This Annual Report on Form 10-K contains statements which, to the extent they are not statements of historical or present fact, constitute "forward-looking statements" under the securities laws. These forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based on assumptions currently believed to be reasonable. Forward-looking statements within (or incorporated by reference in) this Annual Report on Form 10-K can be identified by the use of words such as "believe," "expect," "intend," "foresee," "may," "plan," "anticipate" and other words of similar meaning in connection with a discussion of future operating or financial performance. All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Certain risk factors that could cause actual results to differ from expectations are set forth in Item 1A of this Annual Report on Form 10-K. The Company cannot assure that its results of operations or financial condition will not be adversely affected by one or more of these factors. The Company does not undertake to update any forward-looking statement made in this report or that may from time to time be made by or on behalf of the Company, except or as required by law.

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Gerber Scientific, Inc. and its subsidiaries are hereafter collectively referred to as the "Company" or the "Registrant."

Gerber Scientific, Inc. was incorporated in Connecticut in 1948. The Company is a leading worldwide provider of equipment, software and related services in the sign making and specialty graphics, apparel and flexible materials and ophthalmic lens processing industries. The Company conducts business through three principal operating segments. These operating segments and the principal businesses within those segments are as follows:

             Thermal Printing

In February 2005, GSP began selling its next generation thermal printer, the GERBER EDGE FX™. The EDGE FX produces graphics that are instantly dry, with no waste, odor, harmful emissions, or need for ventilation. The EDGE FX offers excellent image quality on over 30 substrates, including cast, calendered, magnetic, reflective, metallic and label stock substrates. GSP's large installed base of thermal printers facilitates its sales of other equipment (plotters and routers), software and aftermarket supplies.

              Inkjet Printing

GSP unveiled the GERBER SOLARA™ UV2 wide format inkjet printer during fiscal 2006 at trade shows and began shipments in the fiscal 2006 fourth quarter. The SOLARA UV2 is a hybrid, large format, ultraviolet inkjet printer that accommodates a variety of affordable, uncoated flexible or rigid materials up to 60 inches wide. The SOLARA UV2 is especially suitable for shops specializing in durable indoor/outdoor signs, point-of-purchase displays, banners and backlit signage. It produces prints that are instantly dry and ready to cut and its use of non-solvent based inks makes it easier to maintain than similar solvent-based printers.

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      Plotters and Routers

GSP sells a variety of plotters and routers. Plotters are used to cut a sign or graphic form from a vinyl substrate. Routers are used to make 3-D cuts in other signage materials, such as wood and plastic. GSP's plotter products include the enVision™ 375, which is a tabletop sprocket-feed plotter designed for the rigors of everyday use. GSP also sells the Gerber P2C™ range of 24, 48 and 62 inch plotters that employ optical positioning systems to achieve a high level of accuracy.

      Aftermarket Supplies

GSP offers a wide range of aftermarket materials such as color foils (the "ink" used in thermal printers), adhesive-backed vinyls, banner materials and inks for inkjet printers. All foil cartridges include the GerberGauge™ marking system, which is a proprietary system that shows the amount of foil remaining in a cartridge. GSP also offers UV curable inks for the GERBER SOLARA™ UV2. These inks are specially formulated for the needs of the sign market by providing a balance between flexibility and durability.

GSP software is used to design signs and specialty graphics, as well as to manage printing and cutting processes. OMEGA™ 2.5 is GSP's most powerful design and production software.

As of April 30, 2006, GSP distributed its products, supplies and services through the Spandex distribution network and various independent distributors in the United States and internationally. Through its distribution network, GSP serves over 10,000 customers throughout the world and its United States distributors operate in 44 states. GSP's principal 15 United States distributors generated approximately 78 percent of GSP's total United States revenues for fiscal year 2006, none of which individually accounted for more than 10 percent of the Company's consolidated revenue.

GSP has long-standing relationships with the majority of its distributors and believes that these relationships demonstrate a strong commitment by its distributors to GSP's existing and future product lines. Historically, there has not been any material disruption in sales operations as the result of the termination of key distributors and the time needed to replace any distributor is estimated not to exceed six to eight weeks.

Raw Materials

GSP obtains critical materials from three primary suppliers and original equipment manufacturer ("OEM") arrangements. Cast vinyl is purchased a company that GSP has a long-standing relationship. Color foils are supplied by a leading German provider of hot and cold roll foils for a wide range of industries. The thermal transfer print heads used in GSP's imaging systems are supplied by a Japanese company and worldwide leader in the manufacture of thermal heads for fax and bar code applications. GSP has a price list agreement for cast vinyl. GSP does not currently have a written supply agreement for print heads or foils. No other suppliers are significant.

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Of its total revenue from United States shipments, GSP derived 34.6 percent in fiscal 2006, 36.8 percent in fiscal 2005 and 38.0 percent in fiscal 2004 from sales of products incorporating cast vinyl; 16.8 percent in fiscal 2006, 18.0 percent in fiscal 2005 and 18.0 percent in fiscal 2004 from sales of products incorporating thermal transfer foils; and 8.4 percent in fiscal 2006, 7.4 percent in fiscal 2005 and 14.0 percent in fiscal 2004 from sales of products incorporating thermal transfer print heads.

GSP has not experienced any material delays in obtaining raw materials from any of the foregoing suppliers. If it terminated its existing supply relationship with these suppliers, GSP estimates that it could obtain adequate supplies of the applicable raw materials from new suppliers within approximately one to six months following the termination date, although certain brand name marketing advantages would be difficult to replace.

Competition

There is no competitor in GSP's industry offering the comprehensive range of products and services offered by GSP. Nonetheless, GSP faces strong competition in almost all sub-segments of its business, particularly with respect to the sale of inkjet products and aftermarket materials. Entry barriers associated with inkjet products are low. GSP principally competes on the basis of product quality, service, price and customer awareness of product alternatives.

Spandex Ltd.

Overview

Spandex is the world's leading supplier to the sign making and specialty graphics industries, with a particular focus on the outdoor durable market segment. Headquartered in Belgium, Spandex serves over 31,000 customers in 16 countries within Europe, as well as Canada, Australia and New Zealand.

Spandex offers superior market and technical knowledge, excellent supplier relationships and supply chain infrastructure, and a full array of products and support services. Most customers are small sign shops that find appealing the "one-stop shopping" offered by Spandex. Spandex relies heavily on its ability to provide competitive product offerings from both strategic OEM partners and GSP. The European market, where Spandex derives 87 percent of its revenue, increasingly emphasizes digital products, which encompass both wide format inkjet equipment and digital aftermarket materials. This market has seen a proliferation of equipment suppliers and distributors in recent years. Spandex believes that it can compete effectively as a vertical provider of differentiated products and services by leveraging its scale of operations.

During fiscal 2006, Spandex completed a range of initiatives to strengthen its business including:

• Completion of remaining SAP implementations in Europe and Australia/New Zealand, bringing all Spandex operations onto the Company's business platform;
• Implementation of a new, cross functional New Product Introduction process, which has supported the rollout of a range of new hardware and aftermarket products during the year;
• Expansion of its integrated marketing program, strengthening brand awareness and marketing return on investment; and
• Expansion of Spandex's integrated inventory management, warehousing and freight and logistics system to improve inventory management and customer service.

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In fiscal 2007, Spandex expects to introduce additional new hardware and aftermarket offerings targeted at the digital market segment, as well as to expand distribution of current products with the help of increased sales and marketing activities. Spandex's customer service technicians and sales personnel will continue to receive special training in inkjet technology and in the proper matching of equipment, software and aftermarket materials.

Distribution Relationships

Spandex acts as a distributor, in some instances on an exclusive basis, for a number of different equipment and aftermarket consumables suppliers. These suppliers place a high value on the scope of Spandex's sales and distribution network and its capabilities. Several of these suppliers also employ direct sales forces, which can lead to competition with Spandex's products.

Raw Materials

Spandex purchases critical products from various suppliers and through OEM arrangements. Thermal transfer foils are supplied by a leading German provider. Vinyl materials, digital materials, and hardware are supplied by various providers, including GSP.

Of its total revenue, Spandex derived 5.3 percent in fiscal 2006, 6.4 percent in fiscal 2005 and 7.0 percent in fiscal 2004 from sales of its products incorporating thermal transfer foils. Of its total revenue, Spandex derived 27.5 percent in fiscal 2006, 21.3 percent in fiscal 2005 and 23.5 percent in fiscal 2004 from sales of products incorporating vinyl materials from one supplier.

Competition

As a global supplier, Spandex competes with both larger and smaller companies, depending on the country and segment being considered. While Spandex is the largest global supplier in the durable outdoor graphics marketplace, it competes in certain geographies with companies that are considerably larger than Spandex (including Paperlinx, Antalis and Oce).

APPAREL AND FLEXIBLE MATERIALS

Overview

Gerber Technology ("GT") constitutes the Company's Apparel and Flexible Materials operating segment. GT develops and manufactures leading brands of integrated software and automated equipment for the sewn products and flexible materials industries. These systems automate and significantly improve the efficiency of information management, product design and development and pre-production and production processes. GT offers specialized solutions to a variety of end-user markets, including apparel, transportation interiors, furniture, composites and industrial fabrics. GT's headquarters is located in Connecticut and it maintains regional offices, agents and distributors in 117 countries and serves over 16,000 customers. GT engineers, manufactures and distributes its products in various locations in North America, Europe and Asia.

GT offers a comprehensive suite of products that can be used by its customers as integrated solutions throughout the design and manufacturing process, including:

• Computer-aided manufacturing ("CAM") material spreading and single- and multi-ply cutting systems;
• Product lifecycle management ("PLM") and product data management ("PDM") software, which are enterprise-wide applications used by apparel brands and retailers for global management of product activities; that facilitate communication of measurement specifications, construction details, costing and bill of material information among apparel and other flexible materials designers, raw materials suppliers, makers of the materials and retailers;

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• Conceptual design, advanced computer-aided design ("CAD") pattern-making and marking/nesting software;
• Pattern design digitizers and large format plotters;
• Spare parts and consumable materials; and
• Customer training, technical support and comprehensive maintenance and specialized support services for its software and equipment.

The table below shows the percentage of GT's fiscal year 2006 orders for new equipment and software derived from each of the principal industry segments that make use of GT's products:

      Software

GT offers the following major software product lines:

             Product Lifecycle Management Software

Product lifecycle management ("PLM") software is an enterprise-wide tool for managing and improving global product development. Retailers, brand marketers, suppliers and factories adopt PLM solutions to speed products from concept to market - a critically important challenge driven by increasingly shorter fashion cycles in the apparel industry. PLM also enables web-based collaboration and global schedule management throughout the fashion lifecycle. PLM allows precise and secure, real-time communication of product information from pre-production to retail, reducing supply-chain communication errors and lowering development costs. In November 2005, GT announced a new PLM solution designed to meet the specific needs of the fashion market. This new product, Fashion Lifecycle Management™, will be available for customer deliveries during the first half of fiscal 2007.

             Product Data Management Software

Product data management ("PDM") software systems reduce lead times, increase the accuracy of prototyping and improve the quality of information flow along the production chain. Design and manufacturing processes are increasingly occurring at geographically separate locations. PDM software enables customers to reduce the margin of contractor error and delivery delays, increase product quality and help deliver products to market more quickly. GT's PDM software has been adopted by over 1,000 customers worldwide. These customers operate more than 12,000 software licenses of the product. GT continues to enhance its PDM software offerings and is currently marketing the upgraded WebPDM™ V5.0 version of the product.

             Conceptual Design Software

AccuMark™ V-Stitcher is a 3-D visualization solution that allows true-to-life garment design, fitting and merchandising. The product allows users to streamline their product development process, share designs over the Internet and reduce the number of physical samples that need to be created prior to finalizing a production model.

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Vision Fashion Studio™ is a leading conceptual design software system. It enables a designer to sketch or scan styles and conceptualize potential designs using an array of electronic tools and color palettes. The software also enables the design of custom fabrics, allows the rework of prints on screen and permits users to create catalogues and perform other merchandising functions digitally.

             CAD Pattern-Making and Marking/Nesting Software

AccuMark™ is a pattern-making and marking/nesting software that automates the design and pattern-making, pattern-grading (sizing) and marker-making functions. GT markets AccuMark in the apparel, transportation interiors, furniture, industrial fabrics and composites industries. In the apparel industry, AccuMark pattern design and grading software is used to draft and digitize new patterns and replicate existing garments. In addition, the software enables the automatic generation of markers that maximize the efficiency of material utilization prior to the cutting process.

Customers use GT's plotters to produce accurate design prints on industrial-width paper for placement on fabric or other materials to provide process information relative to cutting and downstream operations. GT markets the Infinity™ family of thermal inkjet plotters, designed in coordination with Hewlett-Packard, and a range of pen plotter systems. GT designed and engineered the Infinity AE, an advanced inkjet plotter, which is now produced in China for sale in the local markets.

Distribution

GT's products are sold through its worldwide direct distribution and service network (accounting for roughly 58 percent of GT's total fiscal year 2006 revenue) and through independent agents and distributors. GT's management recognizes that employing a direct sales model in certain regions would likely increase its overall direct revenue, but believes that GT's long-standing agent and distributor network, staffed with knowledgeable individuals who speak the local language and understand the particular challenges and opportunities of their markets, represents an ultimately more valuable asset in these markets.

Raw Materials

GT purchases materials, such as computers, computer peripherals, electronic parts and equipment, from numerous suppliers. Many of these materials are incorporated directly into GT's manufactured products, while others require additional processing. In some cases GT uses only one source of supply for certain materials. To date GT has not experienced significant difficulties in obtaining timely deliveries of these materials. Increased demand or future unavailability of these materials could result in production delays that might adversely affect GT's business. GT's management believes that, if required, it could develop alternative sources of supply for the materials it uses. In the near term, GT's management does not foresee that the potential unavailability of materials, components, or supplies from any particular source would have a material adverse effect on its overall business.

Competition

GT is a leading worldwide brand within the apparel and flexible materials market for computer-controlled material spreading and cutting systems, PLM and PDM solutions and pattern-making, grading and nesting software.  GT faces intense competition in each of these product areas from certain companies based in Europe, such as Lectra and Assyst-Bullmer, and in Japan, such as Takatori and Toray, which are significant suppliers in their respective regions. However, GT believes that only Lectra has a product range and global breadth of distribution network that is comparable to GT's. This capability enables GT to compete on a worldwide basis and support key international accounts as they shift production and sourcing activities around the world.

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OPHTHALMIC LENS PROCESSING

Overview

Gerber Coburn ("GC"), the Company's Ophthalmic Lens Processing operating segment, is a leading provider of lens processing systems for the ophthalmic industry. GC designs, manufactures and services software, equipment and supplies used in all aspects of surfacing prescriptions for coating and machining lenses to fit patient frames. GC serves customers in the wholesale optical lens production laboratories, retail eyewear chains, central processing laboratories and independent eye care practitioners. Independent eye care practioners consist principally of eye care professionals such as ophthalmologists, optometrists and opticians, who perform some of their own in-office lens processing.

GC's product offerings include the components required to process an entire prescription, including computerized prescription entry, lens blocking and surfacing, lens fining and polishing, lens cleaning and scratch-resistant coating, lens edging, and lens inspection equipment. GC also offers a wide range of lens processing supplies, including surfacing pads, fining pads, cutters and blocks.

Although GC's historic focus has been on retail eyewear chains, smaller optical laboratories and eye care professionals, GC continues to look at opportunities to expand sales to the large laboratory and leading high-volume lens companies to take advantage of industry consolidation and to gain overall market share. This strategy requires GC to enhance its product line with new products oriented towards these segments of the market. GC has identified market opportunities in a number of other areas as well. For example, GC believes that its large installed base of products, involving over 7,000 customers in approximately 75 countries, provides it with a significant opportunity to increase its aftermarket consumables business through expanded product offerings. Furthermore, GC believes that the growth market countries in Asia, Eastern Europe and Latin America represent an important revenue opportunity for GC. These markets are beginning to develop the infrastructure to perform sophisticated eye exams of a mature middle class market. GC believes as these markets develop, doctors will begin to prescribe complex prescriptions that require processing, and eyeglass wearers will demand more sophisticated product amenities, such as polycarbonate lenses and anti-reflective coatings, as well as multi-focal lenses that require surfacing. GC plans to leverage the global service capability of the Company's Gerber Service organization to provide a higher volume of on-site installation, training and support for more regions worldwide.

Products

GC's products reduce the time and steps needed to process complex lens prescriptions. The benefits of GC's comprehensive solutions include a reduction of production steps, staff training cycles, operating errors, lens breakage and staffing needs. Benefits also include improved lens quality, minimal optical knowledge required by laboratory staff, lower manufacturing costs per square foot, a clean work environment and the elimination of toxic metals and coolants.

      Equipment

GC's equipment offerings consist of lens surfacing equipment (such as blockers and generators), finers and polishers, finishing equipment (such as tracers and edgers), cleaning and coating equipment and lens inspection equipment.

Prescription lenses are generally processed in two ways. One method entails the use of a "stock lens," with the patient's prescription already existing on the lens that is finish "blocked." Blocking is a process that orients the lens curve to match the prescription. A block, which is a tool used to hold the lens during processing, is then attached to the lens. The shape of the frame is "traced" in a tracer that digitizes the measurements and then communicates them to an edger. This blocked lens is then "finished," or edges are machined, to match the shape of the frames.

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The other method starts with a semi-finished lens blank. The blank is surface blocked and has a curve "generated," or cut into the lens by a generator, on the backside to correspond to the already existing front curves to create the desired prescription. A generator is a computer numerically controlled machine that uses logarithms to calculate the tool path required to generate the curve. This process can create single vision or multi-focal lenses. The lens generating process creates a lens that is not optically clear. This "cut" lens is put through a fining and polishing process. The fining process involves the use of abrasive pads to smooth cutting marks out of the lens and polishing involves the use of a liquid slurry to polish the lens to an optically clear finish. The lens is then de-blocked and ready for coating or finishing.

             Surfacing Equipment

GC offers a range of surfacing equipment that uses computer control to create precise curves on the lenses. GC's lens surface generator offerings include products to satisfy the needs of labs of all sizes processing all types of materials. During fiscal 2006, GC launched the DTL Generator with a Cut-to-Polish option, an affordable, high-speed system for the wholesale laboratory market designed to cut or grind a prescription into a lens while eliminating the fining step, thus improving productivity for the lab. GC also offers blocking products designed for high throughput manufacturing environments. The alloy AcuBlock™ Eclipse Surface Blocker™ is a part of its comprehensive line of digital lens layout blocking systems.

             Finers and Polishers

Through the use of microprocessor programming, GC's systems automatically select the best processing times and pressures for all lens materials, including CR39, polycarbonate, high-index and glass. The degree of precision is supported by a mechanical design that provides optimized fining and polishing orbits and durability for a long production life. In line with GC's commitment to expand its product portfolio to serve the needs of the wholesale labs, GC introduced in fiscal 2006 the CMX-50 cylinder machine, a robust finer and polisher to address this market segment.

             Coating Equipment

GC's environmentally-friendly, scratch-resistant coating process eliminates waste and reduces operator exposure to coating materials. The HRC-180 Coater is designed to meet the needs of wholesale laboratories, is high throughput, and is a self-contained, fully automated system for the application of high-performance, scratch resistant coating to all types of plastic and polycarbonate lenses.

             Finishing Equipment

GC sources most of its lens finishing products from Essilor International and through this relationship offers a wide range of finishing equipment. GC's finishing products are designed to meet the needs of opticians, optometrists, ophthalmologists and ophthalmic laboratories of all sizes and production levels. Within the finishing equipment market segment, the edger business is very competitive internationally. With the introduction of the Kappa CT/CTD finishing system in fiscal 2006, GC is now able to provide its customer with a high performance finishing system with drilling capabilities. GC offers the Esprit 3D Lens Finishing System for international markets.

             Lens Inspection Equipment

Lens inspection equipment is used to test the quality and accuracy of the lenses produced. Certain lens inspection equipment, such as the Dimetrix Lens Inspection and Finish Blocker, also block the lens. Co-developed with Visionix, Ltd., Dimetrix supports the streamlining of lens processing by combining automatic finish blocking and lens power inspection into one device.

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             Full Service Laboratory Equipment

Designed for retail lens processing, GC also sells a complete ophthalmic lens processing system, Premier Lab™. Premier Lab is a compact, full service laboratory for processing CR39, high-index and polycarbonate lenses. A Premier Lab includes a frame tracer, blocking system, surface generator, finer/polisher, coating system, finishing system and related software.

      Software

GC's software is the backbone of its comprehensive solutions, especially for small laboratories. From simple remote tracing with GC's Innovations Lite™ software to a more comprehensive software package such as its Innovations Standard software, GC can provide prescription calculation software necessary to run an optical laboratory. GC provides worldwide on-site software installation, training and support by leveraging a network of local service specialists.

Distribution

GC distributes products directly in the United States and Canada. In other regions of the world the Company leverages a combination of direct sales and independent agents to maximize its coverage. GC also participates in industry trade shows in the Americas, Australia, Europe and Asia. Trade shows often generate a significant source of new sales.

GC purchases materials from numerous suppliers. Many of these materials are incorporated directly into GC's manufactured products, while others require additional processing. GC has not experienced significant difficulties in obtaining timely deliveries. Increased demand for these materials or future unavailability could result in production delays that might adversely affect GC's business. GC's management believes that, if required, it could develop alternative sources of supply for the materials it uses. In the near term, GC's management does not foresee that the unavailability of materials, components, or supplies from any particular supplier would have any material adverse effect on its overall business.

Competition

GC believes that it is one of the fundamental worldwide suppliers of ophthalmic lens processing systems. GC believes that the combination of its technological leadership and strategic alliances and distribution arrangements has enabled it to become a leading supplier of computerized surface blocking and lens generating systems to the small laboratory segment in North America. GC's principal competitors in the large laboratory market segment in Europe and Japan are Statisloh GmbH Wetzlar and Schneider GmbH and Co. KG. Principal competitors in the retail and eye care professionals segment are Nidek, Briot and Santinelli. GC believes that it has the second largest market share worldwide in fining and polishing equipment and aftermarket materials.

BACKLOG

The backlog of firm orders within the Company's operating segments is as follows. The entire backlog as of April 30, 2006 is expected to be delivered in fiscal year 2007.

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The Company has agreements with a major financial services institution for the institution to provide financing to the purchasers of the Company's equipment. These financings, usually through a leasing arrangement, typically have terms ranging from three to five years. As of April 30, 2006, the amount of receivables outstanding related to these arrangements was $21.8 million and the amount that was subject to recourse provisions was approximately $8.6 million. The equipment sold collateralizes the outstanding receivables. In the event of default by the lessee to the financial services institution, the Company has liability to the financial services institution under recourse provisions to the extent the financial services institution repossesses the equipment and returns it to the Company. Under most circumstances, the Company is then able to resell the equipment, the proceeds of which are expected to cover a majority of the liability to the financial services institution.

As of April 30, 2006, the Company had approximately 2,250 employees, of which 59 percent represent employees based outside of the United States. With the exception of Gerber Technology's Ikast, Denmark facility, which had approximately 80 employees, the Company is not subject to any collective bargaining agreements. The Company believes that its relationships with its employees are satisfactory.

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GOVERNMENT REGULATION

None of the Company's principal businesses are directly subject to government regulation that is material to their businesses.

GT's business has been, and will continue to be, affected by trade laws and regulations pertaining to the apparel and textile industries.

The World Trade Organization (the "WTO") eliminated quota restrictions on textile and apparel imports as of January 1, 2005. However, a special safeguard provision was included as part of China's accession to the WTO and has allowed other WTO members to re-impose quotas on Chinese imports through 2008.

United States textile and apparel companies have focused in recent years on developing quota and tariff benefits from regional trade arrangements such as the North American Free Trade Agreement and the Central America Free Trade Agreement, to favor production using United States components. For much of the past decade, these arrangements resulted in Mexico, Central America and Caribbean nations being the top apparel suppliers to the United States market, despite lower labor costs in Asia. However, as the quota restrictions are eliminated, Asian countries, including China and India in particular, can be expected to continue gaining additional global market share.

It is not possible to predict what effect, if any, these regulatory developments may have on GT's business.

The Company was incorporated under the laws of the State of Connecticut in 1948. Its principal executive offices are located at 83 Gerber Road West, South Windsor, Connecticut 06074. The Company's telephone number is (860) 644-1551 and website address is www.gerberscientific.com. On the Investor Relations section of the Company's website, access is provided, free of charge, to the Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed with, or furnished to, the SEC, in accordance with Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. The contents of the Company's website are not a part of this Annual Report on Form 10-K. In addition, the SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers filing electronically, including the Company. The public may read and copy any materials the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The Company has adopted a Financial Code of Ethics applicable to its Chief Executive Officer and certain key financial employees that meets the requirements of a "code of ethics" as defined by Item 406 of Regulation S-K. This Financial Code of Ethics is posted on the Company's website. In addition, the Company has posted on its website its Code of Business Conduct and Ethics applicable to all directors, officers and employees, under NYSE listing standards. The Company will provide copies of these codes in print without charge to any shareholder that requests them. Requests for copies may be directed to the Company's General Counsel at the address noted above. The Company intends to disclose any amendments to these codes and any waiver of a provision of these codes for the benefit of the Company's directors, principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, on its website referred to above within four business days following such amendment or waiver, or within any other period that may be required under SEC rules from time to time.

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ITEM 1A.  RISK FACTORS

The Company's business, financial condition, operating results and cash flows can be affected by a number of factors, including, but not limited to, those set forth below, any one of which could cause actual results to vary materially from prior results or anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, see the discussion in "Cautionary Note Concerning Factors that May Influence Future Results," "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and "Notes to Consolidated Financial Statements" in Item 8 of this Annual Report on Form 10-K.

If the company is unable to continue to develop and commercialize new technologies and products, the company may experience a decrease in demand for its products or products could become obsolete.

Each business unit operates in highly competitive industries. The Sign Making and Specialty Graphics and Ophthalmic Lens Processing operating segments are also subject to rapid technological change. Management believes that the company's ability to develop or acquire new technologies is crucial to success. The company may not be successful in enhancing existing products or developing or acquiring new products and technologies that will receive desired or expected levels of market acceptance. In addition, new products must respond to technological changes and evolving industry standards. The company's operating results could be adversely affected if it is unable, for technological or other reasons, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, or if products are introduced late to the market, thereby resulting in missed opportunities in dynamic, fast-moving markets, or do not achieve market acceptance.

New product introductions in future periods may also affect the sales of existing products. As new or enhanced products are introduced, the company must successfully manage the transition from older products to minimize disruption in customers' ordering patterns, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered to meet customers' demands.

Delays in product development and introduction could adversely affect the operating results of Gerber Scientific Products and Spandex. The failure of these businesses to respond effectively to the continuing transition of sign shops to lower-cost inkjet imaging systems, calendered vinyls and digital media systems may lead to a loss of market share that may be difficult to recapture. Delays in product introductions at Gerber Scientific Products and Spandex may also lead to a loss of market share that may be difficult to recapture.

Local competitors have developed products for sale in Gerber Technology's identified growth markets.  A delay by Gerber Technology in introducing products of its own in these markets may result in a loss of market share or affect Gerber Technology's ability to achieve market penetration in accordance with its strategy.

Delays in product development could disrupt Gerber Coburn's current plans to capture increased business from the higher-volume wholesale optical lens production laboratories and make it more difficult to respond on a timely basis to competitors' product introductions.

The company's businesses could suffer as a result of manufacturers' or suppliers' inability or unwillingness to supply the company with systems, parts or aftermarket consumables on time and to specifications.

Some hardware and aftermarket consumables products are manufactured to the company's specifications by either domestic or international manufacturers or suppliers. The inability or unwillingness of a manufacturer or supplier to ship such products in a timely manner or to meet quality standards could cause the company to miss customers' delivery date requirements for those items, which could result in the cancellation of orders, refusal to accept deliveries, lost customers, product returns, or a reduction in purchase prices, any of which could have an adverse effect on the company's operating results and financial condition.

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The company's product development efforts generally have longer-term timetables, on occasion necessitating entering into original equipment manufacturer ("OEM") arrangements to augment product lines.

The company continually engages in the development of new and enhanced products in an effort to develop incremental sales and improve gross margins. The company's industries are highly competitive and subject to significant and rapid technological change. In some periods, revenue growth depends on outsourcing arrangements with OEMs to augment product lines. If OEMs are not able to supply products reliably, timely, or at a competitive cost, the company's business may suffer. Further, the gross margins associated with sales of OEM products tend to be lower than those associated with internally developed products.

The company is subject to currency risks, geopolitical risks and other risks as a result of international operations.

The company's export sales have generally been made in United States dollars, although in some territories, principally Western Europe, the company makes sales of some products in local currencies. Approximately 68 percent of the company's revenue was generated in fiscal 2006 by the international operations of the company's principal business units.

An increase in the value of the United States dollar relative to foreign currencies could make the company's products more expensive and, therefore, potentially less competitive in foreign markets. For international sales and expenditures denominated in foreign currencies, the company is subject to risks associated with currency fluctuations. The company's hedging strategy may not be successful and currency exchange rate fluctuations may have a material adverse effect on its operating results.

The company expects that revenue from international markets will continue to represent a significant portion of total revenue. It is costly to maintain international facilities and operations, promote brand names internationally and develop localized systems and support centers. Some of the risks that the company faces as a result of its international presence include:

• general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships;
• imposition of or increases in currency exchange controls;
• potential inflation in the applicable foreign economies;
• imposition of or increases in import duties and other tariffs on products; and
• imposition of, or increases in, foreign taxation of earnings and withholding on payments received from subsidiaries.

Part of the company's strategy over the last few years has been to expand worldwide market share and decrease costs through strengthening the company's international distribution network and, to some extent, sourcing materials locally. The company continues to consider the location of production facilities closer to end-use customers in international markets. This strategy may heighten the potential impact of certain of the foregoing risks.

There could be unforeseen environmental costs that may adversely affect the company's future net earnings.

The company operates and competes on a global basis and must conform to applicable environmental, health and safety, or EH&S, laws and regulations wherever the company operates, and in some cases, wherever products are sold. If the company fails to comply with any present or future EH&S laws or regulations, it could incur liabilities, including monetary, civil and criminal penalties and liabilities resulting from the suspension of sales of noncompliant products.

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EH&S laws and regulations have generally affected the company's manufacturing and warehousing operations and regulated the storage, use, discharge and disposal of the chemicals employed in manufacturing products. However, new and emerging EH&S legislation is now aimed at regulating the chemical composition of finished products and establishing requirements for the end-of-life collection, recovery, reuse, recycling, treatment and environmentally sound disposal of the products themselves. Such legislation has recently gone into effect within the European Union and similar legislation is currently proposed for China. As these new EH&S laws and regulations emerge across the global community, it can be difficult to assess how they will be interpreted, how they will be implemented and how they will be enforced by regulators within the various countries and jurisdictions. It can be equally difficult to assess the potential costs that might be associated should there occur instances of noncompliance.

Uncertainty presently exists with respect to recently effective European Union legislation. One European Union directive restricts the use of certain hazardous substances in listed categories of electrical and electronic equipment, and another directive mandates the collection, reuse, recycling, treatment and environmentally sound disposal of listed categories of electrical and electronic equipment at the end of its useful life. The absence of definitions of key terms within the directives, the lack of clear guidance from the European Commission and considerable uncertainty as to how the requirements will be implemented and enforced within the European Union Member States has made it difficult to assess the company's compliance with these directives with certainty. If alleged to be in noncompliance with these or other European Union directives affecting finished products, the company could be required to pay significant legal fees in defense of its positions and, if unsuccessful, could be required to suspend sales of noncompliant products within certain European Union countries. The suspension of product sales could cause the breach of a contractual obligation and result in the company being directly or indirectly liable for costs, penalties or third-party claims. A sustained finding of noncompliance could additionally require the company to incur significant expenses associated with the redesign or reengineering of products or manufacturing processes, or incur expenses associated with the possible recall of any noncompliant product and/or the management of historical waste products.

The intellectual property of the company's businesses, though protected by patents and trademarks, may be at risk when the company manufactures at foreign locations.

As some manufacturing is shifting offshore, there is a risk of having patented products reverse engineered and rebuilt by a local competitor. In some countries, such as China, the company cannot guarantee that its intellectual property rights will be protected. Management considers patents and patent applications collectively to be important to the company's operations and has established controls to help secure intellectual property.

The company's businesses are subject to fluctuations in operating results due to general economic conditions, specific economic conditions in the industries in which it operates and other external forces.

The company's businesses and operations could be affected by:

• changes in general economic conditions and specific conditions in industries in which the company's businesses operate that can result in the deferral or reduction of purchases by end-use customers;
• changes in the level of global corporate spending on technologies related to such economic conditions;

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• the effects of terrorist activity and international conflicts, which have led, and in the future could lead, to business interruptions and difficulty in forecasting;
• the size, timing and cancellation of significant orders, which can be non-recurring;
• product configuration and mix;
• market acceptance of new products and product enhancements;
• announcements, introductions and transitions of new products by the company or the company's competitors;
• deferrals of customer orders in anticipation of new products or product enhancements introduced by the company or the company's competitors;
• changes in pricing in response to competitive pricing actions;
• supply constraints;
• the level of expenditures on research and development and sales and marketing programs;
• the company's ability to achieve targeted cost reductions;
• rising interest rates; and
• excess facilities.

At various times in recent years, markets for one or more of the company's main products have been characterized by falling prices, unstable exchange rates, weaker global demand and shifting production bases. In this type of environment, the company's ability to achieve and sustain profitability may depend to a great degree on the ability to reduce costs, including the costs of sourced materials, and manage the supply chain, increase productivity levels, reposition the company within higher value-added market segments and establish a production presence in geographic areas outside the United States.

Management believes that diversification of the company's businesses across multiple industries and geographically has helped, and should continue to help, limit the effect of adverse market conditions in any one industry or the economy of any one country or region on consolidated results. Nonetheless, the effect of adverse conditions in one or more industries or regions may not be limited or offset in the future.

The company's results are subject to fluctuations in costs of purchased finished goods, components and aftermarket consumables.

The company depends on finished equipment, component parts and other materials from suppliers to manufacture and distribute the systems the company sells. Each of the business units also relies on suppliers for the products it sells directly to its distribution networks. Fluctuations in the prices of such equipment, components and materials, whether caused by market demand, shortages, currency exchange rates, or other factors, could adversely affect the cost basis for the production, delivery or maintenance of the company's products and, in turn, have an adverse effect on its operating results and financial condition.

If the company does not generate the operating cash flow anticipated, it may be unable to service its indebtedness and comply with financial and operating covenants.

The ability to make scheduled payments under the company's credit facility and other indebtedness and to comply with financial and operating covenants will depend primarily on the company's success in generating substantial operating cash flow. The company is also subject to risks in connection with the refinancing of its existing indebtedness. The company's primary credit facility matures in October 2008 and the company may not be able to refinance its existing indebtedness and, even if able to do so, the terms of a refinancing might not be as favorable as the terms of the existing indebtedness. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, including new equity capital, the company's cash flow may not be sufficient to repay all maturing indebtedness at the relevant times. Failure to pay or extend the maturity of such indebtedness could result in default under or acceleration of the company's other indebtedness. If the maturity of the company's indebtedness were accelerated, the company may not have sufficient funds to pay such indebtedness. Prevailing interest rates, operating results and financial condition, or other factors at the time of refinancing, including the possible reluctance of lenders to make loans, may result in higher interest rates and increased interest expense.

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The company's indebtedness could adversely affect its financial health and ability to compete.

As of April 30, 2006, the company had $36.8 million of long-term indebtedness. The company's indebtedness could have important consequences. For example, it may:

• increase the company's vulnerability to general adverse economic and industry conditions, including interest rate fluctuations, as a significant portion of borrowings will continue to be at variable rates of interest;
• require the company to dedicate a substantial portion of its cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flows to fund working capital, capital expenditures and other general corporate purposes;
• limit the company's ability to borrow additional funds in the future as a result of financial and other restrictive covenants in its indebtedness;
• restrict business activities due to financial and other restrictive covenants in the company's debt agreements;
• limit the company's flexibility in planning for, or reacting to, changes in the business and the industries in which it operates; and
• place the company at a competitive disadvantage relative to other companies that have less indebtedness.

The company faces intense competition in each of its principal business units.

Although the company is a pioneer or a leading company in each of the industries that the company's principal business units serve, competition has grown in recent years in each market segment in which the company operates. Unless the company's business units can effectively implement strategies to lower costs, enhance the rate of product development, stimulate revenue growth, expand the geographic reach of operations and leverage brand names and distribution networks, the company may experience a decline in operating results and a deterioration of financial condition.

Approximately 16.6% of the company's assets consisted of goodwill as of April 30, 2006. If the company makes changes in its business strategy or if market or other conditions adversely affect business operations, the company may be forced to record an impairment charge, which would lead to a decrease in the company's assets and reduction in net operating performance. The company tests goodwill for impairment annually or whenever events or changes in circumstances indicate an impairment may have occurred. If the testing performed indicates that impairment has occurred, the company is required to record an impairment charge for the difference between the carrying value of the goodwill and the implied fair value of the goodwill in the period the determination is made. The testing of goodwill for impairment requires the company to make significant estimates about the future performance and cash flows of the company, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in underlying business operations, future reporting unit operating performance, existing or new product market acceptance, changes in competition or changes in technologies. Any changes in key assumptions, or actual performance compared with those assumptions, about the business and its future prospects or other assumptions could affect the fair value of one or more reporting units, resulting in an impairment charge.

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The company is required to account for options under employee stock plans as a compensation expense, which will adversely affect reported operating results beginning in fiscal 2007.

The company currently discloses pro forma compensation expense quarterly and annually by calculating the fair value of options awarded on the date of grant and disclosing the impact on net earnings and net earnings per share in the notes to the consolidated financial statements. Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R") will require the company to record the fair value of all stock options awarded as compensation expense in the consolidated statement of operations, which will adversely affect the company's operating results. The company adopted SFAS 123R on May 1, 2006.

Risks Relating to the Sign Making and Specialty Graphics Business

Gerber Scientific Products must enhance and diversify its product lines and accelerate the pace of new product development, or risk a loss of market share and declining operating results.

Gerber Scientific Products must enhance and diversify its product lines to make sign and specialty graphics production more efficient and cost effective. Gerber Scientific Products also must respond to the transition of sign shops to lower-cost inkjet imaging systems, calendered vinyls and digital media systems. Product development may be outpaced by advances in inks, substrate materials, or print head technology that could alter what end-use customers deem to be the preferred equipment and, in turn, adversely affect the level of market acceptance of Gerber Scientific Product's future equipment offerings.

If Gerber Scientific Products' large aftermarket suppliers decide to sell to its customers directly, operating results would be adversely affected.

Most of Gerber Scientific Products' aftermarket products are supplied on an OEM basis from large industry suppliers. Although the company believes there are alternative sources of supply, the company would need to compete with its current suppliers directly, if they decide to sell to the company's customers directly, which could adversely affect the company's operations.

The non-renewal by any of Gerber Scientific Products' key United States distributors of annual distribution agreements could adversely affect Gerber Scientific Products' operating results.

As a significant percentage of Gerber Scientific Products' revenues are represented by its principal United States distributors, the non-renewal by some or all of these distributors of annual distribution agreements could adversely affect Gerber Scientific Products' operating results. The transition to inkjet imaging systems and lower-cost calendered vinyls has resulted in a decline in the proportion of the sales of Gerber Scientific Products' key distributors represented by Gerber Scientific Products' products in recent years, which increases the risk of non-renewal by one or more of these distributors. This transition also raises the risk that distributors may compete directly in the distribution of inkjet imaging products as the company develops inkjet products.

If the company does not choose the right products to distribute to its end-use customers and distributors and properly test products before distributing them, its market position and operating results may suffer.

A failure to meet customer requirements could have a negative effect on Gerber Scientific Products' market position and operating results. Gerber Scientific Products, as an original equipment manufacturer, and Spandex, as a distributor, must respond to the evolving product needs of their end-use customers. To maintain relationships with customers, Spandex and Gerber Scientific Products' United States distributors must distribute the products that meet customer specifications. They must also ensure that the products are properly tested and that sales personnel and technicians are properly trained concerning the capabilities and calibration of new products. In light of the increased pace of technological advances, and the proliferation of new products due to low industry barriers to entry, end-use customers have become increasingly dependent on Gerber Scientific Products to perform these functions and have this expertise. To meet these objectives, Gerber Scientific Products must carefully manage relationships with equipment and aftermarket consumables suppliers, making sure that they are satisfied with Gerber Scientific Products' performance and services.

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Gerber Technology may face increased competition in the future from manufacturers of low-end products, which could lead to loss of market share, declining prices and margins.

A failure by Gerber Technology to respond effectively to increased competition in sales of low-end products, which may require further steps to lower Gerber Technology's cost of production, may result in a loss of market share and otherwise adversely affect operating results. Low-end products, particularly CAD systems, have experienced increased usage in growth markets such as China, India and Eastern Europe. These products tend to be local in their distribution, thereby minimizing shipping costs, import duties and the cost of obtaining an import license, but there is a risk that these products will be distributed regionally. Further, the introduction of spreaders and plotters in some developing countries could result in more intense competition in growth market countries that are expected to provide significant growth opportunities for Gerber Technology.

The impact of the phasing out of trade quotas as of January 1, 2005 for the apparel and textile industries and for Gerber Technology is not fully known.

The elimination of trade quota restrictions on textile and apparel imports as of January 1, 2005 may contribute to a significant consolidation in apparel and textile sourcing that could hurt many countries whose exports of textiles and apparel account for a very high percentage of their export earnings or their gross domestic product. Although Gerber Technology is seeking to position its business to respond to the changes that may result from the lifting of the trade quotas, the nature and impact of those changes cannot be fully known or assessed. Gerber Technology's strategy of investing in key emerging markets, particularly China, may not produce the expected results in light of the changing market conditions.

Risks Relating to the Ophthalmic Lens Processing Business

Gerber Coburn's quarterly and annual operating results are subject to variation resulting from significant, but sometimes non-recurring, orders from key customers.

Although Gerber Coburn has an installed customer base of over 7,000 customers, its quarterly and annual operating results can vary depending on the timing and level of larger orders for its equipment and aftermarket consumables by, for example, a major retail chain expanding its geographic coverage by opening up a number of new outlets. These orders may be of a periodic or non-recurring nature, the timing of which may be driven by market forces to which the customer is seeking to respond, and not all of which can be anticipated. The variability of Gerber Coburn's periodic operating results may also be heightened as a result of the consolidation occurring within the optical lens industry.

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Gerber Coburn faces risks in seeking to increase its focus on the larger wholesale optical laboratories.

To take advantage of the consolidation occurring in the ophthalmic lens industry, the increase in market share controlled by the larger retail chains and the implementation of centralized purchasing initiatives by the leading lens manufacturers, Gerber Coburn is seeking to enhance its sales to the larger independent optical laboratories and the production facilities of the leading lens manufacturers. Gerber Coburn's strategy is to leverage its distributor relationship with a leading lens manufacturer to become a major supplier to the lens manufacturer's controlled laboratories. This strategy may not succeed if the manufacturer decides to enhance its own lens distribution system rather than enter into a supply relationship with Gerber Coburn.

Chief Executive Officer and Chief Financial Officer Certifications
The Company has filed with the SEC as Exhibits to this Annual Report on Form 10-K the certifications of the Company's Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934 regarding the Company's financial statements, internal control over financial reporting, disclosure controls and procedures and other matters. In addition, following the fiscal 2005 annual meeting of shareholders, the Company submitted to the NYSE in a timely manner the annual certification of the Chief Executive Officer required under Section 303A.12(a) of the NYSE Listed Company Manual, that he was not aware of any violation by the Company of the NYSE Corporate Governance Listing Standards.

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The following table presents selected financial data as of and for the fiscal years ended April 30, 2006, 2005, 2004, 2003 and 2002. The selected financial data as of and for the fiscal years ended April 30, 2005, 2004, 2003 and 2002 have been restated to correct errors contained in the previously issued financial statements associated with the accounting for assets held in a rabbi trust that are directed by the Company to be used to fund benefit payments under the Company's nonqualified supplemental pension plan. The selected financial data as of and for the fiscal years ended April 30, 2006, 2005 and 2004 were derived from the Company's audited financial statements appearing in Item 8 of this Annual Report on Form 10-K. The selected financial data as of and for the fiscal years ended April 30, 2003 and 2002 were derived from the Company's consolidated financial statements, which have been restated to reflect the matters discussed above. For additional information about the restatement, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements which, to the extent they are not statements of historical or present fact, constitute "forward-looking statements" under the securities laws. These forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based on assumptions currently believed to be reasonable. Forward-looking statements can be identified by the use of words such as "believe," "expect," "intend," "foresee," "may," "plan," "anticipate" and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to:

• expected financial condition, future earnings, levels of growth, or other measures of financial performance, or the future size of market segments or geographic markets;
• future cash flows and uses of cash and debt reduction strategies;
• prospective product developments and business growth opportunities, as well as competitor product developments;
• demand for the Company's products and services;
• the impact of recently enacted and proposed international environmental laws on the Company's international revenue;
• methods of and costs associated with potential geographic expansion;
• regulatory and market developments and the impact of such developments on future operating results;
• future effective income tax rates;
• the outcome of contingencies;
• the availability and cost of raw materials; and
• pension plan assumptions and future contributions.

All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Certain risk factors that could cause actual results to differ from expectations are set forth in Item 1A, "Risk Factors" of this Annual Report on Form 10-K. The Company cannot assure that its results of operations or financial condition will not be adversely affected by one or more of these factors. The Company does not undertake to update any forward-looking statement made in this report or that may from time to time be made by or on behalf of the Company, except as required by law.

The following discussion should be read in conjunction with Item 1, "Business" and Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

As disclosed in Note 2 to the Consolidated Financial Statements, included in Item 8 of this Annual Report on Form 10-K, the Company restated its consolidated financial statements for the fiscal years ended April 30, 2005 and 2004, to correct errors in the accounting for assets held in a rabbi trust that are used by the Company to fund benefit payments under the Company's nonqualified supplemental pension plan. The restatement resulted in a cumulative net reduction of earnings during fiscal years 1994 through 2005 of $0.7 million, net of applicable income tax benefits. The restatement impacted the Company's previously disclosed cash flows, reducing net cash from operating activities, which were equally offset by increases in net cash from investing activities.

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OVERVIEW AND OUTLOOK

For the fiscal year ended April 30, 2006, the Company reported revenue of $530.4 million, operating income of $17.8 million and net earnings, including the cumulative effect of a change in accounting principle, of $2.6 million. The Company's performance reflected execution against its strategy, anchored by its past three-year turnaround plan. Adjusting for the unfavorable impact of foreign currency translation in fiscal 2006, which reduced revenue by $6.7 million as compared with fiscal 2005, consolidated revenue improved $19.8 million, or 3.8 percent, from the prior year. Fiscal 2006 operating income benefited from increased sales from new products and the impact of supply chain management strategies implemented over recent years.

During fiscal 2006, the Company brought several significant new products to the market. These included the Solara UV2, an internally developed inkjet printer for the Sign Making and Specialty Graphics market. Also, the XLs50 and XLc7000 (innovative spreading and cutting equipment) were introduced within the Apparel and Flexible Materials Asian growth markets. The Ophthalmic Lens Processing segment launched the DTL Generator with a Cut to Polish option and the CMX-50 within its ophthalmic market base, targeted for larger laboratory usage. The Company expects that this new product pipeline should enhance revenue and operating profit in fiscal 2007 within each operating segment.

The Company's primary objective for its Apparel and Flexible Materials segment continues to be increasing market share in growth markets, particularly China. The lifting of the quotas mandated by the World Trade Organization, which occurred on December 31, 2004, is expected to have a significant favorable impact on the success of the Company's China initiative, since it is expected to benefit China. The United States and other countries, however, have planned, and in some cases introduced, protective trade measures. The United States reached an agreement with China that curtails the growth of Chinese exports through 2008, which is less restrictive than the original protective trade measures. The Company expects this agreement will encourage growth in Chinese manufacturing and will create potential opportunities for the Company. Overall, however, the timing of the benefit to China of the lifting of quotas remains uncertain.

The Company refinanced its debt in October 2005 to a lower-cost credit facility. This credit facility is expected to lower the Company's cost of debt as compared with periods prior to the fiscal 2006 refinancing.

The Company is required to expense stock option compensation costs beginning in fiscal 2007, which is expected to negatively impact full year net earnings by approximately $0.7 million, net of income tax.

In fiscal 2007, the Company expects to emphasize new products and market expansion to provide revenue growth and to continue to leverage its improvements in supply chain management strategies to provide improved operating performance.

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The Company will begin recording stock option-based compensation expense in fiscal 2007 for stock options in relation to the adoption of FASB Statement of Financial Accounting Standards 123 (revised 2004) "Share-Based Payment," which is effective for the Company on May 1, 2006. The Company had $1.3 million, net of tax, of unvested stock option compensation expense not recognized as of April 30, 2006. The Company anticipates that it will incur, net of tax, approximately $0.7 million, $0.4 million and $0.2 million in the fiscal years ending April 30, 2007, 2008 and 2009, respectively. See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Research and Development - Ongoing research and active new product development have kept research and development expenses as a percentage of revenue steady over the past three fiscal years.

Restructuring Charges - There were no new restructuring plans entered into in fiscal 2006. A change in estimates related to the payment of severance to a former employee of the Company resulted in the reversal of fiscal 2001 restructuring expense of $0.3 million. Additional severance expense caused by a change in estimates of $0.1 million was also incurred in fiscal 2006 related to the fiscal 2005 Muskogee, Oklahoma relocation.

Fiscal 2005 Charges - During fiscal 2005, the Company incurred $3.0 million of restructuring charges by implementing the final phase of its three-year shared services restructuring plan. Of these charges, $1.5 million of employee severance was attributable to the relocation of the Ophthalmic Lens Processing segment's manufacturing facility from Muskogee, Oklahoma. Employee separation costs related to the organizational realignment of the Sign Making and Specialty Graphics European business were $1.0 million. The Company also entered into a sublease agreement for a Sign Making and Specialty Graphics leased facility, which caused an increase to a previously established restructuring rent accrual of $0.4 million, attributable to a change in estimates.

If the amount, or timing, of the Company's sublease estimates differs from its estimates as of April 30, 2006, the difference will be recognized within its Consolidated Statements of Operations.

Fiscal 2004 Charges - During fiscal 2004, the Company incurred $2.5 million of restructuring charges by implementing actions necessitated by the second year of the Company's business re-engineering plan. The Company ceased to use a leased facility, which resulted in a $2.0 million charge for the net present value of expected future lease costs within the Sign Making and Specialty Graphics segment. The initial transition of the Ophthalmic Lens Processing segment operations to the shared services program resulted in $0.4 million of employee separation and international facility consolidation costs. The Company also exited a product line within the Sign Making and Specialty Graphics segment, which resulted in $0.1 million of employee separation costs.

Rollforward of Restructuring Reserves - The table below shows the restructuring accruals established by plan fiscal year from April 30, 2004 to April 30, 2006:

Other reconciling differences from the statutory rate of 35.0 percent for fiscal 2006, 2005 and 2004, were primarily attributable to changes in estimates of foreign tax valuation allowances, as well as benefits related to foreign tax planning strategies, tax credits based on research and development costs and export tax incentives.

Cumulative Effect of a Change in Accounting Principle - On April 30, 2006, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB No. 143" ("FIN 47"). This Interpretation provides clarification with respect to the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation are conditional on a future event. FIN 47 requires that the fair value of a liability for a conditional asset retirement obligation be recognized in the period in which it occurred if a reasonable estimate of fair value can be made. The Company determined that conditional legal obligations exist for certain of its worldwide owned and leased facilities related primarily to leasehold improvements. The Company adopted FIN 47 on April 30, 2006 and recorded a noncash transition impact of $0.3 million, net of tax, which is reported as a cumulative effect of a change in accounting principle, net of tax in the Consolidated Statement of Operations included in Item 8 of this Annual Report on Form 10-K. Future periods will include charges for depreciation expense of the assets established for retirement obligations and also accretion expense for the liabilities related to the obligation; however, these costs are not expected to be material.

Cash provided by operating activities in fiscal 2006 was used to reduce the Company's debt by $8.6 million, pay for the debt refinancing costs of $1.1 million and fund capital expenditures and intangible asset additions of $8.1 million.

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In fiscal 2005, the Company generated $17.5 million of cash from operating activities, which represented a decrease of $1.6 million from fiscal 2004. This decrease was primarily attributable to the operating loss and related increase in deferred income taxes and an increase in inventory. The inventory increase, which was offset by a corresponding increase in accounts payable, was associated with increasing inventory requirements for new products introduced in the fourth quarter. Fiscal 2005 cash flows were positively affected by incentive compensation payments in fiscal 2004 of $9.2 million (based on fiscal 2003 results) that did not recur in fiscal 2005, higher accounts receivable collections and better cash management.

Cash from operating activities in fiscal 2005 was used to reduce debt and short-term lines of credit by $13.4 million and to fund capital expenditures and intangible asset additions of $6.2 million.

In fiscal 2004, the Company generated $19.0 million of cash from operating activities. Cash generated from non-cash, currency-adjusted working capital in fiscal 2004 reflected a $2.4 million decrease in accounts receivable because of the lower sales volume, a $4.1 million decrease in inventories resulting from strategic inventory levels associated with the Company's shared services restructuring initiative and a $3.6 million decrease in prepaid expenses, primarily reflecting tax refunds received. These decreases were offset by lower accounts payable and accrued expense balances of $5.5 million and lower accrued compensation and benefits of $9.9 million, which primarily reflected incentive compensation payments made in fiscal 2004 related to fiscal 2003 results. There was no incentive compensation accrual relating to fiscal 2004 results as of April 30, 2004.

Cash from operating activities in fiscal 2004, together with proceeds from the settlement of a promissory note of $1.0 million and reductions in cash balances, was used to reduce debt by $26.7 million, pay costs of $5.6 million associated with the credit facility entered into on May 9, 2003 and fund capital expenditures and intangible asset additions of $4.4 million.

Financial Condition - In fiscal 2006, the United States dollar strengthened against the Euro, the Great Britain pound and the Australian dollar and weakened against the Canadian dollar. The net impact of these currency movements from April 30, 2005 to April 30, 2006 resulted in lower translated Euro, Great Britain Pound and Australian dollar-denominated assets and liabilities and higher translated Canadian dollar-denominated assets and liabilities compared with amounts recorded as of April 30, 2005. The most significant portion of the Company's international assets and liabilities are denominated in the Euro.

Net accounts receivable increased to $92.4 million as of April 30, 2006 from $89.8 million as of April 30, 2005. This increase was the result of a higher volume of year-end shipments as compared with the prior year, partially offset by a reduction in days of sales outstanding ("DSO") and the impact of foreign currencies referred to above. DSO in ending accounts receivable was down to 58 days as of April 30, 2006 compared with 61 days as of April 30, 2005.

Net inventories increased to $53.8 million as of April 30, 2006 from $52.4 million as of April 30, 2005. The increase was primarily driven by a planned increase for specific new products for anticipated demand. This was offset by the impact of foreign currencies referred to above. Inventory turnover was 7.4 times annually as of April 30, 2006 and April 30, 2005.

Prepaid expenses and other current assets increased to $6.1 million as of April 30, 2006 from $5.3 million as of April 30, 2005. The increase was primarily caused by higher foreign value added tax receivables. This was offset by the impact of foreign currencies referred to above.

Net property, plant and equipment decreased to $38.4 million as of April 30, 2006 from $39.9 million as of April 30, 2005, reflecting depreciation expense of $8.0 million, the sale of the Muskogee, Oklahoma facility and the impact of foreign currencies referred to above. Capital expenditures of $7.5 million partially offset the decrease. Capital expenditures in fiscal 2007 are expected to be approximately $7.0 million to $8.0 million, primarily related to investments in information technology, manufacturing, engineering and general facility improvements.

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The fluctuation in goodwill was due to the impact of foreign currencies referred to above.

Other assets, net include patents and other intangible assets, the Company's investment in available for sale securities held in a rabbi trust and other long-term assets. These amounts decreased to $15.8 million as of April 30, 2006 from $18.4 million as of April 30, 2005. The decrease primarily reflects intangible asset amortization expense of $0.6 million, the loss on early extinguishment of debt related to deferred financing costs under the prior credit facilities of $2.5 million and the impact of foreign currencies referred to above. These items were offset by additional deferred financing costs related to the Company's current credit facility, net of amortization of $0.9 million and intangible asset additions of $0.6 million.

Accounts payable and other current liabilities, excluding the current portion of long-term debt, increased to $111.1 million as of April 30, 2006 from $105.5 million as of April 30, 2005. The increase was primarily caused by higher inventory purchases late in the fiscal year for new product development and improved cash management of accounts payable, as well as an increase in accrued compensation for incentive compensation payments. These items were partially offset by a decrease in other accrued liabilities caused by lower accrued professional fees, reflected in lower Sarbanes-Oxley 404 compliance costs and the impact of foreign currencies referred to above.

Credit Facilities - On October 31, 2005, the Company entered into a credit facility (the "Credit Facility") with Citizens Bank of Massachusetts, the Export-Import Bank of the United States ("Ex-Im") and Sovereign Bank and to refinance its former senior credit facilities. The Credit Facility consists of a $50.0 million asset-based revolving line of credit (the "Revolver") that includes a $13.0 million working capital loan guarantee from Ex-Im. The Credit Facility also includes a $1.2 million term loan (the "Term Loan") and a $6.5 million standby letter of credit. The Revolver matures in 2008 and the Term Loan, which is payable in monthly installments, matures in 2010.

Effective January 31, 2006, the Company entered into an amendment with its lenders to remove as an event of default the occurrence of a Material Adverse Effect, as defined in the Credit Facility. This eliminated the sole subjective acceleration clause from the Credit Facility. As a result of that amendment, only amounts due in one year or less are classified as a current liability on the Company's balance sheet as of April 30, 2006.

The Credit Facility obligations are secured by first priority liens on, and security interests in, selected assets of the Company in the United States and its subsidiaries in the United Kingdom and Canada, including inventory, accounts receivable and real estate and leasehold improvements. The Credit Facility obligations are also secured by the capital stock of subsidiaries of the Company.

The initial borrowings under the Credit Facility were used to repay all borrowings under and terminate the Company's four-year $110.0 million senior credit facilities entered into on May 9, 2003.

Revolver borrowings are subject to a borrowing base formula based upon eligible accounts receivable and eligible inventory. The Company must maintain a minimum availability of $1.0 million. Interest on obligations under the Revolver is charged, at the option of the Company, at LIBOR plus 1.75 percent, or at the lenders' prime rate.

The Company is required to pay a monthly commitment fee of 0.25 percent of the daily difference between the total commitment amount of the Revolver and the aggregate outstanding principal amount of the loans under the Revolver.

The Term Loan is payable in 60 equal monthly installments. Interest on obligations under the Term Loan is charged, at the option of the Company, at LIBOR plus 2.0 percent, or at the lender's prime rate.

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The Company is required to maintain two financial covenants set forth in the agreement, including leverage and debt service coverage ratios. The agreement also includes limitations on additional indebtedness and liens, investments, legal entity restructurings and changes in control. Additionally, under the terms of the agreement, the Company may not pay dividends unless such payment does not exceed a specified portion of the Company's excess cash flows, as defined in the agreement, and unless, both before and after such payment, the Company has a specified minimum level of funds available for future borrowings under the facility.

The following table summarizes the financial covenant requirements and the Company's compliance with these covenants as of April 30, 2006:

The Company did not have any goodwill impairments during fiscal 2006 or 2005. To assess goodwill for impairment, internal valuation analyses are performed. Estimates of fair value are primarily determined using discounted cash flow analysis. This approach uses estimates and assumptions, including projected cash flows, discount rate assumptions and perpetual growth rate assumptions. A 10 percent decrease in the fair value of the Company's reporting units also would not have resulted in any goodwill impairments in the Apparel and Flexible Materials reporting unit, but would have resulted in a step two test being required in the Ophthalmic Lens Processing and Spandex reporting units.

As of April 30, 2006, the Company had $51.6 million of goodwill assets on the consolidated balance sheet, which management believes are realizable based on the estimated cash flows of the associated businesses. However, it is possible that the estimates and assumptions used, such as future sales and expense levels, in assessing that value may need to be re-evaluated in the case of market deterioration, which could result in future impairment of those assets.

Pension plans - The amounts recognized in the consolidated financial statements for the qualified and nonqualified defined benefit pension plans are determined from actuarial valuations. Inherent in these valuations are assumptions relating to, among other variables, the expected return on plan assets, discount rates at which the liabilities could be settled and the rate of increase in future compensation levels. These assumptions are updated at the measurement date and are disclosed in Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and generally amortized over future periods and, therefore, affect expense recognized in future periods.

The expected return on assets assumption is developed considering several factors. Such factors include current and expected target asset allocation, historical experience of returns by asset class type, a risk premium, an inflation estimate (weighted towards future expectations), expectations for real returns, and adjustments for anticipated or historical economic changes using a long-term investment horizon. The effects of asset diversification and periodic fund rebalancing are also considered. The long-term rate of return assumption used for determining net periodic pension expense for fiscal 2006 was 8.5 percent and will be 8.5 percent for fiscal 2007. Holding all other assumptions constant and increasing or decreasing the expected long-term rate of return of the plan assets by 0.5 percentage points would increase or decrease fiscal 2007 consolidated earnings before income taxes by approximately $0.4 million.

The discount rate utilized for determining future pension obligations of the pension plans is based on the expected yields of high-quality, long-term corporate bonds. The resulting discount rate used for determining net periodic pension expense for fiscal 2006 was 5.50 percent and will be 6.25 percent for fiscal 2007. Holding all other assumptions constant, a 0.25 percentage point increase or decrease in the discount rate for the plans would increase or decrease fiscal 2007 consolidated earnings before income taxes by approximately $0.4 million.

The assumed rate of increase in compensation levels is calculated based primarily on expected wage inflation. For fiscal 2006, the assumption for the long-term rate of increase in compensation levels used for determining net periodic pension expense was 4.0 percent and will be 4.0 percent for fiscal 2007. Holding all other assumptions constant and increasing or decreasing the long-term rate of increase in compensation levels by 0.5 percentage points would decrease or increase fiscal 2007 consolidated earnings before income taxes by approximately $0.4 million.

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Pension expense for fiscal 2007 is expected to be approximately $4.1 million. In subsequent fiscal years, future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company's pension plans.

Income taxes - The Company accounts for income taxes in accordance with FASB Statement of Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

In assessing the need for a valuation allowance, the Company estimates future taxable income, available tax planning strategies and the realizability of tax loss and credit carryforwards. In estimating future taxable income, the Company has analyzed its historical earnings in each jurisdiction taking into consideration the effect of certain nonrecurring items, which negatively impacted earnings in those periods. The Company has also considered the expected favorable shift in profits between various jurisdictions resulting from recently implemented tax planning strategies in assessing the realizability of its deferred tax assets.

The realization of these deferred tax assets can be impacted by changes in tax law, changes to statutory tax rates and future taxable income levels. In the event the Company were to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged as a reduction to income in the period such determination was made. Likewise, if the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, the Company would decrease the recorded valuation allowance and record an increase to income in the period such determination was made.

The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company's tax returns. These audits can involve complex issues, which may require an extended period of time to resolve. The impact of these examinations on the Company's liability for income taxes cannot be presently determined. In management's opinion, adequate provision has been made for potential adjustments arising from these examinations.

The Company has not recognized United States tax expense on the unremitted earnings of certain of its foreign subsidiaries because it is not anticipated that such earnings will be remitted to the United States. These undistributed earnings were approximately $5.6 million as of April 30, 2006.

In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction). Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 substantially changes the applicable accounting model and is likely to cause greater volatility in income statements as more items are recognized discretely within income tax expense. The Interpretation also revises disclosure requirements and introduces a prescriptive, annual tabular rollforward of the unrecognized tax benefits. FIN 48 is effective for the Company beginning May 1, 2007. The Company is evaluating the impact of adopting FIN 48 on its consolidated financial position and results of operations.

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In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and specifies the accounting for the allocation of fixed production overhead costs. SFAS 151 is effective for the Company beginning May 1, 2006. The Company does not expect the adoption of SFAS 151 to have a material impact on its consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"), which primarily changes the requirements for the accounting for and reporting of a change in accounting principle for all voluntary changes or when an accounting pronouncement does not include specific transition provisions. SFAS 154 is effective for the Company on May 1, 2006, which is when the Company will adopt the standard. In the event of an accounting principle change as described by SFAS 154, the Company will comply with SFAS No. 154 unless other specific transitional guidance is available.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS 123R")," which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for the Company beginning on May 1, 2006. The Company will adopt SFAS 123R on May 1, 2006 using the prospective method. The Company had $1.3 million, net of tax, of unvested stock option compensation expense not recognized as of April 30, 2006. The Company anticipates that it will incur, net of tax, approximately $0.7 million, $0.4 million and $0.2 million of compensation expense in the fiscal years ending April 30, 2007, 2008 and 2009, respectively.

In June 2005, the FASB issued Staff Position No. 143-1, "Accounting for Electronic Equipment Waste Obligations" ("FSP 143-1"), which provides requirements for the accounting for obligations associated with electronic equipment disposal for both commercial users and producers of electronic equipment. FSP 143-1 is effective the later of July 31, 2005 or the date of the adoption of the law by the individual member countries of the European Union. The Company does not expect the adoption of FSP 143-1 to have a material impact on its financial position or results of operations.

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to financial market risks, including changes in currency exchange rates and interest rates.

Foreign Currency Exposures - Foreign currency exposures are identified and managed at the corporate level beginning in fiscal 2006. Prior to fiscal 2006, these risks were managed at the operating unit level. To manage these risks, the Company uses specific planning strategies with its operations located in various locations, which may include the use of foreign currency forward contracts, international tax transfer pricing strategies and intercompany loan planning strategies. There were no foreign currency forward contracts in place as of April 30, 2006 or 2005.

Interest Rate Exposures - The Company is subject to market risk from exposure to changes in interest rates because it finances its operations through variable interest rate debt. As of April 30, 2006, obligations under the Company's credit facility bore interest at floating rates. Interest on obligations under the Revolver is charged, at the option of the Company, at LIBOR plus 1.75 percent, or at the lender's prime rate. A 10 percent change in the interest rate applicable to the Company's $31.1 million of variable-rate credit facility debt would not have a significant impact to the Company's consolidated financial position, results of operations or cash flows.

Obligations under the outstanding $6.0 million of Industrial Development Bonds are at interest rates that are adjusted weekly to market rates. A 10 percent change in the interest rate applicable to the outstanding balance on these Bonds would not have a significant impact to the Company's consolidated financial position, results of operations or cash flows.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Gerber Scientific, Inc.
Consolidated Statements of Operations