2006 ANNUAL REPORT 06 - stockproinfostockproinfo.com/doc/2006/FR0000065484_20061231_US_1.pdf · This English version of the 2006 Annual Report is a translation of the original French

lectra

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Lectra is the world leader in integrated technology solutions (software, CAD/CAMequipment and associated services) dedicated to industrial users of textiles andleather. With a worldwide staff of 1,500, Lectra provides daily accompaniment tomore than 17,000 customers who are evolving around the world in diversifiedmarket sectors such as fashion (apparel, accessories, footwear), automotive (carseats and interiors, airbags), furniture, aeronautical and marine.In the fashion sector, Lectra’s domain of competencies covers the entire valuechain, from design to manufacturing to managing the collections lifecycle. In othersectors, its technologies cover the design and manufacturing of products,responding to the growing need for creativity, flexibility and productivity.Lectra’s strength lies in its passion for innovation and its expertise derived frommore than three decades of experience shared with its customers to help themovercome their challenges in an increasingly demanding world.Lectra is listed on the Euronext Paris stock exchange.

continuously reinventing

SHARE LISTING

Lectra shares are listed on the Eurolist (compartment B) of the Euronext Paris stock exchange.They figure among the French stocks making up the SBF 250, CAC Small90 and CAC Mid&Small190 of Euronext Paris. ICB sector: 9537 – SoftwareISIN code: FR 00000 65484Liquidity Provider: SG Securities (Société Générale) – Paris

FINANCIAL INFORMATION

Lectra’s financial statements are compliant with the International Financial Reporting Standards (IFRS) as adopted by the European Union.The company publishes its financial results quarterly.This English version of the 2006 Annual Report is a translation of the original French Annual Report prepared in the format currently adopted by French publicly-traded companies in accordance with French legal requirements.The following documents exist only in French: the parent company’s financial statements and notes for 2006, the Board of Directors’ report submitted to the Ordinary General Meeting of Shareholders of April 30, 2007, the Board of Directors’ special reports on stock options granted or exercised in 2006 and on the share-buyback program, the Board of Directors’ report to the Extraordinary General Meeting of Shareholders of April 30, 2007, the Statutory Auditors’general and special reports to the Ordinary General Meeting on the parent company, the Statutory Auditors’ special reports to the Extraordinary General Meeting of Shareholders of April 30, 2007 and the resolutions submitted to the Ordinary and Extraordinary General Meetings of April 30, 2007. Copies of these documents, as well as all financial information, are available on www.lectra.com, or by request from the InvestorRelations department.

2007 FINANCIAL CALENDAR

Publication of quarterly and annual financial results• First quarter 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 27, 2007• Second quarter 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 27, 2007• Third quarter 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 30, 2007• Full year 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 11, 2008(after the close of Euronext Paris)

Annual Meeting of Shareholders – Paris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 30, 2007

Analyst Conferences• Paris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 31, 2007• Paris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 12, 2008

The financial calendar is updated on www.lectra.com

ANALYST COVERAGE

Analysts from the following institutions have issued regular reports on the company’s performance: Berenberg Bank, Cheuvreux,Gilbert Dupont, IDMidcaps, IXIS Midcaps, SG Securities (Société Générale).

INVESTOR RELATIONS

email: [email protected]

www.lectra.com

Lectra is a French Société Anonyme with capital of €52,985,937RCS Paris B 300 702 305Registered office: 16-18, rue Chalgrin – 75016 Paris – FranceTel.: +33 (0) 1 53 64 42 00 – Fax: +33 (0) 1 53 64 43 12

Lectra would like to thank the following companies for their assistance in preparing this report:Laurent Van Der Stockt / Gamma – Hervé Lefebvre/ studio Twin.Design and production: Eurorscg C&O – impression SIRA.


interviews_P2

key figures_P8

growth accelerators_P10

core values_P12

overview_P14

significant events_P16

innovation_P17

markets_P24

stock performance_P36

financial report_P37

0703635_LECTRA_GB_RA2006.qxd 27/04/07 16:55 Page 1

performance

interview_

Lectra was expecting a rebound in 2006. Was this expectationdisappointed?

Daniel Harari. The upturn in new systems sales we were expecting in 2006 failed to materialize. We did take the precaution of writing that its timing and scale remained uncertain, as manufacturers were liable to remain hesitant for several months to come, and that’s what happened,unfortunately. On the other hand, we correctly forecasted that theagreements signed by China with Europe and the United States in 2005would open up new horizons for Chinese companies and encourage them to resume investing in technology.Lectra registered strong earnings growth and continued to improve its keyoperating ratios in 2006. At €216.1 million, revenues grew by only 3%, with a 1% increase for new systems sales (€116.2 million) and 6% forrecurring revenues (€99.9 million), for which our action plans have paidoff. However, income from operations before non-recurring items jumped90%, like-for-like, to €14.3 million. Our operating margin rose3.3 percentage points to 6.6%. Finally, free cash flow before non-recurringitems nearly doubled to €15.4 million, and our working capital requirementis now close to zero. After paying off in full our last three acquisitions, we find ourselves with €8.7 million in net cash. All these figures testify tothe company’s sound health even though new systems sales remained flat.

André Harari. Our growth driver, new systems sales, again faltered in 2006; but our performance indicates the considerable leverage we have in terms of future earnings, once the engine starts firing on all cylinders again.

Do these good financial results reflect Lectra’s sales performance?

Daniel Harari. Our sales performance was more mixed: there was a slight drop in aggregate orders, due to a decline in orders for CAD/CAMequipment, whereas orders for new software licenses rose. In the fashion market—which represents 58% of our revenues from newsystems sales—positive or negative changes were very small either way.The sharpest decline in orders for CAD/CAM equipment (–12%) came in the automotive, aeronautical and marine markets, which account for 34%of our revenues from new systems sales. This was due to the difficultiesexperienced by certain major American and European manufacturers,which in turn had an impact on the investments of equipmentmanufacturers. On the other hand, the furniture market was more dynamic,with orders up 14%.

Do these differences show up in the geographic market breakdown?

Daniel Harari. Unevenly, yes. Despite the reluctance to invest in certaindeveloping countries, the Asia-Pacific region, where price pressures were especially strong, registered 14% growth thanks to a 46% rebound in China. At the same time, falling automotive market sales did not preventNorth America from posting a slight increase. Orders fell by 9% on averagein Europe, but locally the situation was highly contrasted: Italy grew by a remarkable 20%, whereas Northern Europe had a more moderate growth,France was stable, and other countries declined.

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Will Lectra adjust its strategy in response to these conditions?

André Harari. Definitely not, quitethe reverse in fact. Lectra owes itsresilience to three fundamentalcharacteristics, which are part of itsDNA: its long-term vision, itsdetermination, and its ability toadapt. As we have said on manyoccasions, our strategy is to act as a relational value player.Relational because we maintainlong-term relationships with ourcustomers, helping them to manageand develop their installed base and supporting their strategy. Value because we help themovercome their challenges

and create value by improving their productivity, flexibility and competitiveness. That’s why Lectra has neverallowed itself to be dragged into a price war. On the contrary, it hasstriven to promote its value-addedproposition and bolster itstechnological leadership. We remain convinced that ourcustomers will of necessity seek to acquire leading-edge technologiesin order to prevail in the radicalchanges now taking place.That’s also why we have acceleratedour company’s transformation, aswe explained last year, and steppedup our investments in people,

technologies and infrastructures forour customers. We have confirmedour global leadership, and ourmanagement team is now morecommitted and motivated than everto successfully implement ourstrategy.

You insist a great deal on Lectra’stransformation. What does thatinvolve?

André Harari. We have threeobjectives: to adapt our company to the major changes taking placein our markets, to become morecompetitive, and to concentrate our resources in order to fulfill our growth potential.

We are continuing to drive Lectra’soffering in the direction of greateradded value, from systems to solutions, and from solutions to projects. This evolution demandsnew competencies and a neworganization, and Lectra preparedfor this in 2005 and 2006. We have reallocated our resourcesand implemented an aggressiverecruitment policy. As a result, 14% of our current team membersjoined us in 2006. We haverenewed our management team in the United States, and it is now running all our activitiesthroughout the Americas. Also, we have combined our globalautomotive, aeronautical andmarine market activities in a singlemanagement team.We have overhauled our informationsystems and supported thecompany's change process by enriching our training programs,in order to develop our sales teams’business and solutions expertise. The result is a leaner “new Lectra,”more compact, more project-oriented, even closer to its customers and with greaterexpertise in their businesses, able to offer solutions that are moreand more intelligent.

strategy

>DANIEL HARARI

CHIEF EXECUTIVE OFFICER


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interview_

What role does innovation play in Lectra's strategy?

Daniel Harari. Obviously it plays a central role. Lectra is a technology company first and foremost, driven by the spirit of innovation. We have investednearly €80 million in research and development in the past five years, and we plan to increasethis spending in order to anticipate our markets' demands. In the fashion sector, the answerlies in highly innovativetechnologies such as 3D, and Web-based information sharing among dispersed players,to create a virtual collaborativecommunity that abolishes frontiers.In the automotive industry, the only way manufacturers can hope to emerge from the crisisand strengthen their competitiveadvantage is by diversifying theirproduct offering and modernizingtheir production. Hence the need for additional creativity, flexibilityand productivity.

André Harari. Never in the past10 years has Lectra announced as many innovations as at LectraWorld 2007, which just took placein Bordeaux before more than1,000 employees and650 customers, leading figures inour various markets, and journalistsfrom all over the world. Examplesinclude the new generation Vector

automated cutting machines, which are more powerful and moreintelligent; the Modaris 3D Fit

3D virtual prototyping softwareapplication; the Easy Grading

automated grading software

application; the new Kaledo designsoftware offering; and, of course,the new version of Lectra Fashion

PLM. Lectra World 2007 willcontinue in Shanghai at the end of March, and be followed byevents in several other countries.

Hasn’t PLM been slow in takingoff?

Daniel Harari. Yes, PLM projectstake time, because they arecomplex and large-scale, reachingright into the heart of a customercompany’s strategy and processes.They involve large numbers of experts and require long-termattention. But we have reasons

to be confident. The first, as notedby the experts at AMR Research, is that 35% of fashion companiesplan to deploy a PLM solution in the next two years. The second is that none of the world's very largesoftware developers competingagainst us is capable of supplying a fully-dedicated solution,capitalizing on 30 years of experience in our customers’businesses, and based onintegrated design-to-manufacturingapplications, enabling users to manage virtual collections. We did sign a certain number of projects in 2006, and we haveseveral others in the pipeline.

PLM is one of Lectra’s five growth accelerators. What's thestatus of the others?

André Harari. The major automotivemanufacturers, with whom we plan to expand our business, will inevitably be reviving theirinvestment in automated cuttingsystems such as our newVectorAutoMX9, launched at LectraWorld 2007. We have alsostrengthened our technologicalleadership in laser airbag cuttingsystems, where we now haveapproximately 80% of the market.In China, where experts agree that 50% of the world's clothing willbe manufactured in 2010,

>ANDRÉ HARARI

CHAIRMAN OF THE BOARD OF DIRECTORS


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technology investment will be a key to competitiveness againstboth domestic competition and competition from other Asiancountries with lower labor costs.Our goal is to increase our revenuesthere to over $50 million in 2010—more than double the 2006figure—by capitalizing on themomentum regained in 2006, more than 20 years of presence inthat country, and our new technologyoffering, which is perfectly adaptedto all the business models developedby Chinese companies.In the United States we have sufferedfrom our own weaknesses; but we now have a team that isready to move forward. Many U.S.brands and labels are equipped with our design solutions for fashion,and major companies have an interest in our PLM offering. The automotive industry is still verypowerful there too. Finally, theUnited States offers us the prospect of high-volume trans-national sales.Our aim is to double our revenuesthere to over $100 million in 2010.Then there is our installed customerbase: the launch of our newtechnology solutions and our newoffering of associated services are strong incentives to upgrade.This is probably the most powerfulof our five growth accelerators.

So there is every reason for confidence in the future?

Daniel Harari. Yes. Sales activity may be temporarily unsettled by product launches in the first half of 2007, resulting in a decline in orders, revenues, earnings and free cash flow—particularly in the firstquarter. In addition, if the U.S. dollar remains where it is today, this will have a negative impact of around 2% on 2007 revenues, and an impact of around €2.7 million on income from operations relative to the average 2006 parity. In addition, we have budgeted for an increase of around 10% in fixedoverheads—an entrepreneurial decision reflecting our determination to accelerate our investments in growth for the future. Given all that, we expect revenues of between €220 and €235 million, an increase of 4% to 11%, like-for-like, while income from operations excluding non-recurring items should come to between €11.5 and €16.5 million, a rise of between 0 and 43%.

André Harari. Our confidence in the future is visible in the confirmation of our growth objectives for 2009,with revenues of €300 million and an operating margin of 15%, based on an average parity of $1.25 to the euro, as we had assumed last year. We enter this new period with a stronger management team, new competencies, and a determination to provide our customers with a technology offering thatincorporates greater intelligence, more day-to-day services, and more value in their operations. We havesolid grounds for confidence: the markets we serve have a strong demand for technology; our new,enriched offering is highly competitive and more responsive than ever to their demands; and our financialfundamentals have been further strengthened, allowing us to expect the resumption of investment and profitfully from it when it comes.

2009 objectives


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interview_

Human resources is one of the levers for transforming a company. What role did it play in 2006?

It played a key role, essentially in three areas: streamlining our organization, recruitment, and skills management. Comingafter the reorganization measures of 2005, we have concentrated our research teams in Bordeaux and strengthened them with40 additional engineers, mainlydedicated to PLM and design for the fashion market. We have seizedevery opportunity to offer ourcustomers access to best-of-breedprofessionals. That includes seniorsales people with long experienceselling projects at major softwaredevelopers, along with experts and consultants. Some 20 peoplewith expertise in our customers’businesses have joined our PLMsales and consulting teams, whichnow comprise more than 80 peopleat headquarters and in oursubsidiaries. And we have rebuilt a highly capable management teamin the United States.

Do you plan to continue this recruitment effort?

Yes, we’ve got to go on doing so in the United States, Germany and Eastern Europe, as well as in Asia—China first and foremost.In these last two regions, ourpriority is to hire additional seniorsales people with an understandingof our major customers’ businessesand our own value-added, service-based sales strategy. Finally, weplan to bolster our marketing teams.In the first place we will berecruiting a Chief Marketing Officerwhose mission will be to roll out ournew technology offering andquicken our growth momentum.

Have you backed up theseinitiatives with a training policy?

Naturally, that has been one of our priorities. Our teams need to master the trends in themarketplace, our customers’businesses, and new technologies.The Lectra Academy provides a steady stream of trainingprograms to help them stay currenton these trends and offers themhigh quality advice and support. We organized more than 3,000training days in 2006. In 2007,

continuing the company’stransformation

we will be arranging still moreeffective programs, leading to certification, guaranteeing thequality of the knowledge and skillsacquired. All our managers will receive training in 2007, and they will be responsible forcontinuously adapting our methodsto the challenges of their respectivemarkets. For Lectra, training is and always will be a powerfulmeans to ensure that eachindividual stays effective, flexibleand motivated throughout his or her career.

Does the company’stransformation extend to internalprocesses as well?

Yes, this is a long-haul effort, whichstarted two years ago with our Elios

global IT systems overhaul project.We have kept the best of theexisting systems while rethinkingour processes and deploying thelatest generation of Oracle solutionsto support them. Using a commoninterface, Elios covers all our business processes, from marketing and sales topurchasing, logistics, accounting,business management andservices, etc. It came on stream in January 2007 and will be fullydeployed in 2008. We expect it to improve visibility over our business activity, optimize our processes, speed decisionmaking, enhance internal and external communication, and generate more reliable data.

VÉRONIQUE ZOCCOLETTODIRECTOR OF HUMAN RESOURCES,ORGANIZATION AND INFORMATION SYSTEMS,MEMBER OF THE EXECUTIVE COMMITTEE

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Lectra’s income from operations increased by €6 million in 2006 compared to a €5 million rise in revenues. How do you account for this?

That’s the virtuous side of our business model. It’s based on several components. First, the structure of revenues, with its balance between new systems sales—our growthdriver—and recurring revenues—a stabilizing factor. The gross margin generated from our recurring revenuescovers 65% of fixed overheads, including R&D expenditure.Then there is the evolution of our product mix, which ismoving toward a higher value-added offering, with moreexpert software and consulting. Finally, there is the steadyimprovement in our margins.

Lectra again generated substantial free cash flow in 2006.Was this a cyclical performance?

Our sales terms and conditions, i.e., the combination of down payments, short payment times and secured payments all help generate free cash flow in excess of net income. In that sense, 2006 was an especially good year, with a freecash flow of €15.4 million excluding non-recurring items, for a net income of €12.1 million. There is nothing cyclicalabout this performance: cumulative free cash flow for the past five years comes to €73.5 million, nearly double the cumulative net income, allowing us to finance our three most recent acquisitions in full. Through stringentmanagement we have sharply reduced our working capital to close to zero.

What conclusion do you draw from the above for the future?

First, that the improvement in our key ratios is structural. Our financial fundamentals are especially solid, with€72 million in stockholders’ equity, just €1.3 million in netfinancial debt, and €10 million in cash and cash equivalents.Second, and surely this is the most important from a financialstandpoint, our business model offers excellent potential: for every additional million euros in revenues from newsystems sales, Lectra registers €0.45 million in additionalincome from operations. In other words, growth in newsystems sales acts as a powerful lever for our operatingprofitability.

Would you say Lectra’s management culture is a managerial one or an entrepreneurial one?

I don’t believe that the two cultures are mutually exclusive; on the contrary, the combination of both is a source of strength for us. There are times in a company’s lifecyclewhen you need to be more cautious and attentive to your key ratios, squeezing costs, and there are other times when it’s necessary to forge ahead. Lectra first reinvented its offering between 1993 and 1996, at a difficult time in the company’s history, before going on to make its first acquisitions in 1998-2000. From 2001 to 2006, a managerial approach was needed. But that didn’t preventus from acquiring three companies in 2004, investing heavilyin R&D, and reinventing our entire offering. In 2007 and goingforward, Lectra plans to be resolutely entrepreneurial. Wefirmly believe we are entering a new phase, one that offerssignificant potential for organic growth. You can’t be highlysuccessful without a bold entrepreneurial spirit—and that’sembedded in Lectra’s DNA.

JÉRÔME VIALA CHIEF FINANCIAL OFFICER,MEMBER OF THEEXECUTIVE COMMITTEE

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a virtuous business model


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key figures_

185.1 184.7208.5 211.2 216.1

REVENUES(in millions of euros)

•New systems

•Recurring revenues

05040302 06

FINANCIAL HIGHLIGHTS

in millions of euros (1) 2006 2005 2004 2003 2002

Revenues 216.1 211.2 208.5 184.7 185.1

Income (loss) from operations beforenon-recurring items (2) 14.3 8.1 10.7 11.1 7.2

Income (loss) from operations (2) 14.1 (11.1) 7.4 10.4 5.8

Net income (loss) before non-recurring items (2) 12.5 6.6 6.1 7.4 3.6

Net income (loss) (2) 12.1 (12.3) 6.1 7.4 3.6

Free cash flow before non-recurring items (3) 15.4 8.3 16.1 13.4 20.3

Free cash flow after non-recurring items (3) 5.7 7.6 16.1 13.4 20.3

Stockholders’ equity (4) 72.2 67.0 86.4 82.7 73.0

Net cash (4) 8.7 10.2 19.4 52.4 35.2

Research & development 18.7 18.5 14.9 14.0 13.7

Capital expenditure 9.5 5.7 4.2 3.4 3.1

Number of employees (4) 1,496 1,532 1,500 1,295 1,356

(1) Except for earnings per common share. The figures for 2002 to 2004 have not been restated to reflect the impact ofIFRS 2 (stock option plans) and IFRS 3 (goodwill) standards which have been in force as of January 1, 2005 and April 1,2004, respectively.

(2) In 2006, the company booked €1.2 million in non-recurring expenses related to the arbitration procedure againstInduyco, and a non-recurring profit of €1 million as a result of a settlement with a supplier. In 2005, the company booked€9.1 million in non-recurring expenses related to restructuring measures and non-recurring income of €1.8 million,and wrote down Investronica's goodwill by €11.9 million.(3) In 2006, the company booked €9.7 million in net non-recurring charges (of which €8.4 million correspond tocharges for which allowance had been made in 2005). In 2005, net non-recurring charges totaled €0.7 million.

(4) At December 31.

REVENUES

By type of businessSoftware 28%CAD/CAM equipment 33%Services 38%Miscellaneous 1%

By regionEurope 56%North America 18%Asia-Pacific 18%Other countries 8%

By market *Fashion (apparel, accessories, footwear) 58%Automotive, aeronautical, marine 34%Furniture 8%

* Revenues from new systems sales


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STOCKHOLDERS’ EQUITY(in millions of euros)

05040302 06

73.0

82.786.4

67.072.2

05040302 06

7.2

11.1 10.78.1*

14.3*

INCOME FROM OPERATIONS*(in millions of euros)*Before non-recurring items.

05040302 06

20.3

13.4

16.1

8.3*

15.4*

FREE CASH FLOW*(in millions of euros)Free cash flow is equal to net cash provided byoperating activities, minus cash used in investingactivities – excluding cash used for acquisitions of companies (net of cash acquired).*Before non-recurring items.

0605040302

35.2

52.4

19.4

10.2 8.7

NET CASH(in millions of euros)After full payment for Investronica, Lacent and Humantec.

0605040302

13.7 14.014.9

18.5 18.7

RESEARCH AND DEVELOPMENT(in millions of euros)

0605040302

3.1

5.7

3.44.2

5.7

9.5

CAPITAL EXPENDITURE(in millions of euros)

•Other investments

•Mangement information systems- Yearly depreciation and amortization

4.64.3 4.1

3.4


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overview_

5 growth accelerators

Technology, the only solution to the crisis

The crisis currently faced by some American and Europeanauto makers results in significant cost pressure and growingdemands for equipment makers to deliver greater creativity,quality and production flexibility in order to meet the needs of consumers. Hence the interest generated by Lectra’stechnologies. The association of DesignConcept Auto, the car seat development software application, and the new VectorAuto MX9 automated cutter, gives them the means withwhich to respond to the expectations of a market in constantevolution, and to an accelerating pace of launching new modelsas well as multiplying variants, for which traditional die-cuttingmethods no longer provide an adequate response. In addition,Lectra holds an 80% share of the automated airbag cuttingmarket, thanks to its Focus laser cutters; the growing numberof airbags found in a vehicle and their increasing volume,combined with Lectra’s advanced technology developed withthe industry’s major players, has made the automotive sectorone of Lectra’s growth accelerators.

automotive

ROY SHURLINGDIRECTOR,WORLDWIDEAUTOMOTIVE &TRANSPORTATIONMARKETS

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BERNARD KARMINDIRECTOR, LECTRA FRANCE

FABIO CANALIDIRECTOR, LECTRA ITALY

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<A significant growth reserve

The continuous improvements toLectra’s technologies in responseto the needs of its 17,000customers makes the installedcustomer base the company’s mostnatural and most powerful growthaccelerator. Indicative of itsstrategic desire to be a relational

value player, this potential is basedon the company’s long-termrelationships with customers. Theevolution of their software to thelatest expert versions, the renewal

of their equipment in order tobenefit from the latest innovations,and training and consultingenhance the performance of customers’ software andequipment to meet their needs.Finally, high value-added servicecontracts and sales of spare partsand consumables constitute the lastaspect of this win-win relationship,contributing to a growing share of business volume and thestrengthening, year after year, of the company’s business model.

installed customer base


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PASCAL DENIZARTDIRECTOR, PLM

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plmAn emerging market with exponential growth potential

Globalization of the fashion industriesand the acceleration of collectionscycles have created the need toaccelerate product development and tobring together, in a virtual environment,participants who are increasinglydispersed geographically. PLMsoftware applications—now beingconsidered by most major globalbrands, even if the number ofconcluded projects on a global scaleremains limited—respond to theseneeds. But PLM can only besuccessfully implemented if itintegrates all software applications that cover the entire value chain topermit the design, development andmanagement of completely virtualcollections through a continuouscollaboration on a worldwide scale.With Lectra Fashion PLM and itsdedicated R&D and consulting teams,Lectra’s ambition is clear: to occupythe position of leader.

chinaFaced with two major challenges

The first challenge for Chinese industrialists is to respond to the demands of their contractorsby improving their productivity, quality, andincreasingly, their flexibility—all without losingcompetitiveness in order to resist pressure fromcountries in which labor costs are even lower.The second challenge is to move beyond theirsub-contractor status to become creators ofbrands for their enormous domestic market, and to cover the entire collections cycle. Lectra’sgrowth in China is driven by its capacity torespond to both challenges. First, with the newgeneration of more powerful, more flexibleVector cutters, along with associated servicesthat are increasingly in demand—a testament tothe growing desire among Chinese industrialiststo optimize their production tools; secondly, with its fashion-dedicated design solutions andspecialized software applications, in particular,the most advanced versions of Lectra’srenowned applications, Modaris Expert andDiamino Expert.

A goal of leadership in all market sectors

Making Lectra theundisputed leader in allmarket sectors—fashionwith, among others, designand PLM, as well asautomotive, aeronautical,and furniture—is within thegrasp of the new Americanteam. Lectra enjoys a strongtechnological advance overits historical CAD/CAMcompetitor, which is the fruitof unequalled R&Dinvestment and a value-added services organization.Regarding its new PLMcompetitors, the companycan promote the advantagesof a solution entirelydedicated to fashion,supported by an intimateknowledge of the fashion

businesses and theintegration of design andproduct developmentapplications. Newmanagement and a renewedsales culture andmethodology allow Lectra to draw on the immensecapacity of American

companies, both in the United States andthroughout the world. Theleveraging effect of theirinfluence over their sub-contractors also presentsLectra with the opportunityfor a large volume of trans-national activities.

the united states

DAVID RODEDIRECTOR,

LECTRAAMERICAS

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HARVEY TSENGDIRECTOR, GREATER CHINA

<

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JAVIER GARCIASALES DIRECTOR,GREATER CHINA


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overview_

5 core values

As the world leader, Lectra has alwaysstrived to be the best.

This state of mind is shared by all teams,guiding relationships with customers andattitudes toward competitors: because aleader cannot rest on its laurels and becauseit also has a responsibility to lead the way, to anticipate the needs of its customers andto offer solutions to ensure their growth.

leadership

Lectra constructs long-termrelationships with itscustomers based on trust,because only partnershipsbuilt on such a foundation can create value.

Lectra realizes that the key to its success is based on itscapacity to fully serve theirinterests, and that their loyaltyis founded on the quality andreactivity of its collaborators.This mutual loyalty, growing

stronger each day, is a sourceof pride for the company.Customer satisfaction is theresult of the quality of Lectra’sproducts and the added valueof its services, of a strongpersonal relationship and totalcommitment to the end. It isalso the result of workingproximity and rapid reaction,thanks to worldwide sales andservices teams that intervene in the field or remotely.

customer care


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Beyond technologicalresearch, Lectra considersinnovation as a globalundertaking and has made its pursuit the driver of its business model and competitiveness.

Lectra has always had a front-runner mentality. The improvement of today’s

technologies and thedevelopment of those of the future are the fruit of its capacity to anticipate. Lectra teams have theknowledge to analyzecustomers’ challenges, identifytheir needs, accompany their changes and provide themwith innovative solutions.

entrepreneurshipMore than 30 years after its creation, Lectra has preserved its fundamentally entrepreneurial spirit.

It maintains its capacity to grasp opportunities, to make decisions, and toinitiate new projects, coupled with a team spirit that transcends geographic andcultural barriers, and an acute sense of personal responsibility and initiative.“Continuously reinventing Lectra” to create a leaner, more responsive, moreefficient company is the cornerstone of the company’s policy.

excellenceAt Lectra, the quest for excellence in all domains is a permanent objective, both individually and collectively.

It entails a constant search for the highestquality, the implementation of best practices,benefiting from the daily involvement andmotivation of all of its team members. These are the ingredients required to bring eachproject to a successful conclusion and to satisfyall of the company’s business partners.

innovation


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overview_

17,000 customersACE Style • Adolfo Domínguez • American Leather • Armani • Ashley Furniture •ASICS • Autoliv • Azimut • B&B Italia • Benetton • BMW • BST • Canali • CenturyFurniture • Cessna Aircraft Company • Chantelle • Christian Dior • Corneliani •DaimlerChrysler • De Coro • De Sede • Debenhams • Décathlon • Devanlay Lacoste• DFS • Diesel • Dolce & Gabbana • EADS • Embraer • Ermenegildo Zegna • Esprit • Faurecia • Fendi • Ferrari • Fruit of the Loom • Gamesa • Givenchy • GKN •H&M • Hanesbrands • Haworth • Hempel • Hermès • Himolla • JC Penney• Johnson Controls • Kenzo • La Perla • La-Z-Boy • Lear • Limited Brands •Lise Charmel • Liz Claiborne • Loewe • Louis Vuitton • Malwee • Mango • Marks & Spencer • Molteni • Mulberry • Prada • Pungkook • Renault F1 • Rolf Benz• Rolls-Royce • Rossi Moda • Russell • Safety Components • Samsonite • Sears, Roebuck & Co. • Sociedad Textil Lonia • Target • The Children’s Place •Toyota Boshoku • TRW • Versace (Alias Ittierre) • Vestebene • Wal-Mart • Youngone• Yves Saint Laurent • Zannier • Zodiac...

In addition to offering internships and recruiting new graduates, which has always been at the heart of its human resources strategy, Lectra supports educationby offering the use of its applied technologies and all of its expertise to help professors integrate them into academic curricula for students at more than660 fashion-dedicated schools and universities around the world. In 2007, a new partnership policy was launched to reinforce Lectra’s support for tomorrow’sfashion professionals. The policy’s goal is to allow educators to remain permanently on the cutting edge of technology, to promote rich exchanges with Lectraexperts, and to offer their students the opportunity to acquire practical knowledge of the business world. Among other advantages, students can benefit frominternships at Lectra—with its R&D, marketing and solutions experts teams, either in their home countries or abroad—or participate at seminars and receivesponsoring support for their end-of-study projects. Agreements are currently being concluded with some of the most prestigious fashion and design institutionsin the United Kingdom, France, China and the United States, with more to follow in other countries.

A WORLDWIDE EDUCATION PARTNER


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a trans-nationalcompany

Thanks to its unequalled international network, Lectra is the privileged partner of major global brands and industrialists with whom it shares a common vision of the markets, accompanying them wherever they are present, in Europe, the Americas, Asia, or elsewhere.

1,500 collaborators, including 850 in 30 international subsidiaries.

More than 90% of revenues are generated directly, and 90% outside of France.

Lectra teams are both multidisciplinary and multicultural, comprising more than 50 nationalities.

5 International Call Centers in Bordeaux (France), Atlanta (United States), Shanghai (China),Milan (Italy) and Madrid (Spain); 90 Lectra experts, intervening remotely via the Internet,ensure permanent technical support.

The Lectra International Technology and Conference Center, recently inaugurated in Bordeaux (France), and 4 Advanced International Technology Centers in Atlanta(United States), Mexico City (Mexico), Shanghai (China) and Istanbul (Turkey) present theentire range of Lectra technologies.

More than 75,000 software licenses, 15,000 plotters and 6,000 automated spreaders and cutters are in service around the world.


lectra partners with microsoftfor the worldwide launch of windows vistainauguration of the lectrainternational technology and conference centerlectra world 2007

significant events_

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Microsoft associated Lectra with theworldwide launch of its new operating systemon November 30, 2006. With Kaledo 3D Trend,developed in Windows Vista, Lectra enters a new phase in the universe of fashiondesigners by offering them a design softwareapplication that is perfectly adapted to theirmode of artistic expression, enabling themto create and animate trend boards in a three-

dimensional universe by adjusting styles withother multimedia components such as soundor video. Technology becomes transparent in the service of creative freedom. Lectra wasthe sole French company of the 16 worldwidecompanies selected by Microsoft to appear on its Vista demonstration Web site.

Lectra World 2007 welcomed more than 1,000Lectra team members and 650 customers,institutional representatives and journalists fromaround the world at the beginning of the year.Lectra World 2007 will continue in Shanghai atthe end of March, and be followed by events inseveral other countries. A series of exceptionalgatherings—the last World Congress tookplace in 1996—it enabled attendees todiscover today’s Lectra, with its passionateteams, a world of technological innovations the likes of which a company rarely proposesto its customers, and more day-to-day services.Invited guests shared their vision of the benefitsbrought by Lectra’s new technologies to overcome new challenges throughroundtable discussions, customer testimonialsand interventions by experts, as well asdemonstrations of the new product offering.

The Lectra International Technology and Conference Center was inaugurated onJanuary 31, 2007. The company’s Bordeaux-Cestas site is now much more than a windowon Lectra; it is in fact a genuine technologyvillage entirely dedicated to customers. The 4,500 square-meter facility regroupsdemonstration centers for all Lectratechnologies, each dedicated to a specificmarket sector (fashion, automotive andtransportation, furniture) where customerscan test products under their own productionconditions, as well as a 100-seat auditoriumwith simultaneous translation, roomsdedicated to training customer teams, and the company’s main International Call Center which visitors can see in action,side by side with Lectra experts.


Lectra’s passion for innovation drives thecompany to place all its expertise in theservice of a single objective: to accom-pany its customers in an increasinglydemanding world that ignores nationalboundaries, in which competition exertsconstant pressure on prices, productionrhythms and creativity. 2007 began withseveral exceptional innovations, includingthe new design offering; 3D pattern-mak-ing and virtual prototyping software appli-cations for apparel, footwear, automotiveand furniture; PLM; and a new generationof automated cutting systems. Theseinnovations are the result of a constantanticipation of the market’s evolving needsand shared experience with customers.

17

Lectra’s passion for innovation drives thecompany to place all its expertise in theservice of a single objective: to accom-pany its customers in an increasinglydemanding world that ignores nationalboundaries, in which competition exertsconstant pressure on prices, productionrhythms and creativity. 2007 began withseveral exceptional innovations, includingthe new design offering; 3D pattern-mak-ing and virtual prototyping software appli-cations for apparel, footwear, automotiveand furniture; PLM; and a new generationof automated cutting systems. Theseinnovations are the result of a constantanticipation of the market’s evolving needsand shared experience with customers.


KALEDOLIBERATING INSPIRATION AND IMAGINATION

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from design to PLM,collaboration to optimize processes

innovation_

MODARIS 3D FIT GIVES VIRTUAL PROTOTYPING ITS TRUE DIMENSIONWITH THE POWER OF MODARIS 3D FIT, PATTERN MAKERS CAN PASS FROM 2D TO 3D TO CONTROL THE QUALITY OF PATTERNS, MAKENECESSARY ADJUSTMENTS AND VALIDATE STYLES, INCLUDING THE PROPER FIT OF A MODEL AND THE HANG OF A GARMENT DIRECTLY ON A VIRTUAL MANNEQUIN, AND ALSO MAKE VARIATIONS TO MATERIALS AND MOTIFS. LIBERATED FROM PHYSICAL CONSTRAINTS, THE PROTOTYPE RESPONDS TO ALL DEMANDS AND PERMITS THE SAVING OF PRECIOUS TIME AND COSTS. PARTICULARLY INNOVATIVE, THE EASY GRADING AUTOMATED GRADING SOFTWARE APPLICATION ALLOWS EACH CUSTOMER TO INSTANTLY APPLY HIS OWNMEASUREMENT CHARTS TO GENERATE ALL THE SIZES OF A COLLECTION.

<


19

LECTRA FASHION PLMDEVELOPING AND MANAGING ENTIRELYVIRTUAL COLLECTIONS

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innovation_

LIBERATING DESIGNERS’ CREATIVITY

The new range of Kaledo design software applications—includ-ing Kaledo Collection for fashion design, three textile designapplications for printed fabric, wovens with motifs, and knits,and a color management application—provides designers withthe highly visual, virtual environment they’ve been waiting for tocreate garment collections. It liberates the inspiration and imag-ination of designers and gives them back the freedom and timethey need to test multiple creative hypotheses, while integratingtheir models very early in the collections development process.Kaledo enables companies to strengthen their brand identity andmeet customer expectations. It rationalizes processes, auto-mates repetitive tasks and design updates, and provides high-performance design tools. Permanent collaboration makesinformation exchange more fluid and reliable, and shortensvalidation time.

LECTRA FASHION PLM, A LEAP FORWARD

Lectra Fashion PLM allows companies to simultaneously man-age and execute processes of design, line planning, productdevelopment and pattern making, sourcing, and marketing. Byeliminating geographical boundaries, it enables the collabora-tion of teams separated by thousands of miles and protectscommunications against subjective interpretations of informa-tion. It unites all collaborators in a vir tual online community,allowing them to share a common vision. Through entirely vir-tual materials, products and collections, it makes it possible tomultiply realistic simulations of items and collection plans,reducing the number of physical prototypes needed. Lectra

Fashion PLM facilitates decision making thanks to its manage-ment dashboards and performance indicators which are indis-pensable to the piloting of collections development. Lectra’ssoftware applications for design, pattern making and 3D virtualprototyping constitute the most complete, integrated solutionon the market.


DESIGNCONCEPT FURNITURE A MAJOR COMPETITIVE ADVANTAGE FORUPHOLSTERED FURNITURE DESIGNERS

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FOR THE FURNITURE AS WELL AS THE AUTOMOTIVE INDUSTRIES, LECTRA’S 3D VIRTUALPROTOTYPING SOFTWARE APPLICATIONS ENABLE DEVELOPERS TO EXPLORE A MULTITUDE OF CREATIVE PATHS AND TO SAVE TIME WHILE INTEGRATING THE SPECIFICITIES OF ALL MATERIALSAND MANUFACTURING CONSTRAINTS TO ENSURE THE QUALITY OF FINISHED PRODUCTS.

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innovation_


ROMANSCAD 3DREDUCES DESIGN-TO-PROTOTYPE TIME FROM TWO WEEKS TO JUST A FEW HOURS

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DESIGNCONCEPT AUTOREDUCES THE OVERALL CYCLE OF DESIGNING NEW MODELS

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A NEW SERVICES OFFERING ADAPTED TO THE NEEDS OF EACH CUSTOMER Consulting and technical support are designed to improve the reliability of systems installed at customer sites and the quality of theirproduction, to improve the efficiency of organization and resource utilization, accelerate return on investment, and improve control overmaintenance budgets. Lectra offers the best of its expertise by proposing four complete lines of services dedicated to its CAD/CAM equipment,which are adapted to the needs of customers according to their resources and technological mastery as well as their preferences to externalizeor integrate maintenance operations.

PERMANENTLY MONITORING SYSTEMS The market’s largest R&D team, enriched with three decades of experience, ensures regular software updates and develops new versions thatintegrate its latest technological advances. Lectra’s International Call Center experts respond remotely to all demands, helping to prevent orresolve technical problems and optimize the utilization of software and equipment. In the field, close to customers’ design or productionfacilities, Lectra technicians intervene to advise and support them in the maintenance of their solutions.

SHARING EXPERTISE Consulting and training teams ensure customers with perfect integration of their Lectra solutions. Combining product knowledge and expertisein customers’ businesses, they provide thorough audits and propose concrete solutions, accompanying customers’ organizational andprocess changes with rigorous project management and assuring the training of users within adapted training programs. For Lectra Fashion

PLM projects, consultants and project managers analyze the customer’s product development cycles and synchronize them with the project.They respect the constraints and delays involved in ongoing collections projects, and take into account the organizational maturity as well asthe information technology configuration of the company. Once the implementation is completed, Lectra transfers to the customer teams allthe competencies necessary to ensure the continuing success of the project.

ASSOCIATED SERVICES, SECURITY AND PERFORMANCE

innovation_


<

1,800 PAIRS OF JEANSCUT PER HOUR: A PRODUCTIVITY RECORD

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A NEW GENERATION OF AUTOMATED CUTTERSFOR EACH MARKET SECTOR:VECTORFASHION, VECTORLINGERIE,VECTORDENIM, VECTORAUTO, VECTORTECHTEX,VECTORFURNITURE

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innovation_

The new generation Vectorpower and intelligence


NEW CUTTING HEADS: A CONCENTRATION OF INNOVATIONFOR MAXIMUM PERFORMANCE

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D

IRREPROACHABLE CUTTING QUALITYFOR UP TO 9 CENTIMETERS OF COMPRESSED FABRIC

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THREE COMPLETE LINES Dedicated to high-volume production, the Vector MH and MH8 offer significant cutting height, enabling the treatment of an additional 14%of compressed fabric. The FX series, with its rapid cutting speed for compressed fabric spreads of lesser height, is dedicated to small-series production. As for the MX line, it is two times faster than competing cutters, on compressed fabric spreads up to 9 centimeters thick.The Vector M88 and FP, conceived on the same platform, render the quality and power of Lectra technologies accessible to markets inneed of fewer functionalities.

GREATER PRECISION AND SPEED The piloting software of the new generation Vector enables irreproachable results with data from Lectra software as well as those fromcompetitor CAD systems. The system’s embedded intelligence takes into account the complexity of tangent pieces to be cut in order toimprove both quality and fabric consumption, thereby reducing the cost of finished products. It modifies the speed and force of the cut-ter so that the blade will not bend under pressure, ensuring perfect consistency of cut pieces, whether they are in the top or bottom layerof fabric plies.

MORE INTELLIGENCE WITH THE INTRODUCTION OF “SMART SERVICES” The system is capable of permanently proposing solutions to increase its own efficiency. Its embedded intelligence is self-controlled,offering planned maintenance interventions to improve its performance and reduce disturbances. It identifies functional anomalies beforethey create problems and alerts the operator or the Lectra Call Center, whose experts can then intervene by taking remote control of thesystem via the Internet after receiving authorization from the customer. The system saves cutting operations in its memory, making itsdiagnostics particularly accurate. Lastly, the software provides data to the customer’s information system and generates activity reportsthat enable the company to optimize cutting room efficiency.

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innovation_


markets_

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ACCOMPANYING EVOLUTIONS

Despite the temporary agreements signed in 2005 with Europe and the UnitedStates to reinstate quotas through 2007-2008 for certain product categories,China has maintained its dominance in garment manufacturing while developingits position in its vast domestic market, where local brands and distributors are emerging. India and Southeast Asian countries have improved theirinfrastructures and labor practices, and benefited from the desire amongcontractors to diversify their suppliers—as have Turkey, Tunisia, and EasternEuropean countries. These garment manufacturers are thus looking for reliable,high-performance technologies that will allow them to respond to increasinglydemanding orders and also overcome growing competition.

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fashion


markets_

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which is one of our main markets, but we sell all overthe world. Our use of CAD/CAM technology solutionsenables us to produce 1,500 jackets and 1,000 pairs oftrousers per day, which would be impossible to achieveworking the old way, cutting by hand with scissors andcardboard. No fashion company can survive todaywithout such technology. We get a lot of value out of ouruse of technology, working with our partners like Lectraso that, together, we can reach our objectives.”MARCO CANALI_Director of Information Systems,Canali (Italy)

“ the chinese have gained moremarket share and now need to gainmore value. A few key words relating to that:

“ canali specializes in men’sformalwear. all of ourproduction is done in italy, efficiency, resources, discipline, and also policy.

Talking about efficiency means technology, andtoday the central topic is PLM. This year we alreadyput the scientific contribution and the brandcontribution as the two key aspects for the Chinesetextile industry, so technology will be a veryimportant issue in the future. I do love thecooperation with the world leaders like Lectra, so welcome to China and we can have a winningfuture.”SUN RUI-ZHE_Vice Chairman, China NationalTextile & Apparel Council (China)


Meanwhile, European and American brands and retailers continueto search for productivity improvements and ways to shorten thetime-to-market for their collections, and to reinforce their brandimage through greater creativity and quality. Their business modelis increasingly oriented toward global “fast fashion,” whichdemands technology solutions that cover the entire value chain. Theneed for new technologies is also vital for major luxury brands. Theneeds of all these players tend to coincide, with emerging-countrymanufacturers broadening their offering to include design and pat-tern making in order to satisfy the expectations of their customers.

A COMPLETELY RENEWED LECTRA OFFERING

Lectra responds to these needs with a range of powerful solutionsbased on the company’s technological expertise and knowledge ofthe apparel professions. The fruit of a considerable R&D effort overthe past five years converged in 2006 with the finalization of a com-pletely renewed Lectra offering, including a new generation of Vector

automated cutting systems which are more powerful and intelligentthanks to the integration of smart services; Modaris 3D Fit, a 3Dvirtual prototyping solution which instantly transforms product data—models, materials, motifs and colors—into a highly readable,visual form, while reducing the number of iterations required toensure proper fit; Easy Grading, an automated grading softwareapplication; a new Kaledo design software range; and the latest ver-sion of Lectra Fashion PLM, the only PLM solution specifically devel-oped for the fashion industry, whose applications integrate fashionindustry best practices. At the heart of the Lectra revolution are pro-fessional services—auditing, consulting and training—along withtechnical support before, during and after the sale to analyze busi-ness processes, implement Lectra solutions and ensure their optimalusage. Furthermore, software evolution contracts permit users tobenefit from the very latest versions of their products as soon asthey are released.

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markets_

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“ the main challenges major fashioncompanies are facing remain getting the rightproduct in the right place at the right time at the right cost. The role of technology is critical. How do you communicatewhen your products are being made in multiple locations acrosscontinents? How do you transfer information about the productdevelopment cycle from where it started at the brand creation towhoever is going to do your samples, run your fit specifications,do your grading, and manufacture the products? You need tohave technology that can help you communicate in those ways.We are in a digital world.”MIKE FRALIX_President, [TC]2 (USA)

“ we have had a special ‘high fashion-high technology’ agreement withlectra since 1998, because the most important,most renowned French brands are at the same time the largestFrench exporters of ready-to-wear fashion. Today, whenever I goto China, I encounter Mr. Harari; and whenever I go to Brazil,naturally I encounter Lectra people there. New technologiesand brands have a common history that is absolutely essential.What Lectra does in our schools, training our students in newtechnologies while they’re learning how to become the fashiondesigners of the future, is absolutely vital.”DIDIER GRUMBACH_President, Fédération Française de la Couture, du Prêt-à-Porter, des Couturiers et desCréateurs de Mode (France)


FOOTWEAR AND ACCESSORIES: ONGOING CHANGE

The manufacture of footwear continues to move toward Asia, at arate of 10% per year, with China maintaining its dominance even asproduction capacity is moving to India and Vietnam due to rapidlyrising prices in China. But Eastern Europe and Tunisia are strength-ening their positions thanks to the flexibility of their production tools.In the leather goods sector, the need for automation is growing dueto competitive pressure and the imperative to renew collectionsmore frequently. By enabling the design, development and manufacturing of shoes orbags in their entirety, Lectra solutions respond to the major strate-gic challenges faced by sector professionals to quickly develop newcollections, reduce costs, achieve just-in-time production, andincrease quality. High-end brands have a growing interest in 3DCAD software applications which liberate creativity and bring signif-icant productivity gains.

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furniture

“ the first benefit of using cad technologyis time savings: we can startdeveloping the upholstery before we have foamed the first piece. Another advantage is the initialcost evaluation. We can obtain all upholstery data by virtualmodelling beforehand, and without making a first physicalprototype. In addition to saving time and money, I am confidentthat CAD technology allows us to better manage the entire designand engineering process because there are no more interruptionsin the virtual flow, from the beginning to the end of thedevelopment process. In this way, the knowledge which is todayonly possessed by the craftsmen can be shared with othercollaborators.”CARLO MAGISTRETTI_Engineering and Industrial Manager,B&B Italia (Italy)


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TWO PREDOMINANT BUSINESS MODELS

Asian products represent a growing share of Western European andNorth American consumption, and the market is dominated by twobusiness models: mass production, largely outsourced; and nicheor made-to-order production, with flexible players able to proposenew collections at a rapid rhythm. With the notable exception of Italy, the majority of European brandshave gradually outsourced their manufacturing, predominantly toEastern Europe, where they benefit from a short development circuitand strong flexibility. American producers have chosen to outsourceproduction to Asia on a massive scale. In a business that continues to be dominated by craftsmen, Lectraoffers each of these business models solutions dedicated toproduct development and production to accelerate and improve thefinalization of products and manufacturing.

3D REVOLUTIONIZES FURNITURE PROTOTYPING

DesignConcept Furniture 3D responds to the need to shorten thecritical prototyping phase and reduce its associated costs. Thesoftware was specifically designed for the furniture businesses inorder to cover all aspects of product development (includingframes, foam padding, and fabric or leather covering), and tooptimize the creation of variations derived from a base model. Itenables designers to create multiple virtual prototypes and therebyproposes a greater range of choices, facilitate decision making anddivide industrialization time by a factor of four.Given the extremely high cost of leather hides, the ability to qualifythe quality of every square inch is indispensable to ensure optimalmaterial consumption. The MFC Furniture cutting solution managesthis process automatically and proposes optimal markers of shapesbefore proceeding to cutting. The new-generation VectorFurniture

automated cutter, dedicated to fabric cutting, is the fastest on themarket; its capacity to simplify and accelerate the manufacturingprocess makes it a key factor in improving flexibility andproductivity. These solutions enable furniture industrialists to satisfyincreasingly shor t production deadlines while ensuring perfectquality of finished products.


markets_

A MARKET IN CRISIS, EAGER FOR INNOVATION

The automotive market is experiencing a period of profound evolu-tion: the principal American and European auto makers are losingmarket share, while their Asian counterparts are gaining ground.The fact that General Motors is struggling to maintain global lead-ership over Toyota demonstrates that the automotive industry isindeed entering a new era.In consequence, auto makers are placing considerable pressure ontheir equipment makers, demanding cost reductions and produc-tivity improvements while at the same time insisting on higher qual-ity in order to satisfy consumers who are increasingly well informedand less loyal. Auto makers multiply available models and versionsin order to attract and keep their customers, and equipment makersneed to provide themselves with the means to deliver high flexibil-ity and quality to auto makers at constantly lower prices. Providingmore while receiving the same or less: that is the dilemma thatLectra enables its customers to solve.In order to overcome these challenges, equipment makers proposehigh-end products and an expanded selection of fabric and materialoptions; as a result, Lectra must help them to re-think theirprocesses and technology solutions. Today, their choices are highlyvaried. Die-cutting technology for production of automotive seatsand interiors, which is still the predominant choice in the Americanmarket, can no longer compare with the immense advantages pro-vided by automated cutting systems in terms of flexibility and costoptimization. Automated cutting solutions such as the Vector havebeen more willingly adopted by European automotive industry play-ers, who have in turn insisted on its adoption by their EasternEuropean sub-contractors. Meanwhile, Japanese players were thefirst to understand the advantages of automated cutting which,despite its higher initial investment cost, offers the ability to satisfyshorter production runs and the growing demand for personalizedvehicles without the need to undergo cumbersome retooling foreach new model. Today, automated cutters represent 90% of cuttingsystems in use by Japanese equipment makers.

LECTRA’S RESPONSE TO THESE NEW CHALLENGES

Lectra’s response to its customers’ challenges is founded on longexperience in the automotive market, along with its policy of inno-vation in close partnership with the world’s major auto makers andequipment manufacturers; the company’s solutions provideimproved productivity and flexibility while guaranteeing the reliabil-ity of production equipment and control of costs. Lectra’s technol-ogy offering is dedicated to two major sub-markets: cars seats andinteriors, and airbags.For the development of car seats, the DesignConcept Auto 3D soft-ware application provides realistic 3D visualization of all creativestyling hypotheses and provides all technical analysis regarding theproduction feasibility needed to make final decisions concerningquality and cost. Choices can thus be made more quickly and final

automotive

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decisions taken as late as possible to better correspond to marketexpectations. Based on the experience and success of the previousgeneration, Lectra launched the new generation VectorAutoMX9

automated cutter, for fabric and other materials used in car seatsand interiors, at Lectra World 2007. More productive and robust, thenew cutters integrate technologies that satisfy the market’s expecta-tions in terms of maximum machine uptime, process security anduser-friendly maintenance, all for a lower total ownership cost thanthat of traditional systems. Other innovations in automated cuttingwere also introduced for leather car seat and interior components.Automated airbag cutting, of which Lectra already has an 80% mar-ket share, requires precision and reliability—two major qualities ofLectra’s FocusAirbag laser cutting system. In partnership with majormanufacturers, Lectra has designed a new version of this solution,which optimizes markers, improves cutting precision, provides upto 40% greater productivity, and enhances process security.

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“ as the primary sub-contractor for toyota, ourpolicy is to offer complete automotive interiorsolutions, from design through development and production. Toyota employs a "no-stock" production method, producing only the required quantity of seats. In Japan, even after a model has gone into production, modifications of patternpieces are often done to reflect minor design changes or to improve quality.Automated cutting solutions are the most suitable response to this challenge.”KATSUNORI MORI_General Manager, Trim Cover Engineering division,Toyota Boshoku (Japan)

“ the team at our strasbourg, france facilitydevelops foams for automotive seats, headrests,and armrests, in collaboration with otherjohnson controls facilities in europe. For example,design work might be shared with Slovakia, tools developed in Austria, and partsbuilt in Slovenia. There is great deal of critical data to be exchanged, so it’s vital that we use the same rules, the same language, and the same software. The ability to make effective decisions early in the development process is increasingly important for keeping costs down. We need to perform and validatecost analyses of various proposals before any money can be spent, while at thesame time dealing with ever-growing quality demands. With DesignConcept Auto,we save three weeks of development time, and divide by 10 the number of physical prototypes we need to create.”DANIEL NAVARRO_Manager, Headrest Development division Johnson Controls (France)


4

5

6

7

(in euros) 2006 2005 2004 2003 2002

Stock price – high 6.24 5.94 8.45 7.47 5.84

Stock price – low 4.14 3.51 4.35 3.35 2.85

Stock closing price at December 31 5.53 4.54 5.00 6.25 4.52

Stockholders’ equity per share at December 31 2.02 1.84 2.27 2.21 1.98

Stockholders’ net cash per share at December 31 0.24 0.28 0.51 1.40 0.96

Earnings per share (1)

• Basic 0.34 (0.34) 0.17 0.21 0.10

• Fully-diluted 0.34 (0.34) 0.16 0.21 0.10

Market capialization at December 31 (2) 197.8 165.3 190.1 234.2 166.5

Annual volume traded (2) (3) 43.5 51.0 89.6 61.4 37.6

Annual volume traded (3) (4) 8.3 11.4 13.9 12.1 8.6

(1) Earnings per share on basic capital are calculated using the weighted average number of shares.Earnings per fully-diluted share are calculated according to IAS principles.

(2) In millions of euros.

(3) Source: Euronext Paris.

(4) In millions of shares.

Dividend

In 2004, the company initiated a new policy of paying dividends to itsshareholders while continuing to fund its future growth. Confirming its confidence in the future, and given the financial performance of fiscal year 2006, the Board of Directors has decided to propose the distribution of a dividend of €0.15 per share in respect of 2006, an increase of 15% over the previous year. Subject to approval at theShareholders’ Meeting on April 30, 2007, the dividend will be madepayable on May 10, 2007.

Fully-diluted capital: 38,776,716 shares

2%Treasury shares held by the company

59%Institutional investors and

general public

30%André and Daniel Harari

2006 2007

EVOLUTION FROM JANUARY 31, 2006 TO FEBRUARY 23, 2007

Lectra (daily closing price)CAC Mid&Small 190 Index (base: December 31, 2005)

(in euros)

BREAKDOWN OF CAPITAL(at February 23, 2007)

The free float is close to 65%. Most is held by institutionalinvestors, among which Financière de l’Échiquier (France)(more than 10% but less than 15% of the capital) and HarrisAssociates (USA) (more than 5% but less than 10% of thecapital) on behalf of their investment funds, customers, or in their role as registered custodian.

BREAKDOWN OF FULLY-DILUTED CAPITAL(at February 23, 2007)

Thanks to a motivating stock option program, the management(other than André and Daniel Harari) and key employees (currently217 people) hold close to 9% of the fully-diluted capital. The Group intends to pursue this selective policy of promotingemployee share-ownership. At February 23, 2007, fully-vestedstock options totaled 8% of the base capital.

Capital: 35,323,958 shares

1%Management and otheremployees

2%Treasury shares held by the company

65%Institutional investors and

general public

32%André and Daniel Harari

9%Management and other employees

stock performance_

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38 MANAGEMENT DISCUSSION AND ANALYSIS

To the Shareholders,

The following is our report on the Lectra Group’s business activityfor its thirty-third fiscal year, ended on December 31, 2006.This Management Discussion and Analysis reports on the company’sfinancial conditions, operations and results, as well as on those ofall of its subsidiaries.

1. SUMMARY OF EVENTS AND PERFORMANCE IN 2006

The Expected Rebound in Sales of New Systems did notMaterialize in 2006In its 2005 annual report the Board of Directors stated that, after a disappointing 2005, new systems sales were expected to bounceback in 2006, though the timing and scale of the rebound remaineduncertain as companies were likely to remain hesitant for severalmore months.Thanks to the improvement in its operating ratios, the company tookthe view that if revenues from new systems sales were to remain attheir 2005 level, revenues would rise slightly, to roughly €216 millionand income from operations excluding non-recurring items would be approximately €10 million (up 23% relative to 2005).Full-year 2006 aggregate orders for new software licenses andCAD/CAM equipment decreased by 2% (–€1.6 million). Orders fornew software licenses increased by 3%, while those for CAD/CAMequipment decreased by 4%.

A Mixed Sales PerformanceIn the fashion market (apparel, accessories, footwear), aggregateorders were down 1%. Orders for new software licenses increased by4%, and those for CAD/CAM equipment decreased by 1%. This trendwas especially prominent in the developing countries, where pricingpressure was particularly strong. Lectra’s strategy in response to thissituation has been to refuse to engage in price wars, focusing ratheron enhanced added value and its unique solutions. The PLMbusiness has been slower to take off than expected, not only forLectra but for the market as a whole. PLM is still in its startup phasein the fashion industry, but experts have confirmed that worldwidesales will accelerate sharply in the next two years.

In the automotive, aeronautical and marine markets, CAD/CAMequipment orders decreased by 12%, reflecting weaker investmentby equipment makers in response to the difficulties afflicting certainmajor U.S. and European automakers.Meanwhile, software and equipment orders in the furniture marketwere buoyant, with orders rising 14% overall.Trends were mixed in Lectra’s main geographic markets. In Europe,orders for new software licenses and CAD/CAM equipment fell by9%; there was no change in France, with Italy alone recordingoutstanding growth of 20%.Orders increased slightly in North America (+1%).There was sustained growth in the Asia-Pacific region, with a rise of 14%. Especially noteworthy was the 46% jump in orders in China,relative to 2005, when business was severely affected by theabolition of textile quotas. As anticipated by the company, the Sino-European agreement of June 2005 and the Sino-American agreementof November 2005 to a large extent dispelled the uncertainty overthe impact of the abolition of textile quotas. This opened up newprospects for Chinese companies until 2007-2008. They have thusbeen emboldened to resume their investments in technology in orderto boost their competitiveness versus domestic competitors as wellas other Asian countries with lower labor costs.Finally, orders in the rest of the world decreased by 3% overall.

Strong Growth in EarningsAgainst this background, full-year 2006 revenues totaled €216.1 million, in line with the company’s forecast at the beginningof the year in the event of no rebound in activity—up €6.5 million(+3%) relative to full-year 2005.Income from operations before non-recurring items, on the otherhand, far exceeded this forecast at €14.3 million; the increase worksout to €6.2 million (+77%). In reported figures the increase was€1.3 million greater than the growth (€4.9 million) in revenue.Like-for-like, the increase works out to €7.3 million (+90%). Theoperating margin (6.6%) increased by 3.3 percentage points. Thisperformance confirms the improvement in Lectra’s key operating ratios.

management discussion and analysis of financial condition and results of operations


39

Net income of €12.1 million compares with a loss of €12.3 millionin 2005 due to non-recurring items.At the same time, free cash flow (€15.4 million) reflects anexcellent, target-beating performance.

Investing for the FutureThe company continued to invest in essential areas in 2006 in orderto achieve its growth potential in the context of the new challenges itfaces.

Lectra Accelerates its TransformationMajor ongoing programs have driven forward the company’stransformation, implementing more efficient business processes,adjusting to the radical shifts taking place in its markets, boostingcompetitiveness, and reallocating global resources.Reorganization at the end of 2005 entailed the departure of 150 employees. At the same time, Lectra initiated an ambitiousglobal recruitment plan designed to reinforce the company’ssoftware R&D teams, its teams of solutions and business expertssupporting customers’ projects, and its PLM and sales teams.A new management team is now in place in North America. Five senior managers have been hired working under the President,David Rode, formerly President and CEO of Intentia’s subsidiary inthe United States. His mission is to double North American revenuesto $100 million by 2010. With effect from January 1, 2007 this teamnow manages operations throughout the Americas following the transferunder its responsibility of Lectra’s organization in South America.Meanwhile Lectra’s global automotive, aeronautical and marinemarket operations have been combined under Roy Shurling, based in Atlanta (USA). Roy Shurling has been with Lectra for twenty years.In his most recent position as Senior Account Director, he managedthe accounts of major Lectra customers such as Boeing, Lockheed,Johnson Controls, Autoliv, Milliken and Delphi. He has notably madea significant contribution to Lectra’s success in automobile airbag,seats and interior design and cutting systems.The Group headcount at December 31 was 1,496, of whom 14%were recruited in the course of the year. The figure was 1,557 at thebeginning of 2005, and the overall headcount is expected to revertprogressively to that level by first-half 2008, according to thecurrent recruitment plan.Alongside these recruitments, Lectra Academy organized a widearray of training and change management support programs totalingmore than 3,000 training days in 2006.

Lectra Sustains its Intensive Research and Development DriveLectra has invested nearly €80 million in R&D over the past five years, and it will continue to invest in the future at a level at least equal to that of 2006. Its R&D teams (220 people atDecember 31, 2006, compared to 207 at December 31, 2005)represent 15% of the total workforce, confirming the priority role of innovation in consolidating Lectra’s technological leadership.A prime focus of the R&D program in recent years has been thedevelopment of future versions of Lectra’s entire product offering.Also under development was the new PLM offering for the fashionindustry—a major growth market for Lectra. Version 1 of thisinnovative, high-performance offering was launched as planned in March, 2006.A new generation of automated cutting systems was unveiled on February 5, 2007, on the occasion of the Lectra World 2007congress—the previous generation was launched in 1993—togetherwith a major line-up of new software (see chapter 10 below).

IT Systems OverhaulFollowing deployment of its Siebel Customer RelationshipManagement (CRM) system, Lectra embarked on a project in 2005to overhaul its entire back-office IT systems. The project, whichinvolved the adoption of the latest generation of Oracle software, willoptimize the company’s business processes in support of its strategyand growth. Phase one of the project became operational onJanuary 1, 2007, and the systems will be progressively deployedthroughout all of the company’s subsidiaries.The €10 million cost of the project is spread over the years 2005-2008.

Lectra Reinforces its Customer-Dedicated InfrastructuresThe Lectra International Technology and Conference Center at Bordeaux-Cestas (France), standing on the site of a buildingdestroyed by a storm in 2005 and wholly dedicated to the company’scustomers, was inaugurated on January 31, 2007. It comprises a 100-seat auditorium, meeting and class rooms, as well as the world’s main center for the demonstration and testing of Lectra technologies.

Microsoft Associates Lectra with the Launch of Windows VistaMicrosoft selected Lectra as a partner in its worldwide launch of its new operating system Windows Vista on November 30, 2006.Microsoft was particularly attracted by Kaledo 3D Trend, the newLectra project developed with Windows Vista. Lectra, the leading

MANAGEMENT DISCUSSION AND ANALYSIS



technology supplier to the fashion industry, has entered a new phasein the world of fashion designers, offering them an interface perfectlyadapted to their mode of artistic expression in a three-dimensionaluniverse.Lectra was one of three French software publishers whose solutionswere highlighted on stage in Paris on the day of the Windows Vistalaunch. Moreover, Lectra was one of the 16 companies in the world(and the only French company) selected by Microsoft to appear on Microsoft’s dedicated website demonstrating Vista applications.

2. ACQUISITIONS AND PARTNERSHIPS

The company made no new acquisition in 2006 and did not enter any new strategic partnership agreements.

3. CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements are an integral part of thisreport.To make the discussion of revenues and earnings as relevant as possible, detailed comparisons between 2006 and 2005 are based—except where otherwise stated—on 2005 exchange rates (like-for-like). The 2006 scope of consolidation is unchanged from 2005.With an average parity of $1.26/€1 for the year, the U.S. dollarwas down by 1% compared to FY 2005. This change produced a mechanical decrease over the full year of 1% in the variousrevenue components and of €1.1 million in income from operations.

Moderate Revenue GrowthRevenues for FY 2006 totaled €216.1 million, up €6.5 million(+3%) relative to FY 2005.Revenues increased by 2% in Europe, 6% in North America, and 7%in Asia-Pacific. These three regions respectively represented 56%(of which France, 9%), 18% and 18% of total revenues. Revenuesfrom the rest of the world, representing nearly 8% of total revenues,were down 2%.

Growth in New Software License Revenues–CAD/CAM EquipmentRevenues UnchangedNew software license revenues (€33.7 million) increased by 9%overall compared to 2005 and accounted for 16% of total revenues(15% in 2005).CAD/CAM equipment revenues were unchanged at €71.8 millionand accounted for 33% of total revenues (34% in 2005).

Moreover, due to delays in the signature of certain projects,revenues from training and consulting (€8.6 million) decreased by €0.4 million.Revenues from new systems sales in the fashion market declined by 4% overall; automotive, aeronautical and marine market revenuesrose by 15%; and furniture market revenues fell by 14%. Thesemarkets represented 58%, 34% and 8% of total revenues,respectively. The growth in automotive revenues, contrasting withthe decline in orders, stems primarily from the shipment and billingin 2006 of a substantial portion of the contract with Johnson Controls.Overall, revenues from new systems sales (€116.2 million)increased by 1% relative to 2005, and represented 54% of totalrevenues for the period (55% in 2005).

Growth in Recurring RevenuesRecurring revenues (€99.9 million) increased by €5.4 millionoverall (+6%), and accounted for 46% of total revenues (45% in 2005).Revenues from recurring contracts increased by €2.5 million(+4%); these alone represented 62% of recurring revenues and 29% of total revenues. The increase was broken down as follows:– revenues from software evolution contracts (€26.7 million) were up 7% and represented 12% of total revenues;– revenues from CAD/CAM equipment maintenance contracts(€25.1 million) fell by 5%;– revenues from subscription contracts to Lectra’s five InternationalCall Centers in Bordeaux-Cestas (France), Atlanta (USA), Shanghai(China), Milan (Italy), and Madrid (Spain) rose 26%, to €10.6 million.These platforms are the only ones of their kind in the market. Theyare accessible via Internet and currently employ 90 Lectra experts.These experts can take control of the customer’s software andequipment online to provide interactive assistance. They handlemore than 50,000 calls per month.Revenues from spare parts and consumables (€34.5 million) rose9%, as a result of the action plan launched by the company in thesecond half of 2005.

Order BacklogThe order backlog for new software licenses and CAD/CAMequipment at December 31, 2006 totaled €12.5 million, down €2.4 million from December 31, 2005 at constant exchange rates, as orders registered in 2006 fell slightly belowcorresponding revenues.


41MANAGEMENT DISCUSSION AND ANALYSIS

Gross Margin RisesDespite the dollar’s weakness and strong competitive pressures, thecompany continued to improve its margins overall. This performanceconfirms the success of its “relational value player” strategy—i.e.,creating value for its customers by providing innovative solutionsand services within the framework of long-term relationships—incontrast to the “price player” strategy pursued by its competitors,which is based on offering discounted prices.Gross margin worked out to 67.6%, a rise of 0.9 percentage pointrelative to FY2005. This increase was due to a combination ofimproved sales mix—in particular the relative growth in sales of newsoftware licenses—and improved margins on equipment sales.

Overhead Costs Kept Firmly Under ControlReflecting the company’s tight control over expenses, total overheadcosts (excluding non-recurring items) were €131.8 million, a decline of 1% compared to 2005. They break down as follows:€120.3 million in fixed overheads and allowances,

down €2.9 million (–2%);– €11.5 million in variable costs, up €1.9 million (+19%)resulting from the growth in earnings.R&D spending (€18.7 million) was fully expensed in the period, and represented 8.6% of revenues (€18 million and 8.5% in 2005);it is included in the above-mentioned fixed overhead costs.The reorganization measures undertaken in Q4 2005, which werefully expensed in FY2005, reduced costs by €5.5 million in 2006. In addition to covering inflation, these savings have enabled Lectrato carry out its planned recruitment drive with no increase in 2006overhead costs.

Robust Growth in Income From OperationsIncome from operations before non-recurring items amounted to €14.3 million, up €7.3 million (+90%).The operating margin (6.6%) increased by 3.3 percentage points.During the year, the company recorded a non-recurring profit of €1 million as a result of a settlement with a supplier. In addition, it increased by €1.2 million its allowance for fees and costs relatingto the arbitration procedure before the International Chamber ofCommerce in London, which it initiated in June 2005 againstInduyco, the former shareholder of Investronica.

Income from operations after non-recurring items amounted to €14.1 million (compared with a loss of €11.1 million fromoperations in 2005, after non-recurring items and write-down of Investronica goodwill).Net interest income (interest received less bank charges) was closeto zero. The company registered a currency translation loss of €0.2 million. In February 2006, the company hedged its netexposure to the U.S. dollar for 2006 via the purchase of a series ofdollar put options with a strike price of $1.25/€1. After a net income tax charge of €1.8 million, and after inclusion of a research tax credit of €3.2 million in France (€1.4 million in 2005), net income amounted to €12.1 million, versus a net loss of €12.3 million in 2005.Net earnings per share on basic and diluted capital amounted to€0.34 (compared to a net loss per share of €0.34 in 2005).

Free Cash Flow of €15.4 million Before Non-Recurring ItemsThe company generated €15.4 million in free cash flow before non-recurring items—nearly twice the figure for 2005(€8.3 million).This resulted from €24.9 million in net cash provided by operatingactivities, of which €3.4 million stemmed from a decrease inworking capital requirement. Net cash provided by operatingactivities in 2005 was €13.8 million (of which €2.5 million camefrom a decrease in working capital requirement). Consequently, in two years Lectra has reduced its working capital requirement by€5.9 million, to close to zero.Capital expenditure, meanwhile, totaled €9.5 million (versus €5.5 million in 2005). Of this figure €3.6 million corresponded to the total cost of the new International Technology and ConferenceCenter at Bordeaux-Cestas, completed at the end of 2006.Furthermore, €3.1 million was spent on the Elios IT systemsoverhaul project.This performance stems primarily from the company’s action plan,initiated at the end of 2005, to reduce inventories, boost downpayments on orders and accelerate the collection of accountsreceivable.After €9.7 million in net non-recurring charges (of which €8.4 millioncorrespond to charges for which allowance had been made in 2005),free cash flow totaled €5.7 million.



A Solid Balance SheetAt December 31, 2006, consolidated stockholders’ equity amountedto €72.2 million (€67 million at December 31, 2005). This figurewas arrived at after deducting €4.1 million in treasury shares carried at cost (€5.9 million at December 31, 2005).The balance sheet comprises €36.9 million in goodwilland €6 million in other intangible assets.Cash and cash equivalents totaled €10 million (€25.1 million at December 31, 2005), after payment of dividends totaling€4.6 million, declared in respect of FY 2005, €9.7 million in netnon-recurring charges, and the final installment of the considerationfor the acquisition of Investronica (€13 million). Financialborrowings were reduced to €1.3 million at December 31, 2006compared with €14.9 million one year earlier.Net cash totaled €8.7 million (€10.2 million at December 31, 2005)

Litigation PendingThe arbitration that Lectra initiated against Induyco in June 2005before the International Chamber of Commerce in hearings in Londonis continuing. In August 2006, Lectra submitted its statement of casewith extensive supporting evidence and in January 2007 Induycosubmitted its response. Both parties are scheduled to presentadditional evidence, after which the arbitral tribunal will convenehearings scheduled to begin in late April 2007. If the currentschedule is maintained, an award is expected in 2007.In 2006, Induyco provided Lectra a security in the form of a firstdemand bank guarantee for an amount of €13 million, in light of Lectra’s outstanding claims. In late January 2007, the arbitraltribunal ordered Induyco to provide Lectra further security in theamount of €4.2 million. The amount of security does not reflect any amount that might be awarded to Lectra in the arbitration.

4. MANAGEMENT OF FINANCIAL RISKS

Foreign Exchange RiskThe Lectra Group is exposed to currency risk resulting fromvariations in the exchange rate of certain currencies against the euro.These currency fluctuations impact the Group at three levels:– impact on competitive position: the Group sells its products and services in global markets, competing primarily with its maincompetitor, a U.S. company. As a result, prices in these markets are generally dependent on the U.S. dollar;– impact on operations: the financial statements are consolidated

in euros. Consequently, the revenues, gross profit and net income of a subsidiary conducting its business in a foreign currency willmechanically be affected by exchange rate fluctuations whentranslated into euros;– impact on balance sheet positions: this refers primarily to foreigncurrency accounts receivable, in particular to those between theparent company and its subsidiaries, and it corresponds to thevariation between exchange rates at collection date and those at billing date.Currency risk is borne by the parent company. The Group seeks toprotect all of its foreign currency receivables and debts as well asfuture cash flows against currency risk. Hedging decisions take intoaccount currency risks and trends where these are likely tosignificantly impact the Group’s financial condition and competitivesituation. The bulk of foreign currency risks concerns the U.S. dollar.The Group generally hedges its net operational exposure to theU.S. dollar (revenues less all expenses denominated in U.S. dollars or strongly correlated currencies) by purchasing dollar puts. Net operational exposure to the U.S. dollar totaled $39 million in 2006 (excluding non-recurring items). Based on this figure, a variation of the U.S. dollar between $1.25 and $1.30/€1 would reduce income from operations by €1.4 million (not accounting for the impact of currency hedges).The Group’s balance sheet exposure is monitored in real time and itutilizes forward currency contracts to hedge all relevant receivablesand debts.

Interest-Rate RiskThe Group is not exposed to interest-rate variations, given thecharacteristics of its financial debt. At the same time, it has adopteda conservative short-term investment policy regarding themanagement of its cash surpluses, which are invested exclusively in money market funds.

Liquidity RiskThanks to its cash position, near-zero financial borrowings and confirmed bank cash facilities, totaling €30.6 million overall at December 31, 2006, the risk of the Group experiencing a cashdifficulty in the short term is very low. The aforementioned cashfacilities were unused at December 31, 2006.

Market RisksThe Group does not hold any interests in listed companies and is therefore not subject to market risk.



Counterparty RiskThe Group is exposed to credit risks in the event of default by a counterparty. The Group pays close attention to the security of payment for the systems and services delivered to its customers. It notably manages this risk by preventively analyzing its customers’solvency. Sales to countries subject to high economic or politicalrisks are for the most part guaranteed by irrevocable and confirmedletters of credit or by bank guarantees.Other economic, legal and regulatory risk factors are described inthe Chairman’s report on conditions governing the preparation andorganization of Board proceedings and on internal control proceduresappended to this report.

Insurance and Risk Coverage

OrganizationThe parent company Lectra SA oversees the management of risksand the writing of insurance programs for the Group as a whole.Lectra SA’s Legal Affairs Department formulates Group policy withrespect to the evaluation of its risks and their coverage, coordinatesthe administration of insurance contracts and claims with respect to legal liability, property and transport.

Risk Management and Insurance PolicyThe Group exercises its judgment when assessing risks incurred in the conduct of its business, the utility or otherwise of writinginsurance coverage with an outside insurer and the cost of theguarantees provided. It may therefore decide to review this policy at any time.The Group works through international brokers whose network has the capacity to assist it throughout its different geographies.Insurance programs are written with reputable insurers of sufficientsize and capacity to provide coverage and administer claims in allcountries. At regular intervals, when programs come due for renewal,insurance companies are invited to submit competing bids in orderto secure the best possible terms and conditions.The guarantees provided by these programs are calculated on thebasis of estimated possible losses, the guarantee terms generallyavailable on the market, notably for companies of comparable sizeand characteristics to Lectra, and depending on insurance companies’proposals.

The Group has taken the following insurance coverage:– legal liability, business continuity, post-delivery and professionalliability (Errors and Omissions in the United States);– directors and officers liability;– property damage;– transported goods.The Lectra Group’s favorable experience with regard to generalliability claims, combined with recent market developments, haveresulted in improved terms for this program since the beginning of 2006, with an increase in the global cap on guarantee limits to €25 million per claim and per year, and a reduction in the totalpremium paid by the Group. At the same time, Lectra managesuncertainty with respect to general liability by means of a contractualpolicy that excludes its liability for indirect damage and limits its liability for direct damage to the extent allowed by applicableregulations.The Property Damage program provides for payment of claims formaterial damage to buildings or physical assets in accordance withthe declared value of each of its sites worldwide, which the Groupreports annually. The program comprises additional guarantees tofinance the continuity or reorganization of activity following a lossevent. Special emphasis is placed on protecting the Bordeaux-Cestassite, which houses research and development and productionactivities as well as critical services for the Group as a whole. Theprogram notably comprises a “business continuity” coverage toinsure against financial loss in the event of a major accident affectingthe Bordeaux-Cestas site which jeopardized the continuity of all or part of the Group’s business. This program is backed up by a policy of risk prevention concerning this site.

5. OFF-BALANCE SHEET ITEMS

Financial InstrumentsCurrency hedging instruments at December 31, 2006 were comprisedof forward sales or purchases of foreign exchange (mainly U.S. dollars,Canadian dollars, Japanese yen, and British pounds) for a net totalequivalent value (purchases minus sales) of €1.3 million.As in previous years, the Group made no use of interest rate hedginginstruments in 2006.Available cash is held in money market funds.



Other Off-Balance Sheet ItemsAt December 31, 2006, the company provided a total of €2.6 million in sureties to banks, mainly to guarantee loans made by the latter tothe company’s subsidiaries and in guarantees given to its customers.In addition, the company:– received in 2006 from Induyco a €13 million security in the formof a bank guarantee payable on first demand, in light of Lectra’soutstanding claims related to the arbitration that Lectra initiatedagainst this company in June 2005 before the International Chamberof Commerce in hearings in London. As stated in Chapter 3 above, in late January 2007 the arbitral tribunal ordered Induyco to provideLectra with a further €4.2 million bank guarantee;– received, within the framework of the acquisition agreements,representations and warranties from the former shareholders of Investronica, Lacent and Humantec concerning certain assets and liabilities in the balance sheet as well as all potential litigationarising in respect of events predating the respective acquisitions.These representations and warranties are of limited duration. Inaddition, in the cases of Investronica and Humantec, the amount of the guarantee is limited to the purchase price (barring certainexceptions), and to CAN $1 million in the case of Lacent.The only other off-balance sheet liabilities concern normal office,motor vehicle and office equipment leasing and rental contracts,which may be cancelled in accordance with contract terms. Theseliabilities are discussed in the Notes to the Consolidated FinancialStatements.Finally, no earn-outs are due on the acquisitions made by thecompany.

6. DIVIDEND INCREASED

In 2004, the company initiated a new policy of paying dividends to its shareholders while continuing to fund its future growth. Itaccordingly declared a dividend of €0.12 per share, excluding taxcredit (avoir fiscal), in respect of 2003. It declared a dividend of €0.13 per share in respect of both 2004 and 2005.Confirming its confidence in the future, and in light of earningsgrowth for the past year, the Board of Directors has decided topropose the distribution of a dividend of €0.15 per share in respectof 2006—an increase of 15%—at the forthcoming Shareholders’Meeting on April 30, 2007.Subject to Shareholders’ approval, the dividend will be madepayable on May 10, 2007.

In accordance with paragraph 1 of article 243 bis of the French TaxCode (Code général des impôts) as modified by article 76 of the2004 Revised France Finance Act, the Board of Directors indicatesthat all distributed dividends are eligible for the 40% rebate set forthin the paragraph 2° of Section 3 of article 158 of the French TaxCode where the shareholder is an individual French Tax residententitled to benefit from such rebate.

7. CAPITAL STOCK – OWNERSHIP – SHARE PRICE PERFORMANCE

Change in Capital StockAt December 31, 2006, capital stock totaled €53,658,672, divided into35,772,448 shares with a par value of €1.50. Since January 1, 2006,capital stock has increased by 513,541 shares as a result of theexercise of stock options (representing €0.8 million in par value,plus €1.4 million in total additional paid-in capital) and reduced by 1,159,639 shares following the cancellation of treasury sharesdecided by the Board of Directors on February 9 and on October 30, 2006.At its meeting on February 9, 2007, the Board of Directors increasedthe capital stock by 109,712 shares as a result of the exercise of stock options since January 1, 2007 and decided to retire 454,115 treasury shares held by the company at December 31, 2006or purchased since the beginning of 2007.Following these changes, capital stock has thus been reduced to €52,985,937, consisting of 35,323,958 shares with a par valueof €1.50 each.As a result the 10% (maximum) reduction of capital authorized by the Shareholders’ Meeting of April 29, 2005 was utilized in full. 3.8 million shares were canceled, reducing the capital stock from38,025,060 shares at April 29, 2005 to 35,323,958 shares, taking intoaccount stock options exercised, representing a net reduction of 7.1%.On February 23, 2007, the main shareholders are:– André and Daniel Harari, who together hold 31.8% of the capitaland 32.1% of the voting rights;– Société Financière de l’Échiquier (France) holds more than 10%(but less than 15%) of the capital and voting rights, on behalf ofinvestment funds managed by itself;– Harris Associates LP (USA), on behalf of its customers andinvestment funds managed by itself, held more than 5% (but lessthan 10%) of the capital and voting rights;– the company holds 2.3% of its own shares in treasury shares.No changes resulting in a crossing of mandatory notificationthresholds were reported to the company in 2006.



Granting of Stock Options – Potential Capital StockThe Extraordinary General Shareholders Meeting of April 28, 2006authorized the creation of a new stock option plan for a maximum of 1.8 million options for the same number of shares with a par valueof €1.50, in accordance with the conditions described in the reportof the Board of Directors to said meeting and in its first resolution.On May 23, 2006, at the recommendation of the CompensationCommittee, the Board of Directors granted 717,712 stock optionswith an exercise price of €5.75 per share to 79 beneficiaries. Thisprice exceeds the average market price of the Lectra shares for the twenty stockmarket trading sessions prior to the date of granting of the options.These options generally vest over a period of four years fromJanuary 1, 2006, depending on the beneficiary’s presence in the Groupat the end of each annual period (the beneficiary must retain linkswith the company or with one of its affiliates in the form of anemployment contract or as a director or officer). For certain beneficiaries,moreover, vesting depends on fulfillment of annual targets.The options are valid for a period of eight years from the date of granting.On May 23, 2006 the Board of Directors also approved the newregulation covering stock option plans. In addition, and pursuant to the decision of the Extraordinary General Meeting of April 28, 2006,it amended the regulaton governing earlier stock-option plans inforce for options already granted, abolishing the clause wherebyshares resulting from the exercise of options granted were eligiblewith effect from January 1 of the year in which they are exercised.Consequently, shares in issue at the date of the Ordinary Meeting of Shareholders voting on the financial statements for the previousyear (with effect from the Meeting of April 30, 2007 called to vote on the 2006 financial statements), and resulting from the exercise of options, will be eligible for the dividends attaching thereto.At present, the Board of Directors has 1,082,288 options remainingat its disposal for further distribution.The Board has committed to grant a maximum of 322,059 options in 2007 in recognition of fulfilment of objectives for 2006. Theseoptions will be issued with an exercise price to be set by the Boardof Directors at the time of their granting in 2007, but will in no casebe less than €5.75 per option. Moreover, the Board of Directors hasalso committed to grant a stock-option plan to David Rode, the newPresident of Lectra Americas, with options to be granted to him

annually until 2010 (inclusive). These options will be issued with an exercise price to be set by the Board of Directors at the time oftheir granting. On the theoretical basis of the exercise price set forthe 2006 stock-option plan (€5.75), this commitment could entailthe creation of a theoretical maximum of 201,739 options.At the same time 513,541 options were exercised in 2006 and646,731 options lapsed following the departure of their beneficiariesor due to failure to achieve the targets required for definitiveacquisition of the right to exercise certain options.There were 236 beneficiaries of stock options outstanding atDecember 31, 2006 (269 at December 31, 2005). No subsidiary of Lectra has opened a stock-option plan.The total number of shares on a fully-diluted basis at December 31,2006, including all new shares that may be issued following theexercise of stock options outstanding and eligible for the subscriptionof news shares, is 39,230,831, consisting of:– capital stock: 35,772,448 shares;– stock options: 3,458,383 options.Each stock option gives the beneficiary the right to acquire one newshare with a par value of €1.50, at the exercise price decided by theBoard of Directors on the date of granting. If all of the options wereexercised, regardless of whether these are fully vested or have notyet vested, and regardless of their exercise price relative to the marketprice of Lectra shares at December 31, 2006, the company’s capital(at par value) would increase by a total of €5,187,575, together witha total additional paid-in capital of €16,808,872.The notes to the consolidated financial statements contain full detailsof the vesting conditions, exercise price and exercise dates andconditions of all outstanding stock options at December 31, 2006.The Board of Directors’ Special Report, as mandated under articleL. 225-184 of the French Commercial Code and resulting from the May 15, 2001 New Economic Regulations Act, is providedin a separate document (available in French only).

Share Price Performance and Trading VolumesThe company’s share price at December 31, 2006 was €5.53, up22% compared to December 31, 2005 (€4.54). Since January 1,2006, the share price reached a high of €6.24 on March 3 and a lowof €4.14 on July 19. The CAC 40 and CAC Mid&Small190 indexeswere up 18%, and 29%, respectively, over the same period.According to Euronext figures, 8.3 million shares were traded, a decrease of 27% compared to 2005. The volume of capital tradedfell by 15%, to €43.5 million.



Lectra shares (code ISIN FR0000065484) figure among the SBF 250,CAC Small90, and CAC Mid&Small190 indexes.

8. CORPORATE GOVERNANCE

The company has taken strenuous measures over many years to implement the requirements of corporate governance.

Voting RightsFollowing the decision of the Extraordinary General Meeting ofMay 3, 2001, shares whose registration was requested subsequent to May 15, 2001, and those purchased after that date, no longer carrydouble voting rights (barring special cases covered by the correspondingresolution passed by the said Extraordinary General Meeting). Attheir own initiative, Messrs André and Daniel Harari have cancelledthe double voting rights that were attached to the shares they held.As a result of the foregoing, only 499,031 shares (representing 1.4%of the capital stock) carried double voting rights at December 31, 2006.

Audit Committee, Compensation Committee and StrategicCommitteeThe Board of Directors established an Audit Committee and aCompensation Committee in 2001. Each of these committees is made up of three directors, two of them independent within the meaning of the rules of corporate governance (as set forth in the Medef–Afep–Agref report on corporate governance of September 23, 2002 known as the “Bouton Report”); and each is chaired by an independent director.In December 2004, the Board set up a Strategic Committee. This Committee is made up of three directors, two of whom areindependent within the meaning of the rules of corporate governance,and is chaired by the Chairman of the Board of Directors.

Separation of the Functions of Chairman of the Board of Directorsand Chief Executive OfficerIn 2002, the Board of Directors separated the functions of Chairmanof the Board of Directors and Chief Executive Officer, as permittedunder the May 15, 2001 Economic Regulations Act.Furthermore, the (French) August 1, 2003 Financial Security Actintroduced two new changes. First, the Chairman of the Board of Directors no longer represents the Board. Second, in a reportattached to the Management Discussion and Analysis,he is henceforth required to present to the General Meeting

of Shareholders a report on the procedures for the preparation andorganization of the Board’s proceedings, together with the internalcontrol procedures established by the company, and limitationsplaced by the Board on the powers of the Chief Executive Officer, if any. The Chairman’s report in respect of 2006 is attached herewith.Under this organization, and pursuant to French legislation, theBoard of Directors is responsible for setting strategy and broadpolicy governing the company’s activities, and for overseeing their implementation. The Chairman organizes and directs itsproceedings, being responsible for reporting to the General Meetingof Shareholders, and for overseeing the proper functioning of thecompany’s management organization. The Chief Executive Officer is invested with full powers to act in the name of the company in all circumstances, and to represent it in its relations with third parties.He may be assisted by one or more Executive Vice-Presidents.In accordance with the Lectra shareholders’ resolution, the ChiefExecutive Officer must be a member of the Board of Directors.The Board of Directors believes this format for the management and administration of the company, which has been in application for the past five years, achieves a better balance and greater operationalefficiency. It considers that the format is better suited to the size of the company, its worldwide structure and mode of operation, and will allow it to comply more fully with the requirements ofcorporate governance.The Chief Executive Officer is thus free to devote his full attention to the execution of the company’s short-term goals and action plan,while continuing to pursue its medium-term business plan—as part of the company’s drive to speed its transformation in order to tacklethe new challenges it faces.It should be recalled that in 2006 the Board of Directors reelectedMr. André Harari to the position of Chairman of the Board ofDirectors and Mr. Daniel Harari to the position of Chief ExecutiveOfficer. It did not name any Executive Vice-President.Daniel Harari chairs the Executive Committee, the other two membersbeing Jérôme Viala, Chief Financial Officer, and Véronique Zoccoletto,Director of Human Resources, Organization and Information Systems.

Directors’ and Officers’ CompensationAs recommended by the Afep (French association of private-sectorenterprises) and the Medef (French employers’ federation) in January, details of directors’ and officers’ compensation arepresented below.



Policy Governing the Compensation of Directors and OfficersCompensation of corporate officers of the company comprises a fixed and a variable portion. The company does not award bonuses in any form.Variable compensation is set in accordance with the following two criteria expressed in terms of annual targets (excluding non-recurring items): consolidated pre-tax profit (which accounts for67%) and consolidated free cash flow (which accounts for 33%).Below a certain threshold, it is equal to zero.Conditional upon the fulfillment of annual targets, variablecompensation for 2006 was equal to 60% of total compensation for the Chairman of the Board of Directors and the Chief ExecutiveOfficer (unchanged relative to 2005).Annual targets are set by the Board of Directors based on therecommendations of the Compensation Committee. The Committee is responsible for ensuring that the rules for setting the variable portion of compensation each year are consistent with the evaluation of corporate

officers’ performance and the company’s medium-term strategy.After the close of each fiscal year, the Committee verifies the annualapplication of these rules and the final amount of variablecompensation paid, on the basis of the audited financial statements.In 2006, the annual profit target and the free cash flow target wereexceeded. Altogether, the variable compensation paid to the Chairmanof the Board of Directors and to the Chief Executive Officer represented142% of the amount tied to the fulfillment of annual targets. The annualprofit target was not fulfilled in 2005, while the free cash flow target wasslightly exceeded. Overall, the variable portion of compensation represented80% of the amount set assuming fulfillment of the annual targets.

Details of Individual Compensation Paid to Each Director and OfficerFixed and variable compensation of corporate officers and directors’fees allocated in respect of fiscal 2006 and 2005 were as follows(gross amounts before employee contribution deductions):

(in euros) Position Fixed Variable Total Benefits in Directors’ compensation compensation compensation kind(1) fees(2)

André Harari Chairman of the Board of Directors2006 190,000 405,093 595,093 18,657 25,0002005 190,000 226,989 416,989 18,546 20,000

Daniel Harari Chief Executive Officer2006 190,000 405,093 595,093 13,317 25,0002005 190,000 226,989 416,989 13,269 20,000

Hervé Debache Director2006 25,0002005 20,000

Louis Faurre Director2006 25,0002005 20,000

(1) The amounts shown under benefits in kind correspond to the value for tax purposes of the use of company cars and life insurance premiums paid for Messrs. André Harari (€11,501) and Daniel Harari (€5,914).(2) Directors’ fees paid in respect of 2006 are subject to approval by the company’s Shareholders Meeting of April 30, 2007.



These amounts were paid in full by the parent company, Lectra SA.Directors and officers received no compensation or special benefitsfrom subsidiaries controlled by Lectra SA under article L. 233-16 of the French Commercial Code (for the record, Lectra SA is notcontrolled by any other company).The information mandated under article L. 225-102-1 of the FrenchCommercial Code regarding compensation and benefits of all kindspaid by Lectra SA to its directors and officers in fiscal year 2006 is disclosed in the notes to the financial statements of the parentcompany, Lectra SA (available separately, in French only). The totalcompensation and benefits in kind paid by Lectra SA to André Harariand Daniel Harari in 2006 amounted to €435,646 and €430,306respectively. Differences between these figures and those in theforegoing table stem from leads and lags in the payment of thiscompensation. Allowance for variable compensation due in respectof a given fiscal year is made in the financial statements of the saidfiscal year, the final amount being calculated after closure of the annual accounts and paid in the following fiscal year.No stock options have been granted to either André Harari or DanielHarari. Neither of them has been entitled to receive any further stockoptions since 2000, under French legislation, insofar as each ofthem has held more than 10% of the capital stock since that date.Mr. Daniel Harari holds no stock options. Mr. André Harari,who holds 334,000 options exercisable at a price of €16.50 untilJune 22, 2008, has not exercised any options.Finally, the company is not bound by any special arrangementrequiring payment of any form of indemnity to directors or officerson retirement.

Aggregate and Individual Attendance Fees Paid to Directors and Rules Governing Their DistributionDirectors’ fees paid in respect of 2006 are detailed above (seesummary table). The total figure of €80,000 approved by theGeneral Meeting of Shareholders on April 28, 2006 was dividedequally among the directors (€20,000, or one quarter of the total,for each director).

Policy Governing the Granting of Stock Options to all Beneficiariesand Specific Policy Governing the Granting of Stock Options to Directors and Corporate OfficersStock options are reserved for persons within the company or anaffiliated company that are linked by an employment contract and/or in their capacity as a corporate officer, and who are entitled by lawto receive stock options, whose responsibilities, missions and/or

performance justify their being given a stake in the capital stock of the corporation by the granting of stock options. Additionaldisclosure on options granted is provided in Chapter 7 of this report.No stock options have been granted to directors or corporate officerssince 2000.

Appointments and Directorships Held by Directors and CorporateOfficers in the Year Under ReviewMr. André Harari holds no directorship or general managementposition in any company other than the parent company, Lectra SA.Mr. Daniel Harari holds no directorship or general managementposition in any company other than the parent company Lectra SAand certain of its international subsidiaries. He is Chairman of theBoard of Directors of Lectra Sistemas Española SA and of LectraItalia SpA and President of Lectra Systems (Shanghai) Co. Ltd,all of which are direct subsidiaries of Lectra SA, located respectively in Spain, Italy, and China. He also held the post of President of Lectra USA Inc. and Lectra Canada, both of which are directsubsidiaries of Lectra in the United States and Canada, until the arrival of Mr. David Rode.Mr. Louis Faurre holds no outside directorship or generalmanagement position outside Lectra SA.Mr. Hervé Debache is Director and Executive Vice-President of AWF (Paris), which specializes in financial engineering, mergersand acquisitions and private equity financing. He is also a Director of Cyber Capital (Paris), a venture capital company specializing in audiovisual and media companies. These directorships are held in France.

Transactions subject to article L. 621-18-2 of the French Financialand Monetary Code and article 222–15-1 of the GeneralRegulation of the Autorité des marchés financiers

No trading took place in 2006 in the shares of Lectra as referred to in article L. 621-18-2 of the French Financial and Monetary Codeand article 222–15-1 of the General Regulation of the Autorité desmarchés financiers (AMF, the French Financial Markets Authority),by directors or by Jérôme Viala and Véronique Zoccoletto, membersof the Executive Committee, these being the only senior executiveshaving power to make management decisions regarding thecompany’s development and strategy and having access to insideinformation concerning the company.



454,115 treasury shares held by the company at December 31, 2006or purchased since the beginning of 2007.Altogether, the company canceled a total of 3,802,506 shares in2005 and 2006, utilizing in full the authority to cancel 10% of the38,025,060 shares comprising the capital stock at April 29, 2005.

Liquidity AgreementBetween January 1 and December 31, 2006, the company purchased212,201 shares at an average price of €5.11 and sold299,195 shares at an average price of €5.30, under the LiquidityAgreement administered by SG Securities (Paris), and in compliancewith the Charter of Ethics established by the Association françaisedes entreprises d’investissement (AFEI, French association ofinvestment companies) and approved by AMF.The company held 300,707 of its own shares at December 31, 2006purchased at an average price of €4.87 within the framework of thiscontract.

Renewal of the Share Buyback ProgramThe Board of Directors has proposed to the General Meeting ofShareholders of April 30, 2007 to renew the share buyback programpursuant to article L. 225-209 of the French Commercial Code.The aims of this program are as follows, in descending order of priority:– to maintain liquidity in the market in the company’s shares, via an authorized investment services provider acting within theframework of a liquidity agreement in compliance with the Charter of Ethics of the AFEI or any other charter recognized by the AMF;– to retain or use all or part of the repurchased shares as a means of payment or exchange or otherwise within the framework of externalgrowth transactions;– to grant shares, notably to present and future officers or employeesof the company and/or the Lectra Group, or to some of them, and in particular within the framework of articles L. 225-179 and after,and L. 225-197-1 and after of the French Commercial Code (relatingto the administration of stock option and free right issue programs);– to deliver shares in the company on the occasion of the exercise of rights attached to securities entailing an entitlement by whatevermeans to the company’s equity;– to cancel shares by reduction of the capital stock, pending the approval of Resolution One of the Extraordinary Shareholders’Meeting of April 30, 2007.In accordance with this resolution, the Board will be entitled tocancel the repurchased shares and to reduce the company’s capital

Group Auditors’ FeesThe Lectra Group booked a total of €949,000 in fees for the audit of the financial statements of the parent company and all of itssubsidiaries in 2006, including €725,000 to PricewaterhouseCoopers,€155,000 to KPMG, and €69,000 for other audit firms. Details are given in the notes to the consolidated financial statements.

9. AUTHORIZATION GIVEN TO THE COMPANY TO ACQUIRE AND SELL ITS OWN SHARES

The Shareholders’ Meeting of April 28, 2006 renewed the existingprogram and granted authority to the company to trade in its ownshares for a period of eighteen months from the date of the saidMeeting.Moreover, the Shareholders’ Meeting of April 29, 2005 authorized theBoard of Directors, for a period of 24 months ending April 29, 2007,to cancel shares representing up to 10% of the capital stock held by the company, or shares that it may come to hold as a result of purchases already made or made within the framework of the buyback program decided by the said Meeting or of any future authority that may be granted by an Ordinary Meeting of Shareholders pursuant to article L. 225-209 of the FrenchCommercial Code.In accordance with the general regulations of the AMF published on January 18, 2006, which notably abolish the need for a visa on the information document presenting stock buyback programs,replacing the latter by a “program description”, the company madethis document available to shareholders on its website and on that of the AMF on April 3, 2006.

Treasury SharesThe company has maintained the mandate given to SG Securities(Paris) (Société Générale Group) to purchase company shares on itsaccount in accordance with the terms of the program authorized bythe Shareholders’ Meeting.Between January 1 and December 31, 2006, the company purchased859,811 shares at an average price of €4.99 and did not sell any shares.At December 31, 2006, the company held 440,803 treasury sharespurchased at an average price of €5.97, as a result of trading on its own account.As stated in Chapter 7 above, at its meetings on February 9 andOctober 30, 2006, the Board of Directors cancelled1,159,639 treasury shares. Previously the Board of Directors ofJuly 28, 2005 cancelled 2,188,752 treasury shares. At its meetingon February 9, 2007, the Board of Directors decided to retire



stock by the amount of the said cancellations up to a maximum of 10% for the two-year period ending April 30, 2009.Concerning the new share buyback program, the company willact in conformity with the requirements of French law with regardto the maintenance of sufficient retained earnings, the registration of shares and the elimination of voting rights attached to treasuryshares.As previously, this program will concern a variable number of sharessuch that the company does not come to hold a number of treasuryshares exceeding 10% of the capital stock (representing3,532,395 shares at the time of preparation of this report) adjustedfor transactions affecting it subsequent to the Shareholders’ Meeting of April 30, 2007, where appropriate.The shares may be repurchased in all or in part by trading in the market or over-the-counter, including by block purchases, by recourse to warrants or to securities carrying a right to shares in the company in accordance with the terms established by the AMF,and at such times as may be decided by the Board of Directors orany person acting on the authority of the Board.The Board of Directors will provide shareholders with the informationrequired in articles L. 225-211 and L. 225-209, paragraph 2, of the French Commercial Code, in its reports to the Annual Meetingof Shareholders.The Board of Directors has proposed the following terms:– maximum purchase price: €12 per share;– maximum amount to be utilized in the stock buyback program:€20 million.If the shareholders approve this resolution, the new program willreplace the one authorized by the General Meeting of Shareholdersof April 28, 2006. It will have a duration of eighteen months from the date of the Annual Meeting of Shareholders, e.g., until October 30, 2008.In accordance with the general regulations of the AMF, the companywill make this document available to shareholders on its website(www.lectra.com) and on that of the AMF (www.amf-france.org). A printed copy can be obtained free of charge (on application to Lectra, Investor Relations department, 16-18 rue Chalgrin, 75016 Paris-France).

10. POST-CLOSING EVENTS

To unveil its technological innovations to the world, Lectra organizeda series of events on the occasion of Lectra World 2007. The previousworld congress was held in 1996.

Lectra World 2007 began by gathering together more than1,000 Lectra employees from all over the world in Bordeaux, France,from January 31 through February 2, 2007.On February 5 and 6, 400 customers, prominent figures from thefashion business, institutions, and journalists from the world overattended a congress in Bordeaux dedicated to the fashion industry.Lectra unveiled its latest technological innovations (see press releasesof January 18, 26 and 29, and February 2, 2007). In particular it presented:– its new generation of Vector cutting systems, even more powerfuland more intelligent, bringing greater reliability and security to the production process, representing an R&D outlay of more than €12 million and mobilizing more than 80 R&D engineers over three years;– its new service contracts for CAD/CAM equipment, based notablyon the capability of the new generation of Vector to perform auto-diagnostics and to automatically communicate with Lectra’s CallCenters;– the new version of Lectra Fashion PLM;– Easy Grading, a powerful and unique automated grading softwareapplication integrated into Lectra’s pattern-making and gradingsolutions—Modaris and PGS—the industry standard in this field;– Modaris 3D Fit, the market’s top-performing 3D virtual prototypingsoftware solution for apparel;– the new Kaledo design software offering, with new automaticupdating functions applying each change in the model’s style rightacross the design chain.Lectra World 2007 will continue in March, in Bordeaux—with two congresses dedicated to the automotive, aeronautical andmarine industries, and to the furniture industry—then in Shanghai.

11. FINANCIAL CALENDAR

The Annual Shareholders’ Meeting will be held on April 30, 2007.First, second, and third quarter earnings for 2007 will be publishedon April 27, July 27, and October 30, 2007 respectively, after theclose of trading on Euronext. The audited financial results for 2007will be published on February 11, 2008.

12. REPORT ON AUTHORITY TO INCREASE THE CAPITAL

Article L. 225-100 of the French Commercial Code, as amended by the Executive Order (Ordonnance) of June 24, 2004, requires thatthe Management Discussion and Analysis comprise a table summarizing



the authorities and powers granted to the Board of Directors by the Shareholders’ Meeting, with respect to capital increases in application of articles L. 225-129-1 and L. 225-129-2 of the FrenchCommercial Code, and their utilization by the Board of Directors in the course of the year. The table is attached to this report.The Extraordinary General Meeting of April 28, 2006 approved a general renewal of the authorities granted by the General Meetingof Shareholders of April 30, 2004 (not utilized by the Board of Directors) and extended its delegation of powers to include the new measuresauthorized under the law and regulations following the ExecutiveOrder (Ordonnance) No.2004-604 reforming the legislation on securities issued by commercial companies.Within the framework of the “global delegation” mechanism, theExtraordinary General Meeting of April 28, 2006 delegated to the Boardof Directors the power to increase the capital stock by a maximumpar value of €15 million, excluding additional paid-in capital (i.e., a maximum of 10 million shares with a par value of €1.50). Moreover,in the event of a bond issue carrying a right to equity in the capitalstock by conversion, exchange or otherwise, the ExtraordinaryGeneral Meeting delegated authority to the Board of Directors to issue bonds for a maximum nominal amount of €100 million,allowing for the duration of the bonds and the anticipatedappreciation of the company’s shares over the said period.The Extraordinary General Meeting also granted authority to the Board of Directors, within the framework of its “global delegationsof authority” to increase the capital stock of the company by meansof public offerings representing up to 10% of the said capital stockper year, within the aforementioned maximum par value of€15 million. It further authorized the Board of Directors to increase the number of shares for issuance in the event of a capital increase,with or without the maintenance of preferential subscription rights,within the limit of 15% of the initial issuance, and within theaforementioned maximum amount. It further granted authority to the Board of Directors to increase the capital stock in remunerationof capital contributions in kind, up to a limit of 10% of the capitalstock, within the aforementioned maximum amount. In addition, it granted authority to the Board of Directors to increase the capitalstock within the framework of a stock-option plan up to a par valuelimit of €2.7 million (excluding additional paid-in capital).Finally, it granted to the Board of Directors the necessary authority to increase the capital stock up to a maximum par value of€25 million, in one or more installments, by capitalization of all or part of retained earnings, additional paid-in capital, or merger or transferpremiums, by raising the par value of the shares. This capital

increase, if carried out, would be distinct from the “globaldelegation.” These delegations have a duration of twenty-six monthsfrom the date of the Shareholders’ Meeting, i.e., until June 28, 2008inclusive, with the exception of the delegation authorizing the issuanceof securities for the benefit of a category of designated persons,which has a duration of eighteen months expiring on October 28, 2007, and with the exception of that authorizing the issuance of shareswithin the framework of a stock option plan having a durationof thirty-eight months expiring June 28, 2009.The Board of Directors has not made use of these authorities.

13. BUSINESS TRENDS AND OUTLOOK

2009 GoalsIn last year’s annual report the company stated that, basedon prospects at the time, it expected to achieve by 2008—or 2009 at the latest—revenues of €300 million, with a 15% operatingmargin, and continue to generate free cash flow in excess of net income. These targets assumed an average parity of $1.25/€1over the period.While the expected rebound in sales of new systems did notmaterialize in 2006, making it unlikely that Lectra will achieve its targets in 2008, the company remains confident of achieving them in 2009, assuming the same euro-dollar parity.Its view remains unchanged: all of the companies in its differentmarkets will undoubtedly seek to adapt to today’s economicconditions by acquiring the technologies they need in order to compete successfully. These are now a vital necessity for companieswishing to survive and thrive in the face of the radical changes taking place. The gradual lifting of uncertainties is expected to reviveinvestment in technology and open up new opportunities for Lectra.The new situation regarding textile quotas affords a crucial breathingspace until 2007-2008 for European and American companies, as well as for those in subcontracting countries other than China, to adapt their business models and organizations. The sharp rise in Lectra’s sales activity in China in 2006 is also a sign that the powerful growth prospects now opening up are encouragingChinese companies to resume investing in technology.Where the leading American and European automotive manufacturersand equipment suppliers are concerned, following their drasticrationalization measures of 2005 and 2006 some are still in gravecrisis, and the only way they can emerge from this is by improvingtheir product lines through greater creativity and by speeding



up the modernization of their production facilities. Companies no longer have any option but to replace progressively the traditionaldie-cutting methods by automated cutting systems such as Lectra’spurpose-designed solutions. Likewise the major Japanesemanufacturers and equipment suppliers will be seeking to build on their lead by stepping up their technology investments.The company therefore now expects it’s five key growth drivers to start delivering their benefits in full, namely: PLM for the fashionindustry; major automotive customers; the United States and China;and, finally, the evolution, renewal and development of Lectra’sinstalled base of 17,000 customers, and the extension of relatedservices.

2007 OutlookLectra enters 2007 in a position of strength. It has bolsteredits teams significantly; they are motivated and ready for action.It has an entirely new, highly competitive product offering. Its financialfundamentals have improved in recent years and these are nowextremely robust. Finally, it continues to step up its investment in R&D, with an ambitious plan, guaranteeing its technologicalleadership.Assumptions for 2007 are based on a parity of $1.33/€1, which will negatively impact revenues (by approximately 2%) and earnings(by approximately €2.7 million) by comparison with the averageparity for 2006 ($1.26/€1). At the date of publication, the companyhas not hedged its net dollar exposure for 2007.

First-half sales activity, however, is likely to suffer from the productlaunches, which could temporarily depress orders, revenues,earnings and free cash flow–particularly in the first quarter.In light of the positive impacts these launches are expectedto produce in the full year, revenues are expected to come to between€220 million and €235 million (respectively +4% and +11%relative to 2006, like-for-like).Due to the combination of improved operating ratios and a rise of around 10% in fixed costs relative to 2006, income fromoperations excluding non-recurring items is expected to come to between €11.5 million and €16.5 million, a growth of between 0 and 43%, like-for-like, relative to 2006.

The Board of DirectorsFebruary 23, 2007



schedule of authorizations to increase the capital at the close of fiscal year 2006Note to chapter 12 of the Management Discussion

Type of issue Authorization date Maturity Term Maximum amount Utilization2005-2006

General authorities granted

Issuance of securities granting access to equity in the capital stock with maintenance of preferential subscription rights April 28, 2006 June 28, 2008 26 months Capital*: €15,000,000 Unused

Debt: €100,000,000

Issuance of securities granting access to equity in the capital stock with waiver of preferential subscription rights April 28, 2006 June 28, 2008 26 months Capital*: €15,000,000 Unused

Debt: €100,000,000

Issuance of securities granting access to equity in the capital stock with waiver of preferential subscription right in favor of a category of persons April 28, 2006 October 28, 2007 18 months Capital*: €15,000,000 Unused

Debt: €100,000,000

Issuance of securities by public offering within an annual limit of 10% of capital stock April 28, 2006 June 28, 2008 26 months 10% of capital stock per year Unused

Increase in number of securities for issuancein the event of a capital increase, with or without waiver of preferential subscriptionrights in case of overallocation April 28, 2006 June 28, 2008 26 months Capital*: 15% of initial issue Unused

and at same price

Increase of capital by capitalization of reserves, additional paid-in capital, or earnings April 28, 2006 June 28, 2008 26 months Capital*: €25,000,000 Unused

Issuance of securities in remuneration of capital contributions in shares April 28, 2006 June 28, 2008 26 months 10% of capital stock Nil

Specific authorities granted in favor of employees, directors and officers

Stock options April 28, 2006 June 28, 2009 38 months Capital*: €2,700,000 Unused

Total authorized amount €42,700,000

* Par value.


54

To the Shareholders,

The French Financial Security Act of August 1, 2003, modifying the obligations of French sociétés anonymes, notably amended articleL. 225-37 of the French Commercial Code. This now requires theChairman of the Board of Directors of a société anonyme to appendto the Management Discussion and Analysis of Financial Conditionand Results of Operations a report giving details of the manner in which the Board’s proceedings are prepared and organized, and on the company’s internal control procedures.The French December 30, 2006 “Employee Profit Sharing and ShareOwnership Development Act” (Law No. 2006-1770) again amendedarticle L. 225-37 of the French Commercial Code. Under the amendedlegislation, the report of the Chairman of the Board of Directors on conditions governing the preparation and organization of Boardproceedings and on internal control procedures is also required todescribe the principles and rules established by the Board regardingcompensation and benefits of the company’s directors and corporateofficers.This report describes (i) the conditions in which the Board preparedand organized its proceedings in the year ended December 31, 2006,(ii) the internal control procedures implemented by the company and (iii) the rules established by the Board of Directors for the purposeof determining the compensation and benefits of directors and corporate officers.

1. CONDITIONS GOVERNING THE PREPARATION AND ORGANIZATION OF BOARD PROCEEDINGS

Role and Operation of the Board of DirectorsThe Board of Directors is responsible under law for setting the company’s strategy and direction for company operations, and for overseeing their implementation. The Chairman of the Boardis responsible for organizing and directing its proceedings, and for reporting to the General Meeting of Shareholders; he is alsoresponsible for ensuring the proper operation of the company’s

management bodies. The Chief Executive Officer is invested with fullpowers to act in the company’s name in all circumstances andrepresents the company in its dealings with third parties. He may be assisted by one or more Executive Vice-Presidents. As resolvedby the Shareholders, the Chief Executive Officer must be a memberof the Board of Directors.The Board of Directors considered it unnecessary to establish internalregulations for the Board. To comply with the rules of corporategovernance, the Board of Directors must include at least two independent directors. A director is deemed to be independentof corporate management when there is no relationship whateverbetween him and the company or the group to which it belongs likelyto compromise his freedom of judgment. Such is the case for two of the four members of the Board of Directors, namely Messrs HervéDebache and Louis Faurre.In 2001, the company named an Audit Committee and a CompensationCommittee from among the members of its Board of Directors. These committees comprise three members each, namely Messrs.Hervé Debache, Louis Faurre, and André Harari, the Chairman of the Board of Directors.The Audit Committee is chaired by Mr. Hervé Debache and meets atleast four times per year, before the Board meetings called to reviewthe quarterly and annual financial statements. The Statutory Auditorsand the Chief Financial Officer attend all of these meetings. The Audit Committee held five meetings in 2006.The Audit Committee continuously oversees the preparation of thecompany accounts, internal audits and financial reporting, togetherwith the quality and fairness of the company’s financial reporting.The Chief Financial Officer assists the Committee in the discharge of its duties, and the Committee periodically reviews with him areasof potential risk to which it needs to be alerted or requiring closerattention. The Committee also works with him in reviewing andapproving guidelines for the work program on management controland internal control for the year in progress. He also reviews theassumptions used in closing the consolidated and company, quarterly,

report of the chairman on conditions governing the preparation and organization of board proceedings and on internal control procedures

REPORT ON INTERNAL CONTROL PROCEDURES


55

half-year and annual financial statements before they are submittedto the Board of Directors. In 2006, as in 2005, the Committeenotably reviewed the goodwill impairment tests.Finally, the Committee reviews and discusses with the StatutoryAuditors the scope of their engagement and their fees, and ensuresthat these are sufficient to enable them to exercise a satisfactorylevel of control (each Group company is subject to an annual audit,usually carried out by a local member of the Statutory Auditors’firms; a limited review is conducted on the half-year reportingpackage of the main subsidiaries). At each meeting the Committeeinvites them to report on their control program and on new areas of risk they may have identified in the course of their work, and it discusses the quality of accounting information with them. Once a year, it receives from the Statutory Auditors a report preparedexclusively for its attention on the findings of their audit of thestatutory and consolidated financial statements for the year ended,and confirming the independence of their firms in accordance withthe French code of professional ethics and the August 1, 2003Financial Security Act.The Compensation Committee, chaired by Mr. Louis Faurre, meetsbefore each meeting of the Board whenever the setting of corporateofficers’ compensation and related benefits or the granting of stockoptions are placed on the Board’s agenda. It also reviews thecompensation of the Group’s senior managers once a year. TheCommittee reviews in detail all corresponding documents preparedby the Chief Executive Officer and the Director of Human Resources,and communicates its recommendations to the Board. The Committeemet three times in 2006.At the end of 2004, the company set up a Strategic Committee. ThisCommittee met twice in 2006 to review, among others, the strategicpriorities, action plans undertaken to accelerate the company’stransformation in keeping with its new strategic challenges, and theoutline of the company’s three-year business plan. The Committeecomprises three directors, Messrs. Hervé Debache, Louis Faurre, and André Harari, and is chaired by Mr. André Harari, Chairman of the Board of Directors.Subjects that the Chairman of either of these committees wishes to discuss are placed on the agenda of the Committee concerned.When an item on the agenda of the Board of Directors requires priordiscussion by the Audit Committee, the Compensation Committee,or the Strategic Committee, the Chairman of the Committee concernedcommunicates his Committee’s comments and recommendations, if any, to the full session of the Board.

Timetable and Meetings of the Board of DirectorsThe company’s financial calendar setting out the dates for thepublication of quarterly and annual results, those of the AnnualGeneral Meeting of Shareholders and the two annual analysts’meetings, is established before the end of the previous fiscal year.The calendar is published on the company’s website andcommunicated to Euronext.The dates of the six meetings of the Board of Directors are decidedon the basis of this calendar. These comprise the quarterly andannual financial results publication dates, approximately forty-fivedays prior to the Annual General Meeting of Shareholders in order to review the documents and decisions to be presented, andapproximately twenty days after the Annual Meeting of Shareholdersfor the granting of the annual stock-options plan. The StatutoryAuditors are invited to, and systematically attend these meetings(with the exception of the meeting to decide on the stock-optionsplan). In addition, the Board also meets outside of these dates todiscuss other subjects falling within its responsibilities (includingall planned acquisitions or the review of the company’s strategic plan).The Chief Financial Officer was appointed Board Secretary in 2006and systematically attends and takes part in all Board meetings,except when prevented from doing so.The two representatives of the employees’ Works Council followBoard meetings by videoconference.The Board of Directors met seven times in 2006.

Organization of Board Proceedings – Communication of Information to DirectorsThe agenda is set by the Chairman of the Board of Directors afterconsulting with the Chief Executive Officer, the Chief FinancialOfficer and, where appropriate, the Chairman of the Audit Committee,the Compensation Committee and, from 2005, the StrategicCommittee, in order to place on the agenda all subjects theywish to be discussed at the forthcoming Board meeting.In advance of each Board meeting, a set of documents is systematicallyaddressed to each director, to the employees’ Works Councilrepresentatives and to the Chief Financial Officer, as well as to theStatutory Auditors for the four meetings called to review the financialstatements and for the meeting to prepare for the Annual GeneralMeeting of Shareholders. Details of each item on the agenda areprovided in a written document prepared by either the Chairman of the Board of Directors, the Chief Executive Officer, the ChiefFinancial Officer, or the Director of Human Resources, Organizationand Information Systems, as required.


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As in previous years, in 2006 all documents required to becommunicated to the directors were made available to them in compliance with regulations. Further, the Chairman regularly asksdirectors if they require additional documents or reports in order to complete their information.Detailed minutes are produced for each meeting and submitted to the Board of Directors for approval at a subsequent meeting.No decision within the competence of the Board of Directors is madeby the Audit Committee, the Compensation Committee, or theStrategic Committee. All decisions required to be made by the Boardof Directors, and in particular those concerning the compensation of corporate officers and the granting of stock options or free rightsissue programs to senior managers and employees, together with all external growth operations, are reviewed and approved in fullsessions of the Board of Directors. Moreover, all financial pressreleases and notices published by the company are submitted in advance for review by the Board and the Statutory Auditors, and are published on the same evening after the close of Euronext.

2. INTERNAL CONTROL PROCEDURES ESTABLISHED BY THE COMPANY

2.1 Identification of RisksThe definition of the internal control policy is based on the prioridentification of the challenges and risks facing the company. Lectra is subject to a variety of risks, the main categories of which are described below.

Economic Risks Specific to the Company’s BusinessLectra designs, produces and markets full-line technologicalsolutions, comprising software, equipment and related servicesdedicated to a broad array of major global markets: fashion (apparel,accessories, and footwear), furniture, automotive, aeronautical,marine and industries utilizing industrial textiles and compositematerials.This activity demands continuous innovation, and the companyconsequently invests heavily in research and development. Thecorresponding expenditures are fully expensed in the year. As a corollary of this policy, the company must ensure both that itsinnovations are not copied and that its products do not infringe third parties’ intellectual property. It therefore has a dedicated team of intellectual property specialists that takes both offensive and defensive measures with regard to patents.

A substantial portion of its equipment manufacture is subcontracted,with Lectra providing only the R&D, final assembly and testing of theequipment it markets. Prior to selection, subcontractors are evaluatedin terms of their technological and industrial performance and theirfinancial condition.Inventory valuation risk is minimized by means of just-in-timesupply and manufacturing methods.Where software is concerned, the main risk lies in the revenuerecognition criteria of this intangible revenue source in companyrevenues.

Currency RiskA substantial portion of revenues is denominated in a variety of currencies whose fluctuations against the euro entail a currencyrisk for the company. The mechanical and competitive effects offluctuations in these currencies (especially the U.S. dollar) againstthe euro are amplified in the Group’s financial statements by the fact that its production sites are located in France, for the most part,and also in Germany, while its main competitor is based in the United States.

Legal and Regulatory RisksThe company markets its products to more than 17,000 customers in nearly 100 countries through a network of 30 sales subsidiaries,supplemented by agents and distributors in countries where it doesnot have a direct presence. Consequently, it is subject to a verylarge number of legal, customs, tax and social regulations in thesecountries.In addition, extensive intra-Group flows have necessitated theformulation of a transfer pricing policy compliant with local andinternational guidelines (OECD in particular). The Group has producedadequate documentation setting out its policy in this regard. Thisdocumentation was scrutinized on the occasion of the most recenttax audit of the parent company, Lectra SA, completed in 2003. This review did not give rise to any observations.The company is listed on the Euronext Paris Stock exchange(Eurolist, compartment B); it is a member of the NextEconomy segment.The company is therefore subject to stock-market regulations(particularly those of the Autorité des marchés financiers AMF, the French Financial Markets Authority).



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2.2 Objectives of Internal ControlWithin the context of the foregoing issues and risks, Lectra’s internalcontrol policy is designed to achieve the following main objectives:

2.2.1 Reliable Financial InformationAmong the control mechanisms in place, special emphasis is placedon procedures for preparing and processing accounting and financialinformation. Their aim is to generate reliable, high quality informationthat presents a fair view of the company’s operations and financialcondition. In addition, these procedures are designed to producetimely quarterly and annual financial statements, ready for publicationthirty days after the close of each quarter at the latest, and a maximumof forty-five days after fiscal year end.These mechanisms are designed to enable the Group to ensure the proper execution and integrity of its operations, and to preventthe risk of fraud within each of its constituent companies.

2.2.2 Optimizing PerformanceAn extensive array of internal control procedures is now in place witha view to ensuring that the company achieves its short and medium-term objectives, notably in terms of revenue growth, operatingprofitability, and free cash flow.

2.2.3 Protection of AssetsInternal control procedures are required to ensure the safeguardingof Group assets (in addition to its financial assets, intellectualproperty, human resources, customer relationships, and corporateimage), all of which play a key role in its dynamism and growth.

2.2.4 Legal and Regulatory ComplianceThe company’s internal control procedures are designed to provideassurance that the operations carried out in all Group companiescomply with the laws and regulations in force in each of the countriesconcerned.

2.3 Organization of Internal ControlAn understanding of the organization of internal control at Lectra isessential in order to assess the appropriateness of its structure andthe role of the different players engaged in internal control functionswithin the Group.

2.3.1 Organization by FunctionThe Executive Committee implements the strategy and policiesdefined by the Board of Directors. This Executive Committee ischaired by the Chief Executive Officer and comprises two othermembers, the Chief Financial Officer and the Director of Human

Resources, Organization and Information Systems. The changesintroduced at the beginning of 2005 also entailed a broadening of the functions of these two officers through new appointments and greater delegation of powers.The Chief Executive Officer is directly responsible for worldwidesales and service operations, whose managers report directly to him, namely:– market sector divisions;– regions and international subsidiaries;– the Services division;– the Marketing and Communications division.The heads of the Lectra Group’s various corporate divisions alsoreport directly to the Chief Executive Officer, i.e.:– the Finance division, which comprises the following functions:treasury, accounting and consolidation, management control andaudit, legal affairs, industrial affairs (purchasing, manufacturing,logistics, quality control);– the Human Resources, Organization and Information Systemsdepartment;– the Software and Hardware Research and Development divisions.

2.3.2 Decision-Making ProcessAll important decisions (sales strategy, organization, investmentsand recruitment) relating to the operations of a region or Groupsubsidiary are made by a Board of Directors responsible for theregion or subsidiary concerned. These Board, chaired by the ChiefExecutive Officer, meet at least quarterly, with the regional managersand heads of the subsidiaries concerned as well as their managementteams attending. The latter submit to the Board their detailed actionplans drawn up on the basis of Group strategic and budgetarydirectives, and they report on the implementation of decisions as well as on their operations and performance.The internal control process involves a large number of players. The corporate divisions are at the center of this organization. Theyare responsible for formulating rules and procedures, for monitoringtheir application and, more generally, for approving and authorizing a large number of decisions connected with the operations of the corporate operating divisions and subsidiaries.

2.3.3 General Organization of ControlsGiven the nature of its business, the Lectra Group is obliged to adaptits organization to market changes whenever necessary. Each changein its organization or modus operandi is preceded by a reviewprocess to ensure that the proposed change is consistent



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with the preservation of an internal control environment conducive tocontinuing compliance with the objectives described in chapter 2.2above. Accordingly, the scope and distribution of the powers ofindividuals and teams, reporting lines and rules for the delegation of signing authority, are subject to scrutiny, and are adjusted if necessary, prior to all organizational changes.The Group does not have an internal audit department as such, but the Group Finance division—and in particular the treasury and management control teams—is central to the internal controlsystem. They conduct systematic monthly verifications of allaccounting and financial information, forecasted and actual, pertaining to all Group companies (see paragraph 2.3.4 below).In each subsidiary, the person in charge of finance and administration,which usually comprises legal affairs, also plays a major role in theorganization and conduct of internal controls. The primary mission of this person, who reports functionally to the Group Finance division,is to ensure that the subsidiary complies with the rules and procedures established by the corporate divisions.The Information Systems division is responsible for guaranteeing the integrity of data processed by the various software packages in use within the Group. It works with the Group Finance division to ensure that all automated processing routines contributing to the preparation of financial information are compliant with accountingrules and procedures. In addition, it verifies the quality andcompleteness of information transferred between the differentsoftware applications. Finally, it is responsible for informationsystems security.The Group Legal Affairs department and Human Resources divisionperform legal and social audits of all Group subsidiaries. Their roleconsists in verifying that the operations of all subsidiaries are compliantwith the laws and other legal and social regulations in force in thecountries concerned. They also supervise most of the contractualrelations entered into between Group companies and third parties or employees. Where necessary, the Legal Affairs department workswith a network of law firms located in the countries concerned andspecializing in the subjects at issue. The Legal Affairs department is also responsible for identifying risks requiring insurance andformulating a policy for covering these risks by means of appropriateinsurance contracts. It supervises and manages potential or pendinglitigation, in conjunction with the Group’s attorneys where appropriate.Currency risk is managed centrally by the Group Treasurer. Groupexposure is hedged by a range of derivative instruments. Future

contracts are used to hedge foreign exchange balance sheet positions,and puts are used to hedge the estimated net impact of currencyfluctuations for a stipulated future period.Finally, as stated above, the company has formed a dedicatedintellectual property team that works in conjunction with the LegalAffairs department. It acts preventively to protect the company’sinnovations and avert all risks of intellectual property rightsinfringement.

2.3.4 Production and Verification of Financial InformationReporting and budget procedures, and procedures for the preparationand verification of the consolidated financial statements,are an integral part of the internal control system. Their purposeis to ensure the quality of financial information communicated to management teams, employee bodies and shareholders. These procedures are described below:

a) Reporting and Budget ProceduresThe company produces a comprehensive and detailed financialreporting that covers all aspects of the activities of each subsidiaryand parent company unit. This is based on a sophisticated financialinformation system built around a market-leading software package.Reporting procedures are based primarily on the budgetary controlsystem put in place by the Group. The Group’s annual budget is prepared centrally by the Finance division management controlteams. This detailed, comprehensive process consists in analyzingand quantifying the budgetary targets of each subsidiary and Groupunit under a very wide range of income statement and treasuryheadings, together with indicators specific to each activity and the structure of operations. This system permits rapid identificationof any deviation in actual or forecasted results, and of any risk of error in the financial information produced.

b) Accounts Preparation and Verification Procedures

Monthly Financial ResultsThe actual results of each Group company are verified and analyzedon a monthly basis, and new forecasts for the current quarter areconsolidated. Each deviation is identified and described in detail in order to determine its causes, verify that procedures have beenrespected and the financial information properly prepared. Thisapproach is designed to ensure that transactions recorded in theaccounts fully reflect the economic reality of the Group’s businessand operations.



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Assets and liabilities are subject to regular controls to ensure the accuracy of monthly reported results. These controls includephysical counting of fixed assets and reconciliation with accounts; a revolving physical count of inventories (the most importantreferences being counted four times per year); a comprehensivemonthly review, with the credit management department, of overdueaccounts receivable (see paragraph 2.4.2 below); a monthly analysisof provisions for risks and charges, and provisions for inventorywrite-downs. On this last point, procedures include the performanceof regular tests to verify that net realizable value is equal to or greaterthan the cost of the item concerned, failing which a write-down isimmediately recognized.

Quarterly Consolidation of Financial StatementsGroup financial statements (balance sheet, statement of income,statement of cash flows, and statements of changes in stockholders’equity) are consolidated on a quarterly basis. The process ofpreparing the consolidated financial statements comprises a largenumber of controls to ensure the quality of the accounting informationcommunicated by each of the consolidated companies and of theconsolidation process itself.All Group subsidiaries employ a single standard consolidationreporting package. All inter-company flows and balances for eachGroup company are systematically reconciled prior to the transmissionof any information. Moreover, each of the form’s headings is verifiedagainst a standard checklist by the person responsible for completingthe form in each of the companies concerned. The purpose of thischecklist is to ensure that all necessary controls have been performedin order to ascertain the existence, comprehensiveness and accuracyof the transactions recorded in the results communicated to theFinance division’s consolidation teams.Each controller is then responsible for analyzing the consolidationpackage of the subsidiaries under his supervision, reconciling actualresults with the forecasts received previously via the monthly reportingprocedure. The controller checks and analyzes deviations and, moregenerally, verifies the quality of the information communicated. The subsidiary’s documents and financial information are deemed to be definitive only after all of these controls have been performed.Upon completion of the consolidation process, all items in thestatement of income, balance sheet and statement of cash flows are analyzed and justified.The resulting financial statements are reviewed by the Chief ExecutiveOfficer and then submitted to the Audit Committee, before beingreviewed and approved by the Board of Directors, and published by the company.

2.4 Description of Internal Control ProceduresGroup internal control procedures pertaining to significant operatingfunctions are described below:

2.4.1 SalesGroup sales comprise two main components, namely sales of new systems, and sales of contracts and other recurring services.Most recurring revenues are covered by a contractual relationshipwith the customer, the general contract terms of which are written by the company. The sales administration of the company issuingthe bill verifies the proper application of the contract terms. In addition,the same verification is subject to random audit by the Groupcorporate divisions.The sales cycle for new systems is subject to extensive controls,oversight of operations being centralized by the Group salesadministration. Current procedures are designed to permit:– verification of the authenticity of the order and its content:technical validation of the proposed solution, checking to ensurecompliance with sales terms, prices, delegations of authority to grant discounts where applicable, and down payment percentages;also, verification of the existence of possible off-balance sheetcommitments vis-à-vis the customer.Controls are performed locally in each subsidiary, and subsequentlyon a centralized basis by the Group sales administration department.The Chief Executive Officer reviews all orders above a certainamount;– verification of shipment and billing: these operations are subject to prior validation by the Group sales administration department,which issues its approval only after confirmation of receipt of a downpayment or, in certain countries, receipt of an irrevocable confirmedletter of credit;– finally, all credit notes above a certain amount are subject to priorauthorization by the Group Finance division.

2.4.2 Credit ManagementA credit management department inside the Group Finance divisionregularly drafts, updates and monitors procedures for limiting therisks of non-recovery and shortening accounts receivable collectiondelays, and verifies their strict application. The credit managementdepartment also tracks all Group accounts receivable above a certainthreshold. These procedures provide for both upstream control of contractual payment terms and the customer’s solvency, prior to booking of the order, together with the systematic and sequencedimplementation of all means of recovery, from simple reminders



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to legal proceedings. These means of recovery are coordinated by the credit management department in conjunction with the LegalAffairs department.Historically, however, bad debts and customer defaults are rare.

2.4.3 PurchasingOne of the main objectives of the purchasing function across theGroup is to constantly optimize purchasing conditions, in particularby regularly benchmarking suppliers.Nearly 60% of subsidiaries’ purchases are made from the parentcompany. The remainder of their purchases, from third parties, is subject to budgetary limits which must be respected. The internalcontrol system inside each subsidiary’s purchasing function consistsprimarily in procedures for the delegation of signing authority,together with procedures applicable throughout the Group for the commitment of expenditures, and the budget tracking system(see paragraph 2.3.4 above).The parent company’s purchases and capital expenditure account for the bulk of Group volumes under these headings. Expenditurecommitments are subject to a computerized procedure covering all phases in the process, designed to ensure compliance with the principle of the segregation of duties and reciprocal verification.For raw materials, subcontracting of components used in themanufacture of equipment, and other products intended for sale, a purchasing request signed by an authorized person (depending on the size of the order) is issued in conformity with the productionschedule, the latter being approved monthly by the Chief FinancialOfficer and Chief Executive Officer. Requests regarding overheadsand investment expenditures can be issued only within the limits laid down in budgetary authorizations; above a certain limit, theserequests must be signed jointly by the Chief Financial Officer.

2.4.4 PersonnelAs a general rule, the organization of each Group company is subjectto comprehensive annual review and approval by the ExecutiveCommittee at the time of the budget planning process.Subsequently, all forecast or actual personnel changes are communicated to the Group Human Resources division. All recruitments and dismissals must receive the division’s priorauthorization. In the case of dismissals, the division mustsystematically assess the actual and forecasted costs of the dismissal and communicate its findings to the Finance division,which in turn ensures that the resulting liability is recognized in the Group accounts.

Compensation is reviewed annually and submitted to the Director of Human Resources for approval. Finally, for all personnel whoseannual compensation exceeds €100,000, the Executive Committeesubmits the annual compensation review, together with rules for the calculation of variable compensation, to the CompensationCommittee for approval.The compensation of certain employees comprises a variablecomponent dependent on fulfillment of annual targets set by theExecutive Committee at the time of the budget planning process and accepted by the beneficiaries. The rules for calculating thisvariable component are formulated jointly by the Group Finance division and Human Resources division. The results are then verified and approved both by the Group Finance and Human Resourcesdivisions. Payments are made on a monthly, quarterly or annualbasis, depending on the case, their definitive amounts being subjectto prior authorization by the Human Resources division. The criteria,based on Group earnings and free cash flow, together with their finalamount following closure of the annual accounts, are submitted to the Compensation Committee for prior approval.

2.4.5 TreasuryThe company’s internal control procedures regarding treasury operationsmainly concern bank reconciliations, security of payment means,delegation of signing authority, and monitoring of currency risk.Bank reconciliation procedures are systematic and comprehensive.They entail verification of all treasury department book entries,together with reconciliation between treasury balances and theaccounts’ bank balances.The company has implemented secure means of payment to avoid or limit all risk of fraud, and agreements covering check security havebeen signed with each of the company’s banks. This stage, which is intended to secure all means of payment (implementing the Etebac 5 protocol), was finalized in 2006.Bank signature authorizations for each Group company are governedby procedures laid down by the Executive Committee and arerevocable at all times with immediate effect. Signing powersdelegated under these procedures are notified to the banks, which must acknowledge receipt thereof.Recourse to short and medium-term borrowing is strictly limited and is subject to prior approval by the Chief Financial Officer.All decisions pertaining to currency hedging instruments are madejointly by the Chief Executive Officer and the Chief Financial Officer,and are implemented by the Group Treasurer.



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2.4.6 Prohibition on Trading in Shares Applicable to Certain Group ManagersIn keeping with corporate governance rules, the Board of Directorsdecided on May 23, 2006 to prohibit members of the corporatemanagement and management teams of the Lectra Group frombuying or selling the company’s shares during the period startingfifteen (15) calendar days before the end of each calendar quarterand expiring two (2) stock-market trading days after the meeting of the Board of Directors closing the quarterly and the annual financialstatements of the Lectra Group. This prohibition does not apply to the exercise of stock options during the period in question by anyperson figuring on the list drawn up by the Board of Directors, butthe said persons are required to hold any resulting shares until the expiration of the period.The Board of Directors further decided that, in addition to each of its members, only the two members of the Executive Committeewho do not hold a directorship have “the power to make managementdecisions regarding the company’s development and strategy” and,further, have “regular access to inside information” and are thereforerequired to notify the AMF within the stipulated deadlines of any purchases, sales, subscriptions or exchanges of financialinstruments issued by the company.

2.5 Changes in Internal Control Proceduresand the 2007 Action PlanLectra continued to improve its internal control processes in 2006.Among others, Group subsidiaries now report systematically, on aweekly or monthly basis, providing more relevant data on customerorders, accounts receivable and personnel transfers, together withmore general assessments of each subsidiary’s performance.At the same time a new set of sales rules and guidelines wasintroduced at the beginning of 2006, leading to improved internalcontrol over the entire sales cycle.The Elios project to overhaul all IT systems was launched in 2005and concerns all front office and back office activities in France and in all subsidiaries. Its aim is to introduce new operational modeswith improved management procedures and rules, via the deploymentof systems to integrate the chain of business processes. The companyhas deployed the Oracle eBusiness Suite, the latest generation ofEnterprise Resources Planning (ERP) software, whose functions spanpurchasing, supply chain, accounts, order and billing processing,and after-sales services. It has also developed functional improvements

to the Siebel Customer Relationship Management (CRM) systemdedicated to the marketing and sales teams and deployed over the period 2001-2004.A major drive was undertaken in 2006 to prepare the Elios project for effective startup of its first phase on January 2, 2007. More than 80 people were involved in the project management team, either as project managers or as intervening parties, together with outsideconsultants. They focused on analyzing and improving businessprocesses applicable to each relevant function and in optimizinginternal controls. Alongside this, French and worldwide personnelconcerned have received support and training in the new procedures.Phase 1 of deployment concerns only the parent company, Lectra SA.The new systems will be deployed progressively in all Groupsubsidiaries over the period from mid-2007 to late-2008/early-2009.The general approach now in place regarding internal controls willbe pursued in 2007, with particular emphasis on:– updating the Group’s risk mapping;– updating and/or formalizing accounting and financial procedures,procedures relating to human resources management and internalcontrol rules;– updating and improving reporting systems;– general improvements to internal control procedures, IT systemsand rules as part of the deployment of the Elios project.At the same time the company will implement in 2007 proceduresenabling compliance with the framework recommended by the AMFin its January 22, 2007 report, for the Report of the Chairman on conditions governing the preparation and organization of Boardproceedings and on internal control procedures for fiscal year 2007.

3. PRINCIPLES AND RULES ESTABLISHED BY THE BOARD OF DIRECTORS FOR DETERMINING THE COMPENSATION AND BENEFITS OF DIRECTORS AND CORPORATE OFFICERS

The principles and rules for determining the compensation andbenefits of directors and corporate officers are subject to priorreview and recommendation by the Compensation Committee. This Committee notably reviews total compensation and the preciserules for determining its variable portion and the specific annualperformance targets that serve to calculate it. All of thesecomponents are then discussed by the Board of Directors in full session and are subject to its sole discretion.



62 REPORT ON INTERNAL CONTROL PROCEDURES

No bonuses are paid, as a matter of principle. The compensation of directors and corporate officers is paid in its entirety by Lectra SA.They receive no compensation or particular benefit from companiescontrolled by Lectra SA within the meaning of article L. 233-16 ofthe French Commercial Code (NB: Lectra SA is not controlled by anyother company). No stock options have been granted to corporateofficers since 2000. The only benefit accorded to them concerns the valuation for tax purposes of the utilization of company cars and the payment of life insurance premiums. In addition, there is noarrangement providing for the payment of compensation in any formwhatever to corporate officers in the event of termination of theircontract, or at the time of their retirement.The variable portion of compensation is determined on the basis of two criteria expressed in terms of annual targets, excluding non-recurring items, namely: consolidated pre-tax income (67%), andconsolidated free cash flow (33%). This variable portion is equal to zero if certain thresholds are not met.Annual targets are set by the Board of Directors as recommended by the Compensation Committee. The Committee pays close attentioneach year to the consistency of the rules for determining the variableportion of compensation with evaluation of senior managers’performance and with the company’s medium-term strategy. Afteryear-end closing it audits the annual application of these rules and the actual amount of variable compensation paid, based on the audited financial statements.

Directors’ fees approved annually by the General Meeting of Shareholders are distributed in equal proportions among thedirectors. Directors who are also corporate officers therefore receivetheir directors’ fees in addition to their fixed and variablecompensation described above.Directors who are not corporate officers receive no form of compensation other than directors’ fees.

4. POWERS OF THE CHIEF EXECUTIVE OFFICER

The Chief Executive Officer is invested with full and unlimitedpowers.


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ASSETS

(in thousands of euros)As at December 31 2006 2005

Goodwill note 1 36,919 37,670

Other intangible assets note 2 5,965 3,622

Property, plant and equipment note 3 14,247 10,205

Non-current financial assets note 4 1,702 2,048

Deferred tax assets note 5.3 8,714 10,492

Total non-current assets 67,547 64,037

Inventories note 6 25,940 24,968

Trade accounts receivable note 7 49,223 46,826

Other current assets note 8 10,863 8,652

Cash and cash equivalents 9,997 25,058

Total current assets 96,023 105,504

Total assets 163,570 169,541

LIABILITIES AND STOCKHOLDERS’ EQUITY

(in thousands of euros) 2006 2005

Ordinary shares note 9 53,659 54,628

Share premium 3,944 6,121

Treasury shares note 9.1 (4,099) (5,922)

Retained earnings note 10 26,836 18,920

Cumulative translation adjustment note 11 (8,141) (6,788)

Total stockholders’ equity 72,199 66,959

Retirement benefit obligations note 12 3,906 3,708

Borrowings, less current portion note 13.2 650 1,405

Total non-current liabilities 4,556 5,113

Trade and other payables 52,259 44,097

Deferred revenues note 14 31,210 26,184

Current income tax liabilities 443 2,798

Borrowings note 13.3 635 13,486

Provisions for other liabilities and charges note 15 2,268 10,904

Total current liabilities 86,815 97,469

Total liabilities and stockholders’ equity 163,570 169,541

The notes on pages 68 through 104 are an integral part of the Consolidated Financial Statements.

consolidated

balance sheet

CONSOLIDATED FINANCIAL STATEMENTS


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(in thousands of euros)For year ended December 31 2006 2005

Revenues notes 16 and 33 216,098 211,197Cost of goods sold note 17 (69,999) (69,853)

Gross profit note 17 146,099 141,344

Research and development note 18 (18,671) (17,968)Selling, general and administrative expenses note 19 (113,123) (115,274)Non-recurring income and expenses note 20 (217) (7,320)Goodwill impairment loss note 1 – (11,917)

Income (loss) from operations 14,088 (11,135)

Financial income note 23 521 723Financial expense note 23 (493) (580)Foreign exchange loss note 24 (160) (1,143)

Income (loss) before tax 13,956 (12,135)

Income tax expense note 5.1 (1,820) (193)

Income (loss) 12,136 (12,328)

(in euros) 2006 2005

Earnings per share: note 25– basic 0.34 (0.34)– fully diluted 0.34 (0.34)Shares used in calculating earnings per share:– weighted average 35,326,394 35,974,037– assuming full dilution 35,608,009 36,106,207


consolidated

statement of income



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(in thousands of euros)For year ended December 31 2006 2005

I. OPERATING ACTIVITIES

Income (loss) 12,136 (12,328)

Depreciation and amortization(1) note 26 (2,638) 13,324

Goodwill impairment loss note 1 – 11,917

Other non-cash operating expenses note 27 675 392

Income (loss) on sale of fixed assets 1 (73)

Increase (decrease) in deferred income taxes, net value note 5.3 1,568 (2,611)

Decrease (increase) in inventories (1,969) (1,443)

Decrease (increase) in accounts receivable note 28 1,518 8,933

Increase in other current assets and liabilities 3,898 (4,972)

Net cash provided by operating activities(1) note 29 15,189 13,139

II. INVESTING ACTIVITIES

Purchases of intangible assets note 2 (3,467) (2,778)

Purchases of property, plant and equipment note 3 (6,735) (2,952)

Acquisitions of companies, net of cash acquired note 30 – (4,067)

Changes in financial assets note 4 360 (323)

Proceeds from sale of intangible assets and property, plant and equipment 340 497

Net cash used in investing activities note 29 (9,502) (9,623)

III. FINANCING ACTIVITIES

Proceeds from issuance of ordinary shares note 9 2,219 2,038

Dividends paid (4,594) (4,764)

Purchases of treasury shares note 9.1 (5,371) (9,748)

Sales of treasury shares net of capital gains or losses note 9.1 1,586 1,817

Repayment of borrowings note 13 (13,733) (14,903)

Net cash used in financing activities (19,893) (25,560)

Decrease in cash and cash equivalents (14,206) (22,044)

Cash and cash equivalents at the opening 25,058 46,664

Decrease in cash and cash equivalents (14,206) (22,044)

Effect of the consolidation of Lectra Tunisia and Lectra South Africa in 2005 – 306

Effect of changes in foreign exchange rates on cash (855) 132

Cash and cash equivalents at the closing note 32 9,997 25,058

Free cash flow before non-recurring items 15,357 8,253

Non-recurring items of the free cash flow (9,670) (670)

Free cash flow 5,687 7,583

Income tax paid 4,481 1,283

Interest paid 2 68

(1) The figures for the financial year 2006 include €8,400 thousand corresponding to non-recurring payments for which allowances were booked in 2005, and €3,430 thousandcorresponding to operating depreciation (€4,106 thousand in 2005).


consolidated

statement of cash flows



67

(in thousands of euros,Ordinary shares Cumulative

except for par value per Number Par value Total Share Treasury Retained translation Stockholders’share expressed in euros) of shares per share per value premium shares earnings adjustement Income equity

Balances at January 1, 2005 38,025,060 1.50 57,038 10,516 (9,634) 30,673 (8,304) 6,109 86,398Measurement of stock options 405 405Cumulative translation adjustment note 11 1,516 1,516Net income (expense) recognized directly in equity – – 405 1,516 – 1,921Income (12,328) (12,328)Net income (expense) recognized as at December 31 – – 405 1,516 (12,328) (10,407)Issuance of ordinary share note 9.4.6 582,238 873 1,164 2,037Cancellation of treasury shares (2,188,752) (3,283) (5,559) 9,923 (1,081) –Sale (purchase) of treasury shares note 9.1 (7,820) (70) (7,890)Transfer of treasury shares(1) 1,609 1,609Dividends paid note 10 (4,764) (4,764)Appropriation of prior-year earnings 6,109 (6,109) –Other variation (24) (24)Balances at December 31, 2005 36,418,546 1.50 54,628 6,121 (5,922) 31,248 (6,788) (12,328) 66,959Measurement of stock options 544 544Cumulative translation adjustment note 11 (1,353) (1,353)Net income (expense) recognized directly in equity – – 544 (1,353) – (809)Income 12,136 12,136Net income (expense) recognized as at December 31 – – 544 (1,353) 12,136 11,327Issuance of ordinary share note 9.4.6 513,541 770 1,449 2,219Cancellation of treasury shares (1,159,639) (1,739) (3,626) 5,365 –Sale (purchase) of treasury shares note 9.1 (3,542) (3,542)Income (loss) on treasury shares (161) (161)Dividends paid note 10 (4,594) (4,594)Appropriation of prior-year earnings (12,328) 12,328 –Other variation (9) (9)

Balances at December 31, 2006 35,772,448 1.50 53,659 3,944 (4,099) 14,700 (8,141) 12,136 72,199

(1) 330,000 treasury shares given in payment on March 24, 2005 for the acquisition of Humantec (historical cost).


consolidated

statement of changes in stockholders’ equity



68

notes to the consolidated financial statementsThe Lectra Group, hereafter the Group, refers to Lectra SA, hereafter the company, and its subsidiaries.The Group’s consolidated financial statements were approved by the Board of Directors on February 23, 2007 and will be proposed to the General Meeting of Shareholders for approval on April 30, 2007.

BUSINESS ACTIVITY

Lectra was established in 1973 and has been listed on the Eurolist(compartment B) of the Paris Euronext stock exchange since 1987.Lectra is the world leader in software, CAD/CAM equipment and related services dedicated to large-scale users of textiles,leather and industrial fabrics. Lectra addresses a broad array of major global markets, including fashion (apparel, accessories,and footwear), automotive, aeronautical, marine and furniture. The company’s technology offering is geared to the specific needs of each market, enabling its customers to design, develop andmanufacture their products (garments, seats, airbags, etc.). For the fashion industry, Lectra’s software applications enable the management of collections and cover the entire productlifecycle, up to retailing (Product Lifecycle Management, or PLM).Lectra forges long-term relationships with its customers andprovides them with complete, innovative solutions.The Group’s customers comprise large national and internationalcorporations and medium-sized companies. Lectra enables them to overcome their major strategic challenges: e.g., cutting costs and boosting productivity; reducing time-to-market; dealing withglobalization; developing secure communications across the supplychain; enhancing quality; satisfying the growing demand for mass-customization; and managing their corporate image andbrands. The Group markets full-line solutions comprising the sale of software, CAD/CAM equipment and associated services (technicalmaintenance, support, training, consulting, sales of consumablesand spare parts).

With the exception of PCs and peripherals and certain products for which the company has formed long-term strategic partnerships,all Lectra software and equipment is designed and developed in-house. Equipment is assembled from sub-elements produced by aninternational network of subcontractors, and tested in the company’smain industrial facilities in Bordeaux-Cestas (France) where most of Lectra’s R&D is performed.Lectra’s strength lies in the skills and experience of its1,500 worldwide employees, encompassing expert R&D, technicaland sales teams with deep knowledge of its customers’ businesses.Lectra has been present worldwide since the mid-1980s. Based in France, the company is present in more than 100 countries throughits network of sales and service subsidiaries, which are backed byagents and distributors in some regions. Thanks to this unrivallednetwork, Lectra generated 92% of its revenues directly in 2006. Its five International Call Centers at Bordeaux-Cestas (France), Madrid(Spain), Milan (Italy), Atlanta (USA) and Shanghai (China) coverEurope, North America and Asia. All of the company’s technologiesare showcased in its five International Advanced Technology Centersat Bordeaux-Cestas (France), Atlanta (USA), Istanbul (Turkey),Shanghai (China) and Mexico City (Mexico). Lectra is geographicallyclose to its customers wherever they are, with nearly 850 employeesdedicated to marketing, sales and services.



69

POST-CLOSING EVENTS

No significant event has occurred.

DividendSubject to the approval of Shareholders at their Meeting scheduledfor April 30, 2007, the Board of Directors held on February 9, 2007proposes to declare a dividend of €0.15 per share in respect of fiscal year 2006, up 15% from the previous year.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Preparation of the financial statements in accordance with IFRSstandards demands that certain critical accounting estimates be made. Management is also required to exercise its judgment in applying the Group’s accounting methods. The areas involving a higher degree of judgment or complexity, or requiring materialassumptions and estimates in relation to the consolidated financialstatements, concern goodwill impairment (see note 1) and deferredtaxation (see note 5.3).

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SCOPE OF CONSOLIDATION

The consolidated financial statements are compliant with theInternational Financial Reporting Standards (IFRS) as adopted by the European Union.The consolidated financial statements are prepared on the basis ofthe company accounts and documents closed in each country andrestated in accordance with the aforementioned accounting policies.The Group did not opt for an earlier adoption on January 1, 2006 of the amendments to the IAS 1 standard, of the IFRS 7 and IFRS 8standards, and of the IFRIC 3, IFRIC 4, IFRIC 6, IFRIC 7, IFRIC 8,IFRIC 9 and IFRIC 10 interpretations. In the view of the Group,application of these standards would have no material impact on its financial statements.

Companies controlled by the Group are consolidated. A company is deemed to be controlled when the Group has the power todetermine, either directly or indirectly, the financial and operatingpolicies of the company such as to benefit from the said company’soperations. All fully-consolidated companies are entities in which the parent company holds more than 99% of the voting rights andare designated FC in the schedule of consolidated companies below.Certain sales and service subsidiaries not material to the Group,either individually or in the aggregate, are not consolidated and are designated NC in the schedule. All intra-Group balances andtransactions, together with unrealized profits arising from thesetransactions, are eliminated upon consolidation. All consolidatedcompanies close their annual financial statements at December 31.

Changes in Scope of ConsolidationThere was no change in the scope of consolidation in 2006.As a reminder, the Group made the following acquisitions in 2005:– Humantec Industriesysteme GmbH (Germany) and HumantecSystems Inc. (United States), consolidated for the first time onJanuary 1, 2005, the date at which Lectra acquired control over them;– Sétif, consolidated for the first time on January 1, 2005, the dateat which Lectra acquired control over it.At the same time, Lectra’s Tunisian (Lectra Systèmes Tunisie SA)and South African (Lectra Systems Pty Ltd) subsidiaries wereconsolidated for the first time on January 1, 2005.In view of the parent company’s percentage of interest in itsconsolidated subsidiaries, minority interests are immaterial and are therefore not shown in the financial statements.



70

% of ownership Consolidation and control method(1)

Company City Country 2006 2005 2006 2005

Parent companyLectra SA Cestas France FC FCSubsidiariesLectra Systems Pty Ltd Durban South Africa 100.0 100.0 FC FCLectra Deutschland GmbH Ismaning Germany 99.9 99.9 FC FCHumantec Industriesysteme GmbH Huisheim Germany 100.0 100.0 FC FCLectra Australia Pty Ltd Melbourne Australia 100.0 100.0 FC FCLectra Benelux NV Ghent Belgium 99.9 99.9 FC FCLectra Brasil Ltda São Paulo Brazil 100.0 100.0 FC FCLectra Canada Inc. Montreal Canada 100.0 100.0 FC FCLacent Technologies Inc.(2) Edmonton Canada – 100.0 – FCLectra Systems (Shanghai) Co. Ltd Shanghai China 100.0 100.0 FC FCLectra Hong Kong Ltd Hong Kong China 99.9 99.9 FC FCPan Union International Ltd Hong Kong China 100.0 100.0 FC FCPrima Design Systems Ltd Hong Kong China 100.0 100.0 FC FCLectra Danmark A/S Ikast Denmark 100.0 100.0 FC FCLectra Sistemas Española SA Madrid Spain 100.0 100.0 FC FCInvestronica Sistemas Española SA(3) Madrid Spain – 100.0 – FCLectra USA Inc. Atlanta USA 100.0 100.0 FC FCLectra Suomi Oy Helsinki Finland 100.0 100.0 FC FCLectra Hellas EPE Athens Greece 99.9 99.9 FC FCLectra Italia SpA Milan Italy 100.0 100.0 FC FCLectra Japan Ltd Osaka Japan 100.0 100.0 FC FCLectra Systèmes SA de CV Mexico City Mexico 100.0 100.0 FC FCLectra Portugal Lda Matosinhos Portugal 99.9 99.9 FC FCLectra UK Ltd Shipley United Kingdom 99.9 99.9 FC FCLectra Sverige AB Borås Sweden 100.0 100.0 FC FCLectra Taiwan Co. Ltd Taipei Taiwan 100.0 100.0 FC FCLectra Systèmes Tunisie SA Tunis Tunisia 99.8 99.8 FC FCLectra Systemes CAD–CAM AS Istanbul Turkey 99.0 99.0 FC FCLectra Chile SA Santiago Chile 99.9 99.9 NC NCLectra Israel Ltd Natanya Israel 100.0 100.0 NC NCLectra Maroc Sarl Casablanca Morocco 99.4 99.4 NC NCLectra Philippines Inc. Manila Philippines 99.8 99.8 NC NCLectra Singapore Pte Ltd Singapore Singapore 100.0 100.0 NC NC(1) FC: Fully consolidated – NC: Non-consolidated.(2) Company merged into Lectra Canada Inc. at January 1, 2006.(3) Company merged into Lectra Sistemas Española SA at January 1, 2006.



71

CURRENT ASSETS AND LIABILITIES

Group consolidated financial statements are prepared on anhistorical cost basis. However, the following assets and liabilities are recorded at fair value, namely derivative financial instruments,cash equivalents, trade accounts receivable, trade payables andother financial liabilities.Current assets comprise assets connected with the normal operatingcycle of the Group, assets held with a view to disposal in the twelvemonths following the close of the fiscal year, together with cash andcash equivalents. All other assets are non-current. Current liabilitiescomprise debts maturing in the course of the normal operating cycle of the Group or in the twelve months following the closeof the fiscal year.

GOODWILL

Goodwill is the difference between purchase cost (including a bestestimate of earn-outs stipulated in the share purchase agreement, if any) and fair value of the purchaser’s share in the acquiredidentifiable assets, liabilities and potential liabilities.Goodwill recognized in a foreign currency is translated at the year-endexchange rate.Goodwill is tested for impairment at the close of each fiscal year in order to identify possible impairment.The method used for this purpose compares the net book value ofeach goodwill item with its recoverable or useful value, consideredas the present value of related future cash flows, excluding interestexpense and tax. Assumptions regarding financial results are derivedfrom the Group’s three-year plan. Beyond the three years of the plan,the method calculates cash flows to infinity, with a growth ratedependent on the growth potential of the markets and/or productsconcerned by the impairment test.The discount rate used is the 10-year French Government bond (OAT rate) plus a risk premium specific to the activity tested.If the impairment test shows a loss of value relative to net bookvalue, an irreversible impairment loss is recognized in order to writedown the net book value of the goodwill to its recoverable value.

OTHER INTANGIBLE ASSETS

Intangible assets are carried at their purchase cost less cumulativeamortization and impairment, if any. Amortization is chargedon a straight-line basis depending on the estimated useful life of the intangible asset.The recoverable amount of intangible assets is tested at the firstappearance of indications of impairment, where appropriate, and at each balance sheet date.

Management Information SoftwarePurchased management information software packages are amortizedon a straight-line basis over three years, together with internal or external development costs incurred in their deployment. Costs incurred by the company in the development of software for its own use refer to direct development costs and to softwareconfiguration costs.

Patents and TrademarksPatents, trademarks and associated costs are amortized on a straight-line basis over three to ten years from the date of registration. The Group is not dependent on any patents or licensesthat it does not own.In terms of intellectual property, no patents or other industrialproperty rights belonging to the Group are currently under license to third parties. The rights held by the Group, notably with regard to software specific to its business as a software developer and publisher, are used under license by its customers within the framework of sales activity.

OtherOther intangible assets are amortized on a straight-line basis overtwo to five years.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is carried at cost less accumulateddepreciation and impairment, if any.The recoverable amount of tangible assets is tested at the firstappearance of indications of impairment, where appropriate,and at each balance sheet date.When a tangible asset comprises significant components withdifferent useful lives, the latter are analyzed separately.



72

Consequently, costs incurred in replacing or renewing a componentof a tangible asset are booked as a distinct asset. The carrying valueof the component replaced is written-off.Subsequent expenditures relating to a tangible asset are capitalizedif they increase the future economic benefits of the specific asset towhich they are attached. All other costs are expensed directly at thetime they are incurred.Financial expense is not included in the cost of acquisition oftangible assets. Investment grants received are deducted from the value of tangible assets.Depreciation is computed on the straight-line method over theirestimated useful lives as follows:– buildings and building main structures: 20-35 years;– secondary structures and building installations: 15 years;– fixtures and installations: 5-10 years;– land arrangements: 5-10 years;– technical installations, equipment and tools: 4-5 years;– office equipment and computers: 3-5 years;– office furniture: 5-10 years.

NON-CURRENT FINANCIAL ASSETS

Financial assets primarily consist of investments in and loan tocompanies not included in the scope of consolidation. As non-currentassets booked at fair value, resulting gains or losses are charged to the income statement.

DEFERRED TAX ASSETS

Deferred taxes are accounted for using the liability method ontemporary differences arising between the accounting bases and taxbases of assets and liabilities. The same is true for tax loss carry-forwards. Deferred taxes are calculated at the future tax rates enactedat the fiscal year closing date. For a given entity, assets andliabilities are netted where taxes are levied by the same tax authority,and where permitted by the local tax authorities. Deferred tax assetsare recognized where their future utilization is deemed probablein light of expected future taxable profits.

INVENTORIES

Inventories of raw materials are valued at the lower of purchase cost(based on weighted-average cost, including related costs) and theirnet realizable value. Finished goods and works-in-progress arevalued at the lower of standard industrial cost (adjusted at year-endon an actual cost basis) and their net realizable value. Cost pricedoes not include interest expense.A write-down is recorded if net realizable value is less than the book value.Write-downs on inventories of spare parts and consumables arecalculated by comparing book value and probable net realizablevalue after a specific analysis of the rotation and obsolescence of inventory items, taking into account the utilization of items for maintenance and after-sales services activities, and changes in the range of products marketed.

TRADE ACCOUNTS RECEIVABLE

Accounts receivable are shown at their fair value, which generallycorresponds to their nominal value. Provisions for impairment arerecorded on the basis of the risk of non-collectibility of the accounts,measured on a case-by-case basis in light of how long they areoverdue, the results of reminders sent out, the local payment practices,and the risks specific to each country.Sales in those countries presenting a high degree of political oreconomic risk are generally secured by letters of credit or bankguarantees.Due to the very short collection delays, trade accounts receivable are not discounted.

CASH AND CASH EQUIVALENTS

Cash (as shown in the statements of cash flows) is defined as the sum of cash and cash equivalents, less bank overdrafts where applicable. Cash equivalents comprise investments in money-market funds recorded at market value at year-end, convertible at any time into a known amount of cash.Net cash (as shown in note 13.4) is defined as the amount of “Cash and cash equivalents” borrowings (as shown in notes 13.2and 13.3).



73

EXCHANGE RATE EXPOSURE HEDGING POLICY – DERIVATIVEFINANCIAL INSTRUMENTS

Exchange rate fluctuations impact the Group’s income in three ways:

Competitive ImpactLectra sells on worldwide markets and its main competitor is anAmerican corporation. As a result, pricing strategies are largelydependent on the US dollar.

Income Statement ImpactFinancial statements are consolidated in euros. Consequently, the revenues, gross profit and net income of a subsidiary whosetransactions are expressed in a foreign currency are mechanicallyaffected by exchange rate fluctuations when translated into euros.

Balance-Sheet ImpactThe impact of balance-sheet positions chiefly concerns foreigncurrency receivables, especially those between the companyand its subsidiaries, and corresponds to the variation between exchangerates at collection date and those at billing date.Currency risk is borne by the company. Practically all billings by thecompany and its subsidiaries of transactions with customers locatedoutside the euro-zone are expressed in foreign currencies andrepresent 44% of revenues (see note 16). The Group monitorsits exposure in real time.The Group seeks to protect all of its foreign currency receivables and debts as well as future cash flows against currency risk, and it usesthe following financial instruments for this purpose:– forward currency contracts to hedge receivables and debts;– forward currency contracts and currency options to hedge futureflows of sales and purchases when there is a strong probability that they will take place.Hedging decisions take into account currency risks and trends wherethese are likely to impact significantly the Group’s financialcondition and competitive situation.Derivative financial instruments are initially booked at cost.Thereafter they are marked to market. Resulting profits or losses are recognized in stockholders’ equity or in the statement of income,depending upon whether the hedge (or the portion of the hedgeconcerned) was deemed to be effective or not, as defined by IAS 39.

In the event that an appreciation was initially recognized instockholders’ equity, the accumulated profits or losses are thenincluded in income for the period in which the initially plannedtransaction actually takes place.

STOCK OPTIONS

The company has granted stock options to Group employees andmanagers. All plans are issued above the average stock market pricefor the twenty trading days prior to granting.Under the regulations governing the company’s stock-options plans,which have been accepted by all of their beneficiaries, the Group is not exposed to the risk of liability for payment of French socialsecurity charges on capital gains arising from sales of shares within four years of the granting of options.Application of the IFRS 2 standard has resulted in the recognition ofa charge corresponding to the value to beneficiaries of all stock optionsgranted after November 7, 2002. This charge is measured using the Black & Scholes model and is deferred prorata temporis over the stock options’ vesting period.

RETIREMENT BENEFIT OBLIGATIONS

The Group is subject to a variety of deferred employee benefitsplans, depending on the subsidiary concerned. The only deferredemployee liabilities are retirement benefit obligations.

Defined Contributions PlansThese refer to benefits payable subsequent to the period of employment.Under these plans, for certain employee categories, the Group paysdefined contributions to an outside insurance company or pensionfund. Contributions are paid in exchange for services performed by employees in respect of the fiscal period. They are expensed as incurred, according to the same logic as wages and salaries.Defined contributions plans do not create future liabilities for the Groupand hence do not require recognition of provisions.Most of the defined contributions plans to which Group companiescontribute are additional to the employees’ legal retirement plans. In the case of the latter, companies contribute directly to a socialsecurity fund, their contributions being charged to income accordingto the same logic as wages and salaries.



74

Defined Benefits PlansThese refer to benefits payable subsequent to the period ofemployment under plans that guarantees contractual additionalincome for certain employee categories (in some cases these plansare governed by specific industrywide agreements). For the Group,the plans cover lump-sum termination payments solely as requiredby legislation or as defined by the relevant industrywide agreement.The guaranteed additional income represents a future liability.This liability is calculated by estimating the benefits to whichemployees will be entitled having regard to projected end-of-careersalaries.Benefits are reviewed in order to determine the net present value of the liability in respect of defined benefits in accordance with the principles set forth in the IAS 19 standard.Actuarial assumptions notably include a rate of salary increase, adiscount rate (this corresponds to the average annual yield on bondswith maturities approximately equal to those of the Group’sobligations) and a turnover rate, in accordance with local regulationswhere appropriate, based on observed historical data.The Group has opted to record actuarial differences in full in the statement of income.When a plan’s terms are modified, the portion relating to theincrease in benefits pertaining to past services performed bypersonnel is booked as a charge and accounted for on a straight-linebasis over the average residual vesting period of the correspondingentitlements. To the extent that rights vest immediately, the cost is directly expensed.The total charge represented by all of the foregoing is recognized in staff costs in the statement of income.

PROVISIONS FOR OTHER LIABILITIES AND CHARGES

All known risks at balance sheet date are reviewed in detail and aprovision is recognized if an obligation exists, if the costs entailed to settle this obligation are probable or certain, and if they can bemeasured reliably. In view of the short-term nature of the risks covered by theseprovisions, the discounting impact is immaterial and therefore not recognized.At the time of the effective payment, the provision is deducted fromthe corresponding expenses.

Provisions for WarrantiesA provision for warranties covers, on the basis of historical data,costs from warranties granted by the Group to its customers at thetime of the sale of CAD/CAM equipment, for replacement of parts,travel of technicians and labor. This provision is recorded at the timethe sale is booked by the company.

REVENUES

Revenues from sales of hardware are recognized when the significantrisks and benefits relating to ownership are transferred to thepurchaser.For hardware or software in cases where the company also sells the computer equipment on which the software is installed, theseconditions are fulfilled upon physical transfer of the hardwareas per the contractual sale terms.For software not sold with the hardware on which it is installed,these conditions are generally fulfilled at the time of installation of the software on the customer’s computer (either by CD-ROM or downloading).Revenues from software evolution contracts and recurring servicescontracts are booked monthly over the duration of the contracts.Revenues from the billing of services not covered by recurringcontracts are recognized at the time of performance of the service or, where appropriate, on a percentage of completion basis.

COST OF GOODS SOLD

Cost of goods sold comprises all purchases of raw materials includedin the costs of manufacturing, the change in inventory and inventorywrite-downs, all labor costs included in manufacturing costs whichconstitute the added value, freight-out costs on systems sales,and a share of depreciation of the manufacturing facilities.This heading does not include salaries and expenses associated with service revenues, which are included under “Selling, generaland administrative expenses”.



75

RESEARCH AND DEVELOPMENT

The technical feasibility of software and hardware developed by the Group is generally not established until a prototype has beenproduced or until feedback is received from its pilot sites, conditioningtheir commercialization. Consequently, the technical andeconomical criteria allowing development costs to be recognized in assets at the moment they occur are not met, and research and development costs are expensed as incurred in the year.

BASIC AND FULLY-DILUTED EARNINGS PER SHARE

Net earnings per share on basic capital are calculated by dividingnet income attributable to shareholders by the weighted-averagenumber of shares outstanding during the period, excluding treasuryshares.Net earnings per share on diluted capital are calculated by dividingnet income attributable to shareholders by the weighted-averagenumber of shares comprising the basic capital, plus stock optionsthat could have been exercised considering the average market priceof the shares during the period. Only options with an exercise pricebelow the said average share price are included in the calculation of the number of shares representing the potential capital.

SEGMENT INFORMATION

The presentation of segment information is based on the company’sinternal organization and management structure, and on its internalmanagement information system.

TRANSLATION METHODS

Translation of Financial Statements of Foreign SubsidiariesThe functional currency of most subsidiaries is their local currency,corresponding to the currency in which the majority of theirtransactions are denominated.

Accounts of foreign companies are translated as follows:– assets and liabilities are translated at the official year-end closing rates;– reserves and retained earnings are translated at historical rates;– income statement items are translated at the average monthlyexchange rates for the year for revenues and cost of products andservices sold, and at the annual average rate for all other income-statement items other than in the case of material transactions;– items in the statement of cash flows are translated at the annualaverage exchange rate. Thus, movements in short-term assets andliabilities are not directly comparable with the correspondingbalance-sheet movements, due to the currency translation impact,which is shown under a separate heading in the statement of cashflows: “Effect of changes in foreign exchange rates”;– gains or losses arising from the translation of the net assets offoreign consolidated subsidiaries, and those derived from the use of average exchange rates to determine income or loss, are recognizedin “Cumulative translation adjustment in stockholders” equityand therefore have no impact on earnings, unless all or part of thecorresponding investments are divested. They are adjusted to reflectlong-term unrealized gains or losses on internal Group positions.

Translation of Balance Sheet Items Denominated in ForeignCurrencies

Third-Party Receivables and PayablesForeign currency receivables and payables are booked at the averageexchange rate for the month in which they are recorded, and may behedged.Receivables and payables denominated in foreign currencies are translated at the December 31 exchange rate.Unrealized differences arising from the translation of foreigncurrencies appear in the income statement. Where a currency has been hedged forward, the translation adjustment reflected on the income statement is offset by the variation in fair value of the hedging instrument.



76 CONSOLIDATED FINANCIAL STATEMENTS

Inter-Company Receivables and PayablesTranslation differences on short-term receivables and payables areincluded in net income using the same procedure as for third-partyreceivables and payables. Unrealized translation gains or losses on long-term assets and liabilities, whose settlement is neither

scheduled nor probable in the foreseeable future, are recorded as a component of stockholders’ equity under the heading “Cumulativetranslation adjustment” and have no impact on net income, in compliance with the paragraph “Net Investment in a ForeignOperation” of IAS 21.

EXCHANGE RATE TABLE FOR MAIN CURRENCIES

(equivalent value in euros) 2006 2005 2004

U.S. dollar

Annual average rate 1.26 1.24 1.24

Closing rate 1.32 1.18 1.36

Japanese yen (100)



British pound



Canadian dollar



Hong Kong dollar


Closing rate 10.24 9.15 10.59

Chinese yuan


Closing rate 10.28 9.52 11.27

INTEREST RATE EXPOSURE HEDGING POLICY

As in prior years, the Group did not make use of any instruments to hedge interest-rate risks in 2006.Available cash is held in money-market funds.

THIRD-PARTY RISK

The Group is exposed to credit risk in the event of default of a third party. It manages its exposure through careful selection of third parties, andby verifying guarantees before accepting orders from them. The Group’s exposure to this risk is limited, and it considers that there is no substantialconcentration of risk on a single counterpart. It does not anticipate any third-party default likely to have a major impact on the financial statementsof the Group.


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notes to the consolidated balance sheet

note 1 GOODWILL

No new acquisition was made in fiscal year 2006. The balance of the consideration due on the acquisition of Investronica, amounting to€13,000,000, was paid on June 30, 2006 (see note 31), with no impact on goodwill recognized at December 31. No earn-out was recognized in 2006.In 2006, a €200,000 adjustment was made to the allocation of goodwill on Humantec Industriesysteme GmbH, made in 2005 followingidentification of a potential liability.Testing of goodwill impairment shown in the balance sheet at December 31, 2006 revealed no impairment. A €11,917,000 impairment chargewas recognized on Investronica goodwill in 2005.The projections used are based on the 2007-2009 plan for each cash-generating unit concerned and on a projection to infinity using a growthrate function of forecasted market trends.Future cash flows are discounted using the 10-year French Treasury OAT bonds rate plus a risk premium, representing a 12.7% discount ratebefore tax.


Book value at January 1 37,670 40,690

New acquisitions – 7,019

Goodwill adjustment 200 594

Write-down – (11,917)

Exchange rate differences (951) 1,284

Book value at December 31 36,919 37,670

Breakdown of goodwill at December 31, 2006:

Date Book(in thousands of euros) of acquisition value

CDI UK Ltd 1998 544

CDI US Inc. 1998 4,607

Prima Design Systems Ltd 1999 2,142

Cadtex 2000 3

Prima UK Ltd 2000 23

Investronica Sistemas SA 2004 19,527

Lacent Technologies Inc. 2004 2,904

Sétif 2005 1,256

Humantec Systems Inc. 2005 827

Humantec Industriesysteme GmbH 2005 5,086

Total 36,919

Commitments receivedThe company has received representations and warranties from the selling shareholders within the framework of the Investronica, Lacent and Humantec acquisitions concerning certain balance-sheet items and all potential litigation relating to events prior to the acquisition. These warranties are of limited duration, and their amount is limited to the purchase price in the case of Investronica and Humantec,and to CAN $1 million in the case of Lacent.Further, within the framework of the arbitration procedure against Induyco initiated by Lectra, on June 20, 2006 Lectra obtained a €13,000,000bank guarantee payable on first demand corresponding to the balance outstanding on the consideration for the Investronica acquisition paid on June 30, 2006.



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note 2 OTHER INTANGIBLE ASSETS

Management(in thousands of euros) information Patents and 2005 software trademarks Other Total

Gross value at January 1, 2005 11,929 2,356 5,331 19,616

External purchases 1,936 94 – 2,030

Internal developments 750 – – 750

Write-offs and disposals (265) (188) – (453)

Transfers 169 16 – 185

Changes in scope of consolidation 48 – – 48

Exchange rate differences 86 – 5 91

Gross value at December 31, 2005 14,653 2,278 5,336 22,267

Amortization at December 31, 2005 (11,554) (1,946) (5,145) (18,645)

Net value at December 31, 2005 3,099 332 191 3,622



External puchases 1,729 129 – 1,858

Internal developments 1,609 – – 1,609

Write-offs and disposals (39) – – (39)

Transfers (3) 7 2 6

Exchange rate differences (53) – (4) (57)



Net value at December 31, 2006 5,458 321 186 5,965

Changes in amortization:


Amortization at January 1, 2006 (11,554) (1,946) (5,145) (18,645)

Amortization charges (965) (142) (13) (1,120)

Amortization write-backs 38 – – 38

Transfers (7) (5) 6 (6)

Exchange rate differences 50 – 4 54


Management Information SoftwareAs part of an ongoing process of upgrading and reinforcing its information systems, in 2005 and 2006 the Group purchased licenses of newmanagement information software together with additional licenses for software already in use in order to increase the number of users.Investments concerned license purchase costs together with the cost of developing and configuring the corresponding software.The company capitalized an expense of €3,058,000 in 2006 in respect of the IT systems upgrade project commenced in 2005. Internaldevelopment expenses amounted to €1,609,000. In 2005, the company capitalized an expense of €1,633,000 on this project.The total asset value of €4,691,000 will be amortized from January 1, 2007 the date of its entry into service.



79

note 3 PROPERTY, PLANT AND EQUIPMENT

(in thousands of euros) Land and Fixtures Equipment2005 buildings and fittings and other Total


Additions – 1,117 1,894 3,011

Write-offs and disposals (1,070) (960) (3,983) (6,013)

Transfers (707) 707 (185) (185)

Changes in scope of consolidation – 6 730 736

Exchange rate differences – 122 625 747


Accumulated depreciation at December 31, 2005 (6,392) (5,747) (16,031) (28,170)

Net value at December 31, 2005 1,770 4,479 3,956 10,205



Additions 898 3,247 2,598 6,743

Write-offs and disposals – (325) (1,648) (1,973)

Transfers – – 109 109

Exchange rate differences – (58) (338) (396)



Net value at December 31, 2006 2,642 6,851 4,754 14,247

Changes in depreciation:


Accumulated depreciation at January 1, 2006 (6,392) (5,747) (16,031) (28,170)

Additional depreciation (26) (782) (1,488) (2,296)

Write-offs and disposals – 254 1,365 1,619

Transfers – – (48) (48)

Exchange rate differences – 36 248 284


“Land and buildings” pertain solely to the Group’s industrial facilities in Bordeaux-Cestas (France), amounting to €9,060,000, net of investmentgrants received.The total cost of construction, fixtures, fittings and furniture of the new building standing on the site of the one destroyed in June 2005 amountsto €3,592,000, of which €2,092,000 correspond to the reconstruction of the building as before, and €1,500,000 to new fixtures, fittings andfurniture. Construction was completed in December 2006. The various components of this new building will be amortized over their estimateduseful lives, i.e. from ten to thirty-five years depending on the component.



80

The facility covers an area of 11.4 hectares (28.5 acres) and the buildings represent 27,300 m2 (295,000 sq.ft.). Land and buildings were partlypurchased outright by the company, and partly under financial leases. These have been paid for in full.The assets purchased outright by the company (excluding fixtures and fittings) represent €4,605,000, amortized to the amount of €2,202,000.The assets (including fixtures and fittings) purchased under finance leases by the company are valued at €4,745,000 including €473,000 forthe land and €4,272,000 for the buildings, depreciated in full. In October 2002, the company became owner of the entire Bordeaux-Cestas landand buildings facilities.No acquisitions of new equipment were made using finance leases in 2005 or 2006.Other fixed assets purchased in 2005 and 2006 mainly concerned furniture, information technology hardware and manufacturing molds and toolsfor the Bordeaux-Cestas industrial facility.

Commitments given: Payments due by period

(in thousands of euros) Less than Between 1 More thanContractual commitments 1 year and 5 years 5 years Total

Rental contracts: offices 4,168 10,244 3,486 17,898

Rental contracts: other(1) 5,203 3,807 – 9,010

Total 9,371 14,051 3,486 26,908

(1) These contracts mainly comprise IT and office equipment.

note 4 NON-CURRENT FINANCIAL ASSETS

Other(in thousands of euros) Investments non-current2005 Loans in subsidiaries financial assets Total

Gross value at January 1, 2005 224 3,212 1,139 4,575

Additions 33 – 459 492

Disposals (3) (279) (171) (453)

Changes in scope of consolidation – – 11 11

Exchange rate differences – – 75 75

Gross value at December 31, 2005 254 2,933 1,513 4,700

Impairment provision at December 31, 2005 – (2,584) (68) (2,652)

Net value at December 31, 2005 254 349 1,445 2,048

Other(in thousands of euros) Investments non-current2006 Loans in subsidiaries financial assets Total

Gross value at January 1, 2006 254 2,933 1,513 4,700

Additions – (1) 578 577

Disposals (7) – (930) (937)

Exchange rate differences – – (82) (82)

Gross value at December 31, 2006 247 2,932 1,079 4,258

Impairment provision at December 31, 2006 – (2,487) (69) (2,556)

Net value at December 31, 2006 247 445 1,010 1,702



81

“Loans” and “Investments in subsidiaries” exclusively concern companies not included in the scope of consolidation.“Other non-current financial assets” at December 31, 2006 primarily consist of deposits and guarantees.

Related-Party TransactionsThe amounts below refer to fiscal year 2006 or December 31, 2006 as applicable.

Items concerned Non-consolidated AmountsType of transaction in consolidated financial statements subsidiaries concerned (in thousands of euros)

Loans Non-current financial assets Lectra Singapore Pte Ltd (Singapore) 248

Receivables Trade accounts receivable Lectra Maroc Sarl (Morocco) 705Lectra Chile SA (Chile) 269Lectra Systemes Inc. (Philippines) 155Other subsidiaries non consolidated 53

Payables Trade payables and other current liabilities Lectra Singapore Pte Ltd (Singapore) 478Lectra Maroc Sarl (Morocco) 12Other subsidiaries non consolidated 37

Sales Revenues Lectra Israel Ltd (Israel) 79Lectra Chile SA (Chile) 143Lectra Maroc Sarl (Morocco) 286Other subsidiaries non consolidated 59

Commissions Selling, general and administrative expenses Lectra Singapore Pte Ltd (Singapore) (215)Other subsidiaries non consolidated 12

Personnel invoiced Selling, general and administrative expenses Lectra Singapore Pte Ltd (Singapore) (663)Other subsidiaries non consolidated (59)

Financial interest Interest income All subsidiaries 29

Transactions with the Chairman of the Board, the Chief Executive Officer and the other members of the Executive Committee are disclosed in notes 21.4 (Compensation of Directors, Corporate Officers and Other Members of the Executive Committee) and 9.4 (Stock Option Plans).

note 5 TAXES

note 5.1 TAX CHARGE


Current tax charge (438) (2,367)

Deferred tax (1,382) 2,174

Net tax charge (1,820) (193)

Income tax payable totaled €443,000 at December 31, 2006.



note 5.2 EFFECTIVE TAX RATE2006 2005

(in thousands of euros) in % in value in % in value

Standard rate of corporate income tax in France(1) 33.67% (4,699) (34.23%) 4,155

Impact of unrecognized deferred tax assets (1.98%) 277 21.83% (2,650)

Effect of other countries’ different tax rates (1.23%) 171 (0.29%) 35

Effect of income and expenses with a low or nil/zero tax rate(2) 1.71% (239) 27.58% (3,347)

R&D tax credit (22.71%) 3,170 (13.35%) 1,620

Others 3.58% (500) 0.05% (6)

Effective tax rate 13.04% (1,820) 1.59% (193)

(1) By convention, for tax rates, a simple sign indicates a tax charge and a sign in brackets a tax credit.(2) This corresponds primarily to non-tax deductible charges for the year and to the elimination for tax purposes of certain consolidation entries. Notably included is the impact of the non-deductibility of the goodwill impairment on Investronica Sistemas Española SA in 2005.

note 5.3 DEFERRED TAXES


Timing differences on amortization and depreciation periods 2,794 3,352

Timing differences on provisions for impairment of receivables 300 359

Timing differences on write-downs of inventories 1,541 1,805

Other timing differences 1,567 1,256

Deferred tax assets on timing differences 6,202 6,772

Tax losses 2,512 3,720

Deferred taxes 8,714 10,492

Owing to uncertainty over the future profit-earning capacity of some subsidiaries, none, or only part, of the said subsidiaries’ tax losses and other potential deferred tax assets on timing differences are recognized as deferred tax assets.At December 31, 2006, unrecognized deferred tax assets totaled €10,867,000, compared with €12,894,000 at December 31, 2005. TheSpanish subsidiary accounted for the bulk of this figure.Deferred taxes representing a negative €186,000 are recognized directly in stockholders’ equity.

The table below records changes in deferred taxes:


Deferred taxes at January 1 10,492 7,637

Net changes for the year (1,382) 2,174

Changes in scope of consolidation – 216

Impact on retained earnings – 13

Exchange rate differences (396) 452

Deferred taxes at December 31 8,714 10,492



83

note 5.4 SCHEDULE OF ACTIVATED TAX LOSS CARRY-FORWARDSExpiration date

Until Between 2008 Beyond(in thousands of euros) 2007 and 2012 2012 Total

Deferred tax assets on tax losses(1) – 24 2,488 2,512

(1) The above schedule corresponds to the maximum period of utilization. Apart from Lectra Sistemas Española SA, activated deferred tax assets are expected to be utilized within a period of between one and five years.

note 6 INVENTORIES


Raw materials 21,025 17,965

Finished goods and works-in-progress(1) 14,465 16,852

Inventories, gross value 35,490 34,817

Raw materials (3,966) (4,675)

Finished goods and works-in-progress(1) (5,584) (5,174)

Write-downs (9,550) (9,849)

Raw materials 17,060 13,290

Finished goods and works-in-progress(1) 8,880 11,678

Inventories, net value 25,940 24,968

(1) Including demonstration and second-hand equipment.

€1,017,000 of inventory fully written down at January 1, 2006 was scrapped in the course of 2006, thereby diminishing the gross value and write-downs by the same amount.The increase in inventories stems primarily from a precautionary build up prior to the launch of the new generation of cutting machines presentedat the beginning of February 2007.Inventory write-downs charged for the year amounted to €3,530,000. Reversals of previous write-downs relating to sales transactions amountedto €2,747,000, booked against the charges for the period.

note 7 TRADE ACCOUNTS RECEIVABLE


Trade acounts receivable excluding deferred revenues 22,664 25,492

Deferred recurring software evolution and services contracts 29,108 23,762

Other deferred equipment and services revenues 2,102 2,422

VAT on deferred recurring contracts and on deferred revenues 4,057 3,404

Trade accounts receivable, gross value 57,931 55,080

Provision for impairment (8,708) (8,254)

Trade accounts receivable, net value 49,223 46,826

Trade receivables at December 31, 2006 include €31,210,000, excluding value-added and other sales taxes on recurring contracts, other servicesand equipment billed in advance for 2007 (compared with €26,184,000, excluding value-added and other sales taxes, at December 31, 2005 in respect of 2006). These amounts have no impact on income, since an identical amount is recorded in “Deferred revenues” (see note 14).




note 8 OTHER CURRENT ASSETS


Other tax receivables 8,013 4,830

Advances to personnel 287 275

Prepaid expenses 1,730 1,461

Other 833 2,086

Other current assets 10,863 8,652

Other tax receivables at December 31, 2006 comprised the parent company’s (French) tax credit for Research and Development (Crédit d’impôtrecherche) amounting to €5,692,000 (€3,519,000 at December 31, 2005) and recoverable value-added tax in the amount of €1,961,000(€338,000 at December 31, 2005).Prepaid expenses mainly comprise rentals, insurance premiums and equipment rentals.In 2005, the heading “Other” included the balance of the insurance indemnity of €1,059,000 on the Bordeaux-Cestas damage.

note 9 SHARE CAPITAL

At December 31, 2006, the Group’s capital stood at €53,658,672, including 35,772,448 shares with a par value of €1.50 per share.Details of changes in the company’s capital are provided in the Statements of Changes in Stockholders’ Equity.

note 9.1 TREASURY SHARES

The General Meeting of Shareholders on April 28, 2006 renewed the existing share buyback program and authorized the Board of Directors to buy and sell company shares. The purposes of this program, which contributes to the financial management of the company’s equity, are, by order of priority:– to maintain liquidity in the market in the company’s shares, via an authorized investment services provider acting within the framework of a liquidity agreement in compliance with the Charter of Ethics of the French Association of Investment Companies (AFEI) or any other charterrecognized by the French Financial Markets Authority (AMF);– to retain or use all or part of the repurchased shares as a means of payment or exchange or otherwise within the framework of external growthtransactions;– to grant shares, notably to present or future officers or employees of the company and/or the Lectra Group, or to some of them, and in particularwithin the framework of articles L. 225-179 and subsequent, and L. 225–197–1 and subsequent of the French Commercial Code;– to deliver shares in the company on the occasion of the exercise of rights attached to securities entailing an entitlement by whatever means to the company’s equity;– to cancel shares by reduction of the capital stock.This share buyback program was published on the AMF website (www.amf.com) and on that of Lectra (www.lectra.com) on April 3, 2006.In keeping with French stock-market regulations, the company has rolled over its Liquidity Agreement with SG Securities (Paris) (Sociétégénérale) to act as a liquidity provider for Lectra’s shares on the stock market, and has traded in its own shares.In addition, the company continued its contract with SG Securities (Paris) to buy and sell its own shares in accordance with the termsof the program authorized by the General Meeting of Shareholders.Overall, at December 31, 2006, and as a result of these two contracts, the company held 2.07% of its capital (compared with 3.1% atDecember 31) for a total of €4,099,000 representing an average purchase price of €5.53 per share (compared with €5,922,000 at December 31, 2005), which has been deducted from stockholders’ equity.


85

2006 2005Amount Average price Amount Average price

Number (in thousands per share Number (in thousands per shareof shares of euros) (in euros) of shares of euros) (in euros)

Treasury shares at January 1

Liquidity agreement 387,701 2,212 5.71 368,163 2,219 6.03

Treasury shares owned by the company on its own account 740,631 3,710 5.01 1,256,721 7,416 5.90

Total at January 1 (historical cost) 1,128,332 5,922 5;25 1,624,884 9,634 5.93

Liquidity agreement

Purchases (at purchase price) 212,201 1,083 5.11 421,376 1,920 4.56

Sales (at sale price) (299,195) (1,586) 5.30 (401,838) (1,817) 4.52

Net cash flow (86,994) (503) 19,538 103

Gains (losses) on disposals (243) (110)

Purchases and sales by the company on its own shares

Purchases (at purchase price) 859,811 4,288 4.99 2,002,662 7,828 3.91

Sales (at sale price) – – – –

Net cash flow 859,811 4,288 2,002,662 7,828

Transfers(1) – – (330,000) (1,620) 4.91

Gains (losses) on disposals – 11

Cancellations(2) (1,159,639) (5,365) 4.63 (2,188,752) (8,844) 4.04

Gains (losses) on cancellations – (1,081)

Treasury shares at December 31

Liquidity agreement 300,707 1,465 4.87 387,701 2,212 5.71

Treasury shares owned by the company on its own account 440,803 2,634 5.97 740,631 3,710 5.01

Total at December 31 (historical cost) 741,510 4,099 5.53 1,128,332 5,922 5.25

(1) Partial payment of the acquisition of Humantec in 2005.(2) The company canceled 493,220 shares and 666,419 shares respectively on February 9 and October 30, 2006. The company canceled 2,188,752 shares on July 28, 2005.

Summary of Changes


Treasury shares at January 1 (historical cost) 5,922 9,634

Treasury shares at December 31 (historical cost) 4,099 5,922

Gross changes in the year (historical cost) (1,823) (3,712)

Transfer of treasury shares – (1,620)

Losses on disposals (243) (99)

Cancellation of shares (5,365) (8,844)

Losses on cancellation of shares – (1,081)

Net changes 3,785 7,932



86

note 9.2 VOTING RIGHTS

Voting rights are proportional to the capital represented by stock held.However, double voting rights, subject to certain conditions, existed until May 3, 2001.The Extraordinary Meeting of Shareholders of May 3, 2001 decided that shares registered after May 15, 2001 together with shares purchasedafter that date, are not eligible for double voting rights (with the exception of special cases covered by the corresponding resolution submitted to the said Extraordinary Meeting). Messrs. André and Daniel Harari have cancelled the double voting rights attached to the shares they held at theirown initiative.Overall, at December 31, 2006, 35,273,417 shares qualified for normal voting rights, and only 499,031 (i.e., 1.40% of the capital stock)for double voting rights. Moreover, no other shares could potentially qualify for double voting rights at some future date.In principle, at December 31, 2006, the total number of voting rights attached to the company’s shares was 36,271,479. This number is reducedto 35,529,969 due to the fact that no voting rights are attached to treasury shares.

note 9.3 STATUTORY THRESHOLDS

Other than the legal notification requirements for crossing the thresholds established by French law, there is no special statutory obligation.

note 9.4 STOCK OPTION PLANS

At December 31, 2006, Lectra’s management and employees held 3,458,383 stock options, each exercisable for one share of Lectra SA, theGroup’s parent company, with a par value of €1.50.If all stock options were exercised, 3,458,383 ordinary shares would be issued and the capital increased by €5,187,575 (plus a total additionalpaid-in capital of €16,808,872). The company’s capital would thereby be raised to €58,846,246.50, divided into 39,230,831 shares with a par value of €1.50 each.The number of beneficiaries decreased from 269 at December 31, 2005 to 236 at December 31, 2006 (i.e., 16% of Group employees at thatdate); this figure takes into account the departure of certain beneficiaries.The IFRS 2 standard, published in 2004 for application as of January 1, 2005 requires companies to record the value of the benefit grantedto the beneficiaries of stock options.Fair value of stock options granted in 2006 was measured by means of the Black & Scholes method, using the following assumptions (no stockoptions were granted in 2005):

2006 2005

Risk-free interest rate 3.52% –

Dividend payout rate 2.54% –

Volatility 30.00% –

Duration of options 4 years –

An expense of €544,000 is recognized in the 2006 financial statements, including €366,000 in respect of the grants made in 2006, and €179,000 in respect of options granted previously but subsequent to November 7, 2002.Plans in force at December 31, 2006 will impact the years 2007, 2008 and 2009 alone in the amounts of €205,000, €56,000 and €9,000respectively.



87

note 9.4.1 Stock Options Outstanding: Options Granted, Exercised and Cancelled During the Year

2006 2005

Stock options outstanding at January 1 3,900,943 5,113,998

Stock options granted during the year 717,712 –

Stock options exercised during the year (513,541) (582,238)

Stock options expired/cancelled during the year (646,731) (630,817)

Stock options outstanding at December 31 3,458,383 3,900,943

– of which fully vested 2,892,429 3,517,102

– for which exercise rights remain to be acquired 565,954 383,841

For plans prior to 2006, the terms relating to the vesting of options are determined on an annual basis over a period of four to five years and mayreflect one or several of the following criteria, depending on the beneficiary:– beneficiary was a Group employee at December 31 of the elapsed fiscal year;– group performance;– performance of the department or subsidiary for which the beneficiary is responsible.

From fiscal year 2006 onward, performance-based options have not been granted by the Board of Directors but have been notified to beneficiaries individually. The options in question will not be granted definitively until such time as the targeted performance has beenmeasured. The number of potential options concerned in this respect is indicated in note 9.4.6.The average exercise price for options exercised in 2006 was €4.32.No stock-options plan has been created by any of the company’s subsidiaries.

note 9.4.2 Breakdown of Stock Options Outstanding at December 31, 2006, by Category of BeneficiariesFor which

Of which exercise rightsNumber of Number of fully remain to be

beneficiaries stock options % vested acquired

Corporate officers and other membersof the Executive Committee(1) 3 795,879 23% 681,240 114,639

Group management 7 519,967 15% 425,306 94,661

Other senior executives 26 699,731 20% 533,775 165,956

Other employees 182 1,232,414 36% 1,041,716 190,698

Persons having left the company and still holding unexercised options 18 210,392 6% 210,392 –

Total 236 3,458,383 100% 2,892,429 565,954

(1) The corporate officers are: André Harari, Chairman of the Board of Directors, and Daniel Harari, Chief Executive Officer. The latter has not received any stock options. The stock-options plans of directors and corporate officers are detailed in note 9.4.5. Jérôme Viala, Chief Financial Officer, and Véronique Zoccoletto, Director of Human Resources, Organization and Information Systems are the other two membersof the Executive Committee, which is chaired by Daniel Harari.



88

note 9.4.3 Breakdown of Stock Options at December 31, 2006, by Expiration Date and Exercise Price

Number of Exercise priceGrant date Expiration date stock options (in euros)

June 22, 2000 June 22, 2008 334,000 16.50

November 27, 2001 November 27, 2009 1,051,565 4.30

June 4, 2002 June 4, 2010 182,725 5.20

September 10, 2002 September 10, 2010 76,595 4.30

September 10, 2002 September 10, 2010 28,380 5.20

May 27, 2003 May 27, 2011 601,695 4.85

May 28, 2004 May 28, 2012 465,711 6.75

May 23, 2006 May 23, 2014 717,712 5.75

Total 3,458,383

note 9.4.4 Breakdown of Stock Options for Which Exercise Rights Remain to be Acquired after December 31, 2006 by the Beneficiaries

Number ofYear of vesting stock options

2007 308,518

2008 164,456

2009 92,980

Total 565,954

note 9.4.5 Stock-Options Plans of Directors and Corporate Officers in Force at December 31, 2006

Number of Of which Exercice price ExpirationGrant date stock options fully vested in euros date

André Harari June 22, 2000 334,000 334,000 16.50 June 22, 2008

Total 334,000 334,000

No stock options were granted in 2006 or in 2005 to Messrs. André Harari and Daniel Harari, each of whom owns more than 10% of the capitalsince 2000 and is therefore prohibited since this date by French law from being granted further stock options.

note 9.4.6 Stock Options Granted in 2006

In May 2006, the Board of Directors granted stock options under the authority given to it by the Extraordinary General Meeting of April 28, 2006.It granted 717,712 stock options to 79 Group employees, each option entitling the beneficiary to one share at an exercise price of €5.75. A maximum of 322,059 options have been earmarked for granting in 2007 in respect of performance in 2006.No stock options were granted in 2005.Of the 717,712 stock options granted in 2006 at an exercise price of €5.75 per share, the 10 Group employees other than Directors receivingthe largest number of options in 2006 were granted a total of 412,385 options.



89

note 9.4.7 Stock Options Exercised in 2006

34 persons exercised options in 2006 (11 employees, and 23 persons having left the company). The options exercised are broken down as follows:

Number of stock options Exercise priceexercised in euros

November 27, 2001 stock-options plan 494,661 4.30

June 4, 2002 stock-options plan 4,000 5.20

September 10, 2002 stock options plan 4,760 4.30

September 10, 2002 stock options plan 5,620 5.20

May 27, 2003 stock-options plan 4,500 4.85

Total 513,541

Of the 513,541 stock options exercised in 2006, 121,561 were exercised by the 10 Group employees other than Directors exercising the largest number of options in 2006.All of the 121,561 options thus exercised concern the November 27, 2001 plan. The subscription price of these options was €4.30 per share.

note 10 RETAINED EARNINGS

Details of changes in retained earnings are presented in the Statement of Changes in Stockholders’ Equity.Company reserves available for dividend distribution total €14,700,000. A dividend of €0.15 per share will be paid in 2007 in respect of fiscal year 2006, subject to approval by the Shareholders’ Meeting on April 30, 2007.The company paid a dividend of €0.13 per share in 2006 in respect of fiscal year 2005.

note 11 CUMULATIVE TRANSLATION ADJUSTMENT

Analysis of changes recorded in 2005 and 2006:


Cumulative translation adjustment at January 1 (6,788) (8,304)

Differences on translation of subsidiaries’ income statements 268 (195)

Adjustment required to maintain subsidiaries’ retained earning at historical exchange rate (1,594) 1,685

Other movements(1) (27) 26

Cumulative translation adjustment at December 31 (8,141) (6,788)

(1) Including adjustments of the parent company’s unrealized long-term translation gains or losses on Group positions.



90

note 12 RETIREMENT BENEFIT OBLIGATIONS

Retirement benefit obligations correspond to lump-sum amounts payable under defined benefit plans. These lump-sum amounts are generallypaid at the time of retirement, but they may also be paid upon resignation or dismissal, depending on local legislation. These obligations applymainly in France, Italy and Japan, as detailed below:

(in thousands of euros) France Italy Japan Others Total

Retirement benefits at January 1, 2006 920 2,122 539 128 3,709

Allowances 99 244 80 25 448

Used amount reversed – (181) – – (181)

Exchange rate differences – – (68) (2) (70)

Retirement benefits at December 31, 2006 1,019 2,185 551 151 3,906

Breakdown of net annual charge:

(in thousands of euros) France Italy Japan Others Total

Current service cost 66 219 61 25 371

Interest expenses 1 90 11 – 102

Actuarial gains/losses during the year 32 (65) 8 – (25)

Charge for the year 99 244 80 25 448

Main actuarial assumptions used:

France Italy Japan

Inflation rate 1.70% 2.00% 0.60%

Discount rate 4.00% 4.60% 2.20%

Average rate of salary increase 1.00% 0.50% 1.74%

Personnel turnover rate(1) 2.71%/8.26% 5.00% 1.09%

(1) Calculated via a table based on age group. The personnel turnover rate for France is 2.71% for non-managerial grade personnel, and 8.26% for managerial grade personnel.

note 13 BORROWINGS

note 13.1 BREAKDOWN OF BORROWINGS BY CURRENCY

At December 31, 2006, 100% of the company’s financial debt was euro-denominated, as at December 31, 2005.

note 13.2 LONG-TERM BORROWINGS

Long-term borrowings at December 31, 2006 corresponds to research and development grants. The repayment schedule is as follows:

(in thousands of euros) Total

2008 125

2009 125

2010 125

2011 and after 275

Total 650



91

note 13.3 SHORT-TERM BORROWINGS


Other short-term borrowings 635 13,486

Bank overdrafts – –

Total 635 13,486

The decline in other short-term borrowings corresponds to the final installment of the consideration for the acquisition of Investronica at June 30, 2006 in the amount of €13,000,000.Other short-term borrowings at December 31, 2006 correspond to the €510,000 installment due in 2007 on interest-free public research and development grants.

note 13.4 NET CASH


Cash equivalents 1,281 11,682

Cash 8,716 13,376

Total borrowings (1,285) (14,891)

Net cash 8,712 10,167

Commitments given:Payments due by period

(in thousands of euros) Less than Between 1 More thanContractual commitments 1 year and 5 years 5 years Total

Guarantees: sureties(1) 2,349 232 – 2,581

(1) This mainly concerns sureties given by banks on the company’s behalf, or given by the company to financial institutions against loans made by the latter to its subsidiaries.

Commitments received:Details of parent company’s cash facilities with banks at December 31, 2006 are provided below:

Authorized Used at Authorized credit lines Currency limit December 31, 2006

Until July 31, 2007 EUR 13,000 –

Until July 31, 2008 EUR 6,500 –

Until October 31, 2008 EUR 6,500 –

Total 26,000 –

In addition, Group subsidiaries have access to cash facilities totaling €4,643,000 at December 31, 2006. These credit lines are generally rolledover annually. They were unused at December 31, 2006.

note 13.5 FINANCIAL INSTRUMENTS: CURRENCY HEDGING

The Group mainly uses forward sales and purchases of currencies to hedge its foreign currency balance-sheet positions at the end of eachmonth. The currencies commonly concerned are the U.S. dollar, the Hong Kong dollar, the Australian dollar, the Canadian dollar, the Taiwanesedollar, the Japanese yen and the British pound.



92

Analysis of forward transactions entered into by the company to hedge balance-sheet currency positions at December 31, 2006 and 2005 is shown below:

2006 2005Equivalent Equivalent

In foreign value in In foreign value incurrency thousands Expiration currency thousands Expiration

(in thousands) of euros(1) date (in thousands) of euros(1) date

Forward sales:

USD vs EUR 8,673 6,585 January 22, 2007 – –

CAD vs EUR 5,220 3,416 January 22, 2007 4,648 3,387 January 24, 2006

GBP vs EUR 615 916 January 22, 2007 715 1,043 January 24, 2006

JPY vs EUR 98,227 626 January 22, 2007 – –

TWD vs EUR 17,605 410 January 29, 2007 20,048 517 February 8, 2006

ZAR vs EUR – – 1,404 188 January 17, 2006

Forward purchases:

USD vs EUR (3,663) (2,782) January 22, 2007 (606) (514) January 24, 2006

AUD vs EUR (1,166) (699) January 22, 2007 (1,100) (683) January 24, 2006

CAD vs EUR (158) (103) January 22, 2007 – –

GBP vs EUR (297) (442) January 22, 2007 – –

HKD vs EUR (5,570) (544) January 22, 2007 (1,348) (147) January 24, 2006

JPY vs EUR (423,614) (2,699) January 22, 2007 (204,121) (1,470) January 24, 2006

SGD vs EUR (870) (430) January 22, 2007 (693) (353) January 24, 2006

ZAR vs EUR (458) (50) January 22, 2007 – –

(1) Fair value of forward contracts is calculated by multiplying the amounts hedged by the closing rate.

Details of forward transactions on future cash flows for 2006 and 2005 are shown below:

2006 2005Equivalent Equivalent

In foreign value in In foreign value incurrency thousands Expiration currency thousands Expiration

(in thousands) of euros(1) date (in thousands) of euros(1) date

Forward sales:

CAD vs EUR – – 469 342 January 24, 2006

JPY vs EUR – – 27,015 194 January 24, 2006

ZAR vs EUR – – 660 88 January 24, 2006

Forward purchases:

USD vs EUR (5,968) (4,531) January 22, 2007 (1,151) (976) January 24, 2006

AUD vs EUR (197) (118) January 22, 2007 (143) (89) January 24, 2006

CAD vs EUR (42) (27) January 22, 2007 – –

GBP vs EUR (201) (299) January 22, 2007 (76) (111) January 24, 2006

HKD vs EUR (2,349) (229) January 22, 2007 (3,369) (368) January 24, 2006

JPY vs EUR (20,390) (130) January 22, 2007 (77,840) (560) January 24, 2006

ZAR vs EUR (1,805) (196) January 22, 2007 – –

(1) Fair value of forward contracts is calculated by multiplying the amounts hedged by the closing rate.

Moreover, the Group generally utilizes currency options to hedge its exposure to the U.S. dollar. At December 31, 2006, the company has not hedged its net dollar exposure for 2007.



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note 14 DEFERRED REVENUES


Deferred recurring software evolution and services contracts 29,108 23,762

Other deferred revenues(1) 2,102 2,422

Total 31,210 26,184

(1) Other deferred revenues mainly correspond to invoiced equipment or services, which were not delivered or completed at year-end.

The counterpart of “Deferred software evolution and recurring services contracts” and “Other deferred revenues” is recorded for the sameamount (plus VAT and related taxes) in “Trade accounts receivable” in the balance sheet (see note 7).

note 15 PROVISIONS FOR OTHER LIABILITIES AND CHARGES

Provisions Provisions Other(in thousands of euros) for litigation for warranty provisions Total

Provisions at January 1, 2006 1,838 662 8,404 10,904

Additional provisions 16 39 389 444

Used during the year (90) – (7,195) (7,285)

Unused amounts reversed (1,555) (163) (35) (1,753)

Exchange rate differences (6) – (36) (42)

Provisions at December 31, 2006 203 538 1,527 2,268

Following the acquisition of Investronica, at December 31, 2004, the company booked a provision for arbitration costs in the dispute withInduyco, Investronica’s former shareholder. In 2006, this provision was the subject of an addition of €1,200,000 and a €1,205,000 reversalagainst expenses incurred.In 2005, this provision was the subject of a €1,000,000 addition and a €1,931,000 reversal against expenses incurred.The reduction in “Other provisions” stems mainly from severance payments made as part of the Group’s restructuring begun at the end of 2005.These were provided for at December 31, 2005 and paid at the beginning of 2006.

Potential LiabilitiesThe Group has no knowledge, at the balance-sheet closure date, of any potential liability for which a reserve has not been registered atDecember 31, 2006.

Environmental RisksThe Group is not exposed to any environmental risks, by virtue of the nature of its business.



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note 16 REVENUES

No single customer represents more than 3% of annual revenues.

Breakdown of Revenues by Currency

2006 2005

Euro 56% 58%

U.S. dollar 25% 24%

Japanese yen 5% 5%

British pound 3% 3%

Chinese yuan 3% 2%

Other currencies(1) 8% 8%

Total 100% 100%

(1) No other single currency represents more than 2% of total revenues.

Breakdowns of sales by geographic region and product line are provided in notes 33.1 and 33.2. Details of the recurring portion of revenues areprovided in note 33.3.

note 17 COST OF GOODS SOLD AND GROSS PROFIT


Revenues 216,098 211,197

Cost of goods sold, of which: (69,999) (69,853)

Purchases and freight-in costs (65,564) (64,416)

Inventory movement, net 1,546 (245)

Industrial added value (5,981) (5,192)

Gross profit 146,099 141,344

(in % of revenues) 67.6% 66.9%

Staff costs and other operating expenses incurred in the performance of service activities are not included in cost of goods sold but arerecognized in “Selling, general and administrative expenses”.

note 18 RESEARCH AND DEVELOPMENT


Fixed staff costs (15,406) (14,607)

Variable staff costs (99) (100)

Other operating expenses (2,737) (2,819)

Depreciation expenses (429) (442)

Total (18,671) (17,968)


notes to the consolidated statementof income



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note 19 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


Fixed staff costs (61,860) (63,455)

Variable staff costs (8,294) (6,397)

Other operating expenses (38,753) (40,809)

Depreciation expenses (2,582) (3,269)

Net provisions (1,634) (1,344)

Total(1) (113,123) (115,274)


(1) “Selling, general and administrative expenses” do not include the expenses comprised in “Industrial added value and freight-in costs” (see note 17), which amounted to €5,981,000 in 2006 (€5,192,000 in 2005).

Group Auditors’ FeesOther operating expenses comprise €949,000 in respect of the audit of all Group companies. Details of fees paid by the company in 2006 to eachof the statutory auditors are provided below:

Audit assignments(1) Other services(2) Total

(in thousands of euros) Amount % Amount % Amount %

Lectra SA’s auditors, statutory and consolidated accounts: 753 86% 127 14% 880 100%

PricewaterhouseCoopers (and network) 598 82% 127 18% 725 100%

of which parent company 152 – 152

KPMG (and network) 155 100% – – 155 100%

of which parent company 124 – 124

Auditors outside of PwC and KPMG networks: 12 100% – – 12 100%

Mazars (Brazil) 12 100% – – 12 100%

Other firms(3) 42 74% 15 26% 57 100%

Total 807 85% 142 15% 949 100%

(1) Statutory audits, certification, and examination of individual company and consolidated financial statements.(2) Tax, legal and social reviews.(3) This mainly refers to work carried out preparatory to audits and tax reviews performed by independent audit firms within the framework of certification of the financial statements. Out of a total of €57,000, feespaid to Italian experts amounted to €39,000, of which €24,000 concerned legal engagements and €15,000 for other services.

note 20 NON-RECURRING INCOME AND EXPENSES

In 2006 the company recognized a non-recurring profit of €983,000 resulting from the settlement of a dispute with a supplier. It also increasedby €1,200,000 the provision for fees and expenses relating to the arbitration initiated against Induyco, the former shareholder of Investronica,before the London ICC in June 2005 (see note 15).In 2005, the company had implemented a series of measures to reorganize, optimize and reallocate its worldwide resources, especiallyconcerning its research and development, manufacturing and logistics operations, booking a charge of €9,139,000.Moreover, the company had been indemnified by its insurers for the extensive damage to one of its buildings at the Bordeaux-Cestas (France)industrial site caused by heavy storms in June 2005, in the amount of €1,819,000.



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Details of these non-recurring income and expenses are provided in the table below:


Severance payments – (7,430)

Exceptional depreciation of inventories and intangible assets – (1,062)

Compensation for breach of commercial agreements – (368)

Fees and costs relating to the arbitration procedure against Induyco (1,200) –

Other fees – (279)

Non-recurring expenses (1,200) (9,139)

Settlement with a supplier 983 –

Bordeaux-Cestas damage indemnity – 1,819

Non-recurring income 983 1,819

Non-recurring income and expenses (217) (7,320)

note 21 STAFF

note 21.1 TOTAL PERSONNEL EXPENSES

The table below combines all fixed and variable staff costs for the Group.


Research and development (15,505) (14,707)

Selling, general and administrative (70,154) (69,852)

Manufacturing, logistics and purchasing(1) (4,250) (3,778)

Total (89,909) (88,337)

(1) “Manufacturing, logistics and purchasing” personnel costs are included in the cost of goods sold, in “Industrial added value and freight-in” (see note 17).

note 21.2 STAFF AT DECEMBER 31

2006 2005

Parent company 659 596

Subsidiaries(1), of which: 837 936

Europe 412 488

North America 146 156

Asia-Pacific 179 191

Other countries 100 101

Total 1,496 1,532

(1) Refers to all consolidated and non-consolidated Group companies.



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Analysis of workforce by function

2006 2005

Administration, finance, management information systems 309 314

Research and development 220 207

Manufacturing, logistics, purchasing 151 152

Marketing, sales, training, consulting 419 444

Call centers, technical maintenance, support 397 415

Total 1,496 1,532

The Group headcount at the beginning of 2005 was 1,557 and the overall headcount is expected to revert progressively to that level by first-half2008, according to the recruitement plan.Alongside these recruitments, Lectra Academy organized a wide array of training and change management support programs totaling more than3,000 training days in 2006.

note 21.3 EMPLOYEE PROFIT-SHARING AND INCENTIVE PLANS

Profit-Sharing PlanA rider to the October 1984 employee profit-sharing plan was signed in October 2000. Under this plan, applicable solely to parent companyemployees, a portion of the special employee profit-sharing reserve set aside annually may be invested in equity securities via four types offunds, one consisting exclusively of Lectra SA stock, at the beneficiary’s discretion. Profit-sharing in respect of 2006 will amount to €342,000.There was no profit sharing in respect of 2005.

Incentive PlanA collective employee incentive plan, applicable solely to parent company employees, was signed for the first time in September 1984.Incentive payments in respect of 2006 totaled €681,000 (€522,000 in 2005).

note 21.4 COMPENSATION OF DIRECTORS, CORPORATE OFFICERS, AND OTHER MEMBERS OF THE EXECUTIVE COMMITTEE

The Group management team consists of the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial Officer, and the Director of Human Resources, Organization and Information Systems.Compensation of directors and officers alike comprises a fixed and a variable portion. They do not receive bonuses in any form.Variable compensation is set in accordance with two criteria: consolidated pre-tax profit (which accounts for 67%) and consolidated free cashflow (which accounts for 33%) . Below a certain threshold, it is equal to zero.Conditional upon fulfillment of annual targets, variable compensation for 2006 was equal to 60% of total compensation for the Chairman of the Board of Directors and Chief Executive Officer (unchanged from 2005), 30% for the Chief Financial Officer (25% in 2005), and 30% for theDirector of Human Resources, Organization and Information Systems (20% in 2005). Variable compensation may represent a higher percentageif the objectives are exceeded.The Board of Directors sets annual targets based on the recommendations of the Compensation Committee.The Committee is careful to ensure that the rules framed each year for setting variable compensation are consistent with the evaluation of officers’ performance and with the company’s medium term strategy. After the end of the year, it verifies the annual application of these rulesand the final amount of variable compensation on the basis of the audited financial statements.The annual targets on the two criteria were exceeded in 2006. In 2005 the annual target for pre-tax income was not met, but it was met for free cash flow.Aggregate compensation and benefits in kind paid to the management team in 2006, excluding directors’ fees, amounted to €1,818,000, of which €733,000 in fixed compensation, €1,045,000 in variable compensation, and €40,000 in benefits in kind. Aggregate compensationand benefits in kind paid to these same people in respect of 2005 amounted to €1,253,000 (of which €688,000 in fixed compensation,€528,000 in variable compensation, and €37,000 in benefits in kind).



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Of the senior management team, only the Chief Financial Officer and the Director of Human Resources were granted stock options in the courseof the year (respectively 101,739 and 59,130). A charge of €77,000 and €40,000 was recognized in respect of 2006 as a result of the newplan together with prior-year plans concerning these two beneficiaries (respectively €46,000 and €18,000 in respect of 2005).Details of directors’ and officers’ stock-options plans in force at December 31, 2006 are provided in note 9.4.5.

note 21.5 DIRECTORS’ FEES

Subject to the approval of the General Meeting of Shareholders on April 30, 2007, €100,000 in Directors’ fees will be allocated to the fourmembers of the Board with respect to fiscal 2006 (€80,000 in 2005), split equally among them.

note 21.6 CONTRIBUTIONS TO PENSION PLANS

Contributions to compulsory or contractual pension plans are expensed in the year in which they are paid.During 2006, subsidiaries subject to defined-contribution pension plans booked a sum of €2,898,000 under staff costs in respect of theircontributions to these pension or retirement funds. The main subsidiaries concerned, in addition to the parent company, were those in the UnitedStates, the United Kingdom, Taiwan, and Hong Kong.

note 21.7 INDIVIDUAL TRAINING RIGHTS

Accumulated number of hours corresponding to rights acquired by employees is 20,146. Rights not yet exercised by employees is 19,483.

note 22 DEPRECIATION AND AMORTIZATION CHARGES

The table below combines all depreciation and amortization charges on tangible and intangible fixed assets (excluding goodwill) and theirallocation between income statement items:


Research and development (429) (442)

Selling, general and administrative (2,582) (3,269)

Manufacturing, logistics and purchasing(1) (407) (379)

Total (3,418) (4,090)

(1) “Manufacturing, logistics and purchasing” depreciation and amortization charges are included in “Industrial added value and freight-in” (see note 17).



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note 23 FINANCIAL INCOME AND EXPENSES


Financial income, of which: 521 723

Gains on sales of cash equivalents 158 329

Other interest income 244 191

Reversal of provisions for depreciation of investments and loans 119 203

Financial expense, of which: (493) (580)

Bank charges (469) (464)

Other interest expense (1) (111)

Provisions for impairment of investments and loans (23) (5)

Total 28 143

note 24 FOREIGN EXCHANGE LOSS

In 2006, this item consisted primarily in the cost of premiums on currency options (€390,000) purchased at the beginning of 2006 andintended to hedge the company’s exposure to the US dollar risk for the year. At December 31, 2006, as at December 31, 2005, the companyheld no currency options (see note 13.5).

note 25 SHARES USED TO COMPUTE EARNINGS PER SHARE

Earnings per share have been calculated in accordance with revised IAS 33, using the share repurchase method. The net income used is identical under both calculations.

2006 2005

Number of shares used for basic earnings calculation(1) 35,326,394 35,974,037

Number of shares corresponding to stock options (treasury stock method) 281,615 132,170

Number of shares used for diluted earnings calculation 35,608,009 36,106,207

(1) 513,541 stock options were exercised in the course of 2006, (see note 9.4). The number of shares created as a result has been included prorata temporis in the basis for calculating earnings per share. At December 31, 2006 the company held 741,510 treasury shares (see note 9.1) within the framework of the Liquidity Agreement managed by SG Securities and under the authority given to the companyto purchase its own shares on the stock market. The average number of treasury shares thus held in the course of the year has been deducted from the basis for calculating earnings per share.



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note 26 DEPRECIATION AND AMORTIZATION

The “Depreciation and amortization” item in the statement of cash flows includes the use of provisions amounting to €7,195,000, correspondingto payments made in 2006 and provided for in the financial statements at December 31, 2005 following the reorganization measures launched at the end of 2005 (see note 20). It also includes the use of a €1,205,000 provision for arbitration fees concerning the dispute with Induyco, the former shareholder of Investronica, a corresponding expense having been incurred in 2006. These two figures explain why this item isnegative in the calculation of cash flows for the period.

note 27 OTHER NON-CASH OPERATING EXPENSES

In 2006 as in 2005, “Other non-cash operating expenses” includes unrealized translation gains or losses on short-term balance sheet positionsaffecting the gain or loss on foreign exchange translation (see note on translation of foreign currency-denominated balance sheet items),additional financial provisions, and the impact of measurement of stock options.

note 28 CHANGE IN ACCOUNTS RECEIVABLE

The volume of accounts receivable excluding services billed in advance declined against in 2006 relative to 2005 (see note 7). This positivelyimpacted total cash provided by operating activities. Consequently, at December 31, 2006, the accounts receivable turnover ratio, measured in revenue days (including VAT), was fifteen days, versus twenty-one days at December 31, 2005.

note 29 FREE CASH FLOW

Free cash flow is equal to net cash provided by operating activities, minus cash used in investing activities–excluding cash used for acquisitionsof companies (net of cash acquired).


Cash provided used in operating activities 15,189 13,139

Cash used in investing activities (9,502) (9,623)

Less cash used for the acquisitions of companies, net of cash acquired – 4,067

Free cash flow 5,687 7,583

In 2006, cash provided by operating activities amounted to €15,189,000 (€13,139,000 in 2005), of which €3,447,000 came from a reductionin working capital requirement (the reduction was €2,518,000 in 2005). These flows comprise a €1,000,000 indemnity received from theinsurance company in respect of the damage caused in June 2005 to the Bordeaux-Cestas site (€1,300,000 received in 2005). This indemnityserved to rebuild the damaged building. The corresponding payments are recognized in cash flows from investing activities.Net cash used in investing activities (less costs incurred in the acquisition of companies) amounted to €9,502,000 in 2006, an increase over2005 (€5,556,000) resulting from construction of the new building at the Bordeaux-Cestas site (see note 3) and the Group IT systems upgradeproject (see note 2).Not including €9,670,000 in non-recurring payments, free cash flow would have amounted to €15,357,000 for 2006.In 2005, net non-recurring payments amounted to €670,000. Excluding this impact, free cash flow would have amounted to €8,253,000in 2005.

notes to the consolidated statementof cash flows



101

note 30 ACQUISITIONS OF COMPANIES, NET OF CASH ACQUIRED

In 2005, “Acquisitions of companies, net of cash acquired” corresponded exclusively to the payments made in cash for the acquisition of 100%of Humantec’s shares for an amount of €3,237,000, net of cash acquired of €260,000, and of Sétif for an amount of €1,102,000, net of thecash acquired of €12,000. Neither of these two acquisitions provides for earn-outs.

note 31 REPAYMENT OF BORROWINGS

Repayment of borrowings in 2005 and 2006 comprises the two final installments of the consideration for the acquisition of Investronica on June 30of each of these two years.

note 32 RECONCILIATION OF CASH IN THE CONSOLIDATED STATEMENT OF CASH FLOWS

Cash shown in the Statement of cash flows corresponds strictly to the heading “Cash and cash equivalents” shown in the balance sheet.



102

note 33 SEGMENT INFORMATION

The Group develops, manufactures and markets software and equipment entirely dedicated to the major industrial users of textiles, leather andother soft materials, and provides related services. The Group analyzes its sales according to two broad criteria: by country or geographic region,and by product line. The Group also analyzes its new systems sales by market sector.The resources pooled (including assets) for the purposes of design, manufacturing and commercialization are generally treated globally and arecommon to the different product lines. The company therefore considers that it is neither possible nor relevant to assess the performance of theGroup and the asset allocation for a particular product line, market sector or geographic region.

note 33.1 REVENUES BY GEOGRAPHIC REGION

2006 2005 Changes 2006/2005Actual % At 2005 Actual % Actual Like-for-like

(in thousands of euros) exchange rates

France 18,588 9 % 18,588 18,365 9% +1% +1%

Other European countries 100,890 47% 100,864 99,036 47% +2% +2%

North America 39,920 18% 40,506 38,252 18% +4% +6%

Asia-Pacific 39,519 18% 40,484 37,851 18% +4% +7%

Other countries 17,181 8% 17,282 17,693 8% –3% –2%

Total 216,098 100% 217,724 211,197 100% +2% +3%

note 33.2 REVENUES BY PRODUCT LINE



Software, of which: 60,358 28% 60,630 56,291 27% +7% +8%

– new licenses 33,676 16% 33,882 31,185 15% +8% +9%

– software evolution contracts 26,682 12% 26,748 25,106 12% +6% +7%

CAD/CAM equipment 71,776 33% 72,696 72,623 34% –1% 0%

Hardware maintenance and on-line services 38,578 18% 38,772 38,047 18% +1% +2%

Spare parts and consumables 34,469 16% 34,650 31,672 15% +9% +9%

Training and consulting services 8,565 4% 8,595 9,035 4% –5% –5%

Miscellaneous 2,352 1% 2,381 3,530 2% –33% –33%

Total 216,098 100% 217,724 211,197 100% +2% +3%



103

note 33.3 BREAKDOWN OF REVENUES BETWEEN SALES OF NEW SYSTEMS AND RECURRING REVENUES



Revenues from new systems sales(1) 116,174 54% 117,361 116,191 55% 0% +1%

Recurring contracts(2), of which: 99,924 46% 100,363 95,006 45% +5% +6%

– recurring contracts 62,337 29% 62,572 60,118 28% +4% +4%

– other recurring revenues on the installed base 37,587 18% 37,791 34,888 17% +8% +8%

Total 216,098 100% 217,724 211,197 100% +2% +3%

(1) Revenues from new systems sales comprise sales of new software licences, CAD/CAM equipment, PCs and peripherals, and related services.(2) Recurring revenues fall into two categories:– software evolution, hardware maintenance, online support contracts, and subscriptions to the LectraOnline Exchange communication platform, which are renewable annually;– revenues from sales of spare parts and consumables, training and consulting, and one-off interventions, on the installed base, which are statistically recurrent.

note 33.4 BREAKDOWN OF REVENUES FROM SALES OF NEW SYSTEMS BY MARKET SECTOR



Fashion (apparel, accessories, footwear) 67,263 58% 67,650 70,171 60% –4% –4%

Automotive, aeronautical, marine 39,077 34% 39,884 34,583 30% +13% +15%

Furniture 9,834 8 % 9,827 11,437 10% –14% –14%

Total 116,174 100% 117,361 116,191 100% 0% +1%

note 34 STATEMENT OF INCOME AT CONSTANT EXCHANGE RATES

2006 2005 Changes 2006/2005Actual At 2005 Actual Actual Like-for-like


Revenues 216,098 217,724 211,197 +2% +3%

Cost of sales (69,999) (70,110) (69,853) 0% 0%

Gross profit 146,099 147,614 141,344 +3% +4%

Research and development (18,671) (18,669) (17,968) +4% +4%

Selling, general and administrative expenses (113,123) (113,549) (115,274) –2% –1%

Income from operations 14,305 15,396 8,102 +77% +90%

(in % of revenues) 6.6% 7.1% 3.8%



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note 35 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(in thousands of euros)2006: quarter ended March 31 June 30 Sept. 30 Dec. 31 2006

Revenues 50,875 56,289 51,111 57,823 216,098

Cost of goods sold (16,350) (17,908) (16,493) (19,248) (69,999)

Gross profit 34,525 38,381 34,618 38,575 146,099

Research and development (4,627) (4,868) (4,196) (4,980) (18,671)

Selling, general and administrative expenses (28,458) (28,996) (26,356) (29,313) (113,123)

Non-recurring income and expenses – – (217) – (217)

Income from operations 1,440 4,517 3,849 4,282 14,088

Net income 1,663 4,110 2,663 3,700 12,136

2005: quarter ended(in thousands of euros) March 31 June 30 Sept. 30 Dec. 31 2005

Revenues 47,092 54,809 52,043 57,253 211,197

Cost of goods sold (15,353) (18,632) (17,229) (18,639) (69,853)

Gross profit 31,739 36,177 34,814 38,614 141,344

Research and development (4,328) (4,429) (4,196) (5,015) (17,968)

Selling, general and administrative expenses (28,357) (29,817) (27,781) (29,319) (115,274)

Non-recurring income and expenses – – – (7,320) (7,320)

Goodwill write-down – – – (11,917) (11,917)

Income (loss) from operations (946) 1,931 2,837 (14,957) (11,135)

Income (loss) (504) 1,277 1,966 (15,067) (12,328)



105

This is a free translation into English of the Statutory Auditors’reportissued in French and is provided solely for the convenience ofEnglish speaking users. The Statutory Auditors’ report includesinformation specifically required by French law in such reports,whether modified or not. This information is presented below the opinion on the consolidated financial statements and includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an auditopinion on the consolidated financial statements taken as a wholeand not to provide separate assurance on individual account captionsor on information taken outside of the consolidated financialstatements.This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standardsapplicable in France.

To the Shareholders of Lectra SA,

Following our appointment as Statutory Auditors by your AnnualGeneral Meeting, we have audited the accompanying consolidatedfinancial statements of Lectra SA for the year endedDecember 31, 2006.The consolidated financial statements have been approved by the Board of Directors. Our role is to express an opinion on thesefinancial statements based on our audit.

1. OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS

We conducted our audit in accordance with professional standardsapplicable in France. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe thatour audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities, of the financial position of the Group as at December 31, 2006 and of the results of its operations for the year then ended in accordance with IFRSs as adopted by the European Union.

2. JUSTIFICATION OF OUR ASSESSMENTS

In accordance with the requirements of article L. 823-9 of the FrenchCommercial Code (Code de commerce) relating to the justificationof our assessments, we bring to your attention the following matters:your company systematically performs impairment tests of goodwillat year end and also assesses any impairment indicators, asexplained in the notes to the consolidated financial statements“Summary of Accounting Policies” dealing with goodwill and otherintangible assets. We have examined the way such impairment testhas been implemented together with the cash flow forecasts and the assumptions made. We have verified the appropriateness of the information provided in the notes “Summary of AccountingPolicies” and in note 1 “Goodwill”.

statutory auditors’ report on the consolidated financial statementsFor the year ended December 31, 2006

STATUTORY AUDITORS’REPORT


106

As explained in the note “Summary of Accounting Policies” dealingwith deferred taxes, your company is obliged to make estimates andassumptions with respect to the evaluation of deferred tax assets.Our audit has consisted in assessing the global coherence of thedata and underlying assumptions used to support the evaluation ofsuch deferred tax assets and in reviewing the company’s calculationsand the appropriateness of the information given in note 5.3. Withinthe framework of our assessments, we have satisfied ourselves thatthe aforesaid estimates are reasonable.These assessments were made in the context of our audit of theconsolidated financial statements taken as a whole, and thereforecontributed to the opinion we formed which is expressed in the firstpart of this report.

3. SPECIFIC VERIFICATION

In accordance with professional standards applicable in France, wehave also verified the information given in the group’s managementreport. We have no matters to report as to its fair presentation and itsconsistency with the consolidated financial statements.

Neuilly-sur-Seine and Mérignac, February 23, 2007

STATUTORY AUDITORS’REPORT

The Statutory Auditors

PricewaterhouseCoopers Audit SA KPMG SA

Marc Ghiliotti Jean-Pierre Raud Christian Libéros


107STATUTORY AUDITORS’REPORT

statutory auditors’ report on the report preparedby the chairman of the board on the internal control procedures

This is a free translation into English of the statutory auditors’ reportissued in the French language and is provided solely for theconvenience of English speaking users. This report should be read in conjunction with, and construed in accordance with, French lawand professional auditing standards applicable in France.

To the shareholders of Lectra SA,

In our capacity as statutory auditors of Lectra SA, and in accordancewith article L.225,235 of the Commercial Code, we report to you onthe report prepared by the Chairman of your company in accordancewith article L.225-37 of the Commercial Code for the year endedDecember 31, 2006.Under the responsibility of the Board, it is for management todetermine and implement appropriate and effective internal controlprocedures. It is for the Chairman to give an account, in his report,notably of the conditions in which the duties of the Board ofDirectors are prepared and organized and the internal controlprocedures in place within the company.It is our responsibility to report to you our observations on theinformation set out in the Chairman’s report on the internal controlprocedures relating to the preparation and processing of financialand accounting information.

We performed our procedures in accordance with professionalguidelines applicable in France. These require us to performprocedures to assess the fairness of the information set out in theChairman’s report on the internal control procedures relating to thepreparation and processing of financial and accounting information.These procedures notably consisted of:– obtaining an understanding of the objectives and generalorganization of internal control, as well as the internal controlprocedures relating to the preparation and processing of financialand accounting information, as set out in the Chairman’s report;– obtaining an understanding of the work performed to support theinformation given in the report.

On the basis of these procedures, we have no matters to report in connection with the information given on the internal controlprocedures relating to the preparation and processing of financialand accounting information, contained in the Chairman of theBoard’s report, prepared in accordance with article L.225-37 of the Commercial Code.

Neuilly-sur-Seine and Mérignac, February 23, 2007

The Statutory Auditors

PricewaterhouseCoopers Audit SA KPMG SA

Marc Ghiliotti Jean-Pierre Raud Christian Libéros


108 BIOGRAPHIES

biographies of lectra directors and corporate officers

André HarariAndré Harari, 63, Chairman of the Board of Directors of Lectra since May 3, 2002.He had been Vice Chairman of Lectra’s Board of Directors since 1991, and Vice Chairman and Executive Vice President since 1998. He was amember of the Supervisory Board of Lectra from 1978 to 1990, CompagnieFinancière du Scribe having been a minority shareholder of Lectra since its early stage, before taking control of it at the end of 1990. André Harariholds no outside directorships.André Harari was Chairman and Chief Executive Officer of CompagnieFinancière du Scribe (Paris, France), a venture capital firm specializing in technology companies, which he founded in 1975. Together with hisbrother Daniel Harari, he was the main shareholder in CompagnieFinancière du Scribe until its merger with Lectra on April 30, 1998. He began his career with the consulting division of Arthur Andersen (Paris, 1970-1975).André Harari is a graduate of the École Polytechnique and the École Nationalede la Statistique et de l’Administration Économique (Paris). He also holds a doctorate in management science from the University of Paris-Dauphine.

Daniel HarariDaniel Harari, 53, Director and Chief Executive Officer of Lectra since May 3, 2002.He was Chairman and Chief Executive Officer of Lectra from 1991, following its takeover by Compagnie Financière du Scribe at the end of1990. He holds no directorships outside the company and its subsidiaries.Daniel Harari has been a director (since 1981) and Chief Executive Officer(since 1986) of Compagnie Financière du Scribe, a venture capital firmspecializing in technology companies founded by his brother André Harari,of which they were the main shareholders until its merger with Lectra onApril 30, 1998.He began his career as Vice President of la Société d’Etudes et de GestionFinancière Meeschaert, an asset management company (Paris, France,1980-1983). He was then Chairman and Chief Executive Officer of La Solution Informatique (1984-1990), a PC distribution and servicescompany, and of Interleaf France (1986-1989), a subsidiary of the U.S.software publisher, both of which he founded in Paris.Daniel Harari is a graduate of the École Polytechnique (Paris) and theInstitut Supérieur des Affaires (Paris, coupled with the second year of theStanford Business School MBA program, Palo Alto, CA, United States).

Jérôme VialaJérôme Viala, 45, Chief Financial Officer of Lectra since 1994, responsiblefor all financial, legal and manufacturing functions.He joined the finance department of Lectra in 1985, then successively heldthe positions of Controller for Europe and North America (1988-1991), CFOfor France (1992-1993) and CFO for the Product Division (1993-1994).Jérôme Viala began his career as a credit analyst at Esso (France). He is a graduate of the École Supérieure de Commerce de Bordeaux(Bordeaux, France).

Véronique ZoccolettoVéronique Zoccoletto, 47, Director of Human Resources, Organization andInformation Systems since 2005.She joined Lectra in 1993 as Chief Financial Officer for the Lectra Francedivision, and subsequently was Group controller (1996-1998), Group SalesAdministration manager (1998-2000), and Director of Organization andInformation Systems (2000-2004).She began her career with Singer (France) in 1983 as Controller, and thenwas head of the budget and internal audit department. From 1989 to 1991she was Chief Financial Officer of SYS-COM Ingénierie (France). In 1991she became CFO of Riva Hugin Sweda France.Véronique Zoccoletto graduated from the University of Paris-Dauphine (France).

Hervé DebacheHervé Debache, 61, Director of Lectra since 1998.Hervé Debache is a Director and Executive Vice President of AWF (Paris,France), which specializes in financial engineering, mergers andacquisitions and private equity finance since it merged in 2002 withTertiaire Développement (Paris) of which he was the founder and Chairmanand Chief Executive Officer since 1991. He is also a director of CyberCapital (Paris), a venture capital company specializing in audiovisual andmedia companies.Hervé Debache began his career as an auditor and consultant at PriceWaterhouse (Paris, 1967-1981) before joining SEMA Group as ChiefOperating Officer of its consulting subsidiary (1982-1988). He then co-founded Compagnie Financière JP Elkan, a French investment bankspecializing in mergers and acquisitions and private equity finance, ofwhich he was Chief Operating Officer.Hervé Debache is a graduate of École des Hautes Études Commerciales(Paris) and a French Certified Public Accountant, as well as a graduate ofthe Harvard Business School’s International Teachers Program (Cambridge,Mass., United States).

Louis FaurreLouis Faurre, 73, Director of Lectra since 1991. He holds no outsidedirectorships.Now retired, Louis Faurre was Chairman and Chief Executive Officer ofSagem-Sat-Service (1983-1995, Paris, France), which specializes in IT and office automation equipment. He began his career as an engineer atSagem (1964-1970, Paris), becoming Senior Vice President, IT division(1970-1983). Louis Faurre was a Director of Compagnie Financière duScribe (since 1981) until its merger with Lectra on April 30, 1998.Louis Faurre is a graduate of the École Polytechnique and the ÉcoleNationale Supérieure des Télécommunications (Paris).


109

WORLD HEADQUARTERS16, 18 rue Chalgrin75016 Paris, FranceTel.: +33 (0)1 53 64 42 00Fax: +33 (0)1 53 64 43 00www.lectra.com

INDUSTRIAL FACILITIES23, chemin de Marticot33610 Bordeaux Cestas, FranceTel.: +33 (0)5 57 97 80 00Fax: +33 (0)5 57 97 82 07

CALL CENTERS

Americas Call CenterTel.: +1 877 453 2872Fax: +1 800 746 8760

Asia-Pacific Call CenterTel.: +86 21 6121 2211Fax: +86 21 6495 7233

Europe Call CenterTel.: +00 800 00 LECTRA /+00 800 00 532872 (Free call)Fax: +33 (0) 5 57 97 82 13

Italy Call CenterTel.: +800 532 872 (Free call)Fax: +39 (02)26 41 04 17

Spain Call CenterTel.: +34 900 800 501 (Free call)Fax: +34 917 888 906

INTERNATIONAL ADVANCEDTECHNOLOGY CENTERS

IATC Europe23, Chemin de Marticot33610 Cestas – France Tel.: +33 (0)5 57 97 80 00 Fax: +33 (0)5 57 97 82 07

IATC Americas889 Franklin Road, SEMarietta, GA 30067-7945 – USA Tel.: +1 770 422 8050Fax: +1 770 422 1503

IATC Asia-PacificFloor 6th, building No 91, Phase 13, Caohejing Hi-Tech Park, No1122, Qinzhou Bei Rd, 200233 Shanghai – ChinaTel.: +86 (0)21 5426 2929Fax: +86 (0)21 5426 2576

IATC MexicoCadiz 59, Col. Insurgentes MixcoacDel. Benito Juarez, C.P. 03920 Mexico D.F.Mexico Tel.: +00 52 55 55 63 91 91 Fax: +00 52 55 55 63 91 92

IATC TurkeyMimar Sinan Bulvari No:9Erdinc Binalari A Blok 3. Kule Kat: 434540 Gunesli – Istanbul – TurkeyTel.: +90 212 656 90 09Fax: +90 212 656 71 95

AUSTRALIA

MelbourneMonash Corporate Centre Unit 19 - 20 Duerdin Street, Clayton North3168 MelbourneTel.: +61 3 9912 5499Fax: +61 3 9558 6294

SydneyUnit 4, 36 Ralph Street, Alexandria2015 SydneyTel.: +61 1300 LECTRA

BELGIUM

GandDendermondesteenweg 6369070 DestelbergenTel.: +32 9 222 20 26Fax: +32 9 222 50 06

BRAZIL

São PauloAl. Jau, 1754 – 3° andar – Jardim Paulista01420.002 São Paulo – SPTel.: +55 (11) 3894 9144Fax: +55 (11) 3083 0744

BlumenauAv. Martin Luther, 545Sala 0389012-010 Blumenau – SCTel.: +55 (47) 3322 1222Fax: +55 (47) 3340 4658

CANADA

Montreal110 Bd Crémazie ouestBur. 900Montréal (Québec) H2P 1B9Tel.: +1 514 383 4613Fax: +1 514 383 5270

Toronto1120, Finch Avenue West, Suite 506Toronto (Ontario) M3J 3H7Tel.: +1 416 661 5544Fax: +1 416 661 5549

CHILE

SantiagoAv. Santos Dumont 267Recoleta – Santiago De ChileTel.: +56 2 735 6137Fax: +56 2 735 5787

CHINA

ShanghaiFloor 6th, building No 91, Phase 13, Caohejing Hi-Tech Park, No1122, Qinzhou Bei Rd, 200233 ShanghaiTel.: +86 (0)21 5426 2929Fax: +86 (0)21 5426 2576

Hong-KongSuite 1901-5A, Tower 6, China HK City33, Canton Road – TsimshatsuiKowloon Hong-KongTel.: +852 27225687Fax: +852 27234664

BeijingRoom 706, Hao Yuan Building B,Jia 88, Cai Hu Ying East Street,Fengtai District, Beijing 100054Tel.: +86 10 63331885Fax: +86 10 63332171

GuangzhouRoom 2501, Dongbao Tower,No. 767 Dong Feng Dong Road,GuangzhouTel.: +86 20 3832 0884Fax: +86 20 3832 0957

Qingdao6-2-1701, Guihe Garden,20 Fuzhou Road (South)266071 Qingdao, ShandongTel.: +86 532 5758655Fax: +86 532 5758652

ShishiNorth plaza, Shi Quan Road362700 Shishi, FujianTel.: +86 595 8582233Fax: +86 595 8585533

CROATIA

ZagrebGlavna podruznica ZagrebKusto ijanska 810000 ZagrebTel.: + 385 1 39 06 842 Fax: + 385 1 39 06 843

DENMARK

IkastNygade 95 A7430 IkastTel.: +45 97 15 49 66Fax: +45 97 15 48 99

FINLAND

HelsinkiUpseerinkatu 1-3 C02600 EspooTel.: +358 9 759 44 30Fax: +358 9 759 44 344

FRANCE

Paris66, rue de la Chaussée d’Antin75009 ParisTel.: +33 (0)1 40 13 59 59Fax: +33 (0)1 40 13 59 58

LyonLe Polaris45, rue Sainte-Geneviève69006 LyonTel.: +33 (0)4 72 83 84 10Fax: +33 (0)4 72 83 84 20

CholetEspace Performance – Bât. A2, Place Michel-Ange49300 CholetTel.: +33 (0)2 41 49 18 70Fax: +33 (0)2 41 49 18 79

addresses of lectra subsidiaries and offices


110

LilleZ.I. La Pilaterie – Acticlub n°2Rue des ChampsBât B – 1er étage59650 Villeneuve-d’AscqTel.: +33 (0)3 20 66 28 80Fax: +33 (0)3 20 66 28 88

GERMANY

MunichAdalperostrasse 8085737 IsmaningTel.: +49 89 99 6260Fax: +49 89 99 6261 99

CologneFriedensstrasse 11851145 CologneTel.: +49 22 03 9207 00Fax: +49 22 03 9207 0700

HuisheimWemdinger Strasse 3586685 HuisheimTel.: +49 90 92 9699 0Fax: +49 90 92 9699 101

NurembergSüd West Park 6090449 NurembergTel.: +49 91 19 6798 66Fax: +49 91 19 6798 67

ISRAEL

Natanya5 Arye Regev St,P.O. Box 8309New Industrial AreaNatanya 42504Tel.: +972 9 835 52 27Fax: +972 9 835 52 28

ITALY

MilanVia Gaetano Crespi, 1220134 Milano (MI)Tel.: +39 02 210471Fax: +39 02 26410417

AnconeStrada Vecchia del Pinocchio, 26/B60100 Ancona (AN)Tel.: +39 071 2865021Fax: +39 0 71 2866146

ArezzoVia Don Luigi Sturzo, 3352100 Arezzo (AR)Tel.: +39 0575 370797Fax: +39 0575 353470

BariVia Nicolò Paganini, 15 E70017 Putignano (BA)Tél./Fax : +39 080 4054955

BolognaVia Parini, 1640069 Zola Predosa (BO)Tél./Fax : +39 051 750376

FlorenceVia Torta, 70Località Osmannoro50019 Sesto Fiorentino (FI)Tel.: +39 055 319349Fax: +39 055 319349

NaplesVia Casa Pagano, 1484012 Angri (SA)Tel.: +39 081 5139011Fax: +39 081 5139789

TurinVia Ponchielli, 2710024 Moncalieri (TO)Tel.: +39 011 6821141Fax: +39 011 6821429

VicenzaVia Zamenhof 22/B36100 Vicenza (VI)Tel.: +39 0444 913417Fax: +39 0444 914485

JAPAN

OsakaRena Tenmabashi Bldg. 3F1-6-6, Funakoshi-cho, Chuo-ku,Osaka 540-0036Tel.: +81 (6) 6946 1248Fax: +81 (6) 6946 1244

Aichi156-1 Nakago, Nakamachi,Toyota-shi,Aichi 473-0904Tel.: +81 (565) 53 9901Fax: +81 (565) 53 9902

Fukuoka1-11-15-112, Jiromaru, Sagara-Ku,Fukuoka-Shi,Fukuoka 814-0165Tel.: +81 (92) 871 6731Fax: +81 (92) 871 6733

IwateA-102 1-73-1,Nimaibashi-cho Minami,Hanamaki-shi,Iwate 025-0315Tel.: +81 (198) 26 0710Fax: +81 (198) 26 0711

OkayamaKurasta Tamashima 1F,3-111-1, Shin-Kurashiki EkimaeKurashiki-shi,Okayama 710-0253Tel.: +81 (86) 525 0830Fax: +81 (86) 525 0834

YamagataKouei Bldg. 2F1-4-6 Shinbashi, Sakata-shiYamagata 998-0864

Fukushima105, No.2 Sun Place Kokubun2-24-30 DaishinKouriyama-shiFukushima 963-8852Tel.: +81 (234) 21 3587Fax: +81 (234) 21 3592

TokyoZexel Bldg. Akasaka 2F2-13-1 Nagata-cho, Chiyoda-kuTokyo 100-0014Tel.: +81 (3) 5521 1521Fax: +81 (3) 5521 1522

MOROCCO

Casablanca219, boulevard Zerktouni – 6e étage - 65 et 66CasablancaTel.: +212 (0) 22 25 59 80Fax: +212 (0) 22 23 00 44

MEXICO

Mexico CityCadiz 59, Col. Insurgentes MixcoacDel. Benito Juarez, C.P. 03920 Mexico D.F.Tel.: +52 55 55 63 91 91 Fax: +52 55 55 63 91 92

NETHERLANDS

BreukelenKeulschevaart 22a3621 MX BreukelenTel.: +31 (0) 346 259900Fax: +31 (0) 346 259989

PHILIPPINES

Mandaluyong City 3/F Unit 35 – The Columbia TowerOrtigas AvenueMandaluyong City 1550Tel.: +632 725 8693Fax: +632 724 4023

POLAND

WarsawOddzial w PolsceUl. Smolenskiego 4/201- 698 WarsawTel.: +48 228 33 08 86Fax: +48 228 33 09 48

PORTUGAL

PortoAv. Dr. Antunes Guimarães, 5214450-621 Leça da PalmeiraTel.: +351 22 999 10 00Fax: +351 22 999 10 01/996 09 19

GuardaRua da CorredouraLote 20 R/C Esq. Posterior6300-825 GuardaTel./Fax: +351 271 23 72 10


111

LisbonEdificio Terraços do BugioAv. Dr. Francisco Sá Carneiro n° 5-4C2780-241 Oeiras (Lisboa)Tel.: +351 21 446 24 80Fax: +351 21 446 24 81

ROMANIA

ClujCalea Dorobantilor 38/13400 ClujTel.: +40 264 593 268Fax: +40 264 439 033

SINGAPORE

Singapore101 Thomson Road#09-01 United SquareSingapore 307591Tel.: +65 6353 9788Fax: +65 6352 5355

SOUTH AFRICA

Durban197 North Ridge Road 4th Floor Suite 406Durban 4001Tel.: +27 (31) 207 7110Fax: +27 (31) 207 2920

Johannesburg1, East Gate LaneBedfordviewJohannesburg 2001Tel.: +27 (11) 622 2714Fax: +27 (11) 622 2490

Cape TownP.O. Box 38763PinelandsCape Town 7430Tel.: +27 (21) 696 0600Fax: +27 (21) 696 0606

SPAIN

MadridVía de los Poblados, n°. 1 – Edificio C/DParque Empresarial Alvento28033 MadridTel.: +34 917 888 800Fax: +34 917 888 999

BarcelonaVia Augusta 13-15, Of. 30808006 BarcelonaTel.: +34 917 888 800Fax: +34 917 888 999

Santiago de CompostelaPolígono TambreVía Edison 8D 2º15890 Santiago de CompostelaTel.: +34 917 888 800Fax: +34 917 888 999

ValenciaParque Tecnológico EmpresarialAvda. Juan de La Cierva N°. 27Edificio 1 Wellness Local 11246900 ValenciaTel.: +34 917 888 800Fax: +34 917 888 999

SWEDEN

BoråsVarbergsvägen 48P.O. Box 97450110 BoråsTel.: +46 33 23 78 70Fax: +46 33 23 78 78

TAIWAN

Taipei2F, 38-1, Sec. 1, Mingshen N. Rd.,Guishan Shiang,Taoyuan 333, TaiwanTel.: +886 3 326 7210Fax: +886 3 326 1049

TUNISIA

TunisRésidence El Amen,Rue du Lac Turkhana1053 Les Berges Du LacTel.: +216 71 965 533Fax: +216 71 965 660

Ksar HellalAvenue Habib Bourguiba5070 Ksar HellalTel.: +216 73 545 351Fax: +216 73 454 206

TURKEY

IstanbulMimar Sinan Bulvari No:9Erdinc Binalari A Blok 3. Kule Kat: 434540 Gunesli – IstanbulTel.: +90 212 656 90 09Fax: +90 212 656 71 95

UNITED KINGDOM

LeedsAlbion Mills, 1st Floor Jade Building, Albion Road, Greengates, BD10 9TQTel.: +44 (0)12 7462 3080Fax: +44 (0)12 7462 3099

London15 Hay’s MewsW1J 5PX LondonTel.: +44 020 7016 7600Fax: +44 020 7016 7601

UNITED STATES

Atlanta889 Franklin Road, SEMarietta, GA 30067-7945Tel.: +1 770 422 8050Fax: +1 770 422 1503

Los Angeles5836 Corporate Ave. Suite 150Cypress, CA 90630Tel.: +1 714 484 6600Fax: +1 714 484 6625

New York119 West 40th Street 3rd FloorNew-York, NY 10018Tel.: +1 212 704 4004Fax: +1 212 704 0751


board of directors and group management

BOARD OF DIRECTORSAndré Harari, Chairman Daniel Harari, Chief Executive OfficerHervé DebacheLouis Faurre

Audit Committee Compensation Committee Strategic CommitteeHervé Debache, Chairman Louis Faurre, Chairman André Harari, ChairmanLouis Faurre Hervé Debache Hervé DebacheAndré Harari André Harari Louis Faurre

GROUP MANAGEMENT

Executive CommitteeDaniel Harari, Chief Executive Officer, Director, Marketing & Sales, Chairman Jérôme Viala, Chief Financial OfficerVéronique Zoccoletto, Director of Human Resources, Organization and Information Systems

Antoine Bertier, Director, Software R&DBruno Blain, Director, FurniturePascal Denizart, Director, PLMDaniel Dufag, General CounselLaurence Jacquot, Director, ManufacturingRoy Shurling, Director, Automotive & TransportationDidier Teiller, Director, ServicesJean-Marc Vigneron, Director, Hardware R&D

North AmericaDavid Rode, Director, Americas

Asia-PacificJean-Luc Aubert, Director, Asia-PacificHarvey Tseng, Director, Greater ChinaYves Delhaye, Director, ASEAN, South Korea, IndiaClaudio Saita, Director, Japan

EuropeFabio Canali, Director, ItalyChristian Duddek, Director, Germany, Eastern EuropePhilippe Heckenbenner, Director, Tunisia, Northern EuropeBernard Karmin, Director, FranceRamiro Marino, Director, Spain

STATUTORY AUDITORSPricewaterhouseCoopers Audit SA KPMG SA

Represented by Marc Ghiliotti Represented by Jean-Pierre Raud and Christian LibérosCrystal Park – 63, rue de Villiers Domaine de Pelus – 11, rue Archimède 92208 Neuilly-sur-Seine Cedex 33692 Mérignac Cedex

112


Lectra is the world leader in integrated technology solutions (software, CAD/CAMequipment and associated services) dedicated to industrial users of textiles andleather. With a worldwide staff of 1,500, Lectra provides daily accompaniment tomore than 17,000 customers who are evolving around the world in diversifiedmarket sectors such as fashion (apparel, accessories, footwear), automotive (carseats and interiors, airbags), furniture, aeronautical and marine.In the fashion sector, Lectra’s domain of competencies covers the entire valuechain, from design to manufacturing to managing the collections lifecycle. In othersectors, its technologies cover the design and manufacturing of products,responding to the growing need for creativity, flexibility and productivity.Lectra’s strength lies in its passion for innovation and its expertise derived frommore than three decades of experience shared with its customers to help themovercome their challenges in an increasingly demanding world.Lectra is listed on the Euronext Paris stock exchange.

continuously reinventing

SHARE LISTING

Lectra shares are listed on the Eurolist (compartment B) of the Euronext Paris stock exchange.They figure among the French stocks making up the SBF 250, CAC Small90 and CAC Mid&Small190 of Euronext Paris. ICB sector: 9537 – SoftwareISIN code: FR 00000 65484Liquidity Provider: SG Securities (Société Générale) – Paris

FINANCIAL INFORMATION

Lectra’s financial statements are compliant with the International Financial Reporting Standards (IFRS) as adopted by the European Union.The company publishes its financial results quarterly.This English version of the 2006 Annual Report is a translation of the original French Annual Report prepared in the format currently adopted by French publicly-traded companies in accordance with French legal requirements.The following documents exist only in French: the parent company’s financial statements and notes for 2006, the Board of Directors’ report submitted to the Ordinary General Meeting of Shareholders of April 30, 2007, the Board of Directors’ special reports on stock options granted or exercised in 2006 and on the share-buyback program, the Board of Directors’ report to the Extraordinary General Meeting of Shareholders of April 30, 2007, the Statutory Auditors’general and special reports to the Ordinary General Meeting on the parent company, the Statutory Auditors’ special reports to the Extraordinary General Meeting of Shareholders of April 30, 2007 and the resolutions submitted to the Ordinary and Extraordinary General Meetings of April 30, 2007. Copies of these documents, as well as all financial information, are available on www.lectra.com, or by request from the InvestorRelations department.

2007 FINANCIAL CALENDAR

Publication of quarterly and annual financial results• First quarter 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 27, 2007• Second quarter 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 27, 2007• Third quarter 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 30, 2007• Full year 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 11, 2008(after the close of Euronext Paris)

Annual Meeting of Shareholders – Paris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 30, 2007

Analyst Conferences• Paris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 31, 2007• Paris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 12, 2008

The financial calendar is updated on www.lectra.com

ANALYST COVERAGE

Analysts from the following institutions have issued regular reports on the company’s performance: Berenberg Bank, Cheuvreux,Gilbert Dupont, IDMidcaps, IXIS Midcaps, SG Securities (Société Générale).

INVESTOR RELATIONS

email: [email protected]

www.lectra.com

Lectra is a French Société Anonyme with capital of €52,985,937RCS Paris B 300 702 305Registered office: 16-18, rue Chalgrin – 75016 Paris – FranceTel.: +33 (0) 1 53 64 42 00 – Fax: +33 (0) 1 53 64 43 12

Lectra would like to thank the following companies for their assistance in preparing this report:Laurent Van Der Stockt / Gamma – Hervé Lefebvre/ studio Twin.Design and production: Eurorscg C&O – impression SIRA.


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Documents

2006 ANNUAL REPORT 06 - stockproinfostockproinfo.com/doc/2006/FR0000065484_20061231_US_1.pdf · This English version of the 2006 Annual Report is a translation of the original French