LETTER TO SHAREHOLDERS

LETTER TO SHAREHOLDERS Autumn 2006 No. 38 The adventure continues Dear Shareholders, At the last Annual General Meeting, you approved the appointment of Jean-Paul Agon as director. At the Board Meeting held after the AGM, the position of Chairman was separated from that of the Chief Executive Officer. Since April 25th, Jean-Paul Agon has therefore had complete operational responsibility for the businesses of L Oréal. With his interpersonal skills and knowledge of our businesses, he brings to the group s management all his energy and his outstanding ability to strengthen team spirit, instil dynamism and innovate in many fields. My role is to contribute actively, with my experience, to determining the development strategy. Together we decide on the group s major strategic choices. Continuity is therefore fully ensured. The L Oréal adventure continues. Sir Lindsay Owen-Jones Chairman L Oréal s growth model is modern and efficient Dear Shareholders, A few months after taking up my appointment as Chief Executive Officer, I would like to tell you that I am very confident about the group s growth prospects for 2006 and beyond. At the end of September, we have achieved a strong increase in sales. The upturn has been confirmed in Western Europe, with rapid expansion in the Rest of the World. In North America, our businesses are improving their market share in an environment which, as predicted, remains affected by consolidation in the retail sector. The quality of the 1st half results although their significance as an annual trend indicator is limited and the prospect of sustained growth in the 2nd half mean that we are very confident of achieving in 2006 another year of double-digit earnings per share growth. I believe in the sustainable success of the L Oréal business model. Built up by Lindsay Owen-Jones, it is founded on a unique brands portfolio, the priority given to R&D, innovation and the rapid globalisation of our businesses. L Oréal s growth model is modern and efficient. Our goal is to make sure that the engine is firing on all cylinders. I know I can count on the remarkable commitment of L Oréal s teams and on the unswerving loyalty of our shareholders. Jean-Paul Agon Chief Executive Officer

Sustained growth over the first nine months 3 11.6 billion euros, up by +8.3% 3 Continuous significant growth in Western Europe 3 Rapid increase in all new markets 3 Targets confirmed for full year 2006 The sales of the L Oréal group, at September 30th, 2006, amounted to 11.6 billion euros, an increase of +8.3%. Currency fluctuations had a positive impact of +0.9%. Growth excluding exchange rate impact amounted to +7.4%. The net impact of changes in consolidation was +1.8%, mainly as a result of the acquisition of The Body Shop, consolidated from July 1st, 2006 onwards. Like-for-like, i.e. based on a comparable structure and identical exchange rates, the increase in the group s sales amounted to +5.6% at September 30th, 2006. Sales by operational division and geographic zone At September 30th 2006 Growth em Like-for-like Reported By operational division Professional Products 1,598 +3.4% +4.0% Consumer Products 5,980 +5.5% +6.4% Luxury Products 2,694 +4.9% +6.5% Active Cosmetics 895 +12.4% +15.8% Cosmetics total 11,231 +5.5% +6.7% By geographic zone Western Europe 5,290 +3.7% +3.9% North America 2,964 +2.4% +4.6% Rest of the World 2,977 +12.2% +14.4% of which: Asia 1,092 +7.4% +8.8% Latin America 744 +16.6% +22.9% Eastern Europe 603 +21.2% +24.6% Other countries 538 +7.7% +5.5% Cosmetics total 11,231 +5.5% +6.7% The Body Shop 172 +8.8% Dermatology (1) 239 +8.4% +9.8% Group total 11,642 +5.6% +8.3% (1) Group share, i.e. 50%. Strong increase in first half results 3 Net profit +21.9% 3 Strengthened confidence in full-year earnings 3 Substantial improvement in gross profit 3 Each division contributes to strong operating profit growth (+19.6%) 3 Large increase in EPS SUSTAINABLE DEVELOPMENT Did you know? More than 100 safety, hygiene and environmental indicators are recorded each month to monitor the performance of all the group s establishments across the world. In 2005, the proportion of raw materials of plant origin rose to 40% of all raw materials used by L Oréal. The group now systematically incorporates the principles of sustainability (such as preserving biodiversity, and encouraging fair trade practices) in its raw material evaluation processes. Since 2002, there have been 152 independent audits of group suppliers to check that their activities are carried out in compliance with fair employment standards. Amongst the many actions taken to promote diversity in its teams, L Oréal organised a recruitment forum in France with the IMS (an institute, which encourages corporate social responsibility), and some fifteen other companies, bringing together more than 200 young people from visible minorities and sensitive areas. L Oréal is one of the first companies to create an annual ethical reporting system to make sure ethical commitments are actually put into practice in countries where the group has subsidiaries. All these advances in fields such as diversity, safety and the environment, alternative safety test methods and corporate governance are set out in the group s Sustainable Development Report, which can be consulted or downloaded from the website for shareholders: www. loreal-finance.com L Oréal receives award for combating HIV/AIDS In May 2006 Sir Lindsay Owen-Jones, Chairman of L Oréal, received the prestigious Award for Excellence of the Global Business Coalition on HIV/AIDS for L Oréal s exemplary commitment to combating the disease. The award ceremony was held in London in the presence of the President of the European Commission, José Manuel Barroso. Each year these awards are given to the best initiatives against AIDS worldwide. L Oréal was given the award in recognition of its Hairdressers of the World against AIDS programme, carried out in partnership with UNESCO, which aims to raise HIV awareness amongst different sections of the population through prevention classes given by L Oréal during its hairdresser training programmes.

BRAND NEWS Our passion: continuously cre The Body Shop, a strategic acquisition for L Oréal Professional Products Division Matrix: Launch of a haircare line for men In June 2006, Matrix entered the rapidly growing men s grooming category with the launch of Matrix Men Style Control System in the USA and Canada. A cosmetics brand based on integrated retailing, The Body Shop operates more than 2,100 boutiques in 55 countries. It has just moved into two new markets with high potential: India and Russia. Naturally inspired, the new Face and Body line for sensitive skin, featuring fair trade Aloe Vera, illustrates the corporate culture and values on which The Body Shop is based. On July 24th 2006, L Oréal finalised the acquisition of The Body Shop, a naturally inspired cosmetics brand with extremely strong values embodied by the brand s founder Dame Anita Roddick. The Body Shop recorded sales of 630 million euros in fiscal year 2005-2006. With its outstanding retailing expertise, The Body Shop fits ideally into L Oréal s brand portfolio. The group will provide The Body Shop with the benefits of its international presence. Its research & development resources and its marketing know-how should enable the brand to enrich its product lines and speed up its growth. This acquisition thus unlocks strong value creation potential. Positioned towards the casual male, this innovative line of haircare and styling products is formulated with a patented Style Control Agent and Ener-G Complex to deliver salon exclusive style from the start. It provides quick-step solutions for everything from thinning to dandruff to style control. With easy-to-use products, compelling advertising, modern packaging, and a masculine fragrance, this collection has gained positive feedback from both stylists and consumers, effectively appealing to the casual style of the Matrix man. The international roll-out is coming in 2007. With The Body Shop, L Oréal is entering a new and rapidly growing segment positioned between mass-market and luxury products.

ating and reinventing beauty Consumer Products Division L Oréal Paris: Age Re-Perfect Pro-Calcium To meet the specific needs of very mature skin, L Oréal Paris launched in March 2006 Age Re-Perfect Pro-Calcium, its first facial skincare product for women over sixty. This new skincare product has been inspired by discoveries about the essential role played by calcium in the epidermis. Six months after its launch, it is one of the most successful products yet for L Oréal Paris Dermo Expertise: Age Re-Perfect Pro Calcium has become the top-selling mature skin product in Spain, France and Germany. In 2007, further launches will follow this daytime skincare, creating with Age Re- Perfect Pro-Calcium the number one line for women over sixty. Luxury Products Division Giorgio Armani: success for Armani Code Women Through his latest great success, Armani Code for women, Giorgio Armani has found the perfect expression of femininity across the brand. A modern elixir with a timeless elegance, this fragrance leaves a distinct, sophisticated and naturally sensual trail. Armani Code is dedicated to every elegant woman, whose magnetic charisma, obvious power and mystery are her personal means of seduction. Active Cosmetics Division La Roche-Posay: roll-out of anti-ageing line with Redermic Launched in April 2006 in the United States and Europe, Armani Code Women has already become one of the top ten fragrances worldwide. It is a top 5 fragrance in Germany, number 5 in the United States, number 5 in Italy, number 1 in Poland, and number 1 in the Czech Republic. The results are even more spectacular in the United Kingdom, where only two weeks after its launch at the end of August 2006, Armani Code Women has captured the number one position. It s just the beginning of a success story Recommended daily by more than 25,000 dermatologists worldwide, La Roche-Posay supports the growing trend for dermatology to encompass aesthetic considerations. In October 2005, the brand extended its antiageing offering with the launch of Redermic, a trailblazing anti-wrinkle product developed through research into scarring. In 2006, this innovative development enabled La Roche-Posay to record spectacular growth in value terms in the European anti-wrinkle market. Building on this success, the Redermic line is being enriched in the autumn of 2006 with an eye care product specially formulated for sensitive eyes.

INTERNATIONAL DEVELOPMENT Boosting our product offer the world over Garnier skincare aims to win over Chinese women Launched in May 2006 in some thirty Chinese cities, the products in Garnier s new skincare line are gradually being introduced throughout the country. This skincare line, particularly well suited to the expectations of Chinese women, consists of three main product lines, including the True White complexion unifier line which is proving a big hit. The internationally celebrated actress Zhang Ziyi has been chosen as the brand s ambassador. Already present in the country with its hair colourants, Garnier is hoping this launch will very significantly strengthen its positions in China in the largest market segment, that of mass-market skincare. La Roche-Posay, the number one partner of Brazilian dermatologists La Roche-Posay has just been designated the number one partner of the Brazilian Dermatology Society for the second year running. This is the culmination of several years of close collaboration with the whole dermatological profession and with pharmacists. The partnership is now leading to spectacular successes for the brand in sun protection products with the Anthelios line, and in the anti-wrinkle skincare market, where sales have grown by 50% since the launch of Redermic. Recognition from Brazilian dermatologists is helping strengthen the global ambitions of La Roche- Posay to become the number one dermatologist s brand. Kiehl s opens four new stores in Europe After conquering the cities of London and Hamburg, the New York cult brand Kiehl s Since 1851 has been substantially building up its positions in Europe with the opening of 4 new stores in 2006. New outlets have been opened in Madrid and Milan, and a second store has been added in Paris. Very soon they will be joined by another major city, when the brand arrives in Stockholm. Cultivating its singularity, Kiehl s has an extremely targeted retailing approach and locates its outlets in the most cosmopolitan districts. Faithful to the spirit of the legendary drugstore founded in New York in 1851, Kiehl s attaches great importance to the quality of the advice and service it provides, and carefully recreates the same universe in each of its stores: the famous vintage Harley Davidson, the baby wall and the gigantic crystal chandelier. Kiehl s success story continues around the world. The brand is fully playing its role as a growth relay. 5000th hair salon for Matrix in Russia Distributed in Russia for the past three years, the Matrix brand is now a partner of 5,000 hair salons throughout the country. Its development has been extremely rapid, reflecting the success of hair colourant formulas such as SoColor Beauty and Color Sync, rolled out in the Russian market in 2005. The brand s development has been backed up by an unprecedented effort in hairdresser training. Matrix is the number two brand of the Professional Products Division and its number one American brand. Its goal is to be present in all salons, including the smallest ones. The epic global story of Matrix continues. In the last five years, the brand has been launched in 30 countries. It is present in more than 250,000 hair salons today, including some 30,000 in the BRIC countries alone (Brazil, Russia, India and China), where it has been launched over the last 3 years.

l oréal AND ITS SHAREHOLDERS Financial information dedicated to shareholders L Oréal rewarded for its financial communication L Oréal has won t wo L Agefi awards in the Board composition and Quality and transparency of information a n d c o m m u n i c a t i o n categories. Furthermore, the loreal-finance. com website came second in the Grand Prix BoursoScan 2006, organised by Boursorama and the market research company TLB. The Annual General Meeting was also unanimously voted Best Annual General Meeting of the Year by a jury of investors, who acknowledged the clarity and quality of the information provided to shareholders. IFOP- INVESTIR survey L Oréal tops shareholder rankings In the Ifop- Investir survey of shareholders opinions about CAC 40 companies, L Oréal has been voted number one in all categories. L Oréal is thus the preferred share of all types of shareholders (including holders of portfolios smaller than 15,000 euros, and holders of portfolios larger than 75,000 euros). Furthermore, 91% of those questioned* consider that L Oréal offers potential for growth and improved profits, 52.75 53.45 85% believe that L Oréal has set out clear strategic priorities, and 87% think that L Oréal applies a good policy with regard to its shareholders. * The survey was carried out by Ifop for Investir Magazine (September-October 2006). A sample of 998 people, who are representative of the individual shareholder population, were questioned from August 30th to September 4th 2006. The questions on growth potential, clarity of strategy, and respect for shareholders amongst CAC 40 companies were submitted to one half of the sample group. L ORÉAL SHARE PRICE FROM SEPT. 2004 TO SEPT. 2006 54.40 55.90 56.75 59.15 61.40 55.60 59.45 59.35 65.10 64.10 64.45 61.35 61.30 62.80 66.10 74.25 73.60 73.50 68.75 73.85 78.45 80.10 80.10 Actionaria SHAREHOLDERS SHOW For the third year running, L Oréal will be taking part in the Actionaria show for shareholders, to be held on November 17th and 18th 2006 at the Palais des Congrès in Paris (Porte Maillot - 75017). We very much hope to see you there. Invitations can be requested by calling + 33 1 47 56 71 90. In 2005, some 2,000 of you visited our stand and met representatives of L Oréal. BOARD OF DIRECTORS The Board of Directors was saddened to learn, on August 10th 2006, of the death of Olivier Lecerf, who was a director from 1990 to 2004. L Oréal paid tribute to an efficient organiser, with a brilliant legal mind, and an excellent advisor, who was also a man of conviction with high moral values, and sincerely humanistic. L Oréal CAC 40 Sept. Oct. Nov. Dec. Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. March April May June July Aug. Sept. 2004 2005 2006 FINANCIAL INFORMATION CALENDAR 3 Friday 17th and Saturday 18th 2006 Actionaria Shareholders Show 3 Tuesday, December 5th 2006 Shareholder meeting in Toulouse 3 Tuesday, December 12th 2006 Shareholder meeting in Strasbourg 3 Thursday, February 15th 2007 Annual results release 3 Tuesday, April 24th 2007 Annual General Meeting of Shareholders at the Carrousel du Louvre in Paris Design: Euro RSCG C&O - Layout: SEITOSEI Registered in France as a Société Anonyme with registered capital of e127,913,682 632012100 RCS Paris NAF Code: 245 C ISIN Code: FR0000120321 Registered office: 14, rue Royale, 75008 Paris, France Headquarters: 41, rue Martre, 92117 Clichy, France Tel.: +33 1 40 14 80 50 Please contact: L Oréal, International Financial Information Department, 41, rue Martre, 92117 Clichy, France, or consult the Internet site http://www.loreal-finance.com, its Shareholder s Corner or the mobile website for PDA: loreal-finance.com mobile edition, or the website of the AMF, the French Market Authority: www.amf-france.org