UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10–K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2006

o Transition Report Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-8472

Hexcel Corporation
(Exact name of registrant as specified in its charter)

Delaware		94-1109521
(State of Incorporation)		(I.R.S. Employer Identification No.)

281 Tresser Boulevard
Stamford, Connecticut 06901
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (203) 969-0666

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
COMMON STOCK		NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes

The aggregate market value of the registrant’s common stock held by non-affiliates was $1,460,003,886 based on the reported last sale price of common stock on June 30, 2006, which is the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of February 23, 2007
COMMON STOCK		93,978,721

Documents Incorporated by Reference:

Proxy Statement for Annual Meeting of Stockholders (to the extent specified herein) — Part III.

PART I

ITEM 1. Business.

General Development of Business

Hexcel Corporation, founded in 1946, was incorporated in California in 1948, and reincorporated in Delaware in 1983. Hexcel Corporation and its subsidiaries (herein referred to as “Hexcel” or “we”, “us”, or “our”), is a leading developer and manufacturer of advanced structural materials. We develop, manufacture, and market lightweight, high-performance reinforcement products, composite materials and composite structures for use in the commercial aerospace, industrial, space and defense, and electronics markets. Our products are used in a wide variety of end applications, such as commercial and military aircraft, space launch vehicles and satellites, body armor, wind turbine blades, printed wiring boards, high-speed trains and ferries, cars and trucks, window blinds, bikes, skis and a wide variety of other recreational equipment.

We serve international markets through manufacturing facilities and sales offices located in the United States and Europe, and through sales representation offices located in Asia and Australia. We are also an investor in two joint ventures, one located in China and one in Malaysia, which manufacture composite structures and interiors.

Narrative Description of Business and Business Segments

We are a manufacturer of products within a single industry: Advanced Structural Materials. In 2006, our advanced structural materials business was organized around three strategic business segments: Composites, Reinforcements, and Structures. In 2006, we announced that we would narrow our focus and consolidate our activities around our carbon fiber, reinforcements for composites, honeycomb and honeycomb parts and panels, matrix and structures product lines into a single organization, potentially divesting non-core product lines. Upon completion of this strategic and operational realignment, we will redefine our business segments to reflect our new organization and narrowed business focus.

The following summaries describe the ongoing activities related to the Composites, Reinforcements, and Structures business segments as of December 31, 2006.

Composites

The Composites business segment manufactures and markets carbon fibers, prepregs, structural adhesives, honeycomb, specially machined honeycomb parts and composite panels, fiber reinforced thermoplastics, moulding compounds, polyurethane systems, gel coats and laminates that are incorporated into many applications, including military and commercial aircraft, wind turbine blades and recreational products.

The following table identifies the Composites business segment’s principal products and examples of the primary end-uses:

BUSINESS SEGMENT	PRODUCTS	PRIMARY END-USES
COMPOSITES	Carbon Fibers	· Raw materials for fabrics and prepregs · Filament winding for various space, defense and industrial applications

	Prepregs and Other Fiber-Reinforced Matrix Materials	· Composite structures · Commercial and military aircraft components · Satellites and launchers · Aeroengines · Wind turbine rotor blades · Yachts, trains and performance cars · Skis, snowboards, hockey sticks, tennis rackets and bicycles

	Structural Adhesives	· Bonding of metals, honeycomb and composite materials · Aerospace, ground transportation and industrial applications

	Honeycomb, Honeycomb Parts & Composite Panels	· Composite structures and interiors · Semi-finished components used in: Helicopter blades Aircraft surfaces (flaps, wing tips, elevators and fairings) High-speed ferries, truck and train components Automotive components and impact protection

Carbon Fibers: Magnamite® carbon fibers are manufactured for sale to third-party customers as well as for our own use in manufacturing certain reinforcements and composite materials. Carbon fibers are woven into carbon fabrics, used as reinforcement in conjunction with a resin matrix to produce pre-impregnated composite materials (referred to as “prepregs”) and used in filament winding and advanced fiber placement to produce finished composite components. Key product applications include structural components for commercial and military aircraft, space launch vehicles, wind blade components, and certain other applications such as recreational equipment.

Prepregs: HexPly® prepregs are manufactured for sale to third-party customers and for use in manufacturing composite laminates and monolithic structures, including finished components for aircraft structures and interiors. Prepregs are manufactured by combining high-performance reinforcement fabrics or unidirectional fibers with a resin matrix to form a composite material with exceptional structural properties not present in either of the constituent materials. Reinforcement fabrics used in the manufacture of prepregs include glass, carbon, aramid, quartz, ceramic and other specialty reinforcements. Resin matrices include bismaleimide, cyanate ester, epoxy, phenolic, polyester, polyimide and other specialty resins.

Other Fiber-Reinforced Matrix Materials: New fiber reinforced matrix developments include HexMC®, a carbon fiber epoxy sheet moulding compound that enables small to medium sized composite components to be mass produced. HexFIT® film infusion material is a product that combines resin films and dry fiber reinforcements to save lay-up time in production and enables the manufacture of large contoured composite structures, such as wind turbine blades. Resin Film Infusion and Resin Transfer Moulding products are enabling quality aerospace components to be manufactured using highly cost-effective processes.

Structural Adhesives: We manufacture and market a comprehensive range of Reduxâ film and paste adhesives. These structural adhesives, which bond metal to metal and composites and honeycomb structures, are used in the aerospace industry and for many industrial applications.

Honeycomb, Honeycomb Parts and Composite Panels: HexWeb® honeycomb is a lightweight, cellular structure generally composed of nested hexagonal cells. The product is similar in appearance to a cross-sectional slice of a beehive. It can also be manufactured in asymmetric cell configurations for more specialized applications. Honeycomb is primarily used as a lightweight core material and acts as a highly efficient energy absorber. When sandwiched between composite or metallic facing skins, honeycomb significantly increases the stiffness of the structure, while adding very little weight.

We produce honeycomb from a number of metallic and non-metallic materials. Most metallic honeycomb is made from aluminum and is available in a selection of alloys, cell sizes and dimensions. Non-metallic materials used in the manufacture of honeycomb include fiberglass, carbon fiber, thermoplastics, non-flammable aramid papers, aramid fiber and other specialty materials.

We sell honeycomb as standard blocks and in slices cut from a block. Honeycomb is also supplied as sandwich panels, with facing skins bonded to either side of the core material. We also possess advanced processing capabilities that enable us to design and manufacture complex fabricated honeycomb parts and bonded assemblies to meet customer specifications.

Aerospace is the largest market for honeycomb products. We also sell honeycomb for non-aerospace applications including automotive parts, high-speed trains and mass transit vehicles, energy absorption products, marine vessel compartments, portable shelters, and other industrial uses. In addition, we produce honeycomb and prepreg for our Structures business segment for use in manufacturing finished parts for airframe Original Equipment Manufacturers (“OEMs”).

COMPOSITES
KEY CUSTOMERS		MANUFACTURING FACILITIES

Aeronnova		Burlington, Washington
Alenia		Casa Grande, Arizona
Alliant Techsystems		Dagneux, France
BAE Systems		Decatur, Alabama
The Boeing Company		Duxford, England
Bombardier		Linz, Austria
CFAN		Livermore, California
CTRM Aero Composites		Parla, Spain
Cytec Engineered Materials		Pottsville, Pennsylvania
EADS (Airbus and Eurocopter)		Salt Lake City, Utah
Easton		Welkenraedt, Belgium
Embraer-Empresa
Gamesa
GKN
Goodrich
Lockheed Martin
Northrop Grumman

Safran
Spirit Aerosystems
United Technologies
Vestas

The Composites business segment’s net sales to third-party customers were $848.0 million in 2006, $787.0 million in 2005, and $683.9 million in 2004, which represented approximately 71%, 69%, and 65% of our net sales, respectively. Net sales for Composites are highly dependent upon the number of large commercial aircraft produced as further discussed under the captions “Significant Customers,” “Markets” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, about 3% of our total production of composite materials in 2006 was used internally by the Reinforcements and Structures business units.

Reinforcements

The Reinforcements business segment manufactures and markets industrial fabrics and other specialty reinforcement products that are the foundation of composite materials, parts and structures or are used in other industrial applications. The following table identifies the Reinforcements business segment’s principal products and examples of the primary end-uses:

BUSINESS SEGMENT

PRODUCTS

PRIMARY END-USES

REINFORCEMENTS

Industrial Fabrics and Specialty Reinforcements

· Raw materials for prepregs and honeycomb

· Structural materials and components used in aerospace, defense, wind energy, automotive, marine, recreation and other industrial applications

· Body armor and other armor applications

· Electronics, primarily high-technology printed wiring board substrates

· Solar protection and other building applications

· Civil engineering and construction applications

Industrial Fabrics and Specialty Reinforcements: Industrial fabrics and specialty reinforcements are made from a variety of fibers, including carbon, aramid and other high strength polymers, several types of fiberglass, quartz, ceramic and other specialty fibers. These reinforcement products are used internally by our Composites business segment and sold to third-party customers for use in a wide range of applications, which are categorized below in order of size. Revenues derived from “Reinforcements for Composites” (“RFC”) include both third-party customer sales and internal sales to the Composites business segment. Third-party revenues from RFC are larger than third-party revenues from “Ballistics”.

Reinforcements for Composites: We manufacture fabrics and specialty reinforcements that are used to make advanced composite materials and structures for the commercial and military aerospace industries. These reinforcements are used in the production of prepregs and other matrix materials used in primary and secondary structural aerospace applications such as wing components, horizontal and vertical stabilizer components, fairings, radomes and engine nacelles as well as overhead storage bins and other interior components. Our reinforcements are also used in the manufacture of a variety of industrial and recreational products such as wind energy blades, automotive components, boats, surfboards, skis and other sporting goods equipment and certain civil engineering and construction applications. Products from this category are also used in honeycomb manufactured by the Composites business segment.

Ballistics: We manufacture reinforcement fabrics used in ballistic applications such as body armor, helmets, blankets and panels. These products offer bullet, fragment and puncture resistance and are used worldwide by military services, government agencies, police departments, prison systems, and other law enforcement groups. We also manufacture Hexform VIPTM, a composite armor system used for ballistic protection in vehicles, and are developing various new products for use in civilian and military armor panels.

Electronics: Our fiber glass fabrics are used to manufacture the substrate materials for printed wiring boards. We focus on high-technology, high-frequency and other specialty boards that are used in electronics applications such as high-end computers, advanced networking and telecommunications equipment, high frequency electronic devices and certain automotive components.

Architectural: We manufacture engineered fabrics used in solar protection and other specialty architectural applications.

General Industrial: Our reinforcement products are also used in a variety of general industry applications including, movie screens, insulating and binding tapes for cables and wires, and automotive components.

REINFORCEMENTS
KEY CUSTOMERS		MANUFACTURING FACILITIES

Armor Holdings		Anderson, South Carolina
Composites One		Decines, France
Cytec Engineered Materials		Les Avenieres, France
DHB Industries		Seguin, Texas

Endicott Interconnect Technologies		Statesville, North Carolina
Isola Laminate Systems
J.D. Lincoln
Nelco
Rogers Corporation

The Reinforcements business segment’s net sales to third-party customers were $235.2 million in 2006, $269.3 million in 2005, and $296.4 million in 2004, which represented approximately 20%, 24%, and 28% of our net sales, respectively. Approximately 35%, 31%, and 24% by value of our total production of reinforcement products was used internally to manufacture composite materials in 2006, 2005, and 2004, respectively.

Structures

The Structures business segment manufactures and markets composite structures for use in the aerospace industry. Composite structures are manufactured from a variety of composite and other materials, including prepregs, honeycomb, structural adhesives and advanced molding materials, using such manufacturing processes as autoclave processing, multi-axis numerically controlled machining, heat forming, pressing and other composite manufacturing techniques. Composite structures include such items as aerodynamic fairings, wing panels and other aircraft components.

The following table identifies the Structures business segment’s principal products and examples of the primary end-uses:

BUSINESS SEGMENT

PRODUCTS

PRIMARY END-USES

STRUCTURES

Composite Structures

· Aircraft structures and finished aircraft components, including:

Wing to body fairings
Wing panels
Flight deck panels
Door liners
Helicopter blades, spars and tip caps

The Structures business segment’s net sales to third-party customers were $109.9 million in 2006, $83.2 million in 2005, and $71.2 million in 2004, which represented approximately 9%, 7%, and 7% of our net sales, respectively.

The Structures business unit has equity investments in two Asian joint ventures. They consist of BHA Aero Composite Parts Co., Ltd. (“BHA Aero”) and Asian Composites Manufacturing Sdn. Bhd. (“Asian Composites”).

In 1999, Hexcel formed BHA Aero with Boeing International Holdings, Ltd. (“Boeing International”) and Aviation Industries of China (now known as China Aviation Industry Corporation I) to manufacture composite parts for secondary structures and interior applications for commercial aircraft. This joint venture is located in Tianjin, China. During the fourth quarter of 2004, BHA Aero and its equity owners (Hexcel, Boeing International and China Aviation Industry Corporation 1 (“AVIC”)) reached agreement on a re-capitalization of BHA Aero and a refinancing of BHA Aero’s third-party loans. Pursuant to the terms of the agreement, Hexcel and Boeing International each agreed to purchase newly issued registered capital of BHA Aero for $7.5 million in cash, resulting in an increase in each of their respective ownership interests from 33.33% to 40.48%. In January 2005, Hexcel and Boeing International made their respective cash equity investments of $7.5 million in BHA Aero. Upon the completion of the equity investment, BHA Aero refinanced its existing bank loans with a new five year bank term loan. The bank term loan is supported by guarantees from Boeing and AVIC. In addition, as part of the refinancing, Hexcel agreed to reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the bank loan were to be called, up to a limit of $6.1 million.

In addition, in 1999, we formed another joint venture, Asian Composites, with Boeing Worldwide Operations Limited, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhad), to manufacture composite parts for secondary structures for commercial aircraft. Our initial equity ownership interest in this joint venture, which is located in Alor Setar, Malaysia, was 25%.

In November, 2006, Hexcel, Boeing Worldwide Operations Limited and Sime Link Sdn. Bhd. entered into an agreement to purchase Naluri Corporation Berhad’s equity interest in Asian Composites, which will increase each respective equity ownership interest in this joint venture to 33.33%. We paid $2.1 million in cash to purchase this additional equity interest when the transaction was completed on February 8, 2007.

Under the terms of the joint venture agreements, Hexcel and Boeing have transferred the manufacture of certain semi-finished composite components to these joint ventures. Hexcel purchases the semi-finished composite components from the joint ventures, inspects and performs additional skilled assembly work before delivering them to Boeing. The joint ventures also manufacture composite components for other tier 1 aircraft component manufacturers. These Asian joint ventures had combined revenues of $53.0 million and $36.5 million in 2006 and 2005, respectively.

Structures
KEY CUSTOMERS		MANUFACTURING FACILITY

The Boeing Company		Kent, Washington
Mitsubishi Heavy Industries		Tianjin, China (JV)
Sikorsky		Alor Setar, Malaysia (JV)

Divestitures and Related Matters

In July of 2006, we announced our intention to explore strategic alternatives for portions of our Reinforcements business segment. In order to take full advantage of the many growing applications for advanced composite materials, we decided to narrow our focus and consolidate our activities around our carbon fiber, reinforcements for composites, honeycomb, matrix and structures product lines. In doing so, we decided to combine our Reinforcements activities related to advanced composites with our Composites and Structures business segments into a single organization and explore the potential divestiture of the ballistics, electronics, architectural and general industrial products lines within our Reinforcements business segment.

In October of 2006, we reached agreement in principle to sell our architectural business. The agreement contemplated the sale of the design, manufacturing and selling activities related to this business including related property, plant and equipment and working capital. The assets to be sold were clearly identified and a review of the activities required to complete the divestiture plan has indicated at the time that it was unlikely that significant changes would be made, or that the divestiture plan would be withdrawn. We concluded that as of October 2006 the transaction satisfied the accounting considerations to be classified as a discontinued operation and have reported the component as such in our financial statements. We completed this transaction on February 28, 2007. For further information see Note 24 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

The revenues of product lines still subject to this strategic review and potential disposition are the Industrial and Electronic revenues of our Reinforcements business segment. These revenues were $155 million during 2006 compared to $200 million during 2005. The revenues to be retained are the Commercial Aerospace revenues of our Reinforcements business segment, which were $80.2 million and $69.1 million in 2006 and 2005, respectively. The specific assets and associated revenues subject to potential divesture may change as we complete our review and any related transactions.

In December of 2006, we completed the sale of our interest in TechFab LLC (“TechFab”) to our joint venture partner for $22.0 million in cash. TechFab is headquartered in Anderson, SC and manufactures non-woven reinforcement materials used in the manufacture of construction and roofing materials, sail cloth and other specialty applications. As a result of the sale, we recognized a pre-tax gain of $15.7 million in the fourth quarter of 2006. The TechFab joint venture was part of our Reinforcements business segment.

Upon completion of the remaining elements of our strategic review and related divestitures together with the integration of our company’s business operations into a single organization focused on advanced composites materials, we will redefine our business segments to reflect our future organization and business focus.

In December of 2005, Hexcel and Dainippon Ink and Chemicals, Inc. (“DIC”) decided to dissolve the DIC-Hexcel Limited (“DHL”) joint venture. This joint venture was located in Komatsu, Japan, and produced and sold prepregs, honeycomb and decorative laminates using technology licensed from us and DIC. The dissolution was completed in the fourth quarter of 2006 with Hexcel receiving a cash distribution of $0.1 million. The DHL joint venture was part of our Composites business unit.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 “Discontinued Operations” and Note 8 “Investments in Affiliated Companies” to the accompanying consolidated financial statements of this Annual Report on Form 10-K for further information related to the status of our strategic review, results from discontinued operations and information related to of our joint ventures.

Financial Information About Business Segments and Geographic Areas

Financial information and further discussion of our business segments and geographic areas, including external sales and long-lived assets, are contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 20 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Significant Customers

Approximately 21.3%, 18.8%, and 19.3% of our 2006, 2005, and 2004 net sales, respectively, were to The Boeing Company (“Boeing”) and related subcontractors. Of the 21.3% of sales to Boeing and its subcontractors in 2006, 16.1% related to commercial aerospace market applications and 5.2% related to space and defense market applications. Approximately 22.6%, 22.1%, and 20.7% of our 2006, 2005, and 2004 net sales, respectively, were to European Aeronautic Defence and Space Company (“EADS”), including its business division Airbus Industrie (“Airbus”), and its subcontractors. Of the 22.6% of sales to EADS and its subcontractors in 2006, 19.4% related to commercial aerospace market applications 3.2% related to space and defense market applications.

(In millions)	2006		2005		2004
Commercial:
Boeing and subcontractors	$	191.6	$	154.5	$	139.5
EADS and subcontractors	232.0		215.9		187.7
Total	$	423.6	$	370.4	$	327.2
Space and Defense:
Boeing and subcontractors	$	62.9	$	63.3	$	67.4
EADS and subcontractors	37.7		40.6		34.4
Total	$	100.6	$	103.9	$	101.8

Markets

Our products are sold for a broad range of end-uses. The following tables summarize our net sales to third-party customers by market and by geography for each of the three years ended December 31:

	2006		2005		2004
Net Sales by Market
Commercial aerospace	52	%	47	%	44	%
Industrial	26		30		32
Space and defense	18		18		18
Electronics	4		5		6
Total	100	%	100	%	100	%
Net Sales by Geography (a)
United States	43	%	46	%	49	%
U.S. exports	8		8		8
Europe	49		46		43
Total	100	%	100	%	100	%

(a) Net sales by geography based on the location in which the sale was manufactured.

Net Sales to External Customers (b)	2006		2005		2004
United States	44	%	47	%	50	%
Europe	44		42		40
All Others	12		11		10
Total	100	%	100	%	100	%

(b) Net sales to external customers based on the location to which the sale was delivered.

Note: Certain prior years’ revenues have been reclassified to conform to the 2006 presentation.

Commercial Aerospace

The commercial aerospace industry is our largest user of advanced structural materials. The economic benefits airlines can obtain from weight savings in both fuel economy and aircraft range, combined with the design enhancement that comes from the advantages of advanced structural materials over traditional materials, have caused the industry to be the leader in the use of these materials. While military aircraft and space craft have championed the development of these materials, commercial aerospace has had the greater consumption requirements and has commercialized the use of these products. Accordingly, the demand for advanced structural material products is closely correlated to the demand for commercial aircraft.

The use of advanced structural materials in commercial aerospace is primarily in the manufacture of new commercial aircraft. The aftermarket for these products is very small as many of these materials are designed to last for the life of the aircraft. The demand for new commercial aircraft is driven by two principal factors, the first of which is airline passenger traffic (the number of revenue

passenger miles flown by the airlines) which affects the required size of airline fleets. According to industry sources, passenger traffic has grown at an annual compound rate of 4.8% from 1985 to 2005. According to the International Air Transport Association, passenger traffic grew by 7.6% and 5.9% in 2005 and 2006, respectively. Growth in passenger traffic requires growth in the size of the fleet of commercial aircraft operated by airlines worldwide.

The second factor, which is less sensitive to the general economy, is the replacement and retrofit rates for existing aircraft. The rates of retirement and refurbishment of passenger and freight aircraft, resulting mainly from obsolescence, are determined in part by the regulatory requirements established by various civil aviation authorities worldwide as well as public concern regarding aircraft age, safety and noise. These rates may also be affected by the desire of the various airlines to improve operating costs with higher payloads and more fuel-efficient aircraft (which in turn is influenced by the price of fuel) and by reducing maintenance expense. When aircraft are retired from commercial airline fleets, they may be converted to cargo freight aircraft or scrapped.

Each new generation of commercial aircraft has used increasing quantities of advanced structural materials, replacing metals. This follows the trend previously seen in military fighter aircraft where advanced structural materials may now exceed 50% of the weight of the airframe. Early versions of commercial jet aircraft, such as the Boeing 707, which was developed in the early 1950’s, contained almost no composite materials. One of the first aircraft to use a meaningful amount of composite materials, the Boeing 767 entered into service in 1983, and was built with an airframe containing approximately 6% composite materials. The airframe of Boeing’s 777 aircraft, which entered service in 1995, is approximately 11% composite. By comparison, the next generation of aircraft in development will contain significantly higher composite content by weight. The Airbus A380 which was certified in December 2006 is being built with an airframe containing approximately 23% composite by weight. The first aircraft is expected to be delivered in autumn 2007. Boeing is starting to assemble the first 787 aircraft with a content of 50% or more composite materials by weight. Its maiden flight is expected in the summer of 2007 and the aircraft is projected to enter into service in the summer of 2008. In December 2006, Airbus formally launched the A350 XWB also projected to have a composite content of 50% or more by weight. The A350 XWB is forecast to enter into service in 2013.

We have been awarded contracts to supply substantial quantities of our products to the A380, including the materials to build the central wing box and rear fuselage. While Boeing has chosen another supplier to provide one advanced structural material product form for the major elements of the wings, fuselage and empennage of the 787, the remaining opportunities for advanced structural materials are significant. We are qualifying products on the 787 and expect that our revenues per aircraft on the 787 will significantly exceed our revenues per aircraft from existing Boeing commercial aircraft. We are now proposing products to be used on the Airbus A350 XWB. The benefit we ultimately derive from new aircraft programs depends upon a number of factors, including the design requirements of our customers, the suitability of our products to meet those requirements, the competitive position of our products against similar products offered by competitors, and the requirements awarded to us by our customers.

The impact of Boeing and Airbus’ production rate changes on us is typically influenced by two factors: the mix of aircraft produced and the inventory supply chain effects of increases or reductions in aircraft production. The dollar value of our materials varies by aircraft type — twin aisle aircraft use more of our materials than narrow body aircraft and newer designed aircraft use more our materials than older generations. On average, we deliver products into the supply chain about six months prior to aircraft delivery. Depending on the product, orders placed with us are received anywhere between one and eighteen months prior to delivery of the aircraft to the customer. With increased aircraft deliveries, our commercial aerospace revenues increased by approximately 15% and 17% in 2005 and 2006, respectively.

Set forth below are historical aircraft deliveries as announced by Boeing and Airbus:

	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006
Boeing (including McDonnell Douglas)	409	312	256	271	375	563	620	491	527	381	281	285	290	398
Airbus	138	123	124	126	182	229	294	311	325	303	305	320	378	434
Total	547	435	380	397	557	792	914	802	852	684	586	605	668	832

Commercial aerospace represented 52% of our 2006 net sales. Approximately 69% of these revenues can be identified as sales to Boeing, Airbus and their subcontractors for the production of commercial aircraft. The balance of our commercial aerospace sales are related to regional and business aircraft manufacture, the production of aircraft engines and nacelles (the casings that contain the engines on an aircraft wing), and other commercial aircraft applications. Regional aircraft production has also increased over time, but does not directly follow the cycle of large commercial aircraft deliveries. These applications also exhibit increasing utilization of composite materials with each new generation of aircraft.

Industrial Markets

We group under this market segment revenue from applications for our products outside the aerospace and electronics markets. A number of these applications represent emerging opportunities for our products. In developing new applications, we seek those opportunities where advanced structural material technology offer significant benefits to the end user, often applications that demand high physical performance. Within this segment, the major end market sub-segments include, in order of size based on our 2006 sales,

wind energy, ballistics (e.g., body armor), recreational equipment (e.g., bicycles, snowboards, tennis rackets and hockey sticks), and surface transportation (e.g., automobiles, mass transit and high-speed rail, and marine applications). Our participation in these market applications complements our commercial and military aerospace businesses, and we are committed to pursuing the utilization of advanced structural material technology where industrial customers can generate significant value.

Space & Defense

The space & defense market has historically been an innovator in the use of, and source of significant demand for, advanced structural materials. The aggregate demand by space and defense customers is primarily a function of procurement of military aircraft that utilize advanced structural materials by the United States and certain European governments. We are currently qualified to supply materials to a broad range of over 80 military aircraft and helicopter programs. The top ten programs by revenues represent less than 50% of our Space & Defense revenues. These programs include the F/A-18E/F Hornet, the F-22 Raptor, and the Eurofighter (Typhoon), as well as the C-17, the V-22 Osprey tiltrotor aircraft, and the Blackhawk, Tiger and NH90 helicopters. In addition, there are new programs in development such as the F-35 Lightening (Joint Strike Fighter or “JSF”) and the EADS A400M military transport planned to enter production later in the decade. The benefits that we obtain from these programs will depend upon which ones are funded and the extent of such funding. Space applications for advanced structural materials include solid rocket booster cases, fairings and payload doors for launch vehicles, and buss and solar arrays for military and commercial satellites.

Contracts for military and some commercial programs contain provisions for termination at the convenience of the U.S. government or the buyer. For example, the Department of Defense announced the cancellation of the RAH-66 Comanche program in 2004. The prime contractors for these programs flow down these provisions to materials suppliers such as Hexcel. In the case of such a termination, we are entitled to recover reasonable costs incurred plus a provision for profit on the incurred costs. In addition, according to the terms of a contract, we may be subject to U.S. government cost accounting standards in accordance with applicable Federal Acquisition Regulations.

Electronics

We are one of the largest Western producers of high-quality, lightweight fiberglass fabrics used in the fabrication of printed wiring board substrates. Our focus is on high-technology, high-frequency and other specialty boards that are used in electronics applications such as high-end computers, advanced networking and telecommunications equipment, high frequency electronic devices and certain automotive components.

Starting in the first quarter of 2001, the electronics industry experienced a severe downturn, and a corresponding inventory correction began working its way through the supply chain significantly impacting demand for fiberglass fabric substrates. As the downturn continued through 2002 and 2003, competition intensified for the business that remained, and pricing pressure increased because of excess production capacity throughout the industry. Meanwhile, the migration of electronics equipment production from the United States to Asia accelerated, placing additional pressure on our electronics business. To respond to these market changes, we have continued to restructure operations, focusing our activities on those applications demanding higher quantity, higher performing materials, and greater levels of service, while also continuing to serve the needs of our existing key customers.

Further discussion of our markets, including certain risks, uncertainties and other factors with respect to “forward-looking statements” about those markets, is contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Backlog

In recent years, our customers have increasingly demanded shorter order lead times and “just-in-time” delivery performance. While we have many multi-year contracts with our major aerospace customers, most of these contracts specify the proportion of the customers’ requirements that will be supplied by us and the terms under which the sales will occur, not the specific quantities to be procured. Our electronics and industrial customers have always desired to order their requirements on as short a lead-time as possible. As a result, twelve-month order backlog is not a meaningful trend indicator for us, and therefore, we do not monitor it in the management of our business.

Raw Materials and Production Activities

Our manufacturing operations are vertically integrated. We produce industrial fabrics, composite materials and composites structures as well as sell these materials to third-party customers for their use in the manufacture of their products.

We manufacture high performance carbon fiber from polyacrylonitrile (“PAN”) precursor produced at our Decatur, Alabama facility. The primary raw material for PAN is acrylonitrile. We consume approximately 52% by value of the carbon fiber we produce and sell the remainder of our output to third-party customers. However, as one of the world’s largest consumers of carbon fiber, we purchase significantly greater quantities of carbon fiber than we produce for our own use. The sources of carbon fiber we can use in any product or application are sometimes dictated by its customer qualifications or certifications, otherwise we select a fiber based on performance, price and availability. With the increasing demand for carbon fiber, particularly in aerospace applications, the supply of carbon fiber started to tighten in 2005. As a result, the supply of carbon fiber available for recreational and industrial applications has

become restricted and is affecting our ability, as well as that of other producers, to supply products for these applications until carbon fiber output increases. In response to increasing demand, all carbon fiber manufacturers have announced plans to increase their manufacturing capacity over the next two to three years. In 2005, we announced our plans to expand our PAN and carbon fiber capacity by about 50% to serve the growing needs of our customers and our own downstream products. The project involves the addition of a precursor line at our Decatur, Alabama facility, and the addition of a carbon fiber line at our Salt Lake City, Utah facility as well as the construction of a new carbon fiber line at Illescas, near Madrid, Spain. Construction of the lines at Decatur and Salt Lake City was completed in December, 2006. These lines are expected to start supplying fiber for industrial and recreational applications towards the end of the first quarter of 2007 and to be certified to produce fibers for aerospace applications by the end of the year. The Spanish carbon fiber line should be completed by the end of 2007 with the line being certified to produce fibers for aerospace applications during 2008.

The Reinforcements business segment purchases glass, aramid and other high-strength fibers as well as carbon fiber to manufacture industrial fabrics. The Composites business segment consumes approximately 35% of the output of the Reinforcements business, by value, in the form of reinforcements for composite products. We purchase glass yarn from a number of suppliers in the United States, Europe and Asia. Aramid and high strength fibers are produced by only a few companies, and during periods of high demand, can be in short supply.

In addition to reinforcement fabrics and fibers, the Composites business segment purchases, among other raw materials, epoxy and other specialty resins, aramid paper and aluminum specialty foils to use in the manufacture of its composite products. When entering into multi-year contracts with its aerospace customers, the business attempts to get back-to-back commitments from its key raw material suppliers.

The Structures business segment purchases composite materials internally and from other composite material manufacturers based on specifications. It also purchases semi-finished composite parts from its Asian Composites and BHA Aero joint ventures.

Our manufacturing activities are generally based on a combination of “make-to-order” and “make-to-forecast” production requirements. We coordinate closely with key suppliers in an effort to avoid raw material shortages and excess inventories. However, many of the key raw materials we consume are available from relatively few sources, and in many cases the cost of product qualification makes it impractical to develop multiple sources of supply. The lack of availability of these materials could under certain circumstances have a material adverse effect on our consolidated results of operations.

Research and Technology; Patents and Know-How

Research and Technology (“R&T”) departments support our businesses worldwide. Through R&T activities, we maintain expertise in chemical and polymer formulation and curatives, fabric forming and textile architectures, advanced composite structures, process engineering, application development, analysis and testing of composite materials, computational design, and other scientific disciplines related to our worldwide business base.

Our products rely primarily on our expertise in materials science, textiles, process engineering and polymer chemistry. Consistent with market demand, we have been placing more emphasis on cost effective product design and lean manufacturing in recent years while seeking to improve the consistency of our products. Towards this end, we have entered into formal and informal alliances, as well as licensing and teaming arrangements, with several customers, suppliers, external agencies and laboratories. We believe that we possess unique capabilities to design, develop and manufacture composite materials and structures. We have over 400 patents and pending applications worldwide, have licensed many key technologies, and have granted technology licenses and patent rights to several third parties in connection with joint ventures and joint development programs. It is our policy to actively enforce our proprietary rights. We believe that the patents and know-how rights currently owned or licensed by Hexcel are adequate for the conduct of our business.

We spent $30.4 million, $25.3 million, and $23.5 million for R&T in 2006, 2005, and 2004, respectively. We increased our R&T spending in 2006 to support new product development and qualification activities particularly in relation to commercial aircraft applications. These expenditures were expensed as incurred.

Environmental Matters

We are subject to federal, state, local and foreign laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. We believe that our policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and associated financial liability. To date, environmental control regulations have not had a significant adverse effect on our overall operations.

Our aggregate environmental related accruals at December 31, 2006 and 2005 were $5.3 million and $4.2 million, respectively. As of December 31, 2006 and December 31, 2005, $2.4 million and $1.4 million, respectively, were included in other current accrued liabilities, with the remainder included in other non-current liabilities. As related to certain of our environmental matters, our accruals were estimated at the low end of a range of possible outcomes since there was no better point within the range. If we had accrued for these matters at the high end of the range of possible outcomes, our accruals would have been $2.7 million and $1.9 million higher at December 31, 2006 and 2005, respectively. These accruals can change significantly from period to period due to such factors as

additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of Hexcel being named in a new matter.

Environmental remediation spending charged directly to our reserve balance for 2006, 2005, and 2004, was $2.8 million, $1.4 million, and $1.2 million, respectively. In addition, our operating costs relating to environmental compliance were $8.0 million, $6.5 million, and $6.0 million, for 2006, 2005, and 2004, respectively, and were charged directly to expense. Capital expenditures for environmental matters approximated $0.8 million in 2006 and $1.1 million in each of 2005 and 2004. We expect the level of spending on remediation, environmental compliance and capital spending in 2007 to approximate spending levels in prior years. A discussion of environmental matters is contained in Item 3, “Legal Proceedings,” and in Note 17 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Sales and Marketing

A staff of salaried market managers, product managers and sales personnel sell and market our products directly to customers worldwide. We also use independent distributors and manufacturer representatives for certain products, markets and regions. In addition, we operate various sales representation offices in the United States, Europe and Asia Pacific.

Competition

In the production and sale of advanced structural materials, we compete with a number of U.S. and international companies on a worldwide basis. The broad markets for composites are highly competitive, and we have focused on both specific markets and specialty products within markets. In addition to competing directly with companies offering similar products, we compete with producers of substitute structural materials such as structural foam, wood and metal. Depending upon the material and markets, relevant competitive factors include approvals, database of usage, technology, product performance, delivery, service, price and customer preference for sole sourcing.

Employees

As of January 31, 2007, we employed 4,459 full-time employees, 2,473 in the United States and 1,986 in other countries. The number of full-time employees as of December 31, 2006, 2005, and 2004 was 4,459, 4,460, and 4,406, respectively. For further discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and to Note 4 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Other Information

Our internet website is www.hexcel.com. We make available, free of charge through our website, our Form 10-Ks, 10-Qs and 8-K’s, and any amendments to these forms, as soon as reasonably practicable after filing with the Securities and Exchange Commission.

ITEM 1A. Risk Factors

An investment in our common stock or debt securities involves risks and uncertainties. You should consider the following risk factors carefully, in addition to the other information contained in this Annual Report on Form 10-K, before deciding to purchase any of our securities.

The markets in which we operate can be cyclical, and downturns in them may adversely affect the results of our operations.

Some of the markets in which we operate have been, to varying degrees, cyclical and have experienced downturns. We are currently in an upturn of demand in the commercial aerospace and wind energy industries. However, a downturn in these markets could occur at any time, and in the event of a downturn, we have no way of knowing if, when and to what extent there might be a recovery. Any deterioration in any of the cyclical markets we serve could adversely affect our financial performance and operating results.

While Boeing and Airbus increased their production and deliveries of commercial aircraft in 2006 and have announced further increases for 2007, any reduction could result in reduced net sales for our commercial aerospace products and could reduce our profit margins. Approximately 52% of our net sales for 2006 were derived from sales to the commercial aerospace industry. Reductions in demand for commercial aircraft or a delay in deliveries could result from many factors, including a terrorist event similar to that which occurred on September 11, 2001 and any subsequent military response, changes in the propensity for the general public to travel by air, a rise in the cost of aviation fuel, consolidation and liquidation of airlines and slower macroeconomic growth.

In addition, our customers continue to emphasize the need for improved yield in the use of our products and cost reduction throughout the supply chain. In response to these pressures, we reduced the price of some products in recent years and may be required to do so in the future. Where possible, we seek to offset or mitigate the impact of such price and cost reductions by productivity improvements and reductions in the costs of the materials and services we procure.

A significant decline in business with Boeing, EADS, Vestas, DHB or other significant customers could materially impact our business, operating results, prospects and financial condition.

We have concentrated customers in the commercial aerospace, space and defense, wind energy and ballistics markets. In the commercial aerospace market, approximately 69%, and in the space and defense market, approximately 50%, of our 2006 net sales were made to Boeing and EADS (including Airbus) and their related subcontractors. In addition, for the years ended December 31, 2006 and December 31, 2005, approximately 21% and 19% of our total net sales, respectively, was made to Boeing and its related subcontractors, and approximately 23% and 22% of our total net sales, respectively, was made to EADS, including Airbus and its related subcontractors. In the wind energy market, a significant portion of our sales in 2006 and 2005 was made to Vestas. In the ballistics market, a significant portion of our 2006 and 2005 sales was made to DHB Industries. Significant changes in the demand for our customers’ end products, the share of their requirements that is awarded to us or changes in the design or materials used to construct their products could result in a significant loss of business with these customers. The loss of, or significant reduction in purchases by, Boeing, EADS, Vestas, DHB Industries or any of our other significant customers could materially impair our business, operating results, prospects and financial condition. The level of purchases by our customers is often affected by events beyond their control, including general economic conditions, demand for their products, business disruptions, disruptions in deliveries, strikes and other factors.

Reductions in space and defense spending could result in a decline in our net sales.

The growth in military aircraft production that has occurred in recent years may not be sustained, production may not continue to grow nor may the increased demand for replacement helicopter blades continue. The production of military aircraft depends upon defense budgets and the related demand for defense and related equipment. Approximately 18% of our net sales in 2006 were derived from space and defense industries. In addition, a portion of our industrial market sales was attributable to ballistic reinforcement materials sold to customers manufacturing body armor. Demand for body armor increased significantly in recent years as the U.S. military forces and their allies re-equipped their personnel. This re-equipment cycle peaked in 2004, and revenues from these body armor applications declined in 2005 and 2006. Additional funding for body armor for military personnel was authorized by Congress in October 2006, providing an improved outlook for ballistics revenues in 2007 compared to 2006, but there are no assurances that this additional funding will continue in subsequent years.

A decrease in supply or increase in cost of raw materials could result in a material decline in our profitability.

Because we purchase large volumes of raw materials, such as epoxy and phenolic resins, aluminum foil, carbon fiber, fiberglass yarn and aramid paper and fiber, any restrictions on the supply or the increase in the cost of our raw materials could significantly reduce our profit margins. Efforts to mitigate restrictions on the supply or price increases of these raw materials by long-term purchase agreements, productivity improvements or by passing cost increases to our customers may not be successful. Our profitability depends largely on the price and continuity of supply of these raw materials, which are supplied through a limited number of sources.

With increased demand for carbon fiber and constrained supply, in 2006 we have made capital expenditures to increase our manufacturing capacity, and will make further expenditures in 2007. Among these investments, we are implementing an expansion of

our carbon fiber manufacturing capacity to increase output by approximately 50%. We completed the addition of a precursor line at our Decatur, Alabama facility, and the addition of a carbon fiber line at our Salt Lake City, Utah facility in December 2006. These lines are expected to start supplying fiber for industrial and recreational applications in the first quarter of 2007 and to be certified to produce fibers for aerospace applications by the end of the year. We are continuing with the construction of a new carbon fiber line at Illescas, Spain which we anticipate will be completed by the end of 2007 with the line being certified to produce fibers for aerospace applications during 2008.

We have substantial international operations subject to uncertainties which could affect our operating results.

We believe that revenue from sales outside the U.S. will continue to account for a material portion of our total revenue for the foreseeable future. Additionally, we have invested significant resources in our international operations and we intend to continue to make such investments in the future. Our international operations are subject to numerous risks, including:

· the difficulty of enforcing agreements and collecting receivables through some foreign legal systems;

· foreign customers may have longer payment cycles than customers in the U.S.;

· compliance with international trade laws of all of the countries in which we do business, including export control laws, relating to sales and purchases of goods and equipment and transfers of technology;

· tax rates in some foreign countries may exceed those of the U.S. and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;

· general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries or not be favorable to our growth strategy;

· governments may adopt regulations or take other actions that would have a direct or indirect adverse impact on our business and market opportunities; and

· the potential difficulty in enforcing intellectual property rights in some foreign countries.

Any one of the above could adversely affect our financial condition and results of operations.

In addition, fluctuations in currency exchange rates may influence the profitability and cash flows of our business. For example, our European operations sell some of the products they produce in U.S. dollars, yet the labor and overhead costs incurred in the manufacture of those products is denominated in Euros or British pound sterling. As a result, the local currency margins of goods manufactured with costs denominated in local currency, yet sold in U.S. dollars, will vary with fluctuations in currency exchange rates, reducing when the U.S. dollar weakens against the Euro and British pound sterling. In addition, the reported U.S. dollar value of the local currency financial statements of our foreign subsidiaries will vary with fluctuations in currency exchange rates. While we enter into currency exchange rate hedges from time to time to mitigate these types of fluctuations, we cannot remove all fluctuations or hedge all exposures, and our earnings are impacted by changes in currency exchange rates.

During the past several years, some countries in which we operate or plan to operate have been characterized by varying degrees of inflation and uneven growth rates. We currently do not have political risk insurance in the countries in which we conduct business. While we carefully consider these risks when evaluating our international operations we cannot provide assurance that we will not be materially adversely affected as a result of such risks.

We could be adversely affected by environmental and safety requirements.

Our operations require the handling, use, storage and disposal of certain regulated materials and wastes. As a result, we are subject to various laws and regulations pertaining to pollution and protection of the environment, health and safety. These requirements govern, among other things, emissions to air, discharge to waters and the generation, handling, storage, treatment and disposal of waste and remediation of contaminated sites. We have made, and will continue to make, capital and other expenditures in order to comply with these laws and regulations. These laws and regulations are complex, change frequently and could become more stringent in the future.

We have been named as a “potentially responsible party” under the U.S. Superfund law or similar state laws at several sites requiring clean up. These laws generally impose liability for costs to investigate and remediate contamination without regard to fault. Under certain circumstances liability may be joint and several, resulting in one responsible party being held responsible for the entire obligation. Liability may also include damages to natural resources. In connection with our Lodi, New Jersey facility, Hexcel, along with the approximately 60 other companies, has been directed by state and federal regulatory authorities to contribute to the assessment and restoration of a stretch of the Passaic River, a project currently estimated to cost $1 billion. We have also incurred and likely will continue to incur expenses to investigate and clean up our existing and former facilities. We have incurred substantial expenses for work at these sites over a number of years, and these costs, for which we believes we have adequate reserves, will

continue for the foreseeable future. The ongoing operation of our manufacturing plants also entails environmental risks, and we may result in our incurring material costs or liabilities in the future which could adversely affect us.

In addition, we may be required to comply with evolving environmental, health and safety laws, regulations or requirements that may be adopted or imposed in the future or to address newly discovered information or conditions that require a response. Although most of the our properties have been the subject of environmental site assessments, there can be no assurance that all potential instances of soil and groundwater contamination have been identified, even at those sites where assessments have been conducted. Accordingly, we may discover previously unknown environmental conditions and the cost of remediating such conditions may be material. See “Legal Proceedings” below and Note 17 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Our debt could adversely impact our operations, cash flow and strategy

As of December 31, 2006, we had $412.3 million of total debt, or $386.6 million of total debt net of cash on hand. In addition, as of December 31, 2006, after taking into account letters of credit $4.3 million, we had $120.7 million of revolving loans available to be borrowed under our senior secured credit facility, or credit agreement. In 2006, we paid interest of $26.0 million on our debt. A substantial portion of our debt bears interest at floating rates, and therefore a substantial increase in interest rates could adversely impact our results of operations.

We cannot assure you that we will generate sufficient cash flow from operations, or that we will be able to obtain sufficient funding, to satisfy our debt service obligations. Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. Our debt could have important consequences, including:

· requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the amount available to fund working capital, capital expenditures and research and development, and to execute our growth strategy;

· limiting, together with the financial and other restrictive covenants in our debt agreements, among other things, our ability to borrow additional funds;

· increasing our vulnerability to general adverse economic and industry conditions; and

· limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation.

Our debt agreements contain numerous financial and operating covenants, some of which are restrictive. These covenants may impair our ability to finance future operations or capital needs. Also, our senior credit facility requires that we maintain compliance with specified financial ratios. A breach of any of these restrictions or covenants could cause a default with respect to our debt, upon which a significant portion of our debt may then become immediately due and payable.

Our forward-looking statements and projections may turn out to be inaccurate.

This Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” and similar terms and phrases, including references to assumptions. Such statements are based on current expectations, are inherently uncertain, and are subject to changing assumptions.

Such forward-looking statements include, but are not limited to: (a) expectations of increases in production and delivery rates of commercial aircraft by Airbus and Boeing and their impact on our commercial aerospace sales; (b) the impact of the push-out in deliveries of the Airbus A380; (c) expectations of composite content on new commercial aircraft programs and our share of those requirements; (d) expectations of growth in revenues from space & defense applications; (e) expectations regarding the U.S. military demand for body armor and its impact on the trend in our sales to ballistic applications; (f) expectations as to the availability of carbon fiber for non-aerospace applications; (g) expectations regarding growth in sales of composite materials for wind energy, recreation and other industrial applications; (h) expectations regarding our joint venture investments and loan guarantees; (i) expectations regarding working capital trends and expenditures; (j) the timing of the completion of our Washington and Livermore plant closings; (k) expectations as to the level of capital expenditures and when we will complete the construction and qualification of its carbon fiber capacity expansion; (l) expectations as to our ability to generate net cash from operations and as to the availability and sufficiency under our senior credit facilities and other financial resources to fund our worldwide operations in 2007 and beyond; (m) the execution of the previously announced strategic review and potential divestiture of our ballistics, electronics and certain general industrial product lines, the timing of potential divestitures, and the application of the net proceeds to

repay debt; and (n) the impact of various market risks, including fluctuations in the interest rates underlying our variable-rate debt, fluctuations in currency exchange rates, fluctuations in commodity prices, and fluctuations in the market price of our common stock.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. Such factors include, but are not limited to, the following: changes in general economic and business conditions; changes in current pricing and cost levels; changes in political, social and economic conditions and local regulations, particularly in Asia and Europe; foreign currency fluctuations; changes in aerospace delivery rates; reductions in sales to any significant customers, particularly Airbus or Boeing; changes in sales mix; changes in government defense procurement budgets; changes in military aerospace programs technology; industry capacity; competition; disruptions of established supply channels; manufacturing capacity constraints; and the availability, terms and deployment of capital.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. In addition to other factors that affect our operating results and financial position, neither past financial performance nor our expectations should be considered reliable indicators of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Further, our stock price is subject to volatility. Any of the factors discussed above could have an adverse impact on our stock price. In addition, failure of sales or income in any quarter to meet the investment community’s expectations, as well as broader market trends, can have an adverse impact on our stock price. We do not undertake an obligation to update our forward-looking statements or risk factors to reflect future events or circumstances.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

We own and lease manufacturing facilities and sales offices located throughout the United States and in other countries, as noted below. The corporate offices and principal corporate support activities for are located in leased facilities in Stamford, Connecticut. Our research and technology administration and principal laboratories are located in Dublin, California; Duxford, United Kingdom; and Les Avenieres, France.

The following table lists our manufacturing facilities by geographic location, related business segment, and principal products manufactured. This table does not include manufacturing facilities owned by entities in which we have a joint venture interest.

Manufacturing Facilities

Facility Location	Business Segment	Principal Products

United States:
Anderson, South Carolina	Reinforcements	Industrial Fabrics
Burlington, Washington	Composites	Honeycomb Parts
Casa Grande, Arizona	Composites	Honeycomb and Honeycomb Parts
Decatur, Alabama	Composites	PAN Precursor (used to produce Carbon Fibers)
Kent, Washington	Structures	Composite Structures
Pottsville, Pennsylvania	Composites	Honeycomb Parts
Salt Lake City, Utah	Composites	Carbon Fibers; Prepregs
Seguin, Texas	Reinforcements	Industrial Fabrics; Specialty Reinforcements
Statesville, North Carolina	Reinforcements	Electronic Fabrics; Industrial Fabrics

International:
Dagneux, France	Composites	Prepregs
Decines, France	Reinforcements	Industrial Fabrics; Specialty Fabrics
Duxford, United Kingdom	Composites	Prepregs; Adhesives; Honeycomb and Honeycomb Parts
Les Avenieres, France	Reinforcements	Electronic Fabrics; Industrial Fabrics; Specialty Reinforcements
Linz, Austria	Composites	Prepregs
Parla, Spain	Composites	Prepregs
Welkenraedt, Belgium	Composites	Honeycomb and Honeycomb Parts

We lease the land on which the Burlington, Washington, facility is located. We also lease portions of the facilities located in Casa Grande, Arizona and Les Avenieres, France. We own all other remaining facilities. In connection with our debt refinancing, on March 1, 2005, we granted mortgages in connection with our new senior secured credit facility on the facilities located in Anderson, South Carolina; Casa Grande, Arizona; Decatur, Alabama; Dublin, California; Kent, Washington; Livermore, California; Salt Lake City, Utah; Seguin, Texas; Statesville, North Carolina; and Washington, Georgia. For further information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and to Note 9 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

In November 2005, we announced our plans to build a carbon fiber plant near Madrid, Spain in connection with our carbon fiber expansion program. In January 2006, we entered into an agreement to purchase land at Illescas, Spain on which to construct the plant. We are installing one carbon fiber line initially, with capacity for the installation of additional lines as required to meet demand for new programs. We expect the new line to be qualified for the production of aerospace products in 2008.

In January 2004, we announced our intention to consolidate the activities of our Livermore, California facility into other manufacturing facilities, principally into the Salt Lake City, Utah plant. We expect to cease manufacturing and complete the transfer of activities from this facility by the end of the first quarter of 2007. We will now commence the disposal of any remaining manufacturing equipment, followed by the demolition of the facility and the preparation of the manufacturing site for sale. The sale is anticipated to be completed in 2008.

In January 2006, we announced our intention to consolidate the activities of our Washington, Georgia facility into other manufacturing facilities, principally into the Statesville, North Carolina plant. We ceased manufacturing activities at this facility in August 2006.

In connection with our portfolio review and the previously mentioned consolidation activities, we have offered for sale certain property located in Anderson, South Carolina; Washington, Georgia; and Decines, France. In addition, we have also offered for sale one of our plant facilities located in Les Avenieres, France.

ITEM 3. Legal Proceedings

We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment, health and safety matters. We estimate and accrue our liabilities resulting from such matters based on a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. Such estimates may or may not include potential recoveries from insurers or other third parties and are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the ultimate resolution of these contingent matters, after taking into consideration our existing insurance coverage and amounts already provided for, will not have a material adverse impact on the our consolidated results of operations, financial position or cash flows.

Environmental Claims and Proceedings

We are subject to various U.S. and international federal, state and local environmental, and health and safety laws and regulations. We are also subject to liabilities arising under the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and similar state and international laws and regulations that impose responsibility for the control, remediation and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste.

We have been named as a potentially responsible party (“PRP”) with respect to several hazardous waste disposal sites that we do not own or possess, which are included on, or proposed to be included on, the Superfund National Priority List of the U.S. Environmental Protection Agency (“EPA”) or on equivalent lists of various state governments. Because CERCLA allows for joint and several liability in certain circumstances, we could be responsible for all remediation costs at such sites, even if we are one of many PRPs. We believe, based on the amount and the nature of our waste, and the number of other financially viable PRPs, that our liability in connection with such matters will not be material.

Pursuant to the New Jersey Industrial Site Recovery Act, we entered into a Remediation Agreement to pay for the environmental remediation of a manufacturing facility we own and formerly operated in Lodi, New Jersey. We have commenced remediation of this site in accordance with an approved plan; however, the ultimate cost of remediating the Lodi site will depend on developing circumstances. During the third quarter of 2006, we recorded a $2.0 million environmental charge for projected additional remediation costs at the site in Lodi, New Jersey. The additional cost of remediation resulted from the discovery of the existence of additional pollutants from those identified in the original assessment of the site requiring additional equipment and operating expenses together with additional project management expenses. This additional accrual brings the total accrued liability related to this matter to $3.5 million as of December 31, 2006.

In October 2003, we received, along with 66 other entities, a directive from the New Jersey Department of Environmental Protection (“NJDEP”) that requires the entities to assess whether operations at various New Jersey sites, including our former manufacturing site in Lodi, New Jersey, caused damage to natural resources in the Lower Passaic River watershed. In May, 2005, the NJDEP dismissed us from the Directive. In February 2004, 42 entities, including Hexcel, received a general notice letter from the EPA which requested that the entities consider helping to finance an estimated $10 million towards an EPA study of environmental conditions in the Lower Passaic River watershed. In May 2005, we signed onto an agreement with EPA to participate (bringing the total number of participating entities to 43) in financing such a study up to $10 million, in the aggregate. Since May, 2005, a number of additional PRPs have indicated their intent to participate in the study. In October 2005, we along with the other EPA notice recipients were advised by the EPA that the notice recipients’ share of the costs of the EPA study was expected to significantly exceed the earlier EPA estimate. While we and the other recipients are not obligated by our agreement to share in such excess, we and the other recipients are currently considering whether to enter into an agreement with the EPA to perform additional study activities. Although we believe we have viable defenses to the EPA claims and expect that other as yet unnamed parties also will receive notices from the EPA, we have established a reserve as of December 31, 2006 for our estimated cost in relation to the EPA study. Our ultimate liability, if any, in connection with this matter cannot be determined at this time.

We were party to a cost-sharing agreement regarding the operation of certain environmental remediation systems necessary to satisfy a post-closure care permit issued to a previous owner of the our Kent, Washington, site by the EPA. Under the terms of the cost-sharing agreement, we were obligated to reimburse the previous owner for a portion of the cost of the required remediation activities. Management has determined that the cost-sharing agreement terminated in December 1998; however, the other party disputes this determination. The Washington Department of Ecology has issued a unilateral order to us to engage in remediation of the groundwater located on our Kent site. We asserted defenses against performance of the order, particularly objecting to the remediation plan proposed by the previous owner, who still owns the adjacent contaminated site. However, we have determined that we will commence complying with the order, without withdrawing our defenses.

Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lodi, New Jersey and Kent, Washington sites is accrued in the consolidated balance sheets. As of December 31, 2006 and 2005, our aggregate environmental related accruals were $5.3 million and $4.2 million, respectively. As of December 31, 2006 and 2005, $2.4 million and $1.4 million, respectively, was included in current other accrued liabilities, with the remainder included in other non-current liabilities. As related to certain environmental matters, the accrual was estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount. If we had accrued for these matters at the high end of the range of possible outcomes, our accrual would have been $2.7 million and $1.9 million higher at December 31, 2006 and 2005, respectively. These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

Environmental remediation spending charged directly to our reserve balance for the years ended December 31, 2006, 2005, and 2004 was $2.8 million, $1.4 million, and $1.2 million, respectively. In addition, the Company’s operating costs relating to environmental compliance were $8.0 million, $6.5 million, and $6.0 million, for the years ended December 31, 2006, 2005, and 2004, respectively, and were charged directly to expense. Capital expenditures for environmental matters approximated $0.8 million for the year ended December 31, 2006 and $1.1 million for each of the years ended December 31, 2005 and 2004. We expect the level of spending on remediation, environmental compliance and capital spending in 2007 to approximate spending levels in prior years. A discussion of environmental matters is contained above and in Note 17 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Other Proceedings

We have previously disclosed that we have settled several lawsuits, including class actions, alleging antitrust violations in the sale of carbon fiber, carbon fiber industrial fabrics and carbon fiber prepreg. With respect to all of such lawsuits, Hexcel denied and continues to deny the allegations, but believed that the costs of continuing defense outweighed the costs of settlement. Eleven companies opted out of the class in one of the class action lawsuits. We have statute of limitation tolling agreements with two of the opt-out companies and with one co-defendant that also purchased product during the alleged conspiracy. To date, none of the opt-out companies or the co-defendant has asserted any claim against us.

Hercules Incorporated (“Hercules”) was one of our co-defendants in the above antitrust lawsuits. In 2004, Hercules filed an action against us seeking a declaratory judgment that, pursuant to a 1996 Sale and Purchase Agreement (whereby we acquired the carbon fiber and prepreg assets of Hercules), we were required to defend Hercules and to indemnify it for its settlements in the antitrust lawsuits and for any liability claims that may be asserted by any of the opt-outs (Hercules Incorporated v. Hexcel Corporation, Supreme Court of the State of New York, County of New York, No. 604098/04). Hercules settled the above antitrust lawsuits for an aggregate of $24.4 million. We are not in a position to predict the outcome of the lawsuit with Hercules, but intend to defend it vigorously.

In February 2006, the U.S. Department of Justice (“DOJ”) informed us that it wished to enter into a statute of limitations tolling agreement covering possible civil claims the United States could assert with respect to Zylon fiber fabric that we made and was incorporated into allegedly defective body armor manufactured by some of our customers. The Zylon fiber was produced by Toyobo Co., Ltd. (“Toyobo”), woven into fabric by us and supplied to customers who required Zylon fabric for their body armor systems. Some of this body armor was sold by such customers to U.S. Government agencies or to state or local agencies under a DOJ program that provides U.S. Government funding for the purchase of body armor by law enforcement personnel.

In 2003, there were two incidents involving the alleged in-service failure of Zylon body armor manufactured by Second Chance Body Armor (“Second Chance”). For some time prior to these incidents, Toyobo had been providing data to the industry showing that certain physical properties of Zylon fiber were susceptible to degradation over time and under certain environmental conditions. Following these incidents, the National Institute of Justice (“NIJ”), a division of the DOJ, and a number of body armor manufacturers conducted extensive investigations of Zylon fiber and body armor containing Zylon fiber. These investigations ultimately resulted in a number of voluntary recalls of Zylon body armor by certain manufacturers and a finding by the NIJ that Zylon fiber is not suitable for use in body armor. Prior to these findings, the DOJ had filed civil actions against Toyobo and Second Chance alleging that they had conspired to withhold information on the degradation of Zylon, caused defective body armor to be purchased under the U.S. Government funding program, and therefore were liable to the U.S. Government under the False Claims Act and various common law claims. In addition, a number of private civil actions were commenced against Toyobo and Second Chance, certain of which we understand have been settled by Toyobo. Although Second Chance’s assets were purchased by another body armor manufacturer (Armor Holdings Inc.), we understand Second Chance retained its Zylon-related liabilities and that Second Chance is currently in a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code. The DOJ actions are still pending against Toyobo and Second Chance. We entered into tolling agreements with the DOJ which exclude the periods February 14 to September 1, 2006, and October 17, 2006 to August 1, 2007, when determining whether civil claims that may be asserted by the United States against us in respect of the above matters are time-barred. We have been informed by representatives of the DOJ that we are not a target of an on-going criminal investigation into these matters. We have agreed to cooperate with the DOJ and have turned over documents to the DOJ and have made a number of our employees available for interviews by government attorneys. We have offered independent counsel to these employees at our expense, provided that each employee undertakes to reimburse us for the expense if required to do so under the

applicable provisions of the Delaware General Corporation Law.

In December 2006, the trustee in the Chapter 7 bankruptcy case of Second Chance filed a complaint to recover alleged preferential transfers made to us (Boyd, as Chapter 7 Trustee for SCBA Liquidation, Inc., v. Hexcel Reinforcements, US Bankruptcy Court for the Western District of Michigan, Case No. GT-0-12515, Adversary Proceeding No. 06-81006-jdg). In the complaint, the trustee alleges that Hexcel Reinforcements did business with Second Chance prior to the filing of the Chapter 11 petition by Second Chance and that, within the 90 days prior to the filing of that petition, Second Chance paid Hexcel Reinforcements $3.6 million. The trustee alleges that all such amounts are voidable preferences under bankruptcy law and seeks return of such funds to Second Chance. Hexcel disagrees with the trustee’s characterization of the payments. We are not in a position to predict the outcome of the proceeding, but intend to defend it vigorously.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Hexcel common stock is traded on the New York Stock Exchange. The range of high and low sales prices of our common stock on the New York Stock Exchange Composite Tape is contained in Note 23 to the accompanying consolidated financial statements of this Annual Report on Form 10-K and is incorporated herein by reference.

Hexcel did not declare or pay any dividends in 2006, 2005 or 2004. The payment of dividends is limited under the terms of certain of our debt agreements.

On February 23, 2007 there were 1,284 holders of record of our common stock.

The following chart provides information regarding repurchases of Hexcel common stock:

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 1 — October 31, 2006	0		N/A		0	0
November 1 — November 30, 2006	0		N/A		0	0
December 1 — December 31, 2006	26,190		$	18.09	0	0
Total	26,190	(1)	$	18.09	0	0

(1) All Shares were delivered by employees in payment of the exercise price of non-qualified stock options.

ITEM 6. Selected Financial Data

The information required by Item 6 is contained on page 31 of this Annual Report on Form 10-K under the caption “Selected Financial Data” and is incorporated herein by reference.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information required by Item 7 is contained on pages 32 to 52 of this Annual Report on Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is incorporated herein by reference.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

The information required by Item 7A is contained under the heading “Market Risks” on pages 49 to 51 of this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 8. Financial Statements and Supplementary Data

The information required by Item 8 is contained on pages 53 to 96 of this Annual Report on Form 10-K under “Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference. The Report of Independent Registered Public Accounting Firm is contained on pages 55 to 56 of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm” and is incorporated herein by reference.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

As of December 31, 2006, our Chief Executive Officer and Chief Financial Officer evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-14 and Rule 15d-14 under the Securities Exchange Act of 1934). Based on their evaluation, they have concluded that our disclosure controls and procedures are effective to ensure that material information relating to Hexcel, including the consolidated subsidiaries, would be made known to them, so as to be reflected in periodic reports that we file or submit under the Securities and Exchange Act of 1934.

There were no significant changes in our internal control over financial reporting identified by management that occurred during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, we are undertaking actions to enhance our internal controls surrounding tax accounting.

Management’s report on our internal control over financial reporting and the attestation report of our independent registered public accounting firm on management’s assessment of our internal control over financial reporting are contained on pages 54 to 56 of this Annual Report on Form 10-K and are incorporated herein by reference.

ITEM 9B. Other Information

None.

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

The information required by Item 10 will be contained in our definitive proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2006. Such information is incorporated herein by reference.

ITEM 11. Executive Compensation

The information required by Item 11 will be contained in our definitive proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2006. Such information is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 will be contained in our definitive proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2006. Such information is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 will be contained in our definitive proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2006. Such information is incorporated herein by reference.

ITEM 14. Principal Accountant Fees and Services

The information required by Item 14 will be contained in our definitive proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2006. Such information is incorporated herein by reference.

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

The following documents are filed as a part of this report:

1. Financial Statements

The consolidated financial statements of Hexcel, the notes thereto, and the Report of Independent Registered Public Accounting Firm, are included in this Annual Report on Form 10-K beginning on page 53.

2. Financial Statement Schedule

The financial statement schedule required by Item 15(a)(2) is included on page 97 of this Annual Report on Form 10-K.

3. Exhibits

Exhibit No.		Description

3.1		Restated Certificate of Incorporation of Hexcel Corporation (incorporated herein by reference to Exhibit 1 to Hexcel’s Registration Statement on Form 8-A dated July 9, 1996, Registration No. 1-08472).

3.2		Certificate of Amendment of the Restated Certificate of Incorporation of Hexcel Corporation (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).

3.3		Amended and Restated Bylaws of Hexcel Corporation (incorporated by reference to Exhibit 3 to Hexcel’s Current Report on Form 8-K dated March 15, 2006).

4		Indenture dated as of February 1, 2005 between Hexcel Corporation and The Bank of New York, as trustee, relating to the issuance of the 6.75% Senior Subordinated Notes due 2015 (incorporated by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated February 4, 2005).

10.1		Credit Agreement, dated as of March 1, 2005 by and among Hexcel Corporation, as Borrower, the Lenders listed therein, as Lenders, Banc of America Securities LLC, as Syndication Agent and Joint Lead Arranger, Deutsche Bank Securities Inc., as Sole Book Manager and Joint Lead Arranger, Deutsche Bank Trust Company Americas, as Administrative Agent, and Credit Suisse First Boston and Wachovia Bank, National Association, as Documentation Agents (incorporated by reference to Exhibit 10.1 to Hexcel’s Current Report on Form 8-K dated March 2, 2005).

10.1(a)		First Amendment to Credit Agreement, dated as of December 5, 2006 by and among Hexcel Corporation, the financial institutions listed therein, as Lenders, and Deutsche Bank Trust Company Americas, as administrative agent for the Lenders (incorporated by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated December 11, 2006).

10.2		Security Agreement, dated as of March 1, 2005 by and among Hexcel Corporation, each of the subsidiary guarantors listed therein, and each additional guarantor that may become a party, and Deutsche Bank Trust Company Americas, as Administrative Agent for and representative of the beneficiaries defined therein (incorporated by reference to Exhibit 10.2 to Hexcel’s Current Report on Form 8-K dated March 2, 2005).
10.3		Subsidiary Guaranty, dated as of March 1, 2005 by Clark-Schwebel Holding Corp. and Hexcel Reinforcements Corp., as Guarantors, in favor of and for the benefit of Deutsche Bank Trust Company Americas, as agent for and representative of any swap counterparties defined therein and the lenders party to the Credit Agreement (incorporated by reference to Exhibit 10.3 to Hexcel’s Current Report on Form 8-K dated March 2, 2005)

10.4*		Hexcel Corporation 2003 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).

10.4(a)*		Hexcel Corporation 2003 Incentive Stock Plan as amended and restated December 11, 2003 (incorporated herein by reference to Exhibit 10.3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).

10.4(b)*		Hexcel Corporation 2003 Incentive Stock Plan as amended and restated May 19, 2005 (incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated May 24, 2005).

10.5*		Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8, Registration No. 333-36163).

10.5(a)*		Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 and further amended December 10, 1997 (incorporated herein by reference to Exhibit 10.5(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

10.5(b)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on January 30, 1997, and further amended on December 10, 1997 and March 25, 1999 (incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 filed on July 26, 1999).

10.5(c)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on January 30, 1997, and further amended on December 10, 1997, March 25, 1999 and December 2, 1999 (incorporated by reference to Exhibit 10.3(c) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

10.5(d)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on February 3, 2000 (incorporated herein by reference to Annex A of the Company’s Proxy Statement dated March 31, 2000).

10.5(e)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on December 19, 2000 (incorporated herein by reference to Exhibit 10.3(e) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.5(f)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on December 19, 2000 and further amended on January 10, 2002 (incorporated herein by reference to Exhibit 10.3(f) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

10.6*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan (incorporated herein by reference to Exhibit 4.3 of the Company’s Form S-8 filed on June 19, 1998, Registration No. 333-57223).
10.6(a)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000 (incorporated by reference to Exhibit 10.1 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000).

10.6(b)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001 (incorporated herein by reference to Exhibit 10.4(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.6(c)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001 and January 10, 2002 (incorporated herein by reference to Exhibit 10.4(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

10.6(d)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001, January 10, 2002 and December 12, 2002 (incorporated herein by reference to Exhibit 10.4(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).

10.7*		Hexcel Corporation Management Stock Purchase Plan, as amended and restated on May 19, 2005 (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated May 24, 2005).

10.8*		Hexcel Corporation Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

10.9*		Form of Employee Option Agreement (2007).

10.10*		Form of Employee Option Agreement (2005 and 2006) (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated January 12, 2004).

10.11*		Form of Employee Option Agreement (2004) (incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).

10.12*		Form of Employee Option Agreement (2003) (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).

10.13*		Form of Employee Option Agreement (2002) (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

10.14*		Form of Employee Option Agreement (2000) (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.15*		Form of Employee Option Agreement Special Executive Grant (2000) dated December 20, 2000 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.16*		Form of Employee Option Agreement Special Executive Grant (1999) dated December 2, 1999 (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.17*		Form of Employee Option Agreement (1999) dated December 2, 1999 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

10.18*		Form of Employee Option Agreement (1999) (incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).

10.19*		Form of Employee Option Agreement (1998) (incorporated herein by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).

10.20*		Form of Employee Option Agreement (1997) (incorporated herein by reference to Exhibit 10.4 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).

10.21*		Form of Employee Option Agreement (1996) (incorporated herein by reference to Exhibit 10.5 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).

10.22*		Form of Retainer Fee Restricted Stock Unit Agreement for Non-Employee Directors (2004 and 2005) (incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).

10.23*		Form of Retainer Fee Option Agreement for Non-Employee Directors (2003) (incorporated herein by reference to Exhibit 10.19 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).

10.24*		Form of Retainer Fee Option Agreement for Non-Employee Directors (2000) (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.25*		Form of Retainer Fee Option Agreement for Non-Employee Directors (1999) (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

10.26*		Form of Retainer Fee Option Agreement for Non-Employee Directors (1998) (incorporated herein by reference to Exhibit 10.11 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998).

10.27*		Form of Retainer Fee Option Agreement for Non-Employee Directors (1997) (incorporated herein by reference to Exhibit 10.8 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

10.28*		Form of Supplemental Compensation Option Agreement (Directors) (incorporated herein by reference to Exhibit 10.23 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

10.29*		Form of Restricted Stock Unit Agreement (2007).

10.30*		Form of Restricted Stock Unit Agreement (2006) (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K dated February 13, 2006).
10.31*		Form of Restricted Stock Unit Agreement (2005) (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K dated January 12, 2005).

10.32*		Form of Restricted Stock Unit Agreement (2004) (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).

10.33*		Form of Restricted Stock Unit Agreement for Non-Employee Directors (2004, 2005) (incorporated by reference to Exhibit 10.38 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).

10.34*		Form of Reload Option Agreement (1997) (incorporated herein by reference to Exhibit 10.8 of Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).

10.35*		Form of Reload Option Agreement (1996) (incorporated herein by reference to Exhibit 10.10 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).

10.36*		Form of Exchange Performance Accelerated Stock Option Agreement (incorporated Herein by reference to Exhibit 10.3 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).

10.37*		Form of Performance Accelerated Stock Option Agreement (Director) (incorporated herein by reference to Exhibit 10.6 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).

10.38*		Form of Performance Based Award Agreement (2007).

10.39*		Form of Performance Based Award Agreement (2006) (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K dated February 13, 2006).

10.40*		Hexcel Corporation 1997 Employee Stock Purchase Plan, as amended and restated as of March 19, 2003 (incorporated herein by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).

10.41*		Hexcel Corporation Nonqualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 99.2 to Hexcel’s Current Report on Form 8-K dated December 16, 2004).

10.42*		Employment Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37 to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).

10.42(a)*		Amendment, dated December 12, 2002, to Employment Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated herein by reference to Exhibit 10.43(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).

10.42(b)*		Second Amendment, dated as of November 16, 2004, to the Employment Agreement dated as of July 20, 2001 between Hexcel Corporation and David E. Berges (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated November 22, 2004).
10.42(c)*		Employee Option Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(a) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).

10.42(d)*		Employment Option Agreement (performance-based option) dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(b) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).

10.42(e)*		Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(d) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).

10.42(f)*		Letter Agreement dated August 1, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(e) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).

10.42(g)*		Letter Agreement dated August 28, 2001 between Hexcel Corporation and David E. Berges (incorporated herein by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).

10.43*		Supplemental Executive Retirement Agreement dated as of May 10, 2000 between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000).

10.43(a)*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).

10.43(b)*		Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.39(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.43(c)*		First Amendment to Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.43(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

10.44*		Supplemental Executive Retirement Agreement dated as of May 10, 2000 between Hexcel and Ira J. Krakower (incorporated herein by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000).

10.44(a)*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Ira J. Krakower (incorporated herein by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).

10.44(b)*		First Amendment to Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and Ira J. Krakower (incorporated herein by reference to Exhibit 10.44(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.45*		Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).

10.46*		Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999 (incorporated herein by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).

10.47*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.14 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).

10.47(a)*		Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.45(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.47(b)*		Service Agreement, dated August 9, 1990, between Ciba-Geigy PLC (subsequently assigned to Hexcel Composites Limited) and William Hunt (incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005).

10.47(c)*		Letter Agreement regarding pension and life assurance benefits, dated August 19, 1992 between Ciba-Geigy PLC (subsequently assigned to Hexcel Composites Limited) and William Hunt (incorporated herein by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005).

10.47(d)*		Letter Agreement regarding pension and related benefits, dated January 21, 1999, between Hexcel Composites Limited, Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005).

10.48*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and David Tanonis (incorporated herein by reference to Exhibit 10.12 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).

10.49*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Joseph Shaulson (incorporated herein by reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).

10.49(a)*		Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Joseph Shaulson (incorporated herein by reference to Exhibit 10.48(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.49(b)*		Executive Deferred Compensation and Consulting Agreement, dated as of April 22, 1996, between Hexcel Corporation and Joseph H. Shaulson (incorporated by reference to Exhibit 10.53(b) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).

10.49(c)		Agreement dated September 12, 2006, between Hexcel Corporation and Joseph H. Shaulson (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated September 18, 2006).

10.50*		Form of Amendment, dated as of November 16, 2004, to Executive Severance Agreement dated as of February 3, 1999 between Hexcel Corporation and each of Messrs. Stephen C. Forsyth, Ira J. Krakower and Joseph H. Shaulson (incorporated herein by reference to Exhibit 99.2 to Hexcel’s Current Report on Form 8-K dated November 22, 2004).

10.51*		Executive Severance Agreement between Hexcel and Robert G. Hennemuth, dated as of March 20, 2006 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2006).

10.51(a)*		Executive Deferred Compensation and Consulting Agreement, dated as of March 20, 2006, between Hexcel Corporation and Robert G. Hennemuth (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2006).
10.52*		Director Compensation Program (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated December 16, 2004).

10.52(a)*		Director Compensation Program, as of December 15, 2005 (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated December 20, 2005).
10.53		Underwriting Agreement, dated as of March 9, 2005 between Hexcel Corporation and Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC as representatives of the several underwriters named on schedule I thereto (incorporated herein by reference to Exhibit 1 to the Company’s Current Report on Form 8-K dated March 15, 2006).

10.54		Purchase Agreement, dated January 27, 2005, between Hexcel Corporation and Goldman, Sachs & Co. as representative of the several purchasers named in Schedule I thereto (incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated January 31, 2005).

10.55		Exchange and Registration Rights Agreement dated as of February 1, 2005 between Hexcel Corporation and Goldman, Sachs and Co. as representatives of the initial purchasers of the 6.75% Senior Subordinated Notes due 2015 (incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated February 4, 2005).

10.56		Underwriting Agreement, dated as of August 3, 2005, between Hexcel Corporation and Goldman, Sachs & Co. and Credit Suisse First Boston LLC as representatives of the several underwriters named on schedule I thereto (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated August 9, 2005).

21		Subsidiaries of the Company.

23		Consent of Independent Registered Public Accounting Firm.

24		Power of Attorney (included on signature page).

31.1		Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Hexcel Corporation


February 28, 2007		/s/ DAVID E. BERGES
(Date)		David E. Berges
		Chief Executive Officer

KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of David E. Berges, Stephen C. Forsyth and Ira J. Krakower, individually, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ DAVID E. BERGES	Chairman of the	February 28, 2007
(David E. Berges)	Board of Directors and
	Chief Executive Officer
	(Principal Executive Officer)


/s/ STEPHEN C. FORSYTH	Executive Vice President and	February 28, 2007
(Stephen C. Forsyth)	Chief Financial Officer
	(Principal Financial Officer)


/s/ WILLIAM J. FAZIO	Corporate Controller	February 28, 2007
(William J. Fazio)	(Principal Accounting Officer)


/s/ JOEL S. BECKMAN	Director	February 28, 2007
(Joel S. Beckman)


/s/ H. ARTHUR BELLOWS, JR.	Director	February 28, 2007
(H. Arthur Bellows, Jr.)


/s/ LYNN BRUBAKER	Director	February 28, 2007
(Lynn Brubaker)


/s/ JEFFREY C. CAMPBELL	Director	February 28, 2007
(Jeffrey C. Campbell)


/s/ SANDRA L. DERICKSON	Director	February 28, 2007
(Sandra L. Derickson)


/s/ DAVID C. HURLEY	Director	February 28, 2007
(David C. Hurley)


/s/ DAVID L. PUGH	Director	February 28, 2007
(David L. Pugh)


/s/ MARTIN L. SOLOMON	Director	February 28, 2007
(Martin L. Solomon)

Selected Financial Data

The following table summarizes selected financial data as of and for the five years ended December 31:

(In millions, except per share data)	2006			2005			2004			2003			2002

*Results of Operations (a):*
Net sales	$	1,193.1		$	1,139.5		$	1,051.4		$	877.0		$	833.4
Cost of sales	928.3			889.4			827.3			707.3			676.0
Gross margin	264.8			250.1			224.1			169.7			157.4

Selling, general and administrative expenses	113.2			104.9			108.8			91.4			84.0
Research and technology expenses	30.4			25.3			23.5			19.7			15.2
Business consolidation and restructuring expenses	14.8			2.9			2.7			3.9			0.5
Other expense (income), net	—			15.1			3.0			(2.2		)	—
Operating income	106.4			101.9			86.1			56.9			57.7

Interest expense	28.0			33.9			47.7			53.6			62.8
Non-operating (income) expense, net	(15.7		)	40.9			2.2			2.6			(10.3		)
Income from continuing operations before income taxes, equity in earnings (losses) and discontinued operations	94.1			27.1			36.2			0.7			5.2
Provision (benefit) for income taxes	34.1			(109.1		)	10.3			12.3			10.4
Income (loss) from continuing operations before equity in earnings (losses) and discontinued operations	60.0			136.2			25.9			(11.6		)	(5.2		)
Equity in earnings (losses) of and write-downs of an investment in affiliated companies	4.1			3.6			1.1			(1.4		)	(10.0		)
Net income (loss) from continuing operations	64.1			139.8			27.0			(13.0		)	(15.2		)
Income from discontinued operations, net of tax	1.8			1.5			1.8			1.9			1.6
Net income (loss)	65.9			141.3			28.8			(11.1		)	(13.6		)
Deemed preferred dividends and accretion	—			(30.8		)	(25.4		)	(9.6		)	—
Net income (loss) available to common shareholders	$	65.9		$	110.5		$	3.4		$	(20.7	)	$	(13.6	)
Net income (loss) from continuing operations:
Basic	$	0.69		$	1.81		$	0.04		$	(0.59	)	$	(0.39	)
Diluted	$	0.67		$	1.49		$	0.04		$	(0.59	)	$	(0.39	)
Net income (loss) per share:
Basic	$	0.71		$	1.84		$	0.09		$	(0.54	)	$	(0.35	)
Diluted	$	0.69		$	1.51		$	0.08		$	(0.54	)	$	(0.35	)
Weighted average shares outstanding:
Basic	93.4			60.0			39.3			38.6			38.4
Diluted	95.5			93.7			42.1			38.6			38.4

*Financial Position (a):*
Total assets	$	1,012.9		$	880.6		$	776.8		$	722.7		$	708.1
Working capital (deficit)	$	206.5		$	174.5		$	157.3		$	140.7		$	(530.8	)
Long-term notes payable and capital lease obligations	$	409.8		$	416.8		$	430.4		$	481.3		$	—
Stockholders’ equity (deficit) (b)	$	301.6		$	210.7		$	(24.4	)	$	(93.4	)	$	(127.4	)

*Other Data (a):*
Depreciation and amortization	$	43.4		$	46.4		$	51.0		$	51.5		$	46.5
Capital expenditures and deposits for capital purchases	$	120.2		$	66.4		$	37.5		$	21.4		$	14.7
Shares outstanding at year-end, less treasury stock	93.8			92.6			53.6			38.7			38.5

(a) All financial data presented has been restated to report our Architectural business in France as a discontinued operation. Total assets include both current and non-current assets associated with our Architectural business for each period presented.

(b) No cash dividends were declared per share of common stock during any of the five years ended December 31, 2006.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

	Year Ended December 31,
(In millions, except per share data)	2006			2005			2004
Net sales	$	1,193.1		$	1,139.5		$	1,051.4
Gross margin %	22.2		%	21.9		%	21.3		%
Operating income	$	106.4		$	101.9		$	86.1
Operating income %	8.9		%	8.9		%	8.2		%
Non-operating (income) expense, net	$	(15.7	)	$	40.9		$	2.2
Provision (benefit) for income taxes (a)	$	34.1		$	(109.1	)	$	10.3
Equity in earnings of affiliated companies	$	4.1		$	3.6		$	1.1
Income from continuing operations	$	64.1		$	139.8		$	27.0
Income from discontinued operations, net of tax	$	1.8		$	1.5		$	1.8
Net income	$	65.9		$	141.3		$	28.8
Deemed preferred dividends and accretion	$	—		$	(30.8	)	$	(25.4	)
Net income available to common shareholders	$	65.9		$	110.5		$	3.4
Diluted net income per common share	$	0.69		$	1.51		$	0.08

(a) The provision (benefit) for income taxes includes non-cash benefits of $4.5 million and $119.2 million for 2006 and 2005, respectively, arising from the reversal of the previously recorded valuation allowance against our U.S. deferred tax assets. See Note 13 in the accompanying consolidated financial statements for further detail.

Business Trends

The primary markets we serve continued to grow in 2006. Our customers continue to expand their use of advanced structural materials.

· The commercial aerospace market continued to grow in 2006. The International Civil Aviation Organization estimates that global passenger traffic measured as revenue passenger kilometers increased by 5.9% in 2006. Boeing and Airbus have reported commercial aircraft net orders of 1,834 in 2006. They made 832 new commercial aircraft deliveries, 25% higher that the 668 delivered in 2005. Both Boeing and Airbus have announced they expect to further increase deliveries in 2007.

· Reflecting the strength of our customers’ demand, our commercial aerospace sales increased by 16.7% in 2006 compared to 2005 despite the further push-out in production and deliveries of the Airbus A380 that impacted our commercial aerospace revenues in the second half of the year. On average, we deliver our products six months ahead of the delivery of aircraft. New development aircraft can result in revenues for years before launch into full production. The growth in our commercial aerospace revenues reflects the strength of demand from Boeing and applications for our products in the production of engines and nacelles as well as regional and business aircraft. While the A380 successfully obtained its type certificate in December 2006 as planned, wiring variations to customize the aircraft for the many customer configurations resulted in a further push out of deliveries. The practical consequence is to delay the ramp-up of aircraft production until 2008. By the fourth quarter of 2006, the beginnings of the supply chain adjustments were evident in our revenues from this program.

· 2006 provided further confirmation of the longstanding trend of the commercial aerospace industry utilizing a greater proportion of advanced composite materials with each new generation of aircraft. Among the new aircraft orders received by Boeing and Airbus were orders for their new composite-rich aircraft in development. Boeing has now recorded 468 orders and commitments for its 787 Dreamliner aircraft. Boeing has indicated that this aircraft will have at least 50% composite content by weight, including composite wings and fuselage, compared to the 11% composite content used in the construction of its 777 aircraft. The 787 is expected to enter into service in 2008. In December 2006, Airbus announced the launch of the A350 XWB which they indicated will also have at least 50% composite content by weight. The A350 is expected to enter into service by 2013. Meanwhile, the first Airbus A380 delivery now expected in late 2007 has 23% composite content by weight and has more Hexcel material used in its production than any aircraft previously manufactured.

· With increased production of large commercial aircraft in 2007, we anticipate that our revenues tied to Boeing and other commercial aircraft programs will grow more than 10% in 2007. With the push-out of the A380, revenues from Airbus programs are likely to be lower than in 2006, particularly in the first half of 2007 when the growth in aircraft production is unlikely to offset the revenues we saw from the A380 program in 2006. As a result, total 2007 commercial aerospace revenues are projected to be flat to slightly up over 2006, but should strengthen as we move into 2008 and begin to see the ramp-up in Boeing 787 and Airbus A380 production as well as projected line rate increases in other programs.

· The benefit Hexcel ultimately derives from new aircraft programs depends upon a number of factors, including the design requirements of its customers, the suitability of our products against similar products offered by our competitors, and the requirements our customers and their subcontractors award to us. We expect the continuing transition from metals to composites will continue to increase our average revenues per aircraft over time.

· Our sales to the Space & Defense market in 2006 were comparable to 2005. Inventory adjustments at certain rotorcraft customers slowed revenue growth from historical levels for much of the year. There is evidence that these corrections are coming to an end and therefore we anticipate revenue growth recovering to historic levels in 2007. We continue to benefit from our extensive qualifications to supply composite materials and, in some cases, composite structures to a broad range of military aircraft and helicopter programs around the world.

· Our revenues from applications outside aerospace declined compared to 2005 as orders for military body armor declined sharply in the first three quarters of 2006. New funding authorized by Congress in October started to reverse the trend in the fourth quarter. Revenues from materials used to build the blades of wind turbine applications again showed strong growth, up over 17% compared to 2005, offsetting some of the impact of the decline in ballistics revenues. The growth was driven by the increased number of global wind turbine installations during the year. The outlook for wind energy remains robust with growing global demand for renewable energy and we anticipate another year of mid-to-high teens revenue growth. Sales to other industrial applications, such as recreational products, were constrained by the global shortage of industrial carbon fiber and were generally flat compared to 2005.

· As a whole, the growth in all our major markets will be moderated by the impact of the push-out in A380 deliveries. Taking these factors into consideration, 2007 consolidated revenues are anticipated to grow in a range of 5-10% year-on-year assuming the Euro and British pound currency exchange rates for the year of 2007 are comparable to 2006.

Further information regarding our outlook for 2007 is contained in our Form 8-K dated December 13, 2006. This 8-K should be read in conjunction with the risk factor section included in this Form 10-K.

Portfolio Review

In July of 2006, we announced our intention to explore strategic alternatives for portions of our Reinforcements business segment. In order to take full advantage of the many growing applications for advanced composite materials, we decided to narrow our focus and consolidate our activities around our carbon fiber, reinforcements for composites, honeycomb, matrix and structures product lines. In doing so, we decided to combine our Reinforcements activities related to advanced composites with our Composites and Structures business segments into a single organization, and explore the potential divestiture of the ballistics, electronics, architectural and general industrial products lines within our Reinforcements business segment.

In October of 2006, we reached agreement in principle to sell our architectural business. The agreement contemplates the sale of the design, manufacturing and selling activities related to this business including related property, plant and equipment and working capital. The assets to be sold have been clearly identified and a review of the activities required to complete the divestiture plan has indicated that it is unlikely that significant changes will be made, or that the divestiture plan will be withdrawn. We entered into a definitive agreement for that transaction on February 12, 2007 and expect to complete it during the first quarter of 2007. We have concluded that the transaction satisfied the accounting considerations to be reported as discontinued operations and have been reported the component as such in our financial statements.

The revenues of product lines still subject to this strategic review and potential disposition are the Industrial and Electronic revenues of our Reinforcements business segment. These revenues were $155 million during 2006 compared to $200 million during 2005. The revenues to be retained are the Commercial Aerospace revenues of our Reinforcements business segment, which were $80.2 million and $69.1 million in 2006 and 2005, respectively. The specific assets and associated revenues subject to potential divesture may change as we complete our review and any related transactions.

In December of 2006, we completed the sale of our interest in TechFab to our joint venture partner for $22.0 million in cash. The unit purchase agreement contained limited indemnification provided by us related to certain liabilities incurred prior to the date of sale. TechFab is headquartered in Anderson, SC and manufactures non-woven reinforcement materials used in the manufacture of construction and roofing materials, sail cloth and other specialty applications. As a result of the sale, we recognized a pre-tax gain of $15.7 million in the fourth quarter of 2006. The TechFab joint venture was part of our Reinforcements business segment.

Results of Operations

We have three reportable segments: Composites, Reinforcements and Structures. Although these strategic business units provide customers with different products and services, they often overlap within four end market segments: Commercial Aerospace, Industrial, Space & Defense, and Electronics. We find it meaningful to evaluate the performance of our segments through the four end market segments. Further discussion and additional financial information about our segments may be found in Note 20 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

2006 Compared to 2005

Net Sales: Consolidated net sales of $1,193.1 million for 2006 were $53.6 million, or 4.7% higher than the $1,139.5 million of net sales for 2005. The increase was primarily attributable to sales growth within Commercial Aerospace. Had the same U.S. dollar, British Pound Sterling and Euro exchange rates applied in 2006 as in 2005 (“in constant currency”), consolidated net sales for 2006 would have been $50.5 million higher than the 2005 net sales of $1,139.5 million at $1,190.0 million.

The following table summarizes net sales to third-party customers by business segment and end market segment in 2006 and 2005:

(In millions)	Commercial Aerospace			Industrial			Space & Defense			Electronics			Total
*2006 Net Sales*
Composites	$	446.3		$	208.9		$	192.8		$	—		$	848.0
Reinforcements	80.2			103.2			—			51.8			235.2
Structures	91.5			—			18.4			—			109.9
Total	$	618.0		$	312.1		$	211.2		$	51.8		$	1,193.1
	52		%	26		%	18		%	4		%	100		%
*2005 Net Sales*
Composites	$	392.7		$	200.6		$	193.7		$	—		$	787.0
Reinforcements	69.1			143.3			—			56.9			269.3
Structures	67.6			—			15.6			—			83.2
Total	$	529.4		$	343.9		$	209.3		$	56.9		$	1,139.5
	47		%	30		%	18		%	5		%	100		%

Commercial Aerospace: Net sales to the commercial aerospace market segment increased by $88.6 million or 16.7% to $618.0 million for 2006 as compared to net sales of $529.4 million for 2005. Net sales of the Composites business segment were $53.6 million higher, up 13.6% from 2005. Net sales of the Reinforcements business segment were higher by $11.1 million, up 16.1% from 2005. Net sales of the Structures business segment to commercial aerospace applications increased by $23.9 million or 35.4% to $91.5 million in 2006. In constant currency, net sales to the commercial aerospace market segment increased $87.5 million, or 16.5%, to $616.9 million.

Our overall year-over-year improvement was driven by increases in aircraft production in 2006 and 2007 by Boeing, Airbus and other aircraft manufacturers, as well as the resultant growth in demand by aircraft engine and nacelle manufacturers.

We continue to pursue the increased use of advanced structural materials in each new generation of aircraft. Boeing and Airbus are currently developing the 787 and A350XWB aircraft, respectively, each of which will utilize a higher percentage of advanced structural materials than any previous large commercial aircraft.

Industrial: Net sales of $312.1 million for 2006 decreased by $31.8 million, or 9.2%, compared to net sales of $343.9 million in 2005. In constant currency, net sales to the industrial market segment decreased $33.1 million or 9.6%, to $310.8 million. This decrease was primarily due to lower revenues from reinforcement fabrics used in body armor ballistic applications offset in part by strong growth in sales of composite materials used in wind energy applications.

Sales of composite materials used to manufacture wind turbine blades grew 17% compared to 2005, and now represents the largest contributor within our Industrial market segment. These results reflect the underlying growth in global wind turbine installations. Our sales of reinforcement fabrics used in ballistic applications decreased by 35% compared to 2005; however, as a result of the new personal protection funding authorized by Congress, we saw some improvement in this segment at the end of 2006, and expect continued improvement in 2007. Revenues for 2006 from other industrial applications were 3.5% lower than in 2005.

Space & Defense: Net sales of $211.2 million increased $1.9 million, or 0.9%, for 2006 as compared to net sales of $209.3 million for 2005. In constant currency, net sales increased $1.1 million to $210.4 million. Some inventory corrections at certain of our rotorcraft customers during 2006 constrained revenue growth compared to 2005. The revenues that we derive from military and space programs tend to vary quarter to quarter based on customer ordering patterns and manufacturing campaigns. We continue to benefit from our ability to supply composite materials and, in some cases, composite structures to a broad range of military aircraft and helicopter programs, including the F/A-18E/F (Hornet), the F-22 (Raptor), the European Fighter Aircraft (Typhoon), the C-17, the V-22 (Osprey) tilt rotor aircraft, and the Blackhawk, the Tiger and the NH90 helicopters. In addition, the EADS A400M military

transport aircraft and the F-35 (joint strike fighter or JSF) are currently under development and should enter low rate initial production later in the decade.

Electronics: Net sales of $51.8 million in 2006 decreased by $5.1 million, or 9.0%, as compared to net sales of $56.9 million for 2005. On a constant currency basis, net sales to the electronics market segment decreased by $5.0 million, or 8.8%, to $51.9 million. To better match regional production capacities and anticipated demand, in December 2005 we announced plans to consolidate certain of our glass fabric production activities in France, and in January 2006 we announced plans to consolidate our North American electronics production activities into our Statesville, North Carolina plant and to close our plant in Washington, Georgia.

Gross Margin: Gross margin for 2006 was $264.8 million, or 22.2% of net sales, compared to gross margin of $250.1 million, or 21.9% of net sales, in 2005. The improvement reflects primarily the contribution of higher net sales from Commercial Aerospace and our continued focus on cost containment. The gross margin for 2006 included an accrual of $2.0 million for projected additional environmental remediation costs at a former manufacturing site.

The gross margin for our Composites business unit was $192.1 million or $16.0 million higher than the previous year. The gross margin for our Reinforcements business unit was $56.6 million or $6.8 million lower than the previous year resulting primarily from a decrease of $34.1 million in sales. Gross margin attributable to our Structures business unit increased $8.8 million to $20.3 million, primarily due to higher aircraft build rates and new programs.

Selling, General and Administrative (“SG&A”) Expenses: SG&A expenses were $113.2 million, or 9.5% of net sales, for 2006 compared with $104.9 million, or 9.2% of net sales, for 2005. The $8.3 million increase in SG&A expenses reflects, among other factors, an increase of $6.3 million for share-based compensation following our adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“FAS 123(R)”) and $1.1 million of disposition costs associated with potential divestures.

Research and Technology Expenses: R&T expenses for 2006 were $30.4 million, or 2.5% of net sales, compared with $25.3 million, or 2.2% of net sales, for 2005. The $5.1 million increase was due to, among other factors, increased spending in support of new products and new commercial aircraft qualification activities.

Other Expense, Net: We did not incur any costs classified as other operating expense in 2006. Other expense, net for 2005 was $15.1 million. Included in other expense was an accrual of $16.5 million for the settlement of litigation matters offset partially by a $1.4 million gain on the sale of surplus land at one of our manufacturing facilities. Refer to Note 21 to the accompanying consolidated financial statements in this Annual Report on Form 10-K for additional information.

Operating Income: Operating income for 2006 was $106.4 million compared with operating income of $101.9 million for 2005. Operating income as a percent of sales was 8.9% for both 2006 and 2005. The $4.5 million increase in operating income is due in part to greater sales for 2006 resulting in an increase in gross margin, and the fact that we incurred other expense, net, of $15.1 million in 2005 and there was no such expense in 2006. As previously mentioned, during 2006 we incurred increased SG&A expenses of $6.3 million primarily due to the adoption of FAS 123(R) and increased R&T expenses of $5.1 million, primarily attributable to an increase qualification activities. In addition, business consolidation and restructuring expenses increased $11.9 million over the prior year to $14.8 million. The increase in business consolidation and restructuring expenses result primarily from our organizational realignment and reduction of stranded costs that will result from divestures associated with our portfolio review, the closure of our Washington, Georgia facility as well as the continuing costs associated with the closure of our Livermore, California facility.

Operating income for the Composites business segment increased $1.1 million or 1.1% to $105.1 million, as compared to $104.0 million for 2005. Operating income for the Composites business segment includes $2.9 million in share-based compensation expense in 2006. The Reinforcements business segment’s operating income decreased $14.7 million, as compared with 2005, to $26.0 million resulting from decreased sales, share-based compensation expense of $1.5 million in 2006 and $1.1 million of disposition costs associated with potential divestures. The Structures segment’s operating income increased by $5.4 million compared with 2005 to $13.4 million, resulting primarily from higher sales volumes.

We did not allocate corporate operating expenses of $38.1 million and $50.8 million to operating segments in 2006 and 2005, respectively. The year-on-year decrease in corporate operating expenses of $12.7 million is primarily attributable to expense of $16.5 million associated with litigation settlements in 2005, offset by increased share-based compensation of $2.5 million resulting from the adoption of FAS 123(R).

Interest Expense: Interest expense for 2006 was $28.0 million compared to $33.9 million for 2005. The $5.9 million decline in interest expense primarily reflects a $3.5 million increase in interest expense capitalized in 2006 as a result of our carbon fiber capacity expansion. Cash interest paid decreased by $14.0 million during 2006 to $26.0 million compared to $40.0 million for 2005. Refer to Notes 9 and 16 to the accompanying consolidated financial statements in this Annual Report on Form 10-K for additional information.

Non-Operating (Income) Expense, Net: Non-operating income for 2006 was $15.7 million compared to non-operating expense, net of $40.9 million in 2005. During 2006, we completed the sale of our interest in TechFab to our joint venture partner for $22.0 million in cash. As a result of the sale, we recognized a gain of $15.7 million in the fourth quarter of 2006. During 2005, we

recognized $40.9 million in losses on the early retirement of debt, $40.3 million resulting from the first quarter’s debt refinancing. Refer to Notes 8, 9 and 22 to the accompanying consolidated financial statements in this Annual Report on Form 10-K for additional information.

Provision (Benefit) for Income Taxes: During 2006, we recorded a tax provision $34.1 million or 36.2% of pre-tax income. The full year tax provision included a $4.5 million benefit of the reversal of the valuation allowance against our U.S. deferred tax assets related to capital losses. During the fourth quarter of 2005, we recorded a $119.2 million benefit from the reversal of the majority of the previously recorded valuation allowance established on our U.S. federal, state and local deferred tax assets except for that portion where the evidence did not yet support a reversal.

As of December 31, 2006, no evidence exists to support the reversal of the $6.2 million valuation allowance related to our Belgian subsidiary. Consistent with prior years, we continue to adjust our tax provision rate through the establishment, or release, of a non-cash valuation allowance attributable to currently generated Belgian net operating income (losses). This practice will continue until such time as the Belgian operations have evidenced the ability to consistently generate sufficient taxable income such that in future years management can reasonably expect that the deferred tax assets can be utilized.

Equity in Earnings of Affiliated Companies: Equity in earnings of affiliated companies was $4.1 million in 2006 compared to $3.6 million in 2005. The year-over-year improvement resulted from higher equity in earnings reported by the Structures business segment’s joint ventures in China and Malaysia. We recorded equity in earnings of affiliated companies of $1.9 million and $3.0 million during 2006 and 2005, respectively, related to the joint venture interests sold or dissolved during 2006. Equity in earnings of affiliated companies does not affect our cash flows. For additional information, see Note 8 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Income from Continuing Operations: Net income from continuing operations was $64.1 million, or $0.67 per diluted share for the year ended December 31, 2006 compared to $139.8 million, or $1.49 per diluted common share for the year ended December 31, 2005. The decrease reflects the results discussed above.

Income from Discontinued Operations, Net: Income from discontinued operations was $1.8 million, or $0.02 per diluted common share for the year ended December 31, 2006 compared to $1.5 million, or $0.02 per diluted common share for the year ended December 31, 2005. In October of 2006, we reached agreement in principle to sell our architectural business. The transaction is proceeding as expected and is anticipated to close during the first quarter of 2007. For additional information, see Note 2 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Deemed Preferred Dividends and Accretion: We recognized deemed preferred dividends and accretion of $30.8 million for 2005. Included in deemed preferred dividends and accretion for 2005 are accelerated charges of $23.2 million resulting from the conversions of mandatorily redeemable convertible preferred stock into common stock. For additional information, see Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Net Income Available to Common Shareholders and Net Income Per Common Share:

(In millions, except per share data)	2006		2005
Net income available to common shareholders	$	65.9	$	110.5
Diluted net income per common share	$	0.69	$	1.51
Diluted weighted average shares outstanding	95.5		93.7

A portion of the Company’s stock options were excluded from the computation of diluted net income per common share for the years ended December 31, 2006 and 2005 as they were anti-dilutive. For additional information, see Note 15 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

2005 Compared to 2004

Net Sales: Consolidated net sales of $1,139.5 million for 2005 were $88.1 million, or 8.41% higher than the $1,051.4 million of net sales for 2004. The increase was primarily attributable to sales growth within the Commercial Aerospace and Space & Defense markets. Had the same U.S. dollar, British Pound Sterling and Euro exchange rates applied in 2005 as in 2004 (“in constant currency”), consolidated net sales for 2005 would have been $87.4 million higher than the 2004 net sales of $1,051.4 million at $1,138.8 million.

The following table summarizes net sales to third-party customers by business segment and end market segment in 2005 and 2004:

(In millions)	Commercial Aerospace			Industrial			Space & Defense			Electronics			Total
*2005 Net Sales*
Composites	$	392.7		$	200.6		$	193.7		$	—		$	787.0
Reinforcements	69.1			143.3			—			56.9			269.3
Structures	67.6			—			15.6			—			83.2
Total	$	529.4		$	343.9		$	209.3		$	56.9		$	1,139.5
	47		%	30		%	18		%	5		%	100		%
*2004 Net Sales*
Composites	$	337.6		$	164.1		$	182.2		$	—		$	683.9
Reinforcements	64.6			169.9			—			61.8			296.3
Structures	60.3			—			10.9			—			71.2
Total	$	462.5		$	334.0		$	193.1		$	61.8		$	1,051.4
	44		%	32		%	18		%	6		%	100		%

Commercial Aerospace: Net sales to the commercial aerospace market segment increased by $66.9 million or 14.5% to $529.4 million for 2005 as compared to net sales of $462.5 million for 2004. In constant currency, net sales to the commercial aerospace market segment increased $67.3 million, or 14.6%, to $529.8 million. Net sales of Composites business segment were $55.1 million higher, up 16.3% from 2004. Net sales of the Reinforcements business segment were higher by $4.5 million, up 7.0% from 2004. The net sales of the Structures business segment to commercial aerospace applications increased by $7.3 million or 12.1% to $67.6 million in 2005.

The overall year-over-year improvement was driven by higher aircraft production rates by Boeing and Airbus as they increased the number of aircraft they manufacture and deliver in 2005 and 2006. We have also benefited from the favorable mix of aircraft being manufactured by our customers that utilize more composite materials.

Industrial: Net sales of $343.9 million for 2005 increased by $9.9 million, or 3.0%, compared to net sales of $334.0 million in 2004. In constant currency, net sales to the industrial market segment increased $9.0 million or 2.7%, to $343.0 million. This increase was primarily due to strong growth in sales of composite materials used in wind energy applications, offset by lower revenues from reinforcement fabrics used in body armor ballistic applications. Revenues for 2005 from other industrial applications, including recreational, architectural and automotive segments, were relatively consistent with 2004 results.

Sales in composite materials used to manufacture wind turbine blades grew 58% compared to 2004, and led to the overall growth of the industrial market segment. These results reflect the underlying growth in global wind turbine installations and the share gains we made in the second half of 2004.

Our sales of reinforcement fabrics used in ballistic applications decreased by 16% compared to 2004, as the recent body armor re-equipment cycle for U.S. military started to slow.

While sales of composite products to recreational applications were consistent with 2004, the tightening in the supply of carbon fiber, particularly as commercial aerospace demand increased, restricted the available supply of carbon fiber to industrial applications that utilize this fiber, and affected our ability to supply products for these applications.

Space & Defense: Net sales of $209.3 million increased $16.2 million, or 8.4%, for 2005 as compared to net sales of $193.1 million for 2004. Revenues related to new helicopter production worldwide as well as helicopter blade replacement programs showed the greatest contribution to growth in the year.

Electronics: Net sales of $56.9 million in 2005 decreased by $4.9 million, or 7.9%, as compared to net sales of $61.8 million for 2004. On a constant currency basis, net sales to the electronics market segment decreased by $5.1 million, or 8.3%, to $56.7 million.

Gross Margin: Gross margin for 2005 was $250.1 million, or 21.9% of net sales, compared to gross margin of $224.1 million, or 21.3% of net sales, in 2004. The improvement reflected the impact of higher net sales and our continuing efforts to keep the rate of change in our costs lower than the rate of growth in sales, and the benefit of available manufacturing capacity within many of our manufacturing plants.

The gross margin for the Composites business unit was $20.0 million higher than the prior year. The benefit of higher sales volume and productivity improvements more than offset changes in raw material and utility prices as well as changes in labor, freight and fixed production costs. The gross margin percentage for 2005 was 22.4% versus 22.2% for 2004 in part due the changes in our hedged foreign currency exchange rates compared to 2004.

The gross margin for the Reinforcements business unit was $1.4 million higher than the prior year. The gross margin percentage was 23.5% for 2005 compared to 20.9% for 2004. The decline in revenues from ballistic applications was offset by the growth of revenues from composite reinforcement applications.

The gross margin for the Structures business unit was $4.7 million higher than the prior year. Gross margin percentage increased by approximately 4% over last year. Higher sales volume, productivity improvements, cost control and favorable sales mix generated this improvement.

Selling, General and Administrative Expenses: SG&A expenses were $104.9 million, or 9.2% of net sales, for 2005 compared with $108.8 million, or 10.3% of net sales, for 2004. The $3.9 million decrease in SG&A expenses reflected, among other factors, the $2.3 million provision recorded in 2004 against accounts receivable from Second Chance Body Armor following their Chapter 11 bankruptcy filing on October 17, 2004 and a $2.1 million reduction in 2005 spending compared to 2004 related to compliance with the Sarbanes-Oxley Act. Partially offsetting these favorable impacts were higher legal fees and expenses related to carbon fiber litigation settlements.

Research and Technology Expenses: R&T expenses for 2005 were $25.3 million, or 2.2% of net sales, compared with $23.5 million, or 2.2% of net sales, for 2004. The $1.8 million increase was due to, among other factors, increased spending in support of new products and new commercial aircraft qualification activities.

Other Expense, Net: Other expense, net for 2005 was $15.1 million compared to $3.0 million in 2004. Included in other expense were accruals of $16.5 million and $7.0 million for the settlement of litigation matters for the years ended December 31, 2005 and 2004, respectively. In addition, during 2005 and 2004, we recognized a $1.4 million and a $4.0 million gain, respectively, on the sale of surplus land at one of our manufacturing facilities. Refer to Note 21 to the accompanying consolidated financial statements in this Annual Report on Form 10-K for additional information.

Operating Income: Operating income for 2005 was $101.9 million, or 8.9% of net sales, compared with operating income of $86.1 million, or 8.2% of net sales, for 2004. The increase in operating income was primarily driven by increased net sales contributing to improved percentage gross margins and lower SG&A expenses. Partially offsetting these favorable impacts was an increase in other expenses, net as described above.

Operating income for the Composites business segment increased $14.9 million or 16.7% to $104.0 million, as compared to $89.1 million for 2004. Year-on-year sales growth of 15.1% drove this improvement. The Reinforcements business segment’s operating income increased $3.7 million, as compared with 2004, to $40.7 million despite decreased revenues of $27.0 million. In 2004, the business segment recorded a $2.3 million provision against accounts receivable from Second Chance Body Armor. The Structures segment’s operating income increased by $4.2 million compared with 2004 to $8.0 million, resulting primarily from the 16.9% growth in sales productivity improvements, cost control and favorable sales mix.

We did not allocate corporate operating expenses of $50.8 million and $43.8 million to operating segments in 2005 and 2004, respectively. The year-on-year increase in corporate operating expenses of $7.0 million included a year-over-year increase of $9.5 million related to litigation settlements. Additionally, we incurred legal fees and expenses of $1.9 million in the third quarter, 2005 associated with the carbon fiber litigation settlements. Partly offsetting these unfavorable impacts were reduced incentive compensation accruals and lower expenses associated with compliance with the Sarbanes-Oxley Act.

Interest Expense: Interest expense for 2005 was $33.9 million compared to $47.7 million for 2004. The $13.8 million decline in interest expense primarily reflected lower interest rates as a result of our refinancing during the first quarter of 2005 offset by slightly higher average debt in 2005. Refer to Notes 9 and 16 to the accompanying consolidated financial statements in this Annual Report on Form 10-K for additional information.

Non-Operating Expense, Net: Non-operating expense, net for 2005 was $40.9 million compared to $2.2 million in 2004. During 2005, we recognized $40.9 million in losses on the early retirement of debt, $40.3 million resulting from the first quarter’s debt refinancing. During 2004, we recognized a $3.2 million loss on the early retirement of debt resulting primarily from the redemption of $44.8 million of our senior subordinated notes during the year. This loss was partially offset by a $1.0 million gain attributable to the sale of securities obtained through a de-mutualization of an insurance company. Refer to Note 22 to the accompanying consolidated financial statements in this Annual Report on Form 10-K for additional information.

Provision (Benefit) for Income Taxes: During the fourth quarter of 2005, we reversed the majority of the previously recorded valuation allowance established on our U.S. federal, state and local deferred tax assets except for that portion where the evidence does not yet support a reversal. As a result of our decision to reverse the valuation allowance, we recorded in the fourth quarter of 2005 a $119.2 million benefit relating to the reversal of its tax provision.

As of December 31, 2005, no evidence existed to support the reversal of the $5.5 million valuation allowance related to our Belgian subsidiary. Consistent with prior years, we continue to adjust its tax provision rate through the establishment, or release, of a non-cash valuation allowance attributable to currently generated Belgian net operating income (losses). This practice will continue until such time as the Belgian operations have evidenced the ability to consistently generate sufficient taxable income such that in future years management can reasonably expect that the deferred tax assets can be utilized.

Equity in Earnings of Affiliated Companies: Equity in earnings of affiliated companies was $3.6 million in 2005 compared to $1.1 million in 2004. The year-over-year improvement resulted from higher equity in earnings reported by TechFab, the Reinforcements business segment’s joint venture, and improved overall equity earnings associated with the Structures business segment’s joint ventures in China and Malaysia. Equity in earnings of affiliated companies does not affect our cash flows.

Deemed Preferred Dividends and Accretion: We recognized deemed preferred dividends and accretion of $30.8 million and $25.4 million for 2005 and 2004, respectively. Included in deemed preferred dividends and accretion for 2005 and 2004 were accelerated charges of $23.2 million and $12.9 million, respectively, resulting from the conversions of mandatorily redeemable convertible preferred stock into common stock. For additional information, see Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Net Income Available to Common Shareholders and Net Income Per Common Share:

(In millions, except per share data)	2005		2004
Net income available to common shareholders	$	110.5	$	3.4
Diluted net income per common share	$	1.51	$	0.08
Diluted weighted average shares outstanding	93.7		42.1

Our convertible subordinated debentures, due 2011, and mandatorily redeemable convertible preferred stock were excluded from the computation of diluted net income (loss) per common share for the year ended December 31, 2004. A portion of our stock options were excluded from the computation of diluted net income per common share for the years ended December 31, 2005 and 2004 as they were anti-dilutive. For additional information, see Note 15 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Business Consolidation and Restructuring Programs

December 2006 Program

In December 2006, we announced that we had begun the process of realigning our organization into a single business and addressing stranded costs that will result from divestitures associated with our portfolio realignment. In connection with this action, we expect to incur severance and relocation expenses of up to $10 million. During 2006, we recorded business consolidation and restructuring expenses of $7.6 million in connection with this action, of which $7.4 million and $0.2 million related to employee severance and relocation costs, respectively. We expect to continue to incur business consolidation and restructuring expense in 2007.

Electronics Program

In December 2005, we announced plans to consolidate certain of our glass fabric production activities at our Les Avenieres, France plants. In January 2006, we announced plans to consolidate our North American electronics production activities into our Statesville, North Carolina plant and to close our plant in Washington, Georgia. These actions were aimed at matching regional production capacities with available demand. For the years ended December 31, 2006 and 2005, we recognized business consolidation and restructuring expenses of $5.6 and $0.3 million, respectively, related to this program for employee severance, facility closure and equipment relocation costs. This program is substantially complete.

Livermore 2004 Program

In January 2004, we announced the consolidation of activities of our Livermore, California facility into other operations, principally the Salt Lake City, Utah plant. Costs associated with the facility’s closure, along with costs for relocation and re-qualification of equipment, are being incurred over several years. We expect to cease manufacturing and complete the transfer of activities from this facility by the end of the first quarter of 2007. We will then commence the disposal of remaining manufacturing equipment, followed by the demolition of the facility and the preparation of the manufacturing site for sale. We will continue to incur costs associated with the facility’s closure and demolition until the property is sold. For both the years ended December 31, 2006 and 2005, we recognized business consolidation and restructuring expenses of $1.8 million, related to this program for employee severance, facility closure and equipment relocation costs.

During the first quarter of 2006, we determined that involuntary termination benefits under the Livermore Program should have been accounted for under Statement of Financial Accounting Standards No. 112, Employers’ Accounting for Postretirement Benefits, instead of Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. As a result of this determination, we made an adjustment in the first quarter of 2006, and concluded that the impact was not material to either the current period or to any prior periods.

November 2001 Program

In November 2001, we announced a program to restructure our business operations as a result of reductions in commercial aircraft production and depressed business conditions in the electronics market. For the year ended December 31, 2006, we recognized a change in estimate decreasing business consolidation and restructuring expenses by $0.2 million. For the year ended December 31, 2005, we recognized business consolidation and restructuring expenses of $0.8 million. This program is substantially complete. Severance and lease payments will continue into 2009.

The aggregate business consolidation and restructuring activities for the three years ended December 31, 2006, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2003	$	4.2		$	1.7		$	5.9
Business consolidation and restructuring expenses
Current period expenses	0.9			1.9			2.8
Change in estimated expenses	(0.1		)	—			(0.1		)
Net business consolidation and restructuring expenses	0.8			1.9			2.7
Cash expenditures	(2.0		)	(2.5		)	(4.5		)
Non-cash usage, including asset write-downs	—			(0.1		)	(0.1		)
Currency translation adjustments	0.3			—			0.3
Balance as of December 31, 2004	$	3.3		$	1.0		$	4.3
Business consolidation and restructuring expenses	1.1			1.8			2.9
Cash expenditures	(0.6		)	(2.1		)	(2.7		)
Currency translation adjustments	(0.3		)	—			(0.3		)
Balance as of December 31, 2005	$	3.5		$	0.7		$	4.2
Business consolidation and restructuring expenses
Current period expenses	10.1			4.9			15.0
Change in estimated expense	(0.2		)	—			(0.2		)
Net business consolidation and restructuring expenses	9.9			4.9			14.8
Cash expenditures	(2.9		)	(5.3		)	(8.2		)
Currency translation adjustments	0.2			—			0.2
Balance as of December 31, 2006	$	10.7		$	0.3		$	11.0

Retirement and Other Postretirement Benefit Plans

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, as well as retirement savings plans covering eligible U.S. employees, and participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations. In addition, we provide certain postretirement health care and life insurance benefits to eligible U.S. retirees. Benefits under the defined benefit retirement plans are generally based on years of service and employee compensation under either a career average or final pay benefits method. Depending on the plan, postretirement health care and life insurance benefits are available to eligible employees who retire on or after age 58 or 65 after rendering a minimum of 15 or 25 years of service, respectively. We also make profit sharing contributions when we meet or exceed certain performance targets, which are set annually.

Under the retirement savings plans, eligible U.S. employees can contribute up to 20% of their compensation to an individual 401(k) retirement savings account. We make matching contributions equal to 50% of employee contributions, not to exceed 3% of employee compensation.

Effective December 31, 2000, we made certain changes to our U.S. retirement benefit plans that were intended to improve the flexibility and visibility of future retirement benefits for employees. These changes included an increase in the amount that we contributed to individual 401(k) retirement savings accounts and an offsetting curtailment of our U.S. qualified defined benefit retirement plan (“U.S. Qualified Plan”). Beginning January 1, 2001, we started to contribute an additional 2% to 3% of each eligible employee’s salary to an individual 401(k) retirement savings account, depending on the employee’s age. This increases the maximum contribution to individual employee savings accounts to between 5% and 6% per year, before any profit sharing contributions. Offsetting the estimated incremental cost of this additional benefit, participants in our U.S. Qualified Plan no longer accrued benefits under this plan after December 31, 2000, and no new employees will become participants. However, employees retained all benefits earned under this plan as of that date. In December 2006, our Board of Directors voted to terminate the U.S. Qualified Plan as of April 1, 2007, subject to appropriate regulatory approval. The U.S. Qualified Plan had been slowly self-liquidating as a result of its curtailed status and our decision to fund lump-sum payouts to employees who were participants in this plan and either retired or left Hexcel. Our greatly improved financial condition strongly influenced our decision and that of our Board of Directors to terminate the plan by providing the opportunity for either lump-sum or annuity payments to all participants in the plan in accordance with the terms

of the plan and all appropriate government regulations. Final termination of the U.S. Qualified Plan is expected to occur in either the fourth quarter of 2007, or early 2008.

Historically, we have developed an asset allocation policy for the U.S. Qualified Plan with consideration of the following long-term investment objectives: achieving a return on plan assets consistent with the funding requirements of the plan, maximizing portfolio return with an expected total portfolio return of 7.5%, and minimizing the impact of market fluctuations on the fair value of the plan assets. In connection with our decision to terminate the U.S. Qualified Plan, we also made the decision to liquidate all our equity investments in the plan. As such, as of December 31, 2006, our cash balances in this plan exceed the plan’s targeted range. Such cash balances will be invested in high quality government securities with maturities of one year or less, as the termination process continues into 2007. In addition, the U.S. Qualified Plan’s managed fixed income portfolio will be liquidated during 2007.

Changes made to the actual asset allocations outside of targeted policy ranges as a result of the decision to terminate the U.S. Qualified Plan were approved by our Board of Directors. In 2006, we made an additional cash contribution of $1.9 million to the plan to fund lump-sum payments.

In addition to the broad asset allocations described above, the following investment policies apply to individual asset classes: equity investments can include common and preferred securities, American Depository Receipts, as well as mutual funds in such securities. The portfolios are required to be diversified among industries and economic sectors. No more than 10% of the plan’s assets may be in illiquid securities. To enhance diversification and liquidity, equity investments have historically been directed into mutual funds. Short sales, margin purchases and similar speculative transactions are prohibited. Fixed income investments are oriented toward risk adverse, investment grade securities. The short-term portion of the portfolio will be invested in high-grade commercial paper (rated A-1 and P-1), treasury bills, and short-term repurchase agreements (collateralized by U.S. Treasury or Agency issue or commercial paper), approved bankers’ acceptances and approved domestic certificates of deposit of banks. Longer-term fixed income purchases will be limited to issues rated at or above BBB- by Standard & Poor’s and Baa3 by Moody’s, while the entire portfolio must have a minimum overall rating of AA by both rating agencies. Short sales, margin purchases and similar speculative transactions are prohibited. The portfolio should compare favorably to the Lehman Bros. Aggregate Index over a 5-year period.

We use long-term historical actual return experience, future expectations of long-term investment returns for each asset class, and asset allocations to develop the expected long-term rate of return assumptions used in the net periodic cost calculations of our U.S. Qualified Plan. As a result of an annual review of historical returns, market trends, and our recent asset allocation reflecting the decision to terminate the plan, we have reduced our expected long-term rate of return for the 2007 plan year to 5%. We expect that during the termination process the majority of the plan’s assets will be invested in high quality government securities with maturities of one year, or less.

We account for our defined benefit retirement plans and our postretirement benefit plans using actuarial models required by Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions (“FAS 87”), and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (“FAS 106”), respectively. These actuarial models require the use of certain assumptions, such as the expected long-term rate of return, discount rate, rate of compensation increase, healthcare cost trend rates, and retirement and mortality rates, to determine the net periodic costs of such plans. These assumptions are reviewed and set annually at the beginning of each year. In addition, these models use an “attribution approach” that generally spreads individual events, such as plan amendments and changes in actuarial assumptions, over the service lives of the employees in the plan. That is, employees render service over their service lives on a relatively smooth basis and therefore, the income statement effects of retirement and postretirement benefit plans are earned in, and should follow, the same pattern.

We use our actual return experience, future expectations of long-term investment returns, and our actual and targeted asset allocations to develop our expected rate of return assumption used in the net periodic cost calculations of our funded U.S. and European defined benefit retirement plans. Due to the difficulty involved in predicting the market performance of certain assets, there will almost always be a difference in any given year between our expected return on plan assets and the actual return. Following the attribution approach, each year’s difference is amortized over a number of future years. Over time, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees.

We annually set our discount rate assumption for retirement-related benefits accounting to reflect the rates available on high-quality, fixed-income debt instruments. Recent declines in discount rates have increased our net periodic costs for the three years ended December 31, 2006 and the unfunded status of our funded qualified plan as of December 31, 2006 and 2005. The discount rate assumption used to calculate net periodic retirement related costs for the U.S. funded plan in 2006 was 4.75% compared to a discount rate of 5.5% used in 2005 and 5.75% used in 2004. The rate of compensation increase, which is another significant assumption used in the actuarial model for pension accounting, is determined by us based upon our long-term plans for such increases and assumed inflation. These rates used have remained relatively constant over the past three years and are expected to remain constant for 2007. For the postretirement health care and life insurance benefits plan, we review external data and its historical trends for health care costs to determine the health care cost trend rates. Retirement and mortality rates are based primarily on actual plan experience.

Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic costs and recorded obligations in such future periods. While we believe that the assumptions used are appropriate,

significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations.

For more information regarding our retirement and other postretirement benefit plans, including information related to our adoption of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“FAS 158”), see Notes 1 and 12 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Significant Customers

Approximately 21.3%, 18.8% and 19.3% of our 2006, 2005 and 2004 net sales, respectively, were to Boeing and its subcontractors. Of the 21.3% of sales to Boeing and its subcontractors in 2006, 16.1% and 5.2% related to commercial aerospace and space and defense market applications, respectively. Approximately 22.6%, 22.1% and 20.7% of our 2006, 2005 and 2004 net sales, respectively, were to EADS, including Airbus, and its subcontractors. Of the 22.6% of sales to EADS and its subcontractors in 2006, 19.4% and 3.2% related to commercial aerospace and space and defense market applications, respectively.

(In millions)	2006		2005		2004
Commercial:
Boeing and subcontractors	$	191.6	$	154.5	$	139.5
EADS and subcontractors	232.0		215.9		187.7
Total	$	423.6	$	370.4	$	327.2
Space & Defense:
Boeing and subcontractors	$	62.9	$	63.3	$	67.4
EADS and subcontractors	37.7		40.7		34.4
Total	$	100.6	$	104.0	$	101.8

Financial Condition

Liquidity: During the first quarter of 2005, we refinanced substantially all of our long-term debt. In connection with the refinancing, we entered into a $350.0 million senior secured credit facility (the “Senior Secured Credit Facility”), consisting of a $225.0 million term loan and a $125.0 million revolving loan. In addition, the Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million. Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan. As of December 31, 2006, we had aggregate borrowings of $183.6 million outstanding under the Senior Secured Credit Facility consisting of term loans, and had issued letters of credit under the Senior Secured Credit Facility totaling $4.3 million. Cash and cash equivalents as of December 31, 2006 was $25.7 million.

As of December 31, 2006, our total debt, net of cash, was $386.6 million, a decrease of $12.2 million from $398.8 million as of December 31, 2005. The reduction in net debt reflected the net cash provided by operating activities of $100.6 million, cash proceeds of $22.0 million and $10.6 from the TechFab sale and activity under stock plans, respectively, offset by $120.2 million of capital expenditures and deposits for capital purchases during the year.

Net cash from operating activities is our primary source of funds to finance working capital and capital expenditures each year. Over the last three years, net cash from operating activities has provided a source of funds ranging between $72.2 million and $100.6 million per year. Short-term liquidity requirements consist primarily of normal recurring operating expenses; costs associated with legacy business matters, including costs related to our retirement benefit plans; capital expenditures and debt service requirements. We expect to meet these short-term requirements through net cash from operating activities and our revolving credit facility. Total undrawn availability under the Senior Secured Credit Facility as of December 31, 2006 was $120.7 million. As of December 31, 2006, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations. We expect to meet long-term liquidity requirements through cash provided from operations, and if necessary, supplemented with long-term borrowings and other debt or equity financing. The availability and terms of any such financing will depend upon market and other conditions at the time. Proceeds received from our divestiture activities will be initially used to prepay debt and finance capital expenditures

Credit Facilities: On March 1, 2005, we entered into a $350.0 million senior secured credit facility, consisting of a $225.0 million term loan and a $125.0 million revolving loan. The term loan under the Senior Secured Credit Facility is scheduled to mature on March 1, 2012 and the revolving loan under the Senior Secured Credit Facility is scheduled to expire on March 1, 2010. Term loan borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on the agent’s defined “prime rate” plus a margin that can vary from 0.50% to 0.75% or LIBOR plus a margin that can vary from 1.50% to 1.75%, while revolving loan borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on either the agent’s defined “prime rate” plus a margin that can vary from 0.25% to 1.00%, or LIBOR plus a margin that can vary from 1.25% to 2.00%. The margin in effect for a borrowing at any given point depends on our leverage. Initially the interest rate on the term loan was LIBOR + 175bps and on the revolving loan the interest rate was initially LIBOR +200bps. Effective as of September 1, 2005, the interest rate on the revolving loan stepped down to LIBOR + 175bps. The Senior Secured Credit Facility is secured by a pledge of assets that includes, among other things, the receivables, inventory, property, plant and equipment and intellectual property of Hexcel Corporation and our

material U.S. subsidiaries, and 65% of the share capital of our Danish subsidiary and first-tier U.K. subsidiary. In addition, the Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million, of which $4.3 million were outstanding as of December 31, 2006. Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan.

We are required to maintain various financial ratios throughout the term of the Senior Secured Credit Facility. These financial covenants set maximum values for our leverage (the ratios of total debt to EBITDA), interest coverage (the ratio of EBITDA to book interest), and capital expenditures (not to exceed specified annual expenditures). The Senior Secured Credit Facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments, including dividends, entering into transactions with affiliates and prepaying subordinated debt. In addition, the Senior Secured Credit Facility contains other customary terms relating to, among other things, representations and warranties, additional covenants and events of default. At December 31, 2006, we were in compliance with the financial covenants under the Senior Secured Credit Facility. In December 2006, our lenders agreed to amend the credit agreement to permit the planned divestitures of portions of the Reinforcements business segment and to increase the maximum allowable capital expenditures in the calendar years of 2006 and 2007 to $135.0 million and $150.0 million, respectively. In addition as a result of the amendment, our minimum interest coverage ratio was increased from 3.75 to 4.00, and our maximum leverage ratio was decreased from 3.50 to 3.25.

In addition, we have available European credit and overdraft facilities, which can be utilized to meet short-term working capital and operating cash requirements. These European credit and overdraft facilities are uncommitted lines and can be terminated at the option of the lender.

Operating Activities: We generated $100.6 million from operating activities during 2006. Net income generated from continuing operations plus non-cash charges (depreciation and amortization) contributed $109.1 million of cash flow. The deferral of tax payments of $17.0 million, business consolidation and restructuring activities (expense net of payments) of $6.6 million, share-based compensation of $9.2 million and dividends from affiliates of $1.3 million, were also positive contributors of cash. A net decrease in working capital of $19.5 million, a $15.7 million gain on the sale of an investment in an affiliated company and equity earnings of $4.1 million partially offset cash generated by operations.

Net cash provided by operating activities was $72.2 million in 2005 as compared to $89.2 million generated in 2004. The year-on-year decrease of $17.0 million was primarily attributable to litigation settlements of $23.3 million paid during 2005, $7.0 million of which had been accrued for at December 31, 2004. Business consolidation and restructuring payments of $2.7 million during 2005 were $1.8 million lower than in 2004. Net working capital decreased in 2005 reflecting the impact of increased accounts receivable and inventories combined with a decrease in accounts payable and accrued liabilities. Dividends of $3.1 million and $3.0 million were received from an affiliated company during 2005 and 2004, respectively.

Investing Activities: Net cash used for investing activities was $98.2 million in 2006 compared to $72.5 million in 2005. Cash expenditures and deposits for capital purchases increased $53.8 million over 2005, primarily related to our carbon fiber expansion programs. During 2006, we received proceeds of $22.0 million in connection with the sale of our ownership interest in TechFab, an affiliated company. During 2005, we had made a $7.5 million cash investment in BHA Aero, an affiliated company.

With increased demand for our products, we made capital expenditures in 2006 to increase our manufacturing capacity, and will make further expenditures in 2007. Among these investments, we are implementing an expansion of our carbon fiber manufacturing capacity to increase output by approximately 50%. We completed the addition of a precursor line at our Decatur, Alabama facility, and the addition of a carbon fiber line at our Salt Lake City, Utah facility in December 2006. These lines are expected to start supplying fiber for industrial and recreational applications towards the end of the first quarter of 2007 and to be certified to produce fibers for aerospace applications by the end of the year. We are continuing with the construction of a new carbon fiber line at Illescas, Spain which we anticipate will be completed by the end of 2007, with the line being certified to produce fibers for aerospace applications during 2008. Capital expenditures for 2007 are projected to be similar in value to those made in 2006; however, actual capital expenditures will depend upon the progress of new carbon fiber opportunities and the growth in demand from our wind energy customers during the year.

Net cash used in investing activities was $72.5 million in 2005, or $41.5 million greater than 2004. Cash expenditures and deposits for capital purchases increased $28.9 million over 2004, including activities related to our carbon fiber expansion programs. In addition, we made a $7.5 million cash investment in BHA Aero, an affiliated company. During 2005, we received $1.4 million in cash proceeds from the sale of surplus land, which was $5.1 million lower than amounts received during the prior year.

Net cash used for investing activities was $31.0 million in 2004. Cash used for capital expenditures of $37.5 million was offset in part by proceeds of $6.5 million from the sale of surplus land.

Financing Activities: Net cash provided by financing activities was $2.6 million during 2006. During 2006, we received $10.6 million from activity under stock plans. In addition, we made net payments of $6.4 million on the outstanding balance of our senior secured credit facility and made capital lease payments and other debt of $1.6 million.

Net cash used for financing activities was $40.7 million for 2005 compared with $41.6 million in 2004. During 2005, we refinanced substantially all of our long-term debt. In connection with the refinancing, we entered into a $350.0 million senior secured credit facility, consisting of a $225.0 million term loan and a $125.0 million revolving loan. Borrowings as of December 31, 2005 under the Senior Secured Credit Facility were $190.0 million, consisting of $185.0 million of term loans and $5.0 million of revolver loans. In addition, we issued $225.0 million principal amount of 6.75% senior subordinated notes, due 2015. The Senior Secured Credit Facility replaced our then existing $115.0 million five-year secured revolving credit facility. Proceeds from the Senior Secured Credit Facility and the new senior subordinated notes were used to redeem $285.3 million principal amount of the 9.75% senior subordinated notes due 2009, repurchase $125.0 million principal amount of the 9.875% senior secured notes due 2008, redeem $19.2 million principal amount of the 7.0% convertible subordinated debentures, due 2011, and pay $42.1 million of cash transaction costs related to the refinancing.

Net cash used for financing activities was $41.6 million in 2004. During 2004, we utilized cash provided by operating activities, net of cash used for investing activities, together with $12.8 million of cash from activity under our stock plans to pay down outstanding borrowings under the Senior Secured Credit Facility, repay other long-term debt and capital lease obligations, and to repurchase, at a premium, $44.8 million principal amount of its 9.75% senior subordinated notes, due 2009.

Financial Obligations and Commitments: As of December 31, 2006, current maturities of notes payable and capital lease obligations were $2.5 million. Debt obligations maturing in 2007 include $1.9 million due under the term loan portion of the Senior Secured Credit Facility, $0.3 million of drawings under European credit and overdraft facilities and $0.3 million due under capital lease obligations. The European credit and overdraft facilities available to certain of our European subsidiaries by lenders outside of the Senior Secured Credit Facility are primarily uncommitted facilities that are terminable at the discretion of the lenders. We have entered into several capital leases for buildings and warehouses with expirations through 2012. In addition, certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

Total letters of credit issued and outstanding under the Senior Secured Credit Facility were $4.3 million as of December 31, 2006. We had no letters of credit issued separately from this credit facility. While the letters of credit issued will expire under their terms in 2007, most, if not all, will be re-issued.

The following table summarizes the scheduled maturities as of December 31, 2006 of financial obligations and expiration dates of commitments for the years ended 2007 through 2011 and thereafter.

(In millions)	2007		2008		2009		2010		2011		Thereafter		Total
Senior secured credit facility – revolver due 2010	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Senior secured credit facility – term B loan due 2012	1.9		1.9		1.9		1.9		132.1		43.9		183.6
European credit and overdraft facilities	0.3		—		—		—		—		—		0.3
6.75% senior subordinated notes due 2015	—		—		—		—		—		225.0		225.0
Capital leases