the sale of LVMH shares and changes in provisions on these shares; and finally an amount of EUR 161 million relating notably to provisions for the restructuring of Moët Hennessy’s retail network in some regions, the final cost for disposing of the residual shareholding in Phillips and the closing of certain stores.

     The average 2002 tax rate of 27% is lower than that reported in 2001 due to the use in 2002 of the tax losses from certain activities.

     LVMH’s share from investments accounted for using the equity method was a loss of EUR 18 million. This primarily reflects LVMH’s share in the results of Millennium and Bonhams, as well as its 50% stake in its joint venture with De Beers. In 2001, it also included LVMH’s share in e-Luxury.com’s results.

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     Net income before amortization of goodwill and unusual items rose to EUR 818 million in 2002, from EUR 334 million at year-end 2001.

     In 2002, goodwill amortization was EUR 262 million, up from EUR 168 million the previous year. This increase results from the reduction of the amortization period for DFS to 20 years and changes in consolidation scope, particularly the integration of Fendi and Donna Karan.

     Minority interests rose from EUR 99 to EUR 131 million, primarily due to Wines and Spirits results, in which Diageo holds a 34% interest.

     LVMH reported a net income of EUR 556 million in 2002; as opposed to EUR 10 million in 2001 after EUR 156 million of unusual items.

Consolidated Operations – 2001 as compared to 2000

     Consolidated sales for the year 2001 were EUR 12,229 million, up 6% from the previous year, and 43% higher than 1999. Sales growth was 13% in the first half of 2001. However, the uncertain economic environment and the consequences of the tragic events of September in the United States weighed heavily on activity in the second half of the year, particularly in the final months of the year, which are crucial for LVMH. While sales remained steady for the European Union as a whole, with growth of 10% for the year, LVMH’s other traditional areas of activity saw their sales growth limited, with 5% growth in the United States, 4% in Japan (13% in yen) and steady sales in Asia (excluding Japan).

     The effects of this uncertain economic environment on the main business activities of LVMH varied widely. The Fashion and Leather Goods business group remained remarkable both for its 13% growth rate and for its geographic range, as Asia (including Japan) was the only region in which sales grew by less than 10%, even though sales in Japan grew 20% in yen.

     The Perfumes and Cosmetics business group expanded 8%, primarily in Europe and the United States. Sales of Wines and Spirits declined in all major markets. Despite growth of 3% in cognac, Wines and Spirits business group sales as a whole declined by 4% over 2000. The Selective Retailing business group, which grew by 6%, benefited from the growth of Sephora and the effects of the acquisition of La Samaritaine, despite the fact that DFS’ net sales declined by 10%.

     Sales for the Watches and Jewelry business group declined 11% as a result of the discontinuation of certain subcontracting activities and the market repositioning of this new business group created in late 2000.

     These changes in consolidated sales included the positive effects of changes in the scope of consolidation, which were 3%, and the negative effects of exchange rate fluctuations which were less than 0.5%. The increase in the dollar did not offset the decline in the yen. On a comparable structural and currency basis, organic growth in consolidated sales would have been 3%.

     Changes in the scope of LVMH’s consolidation, as described in Item 17 – “Financial Statements” – Note 3 to the Consolidated Financial Statements, did not have a significant impact on the breakdown of consolidated sales for the fiscal year by business group, which remained stable: Wines and Spirits 18%; Fashion and Leather Goods 30%; Perfumes and Cosmetics 18%; Watches and Jewelry 5%, and Selective Retailing 28%.

     However, the change in the economic and monetary environment slightly altered the breakdown of sales among the main invoicing currencies. The weight of the U.S. dollar declined from 35% to 32% of LVMH’s total sales, in favor of the euro, which rose from 29% to 31%. The proportion of other currencies remained stable, particularly the yen, which represented 16% of LVMH’s sales.

     In 2001, gross margin totaled EUR 7,575 million, a margin rate on total revenue of 62% which represents a decline of one point from 2000.

     Marketing and selling expenses amounted to EUR 4,568 million in 2001, an increase of 9% from 2000, and 6% on a comparable structural and currency basis. This change reflects an increase in the number of LVMH owned and managed stores, to 1,501 at the end of December 2001, primarily under the Louis Vuitton name and the Selective

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Retailing brands. This increase is also the result of increased communication expenses incurred in connection with new product launches, particularly in the Perfumes and Cosmetics business group during 2001.

     In 2001, general and administrative expenses were EUR 1,447 million, an increase of 21% from 2000, or 17% on a comparable structural and currency basis.

     Income from operations totaled EUR 1,560 million in 2001, a 20% decline from 2000. Income from operations for the Fashion and Leather Goods business group was EUR 1,274 million, increasing 9% over 2000. The Wines and Spirits and the Perfumes and Cosmetics business groups reported income from operations of EUR 677 million and EUR 149 million respectively, declining by 6% and 19%, essentially for the reasons described above relating to the uncertain economic environment. However, the decline in income from the Wines and Spirits business group results from two opposing trends: a decline of 18% for champagnes and wines, but an increase of 15% for cognac. Income from operations for the Watches and Jewelry group was EUR 27 million, compared to EUR 59 million in 2000, as a result of the repositioning of its activities and products. The income from operations of the Selective Retailing business group, which was at break-even in 2000, became negative EUR 194 million in 2001. This was primarily the result of Sephora’s activities in the United States, where recently opened stores have not yet reached their break-even point. It is also the result of DFS and Miami Cruiseline having suffered a sharp year-end fall in the number of passengers, on both international flights and cruise ships. DFS was also affected by the unfavorable exchange rate of the yen against the U.S. dollar, which had a negative effect on Japanese tourists. Operating income from Other Activities, which was negative EUR 372 million, reflected both the increase in corporate expenses attributable to the growth of LVMH, and the costs of developing the international activities of Phillips, de Pury & Luxembourg. In 2001, LVMH’s internet sites, particularly Sephora.com, sharply reduced their expenses, as their development phase was largely completed.

     In 2001, net financial expenses amounted to EUR 459 million, compared to EUR 421 million in 2000. This change reflects an increase in the current net financial debt, resulting from LVMH’s expansion and its operating and financial investments.

     Dividends received from unconsolidated investments declined from EUR 45 million to EUR 21 million, mainly as a result of the reduction in June 2001 of LVMH’s interest in Diageo. In 2001, this amount mainly included ordinary dividends received from LVMH’s interest in Gucci.

     In 2001, other income and expenses included capital gains of EUR 39 million from sales of LVMH treasury Shares, and a EUR 343 million provision for depreciation of these shares held at year-end. In 2000, capital gains from LVMH’s treasury Shares totaled EUR 115 million. In 2001, other income and expenses also included the depreciation of point of sales advertising items in the Perfumes and Cosmetics business group, and the depreciation of various assets, specifically unconsolidated investments.

     The 2001 average tax rate was lower than that recorded in 2000, because of the tax use of the temporary increase in deficits for some businesses.

     Losses from equity investments amounted to EUR 42 million in 2001. This loss mainly represents LVMH’s share in results of the e-Luxury web site, and from start-up costs of LVMH’s joint venture with De Beers.

     Net income before amortization of goodwill and unusual items totaled EUR 334 million in 2001, compared to EUR 846 million in 2000.

     In 2001, amortization of goodwill, excluding unusual items, totaled EUR 168 million, compared to EUR 141 million for the previous year. This increase reflects above-mentioned changes in the scope of consolidation.

     In 2001, minority interests in net income before amortization of goodwill and unusual items was EUR 99 million, compared to EUR 179 million in 2000. This decline is related to the effects of the economic downturn on income.

     In 2001, unusual items included earnings of EUR 864 million related to the investment in Gucci shares, including a capital gain of EUR 774 million from the sale of this investment and an exceptional dividend of EUR 90 million recorded during the fourth quarter of the year. Unusual items also included a restructuring provision of EUR 446 million, including a EUR 385 million provision for Selective Retailing. Exceptional asset depreciation or amortization expenses were also recorded, including EUR 323 million for DFS goodwill, EUR 83 million for the

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Bouygues investment, EUR 60 million for unconsolidated media and telecommunications investments and EUR 141 million for the impairment of the goodwill and assets of Phillips, de Pury & Luxembourg. This expense mainly corresponds to the full amortization of the related goodwill. Unusual items are presented net of their positive impact on taxes representing EUR 71 million.

     Net income totaled EUR 10 million in 2001.

Consolidated Data Discussed by Business Group for 2000, 2001 and 2002 – Geographic Information and Investments