Rakon 2006 Annual Report

ANNUAL REPORT 2006

RAKON LIMITED

ANNUAL REPORT 2006

Contents

2

Notice of Meeting

3

Financial Highlights

4

Chairman’s Report

5

Rakon at a Glance

6

Managing Director’s Report

8

Customers & Products

10

Board of Directors

14

Corporate Governance

15

Directors’ Report

17

Management

18

Statements of Financial Performance

21

Statements of Movements in Equity

21

Statements of Financial Position

22

Statements of Cash Flows

23

Statement of Accounting Policies

25

Notes to Financial Statements

28

Auditors’ Report

42

Shareholder Information

44

Glossary of Terms

52

Directory

54

Notice of Meeting RAKON LIMITED Notice of Annual Shareholders’ Meeting Friday, 1 September 2006 commencing 2pm at the Guineas Room, Ellerslie Convention Centre, Ellerslie Racecourse, 80-100 Ascot Avenue, Greenlane Road, Auckland

AGENDA ANNUAL REPORT 1. To receive the Annual Report for the year ended 31 March 2006, including the financial statements and auditors’ report.

RE-ELECTION OF DIRECTORS 2. In accordance with the constitution of the Company Warren John Robinson retires by rotation and, being eligible, offers himself for re-election.

3. In accordance with the constitution of the Company Darren Paul Robinson retires by rotation and, being eligible, offers himself for re-election.

AUDITOR 4. To record the reappointment of PricewaterhouseCoopers as the Company’s auditor and to authorise the Directors to fix the auditors’ remuneration.

BY ORDER OF THE BOARD

Bryan Mogridge Chairman 20 June 2006 Notes: 1. A shareholder may attend the Annual Meeting of Shareholders and vote or may appoint a proxy to attend the Annual Meeting of Shareholders and vote in place of the shareholder. A proxy form is enclosed.

2. A shareholder wishing to appoint a proxy should complete the enclosed proxy form and produce the proxy form to the office of Rakon’s share registrar, Computershare Investor Services Limited, either by fax to 64 9 488 8787, by delivery to Level 2,159 Hurstmere Road, Takapuna, North Shore City, Auckland, New Zealand or by mail to Private Bag 92 119, Auckland 1020, New Zealand so as to be received no later than 2pm on 30 August 2006, being 48 hours before the start of the Annual Meeting of Shareholders.

3. All resolutions will be considered as ordinary resolutions and, in particular, each resolution to re-elect a director is to be considered as a separate ordinary resolution. To be passed, each resolution requires the approval of a simple majority of the votes cast by the holders of ordinary shares.

4. No business may be transacted at the Annual Meeting of Shareholders if a quorum is not present. A quorum will be present if shareholders or their proxies or their representatives are present who between them are able to exercise a majority of the votes cast on the business to be transacted by the Annual Meeting of Shareholders.

3

Financial Highlights Group 2006

2005

($000s)

($000s)

Operating revenue

74,371

71,422

EBITDA

11,876

8,679

EBIT

8,918

6,267

Net surplus after tax

4,802

2,910

EPS1

5.5cps

3.7cps

Total assets

49,200

46,901

Total equity

24,045

7,957

Return on total assets Return on equity Return on adjusted equity2

9.8% 20.0% 20.0%

6.2% 36.6% 14.8%

Notes: 1. On 12 April 2006 Rakon undertook a share split at a ratio of 311.394549 to one, which increased the number of shares on issue from 321,136 to 100 million. EPS is calculated as if this share split occurred at the beginning of 2005. Accordingly the weighted average number of shares on issue used to calculate EPS in 2006 is 86.9 million and in 2005 is 77.8 million.

2. In order to provide a relative comparison, the calculation of Return on adjusted equity for 2005 includes a shareholder loan of $11.8 million, that was capitalised during 2006.

Revenue 2002 – 2006

EBITDA 2002 – 2006

NZD 2002-06 CAGR 21% USD 2002-06 CAGR 37%

NZD 2002-06 CAGR 65% USD 2002-06 CAGR 88%

%")4$! M

2EVENUE M

NZD USD

4

NZD USD

Chairman’s Report

2. This demand for quality and technology advancement is an important driver of Rakon’s research and development, which allows Rakon to develop products that have wider and consequently more valuable applications than the limited military supply market would present on its own.

Bryan Mogridge

Welcome to this, the first annual report for Rakon Limited.

We are pleased to be able to report a net surplus after tax for the year ended March 31 2006 of $4.8m which was 9% above the prospectus forecast.

It has been a very exciting time since the Company’s May 16, 2006 listing on the New Zealand Stock Exchange (NZSX), with inaugural shareholders receiving a significant uplift in value. The market’s valuation of the company has placed high expectations on Rakon to perform this year and into the future. This is a challenge that the team at Rakon appreciates and is willing to respond to.

Rakon is a world leading technology company that has developed its intellectual capital in the relative isolation of New Zealand. This isolation has allowed the Company to develop products and techniques that are unaffected by known methods, either solutions or failures, in other countries. This unique Kiwi approach follows the tradition of many other local based pioneers who ignored overseas protocols to develop their own unique and revolutionary inventions that led in their chosen fields. Rakon strives to maintain this approach today in a genuine effort to stay ahead of the global competition within its chosen field of Global Positioning Systems (GPS).

There has been much public comment about Rakon’s involvement in the supply of some of its oscillators to customers who build for the military market. Much of this comment has been ill-informed. When considering this particular market, in the wider context, there are two important points to consider: 1. The military have generally driven leading edge change in technology and quality. Such things as radar, jet engines, and more recently the internet and cell phones all have their genesis in military use.

The time since we released Rakon’s prospectus has not been long and consequently there is not a significant amount of new information to present to you. We anticipate providing a comprehensive update at our Annual Meeting on September 1, 2006.

The only significant change that has occurred since the offer document relates to the Directors view of the exchange rates that impact on our business. As a result of increased volatility within the major currencies that affect our business, (the Yen/USD cross rate and the USD/ NZD cross rate), we have increased our levels of cover through forward contracts and options. This has resulted in 86% of our predicted Yen expenditures being covered at USD1=JPY113.2 and 97% of USD receipts being covered by a combination of instruments that should provide a worst case outcome for Rakon of NZD1=USD0.64.

At this point in time your Directors remain confident of achieving the forecast for the 2007 fiscal year, as presented in the offer document.

As a final note I would like to thank all the team at Rakon for their part in bringing this exciting company to the point where it was able to successfully list on the NZSX. They have done a truly wonderful job over the past years to build a platform that will allow this exciting business to grow on the back of the anticipated rise in worldwide demand for GPS.

Bryan W Mogridge Chairman June 20, 2006

5

Rakon at a Glance

Rakon is a world leader in the development and production of high performance Quartz Crystal components used for timing reference and frequency control in demanding applications, such as global positioning systems (GPS) and microwave communications.

From its head office and manufacturing facility in Auckland, New Zealand, Rakon produces a range of Crystals and Oscillators for its global customer base.

Rakon’s business was founded in 1967 by Warren Robinson with the incorporation of Rakon’s predecessor company, Rakon Industries Limited (RIL). The Company currently has operations in New Zealand and marketing offices in the United States, Taiwan and the United Kingdom, and employs approximately 500 people. The vast majority of employees and operations are based in New Zealand.

Since first developing temperature compensated Crystal Oscillator (TCXO) technology in 1980, RIL, and now Rakon, has focused on staying at the forefront of Crystal and Oscillator technology.

Through ongoing investment in new technologies, Rakon has developed the proprietary know-how to mass produce Crystals and Oscillators with a miniature form factor (size) suited to consumer mass market electronic devices, while maintaining the highest performance specifications required in recreational, commercial and military/aerospace applications.

Central to the Company’s capability and market position is its embedded culture of continual innovation and improvement. This has led to the creation of many proprietary products and processes designed and produced by the Rakon team.

Quartz Crystals Quartz Crystals are found in nearly all electronic devices, from high-tech aerospace applications through to TVs and wrist watches.

Quartz Crystals are used in electronic devices to act as a timing or frequency reference device to ensure the functionality of electronic equipment dependent upon accurate timing or frequency control.

Quartz possesses the Piezoelectric Effect which enables it to be used as a frequency control device. The Piezoelectric Effect occurs when a Crystal is subjected to an externally applied voltage that results in the Crystal changing shape in an oscillating manner, which then in turn generates a charge or voltage on the Crystal’s surface at a specific frequency. The voltage output of the Crystal Oscillator can then be converted into pulses suitable for use as timing or frequency reference in electronic circuits. The frequency of oscillation can be modified by the shape in which the Crystal is cut and its thickness.

Also affecting quartz’s resonating frequency is temperature, with frequency varying widely across a wide temperature range. In order to create stability of a Quartz Crystal’s oscillating frequency across a temperature range, a compensating correction voltage can be

applied based upon an output signal received from a temperature sensor, which stabilises the frequency output when temperature changes.

Rakon’s key products, which are produced to a range of specifications, are: • Quartz Crystals, which Rakon manufactures in both round (UM) and strip (RSX) designs in metal and ceramic packages respectively. Rakon currently produces Crystals in the RSX design down to a 3.2x2.5mm form factor and is currently developing a new model with a form factor of 2.5x2.0mm, which is among the smallest in the world.

• Oscillators, Rakon produces both discrete and integrated Oscillators. Rakon is currently capable of producing its integrated TCXOs in a range of sizes down to 3.2x2.5mm with a 2.5x2mm size under development. Rakon believes it is also the leading global producer of calibrated dual Crystal Oscillators (CDXO). CDXOs provide a higher degree of performance than TCXOs and are currently used in a number of military/aerospace applications.

• RF module, Rakon has recently developed, and is preparing to manufacture, what it believes to be the world’s smallest GPS front-end receiver (RF module). The RF module will incorporate a range of Rakon Oscillators and significantly reduces the size and cost of incorporating a complete GPS unit into small electronic equipment such as mobile phones and personal digital assistants (PDA).

Rakon also has particular expertise in custom products, where its engineering expertise, flexible production processes, and ability to co-develop, enable the Company to rapidly prototype and put into production Crystals and Oscillators designed to a customer’s particular specifications.

Future Rakon is well positioned to benefit from the significant growth it predicts is likely to occur in the GPS industry over the coming years.

The Company has invested in leading edge production technology, new products, and increased production capacity to ensure that it obtains the maximum advantage and growth from its market position and strong customer relationships with world leading customers. The major source of Rakon’s growth is expected to be growth in the GPS market, as GPS moves from a niche market to a consumer mass market, driven by increasing GPS adoption in many applications. Further growth is also expected to come from expansion of Rakon’s customer base and product suite in other markets such as non GPS satellite communications, microwave communications, cellular base stations and two-way digital radio.

7

Managing Director’s Report

EBIT 2002 – 2006

NZD 2002-06 CAGR 65% USD 2002-06 CAGR 88%

%")4 M

Brent Robinson

Rakon’s listing on the New Zealand Stock Exchange in mid May represented one of the most important events in our history.

Moving beyond family ownership represents a substantial change for the Company, but one which I believe is the best way to drive Rakon forward in the future. I am delighted at the support and interest from the New Zealand investing public – it is terriďŹ c that Rakon has been able to take this step by way of a listing in our home market.

Rakon’s movement into public ownership is underpinned by a pattern of strong growth and the past year has been no exception with new heights being reached. • Operating revenue grew to NZ$74.4 million – since 2002 revenue has grown at a compound average rate of 21%.

Eliminating the impact of the strengthening NZ$ over this period pushes the compound average rate to 37%. • Earnings before interest & tax (EBIT) grew to $8.9 million - since 2002 EBIT has grown at a compound average rate of 65%. • Productive capacity reached 3.5 million units per month.

Monthly production in March 2006 was eight times that recorded in March 2002. We plan to substantially increase Revenue 2002 – 2006

NZD 2002-06 CAGR 21% USD 2002-06 CAGR 37%

2EVENUE M

NZD USD

production capacity again by the end of the 2007 ďŹ nancial year with expansion of and innovation in our manufacturing processes.

Putting the Company into public ownership gives us the opportunity to build upon our impressive achievements of the past and take the Company to new levels by accelerating the development of products and expanding our manufacturing capability.

Customers & Products Rakon’s focus is on continuing to manufacture quartz crystal based products of the highest speciďŹ cation to supply to high end communications, industrial and military/aerospace customers. We have a customer base of more than 400 businesses. Over the last year Rakon has continued to build on its already diverse customer base, in particular securing a strong position in the rapidly expanding Asian GPS market.

Rakon’s proprietary testing process that provides 100% temperature screening of high volume production is a key factor in Rakon’s maintenance of long term relationships with many outstanding companies. The Rakon brand is recognised for the highest standards of speciďŹ cation and quality reected in many supplier awards and commendations over the years.

In May 2006 Rakon was recognized as one of the Top Preferred Suppliers for 2006 by Rockwell Collins for performance in meeting delivery schedules and product quality. Rockwell Collins also recognised Rakon for design, engineering support and teamwork.

NZD USD

8

A culture of continual innovation and improvement fosters an approach to product development that is often dierent to that of our competitors. An example of this has been the success of Rakon’s 0.5ppm TCXO. This product which we ďŹ rst sold in

2003 is 5 times more sensitive/ accurate than that historically produced by most of our competitors. Rakon targets the high end of the industry, which demands sensitivity and reliability over size or price. Rakon’s approach has been to set the standard on precision then move quickly to reduce the form factor (size). Over the past year we have seen a transformation in the composition of sales of our main TCXO product line from a form factor of 5.0x3.2mm to 3.2x2.5mm. Rakon is currently developing products to deliver still higher standards of sensitivity and even smaller form factors.

Early in 2006 Rakon announced the successful development of a GPS Radio Frequency Receiver Module (GRM). The tiny radio receiver is a complete ‘plug and play’ unit, which makes it uniquely simple for GPS designers to embed into their devices.

The receiver means GPS manufacturers can meet market demand to miniaturise devices, while offering improved capability. The high stability of the unit enables very weak GPS signals to be received, which is a real breakthrough in an industry that needs to have products that will function in urban environments with very high interference.

Competitive manufacturing cost is imperative to Rakon’s success. Rakon continues to invest in new capital equipment to support the future profitability of the business. Rakon spent $5.4 million on capital equipment in the past financial year and plan to spend twice this amount in 2007 to expand and improve our manufacturing capability. Also, during the past year Rakon secured annualised reductions in raw material costs amounting to $2.9 million. Direct labour cost was also lowered by over $1 million through more efficient production scheduling, improved efficiencies and outsourced manufacturing. This was achieved while at the same time sales volume increased by 16.5%.

People To support the growth of our business and transition to public ownership we have recruited key people in marketing, sales, finance and human resources and added to our impressive line up of engineering and operational talent. Rakon employs nearly 500 employees worldwide including marketing offices in the USA, Asia and a newly established European base in London. The European base will enable us to better service our existing European customers and further develop our position in this market. We have also expanded our presence in the rapidly growing Asian market to take further advantage of the opportunities there and gain early awareness of consumer product development trends.

Rakon’s past success would have not been achieved without the commitment of our staff. We are focused on retaining and developing the talented people in our organisation and attracting new talent to realise the growth potential to Rakon.

Our employees participated strongly in the initial listing with 25% of our employees becoming shareholders on the day of listing. We are delighted with this, demonstrating the confidence in and commitment of our people to the future success of Rakon.

Outlook Early indications are that 2007 is shaping up to be another excellent year. For 2007 and beyond Rakon’s strategic focus is to: • Continue to develop industry leading Quartz Crystal based products that deliver performance and features that add value to the GPS solution; • Continue to develop new production and test equipment providing Rakon a competitive advantage; • Expand our leading edge Crystal & TCXO production capability to ensure flexibility, low production cost and continuity of supply; • Establish our GPS RF modules in the market and develop next generation GPS receivers in partnership with leading GPS chipset companies; and • Expand the marketing and technical support in all of our markets.

Rakon has the support of an excellent Board, with its members offering a wealth of industry and commercial experience. We are confident this leadership, in combination with Rakon’s strategic focus, market position and the continued excellence and commitment from our employees will result in superior value to shareholders now and in the future.

Brent Robinson Managing Director June 20, 2006

9

Customers & Products

Rakon has a diverse customer base of more than 400 businesses from a range of industries and geographies.

The vast majority of Rakon’s customers are electronics manufacturing companies producing consumer electronic products such as mobile phones and GPS devices.

Rakon’s supply of Crystals and Oscillators to leading GPS device manufacturers reflects the Company’s position in that market. Rakon deals with all key customers directly on an account management/sales level and an engineering level. Engineering level relationships enable the Company to better serve customers and participate in the product design process which can lead to Rakon’s products being designed into the core product specification.

The composition of Rakon’s sales by end market/application and geography is illustrated in the graphs below. Reflecting the location of its customers, approximately 95% of Rakon’s revenue is denominated in US Dollars.

Sales by end market FY2006 7%

3%

Examples of end products incorporating Rakon products Automatic landing system of Boeing 747 jets use Rakon TCXOs Garmin recreational GPS units use Rakon Crystals and TCXOs Mobile phones manufactured for Nextel for emergency location use Rakon TCXOs Qualcomm’s omni-satellite tracking & communications for trucking uses Rakon TCXOs GM OnStar (Motorola) motor vehicle assistance uses Rakon TCXOs

Sample of key customers Customer

End products

Ericsson

Telecommunications, mobile phones

1998

Car navigation GPS chipsets/modules

1997

Land, marine & aviation GPS receivers

1993

GPS receivers, mobile phones

2003

Car navigation (OnStar by GM)

1999

Motorola PCS

Mobile phones

2002

Motorola iDEN

Mobile phones p

2001

Flextronics (u-Blox) 36%

9%

Garmin 12%

Mitac Computer Motorola Automotive

13% 20%

Customer since

GPS Personal Navigation/OEM

GPS Phone

GPS Automotive

GPS Aerospace

Navman

GPS receivers

1997

Telecom

Other

Qualcomm

Mobile phone GPS capable chipsets

1995

Research In Motion

PDAs

1996

Rockwell International

Military/aerospace applications

1991

Samsung

Mobile phones

2003

Tait Electronics

Telecommunications

1968

Thales Navigation

Car navigation GPS receivers

1991

Survey & car navigation GPS receivers

1992

GPS Other

Sales by geography FY2006 4% 11%

54%

31%

Asia

Trimble Navigation

North America

Europe/Middle East/Africa

New Zealand

11

Product Range Product Range Rakon provides a broad range of Quartz Crystal based products from Crystals to high performance TCXOs. In order to meet customer requirements, Rakon seeks to maintain a broad range of products and accordingly, its range includes certain lower-end products sourced on an original equipment manufacture (OEM) basis from third party producers. All products sold by Rakon to its customers, including OEM products, are put through the Company’s test and screening process to ensure that they meet the Company’s quality and performance standards. Rakon’s product lines may be divided into the groups outlined below: Product type

Description

Key Markets

UM crystals

High performance Crystal, packaged in a metal can with formed legs for surface mounting

Satellite navigation, particularly automotive and military/aerospace

RSX crystals

Low profile form factor Crystal in ceramic packaging

Used in Rakon’s TCXOs, consumer oriented GPS and local wireless data connections

Custom TCXOs

Traditional printed circuit board based Oscillator incorporating passive components and Crystal resonator for temperature control compensation

Telecommunications

Integrated TCXOs

Integrated circuit for temperature control / compensation joined with RSX Crystal in a ceramic package

Predominantly GPS applications including E-911 mobile phones and telematics

Precision Products

Products designed to customer’s particular specifications. Precision products are customer products with especially high performance

Wide range of applications / customers. Precision products primarily for military/aerospace applications

SMD Discrete TCXOs

Smaller form factor voltage controlled-temperature controlled Oscillators and voltage controlled Oscillators

Telecommunications

RF module

Small form factor GPS RF Front-end receivers

Consumer oriented. GPS applications

RSX Crystals

Custom TCXOs

Integrated TCXOs

Precision Products

RF Module SMD Discrete TCXOs

UM Crystals

Rakon’s Quartz Crystal products range from Crystals to high performance TCXOs

Supplying to a global market

ERICSSON QUALCOMM

Thrane & Thrane

13

Board of Directors Bryan Mogridge ONZM Independent Chairman Bryan Mogridge was appointed Chairman in November 2005.

Bryan has been a public company director since 1984. He is currently Chairman of Enterprise Waitakere, Waitakere City Holdings Limited, Designworks Enterprise IG Limited, Guardian Healthcare Group Limited, Momentum Energy Limited and The Starship Foundation. Additionally, Bryan sits on the Board of Mainfreight Limited and Pyne Gould Corporation Limited.

Bryan has also chaired the Wine Institute, the New Zealand Food and Beverage Exporters Council, the Tourism Board and most recently, the business led initiative, The Committee for Auckland.

Bruce Irvine Independent Non-executive Director Bruce Irvine was appointed as a Director of Rakon in November 2005.

Bruce is the managing partner of Deloitte’s Christchurch office and is also a member of the Deloitte National Board.

Bruce is currently the Chairman of Jade Stadium Limited and is a Director of Pyne Gould Corporation Limited, Marac Limited, Godfrey Hirst Limited, Market Gardeners Co-operative Limited, House of Travel Limited, Christchurch City Holdings Limited and Canterprise Limited.

In a voluntary capacity, he serves as a trustee of the Christchurch Symphony Trust, the Christchurch Art Gallery Trust and the Central Plains Water Trust.

Peter Maire Non-executive Director Peter Maire was appointed as a Director of Rakon in November 2005.

Peter is the co-founder and former President of Navman New Zealand Limited. He sold his shareholding to Brunswick in 2004 and resigned his position as Chariman at the end of 2005.

Peter is currently a member of the Government Growth and Innovation Advisory Board, and has been appointed to the Board of New Zealand Trade and Enterprise. Peter is also Chairman of the investment committee for the First New Zealand Investment Fund. Peter is a significant shareholder and Director of Cadmus Technology NZ Limited and Fusion Electronics Limited.

14

Bryan Mogridge

Bruce Irvine

Brent Robinson Executive Director Brent Robinson was first appointed Managing Director at Rakon Industries Limited in 1986 and continues in that role at Rakon. Brent has over 25 years experience in the design and manufacture of Crystals and Oscillators. Since his appointment Brent has led and driven the development of Rakon’s core TCXO business, which is the basis of the Company’s success today, supplying over 50% of the world GPS market for TCXOs. Since assuming leadership in 1986, Rakon has grown from sales of approximately $1.7m to $74.4 m in FY2006.

Darren Robinson Executive Director Darren has over 25 years sales and marketing experience and was appointed Sales and Marketing Director for Rakon in 1990. Darren has driven sales for Rakon through exploring new markets, applications and establishing arrangements with many top Fortune 500 companies. Since his appointment sales revenue has grown on average by 25% per annum.

Peter Maire

Brent Robinson

Warren Robinson Non-executive Director Warren Robinson founded the Rakon business in the basement of his Howick home in 1967. He successfully grew and operated the business until 1986 when Brent Robinson became the Managing Director. In subsequent years, Warren has continued to maintain an active role within Rakon as Chairman until November 2005.

Warren received a First Class Certificate in Radio Technology and is a member of the Institute of Electrical and Electronics Engineers, a senior member of the New Zealand Electronics Institute and is a member of both the New Zealand Business Roundtable and The Royal Society of New Zealand.

Corporate Governance The Role of the Board The Board has ultimate responsibility for the strategic direction of Rakon and oversight of the management of Rakon for the benefit of Shareholders. Specifically, the responsibilities of the Board include:

Darren Robinson

Warren Robinson

• working with management to establish the strategic direction of Rakon; • monitoring management and financial performance; • monitoring compliance and risk management; • establishing and monitoring the health and safety policies of Rakon; • establishing and ensuring implementation of succession plans for senior management; and • ensuring effective disclosure policies and procedures.

In discharging their duties, Directors have direct access to and may rely upon Rakon’s senior management and external advisers. Directors have the right, with the approval of the Chairman or by resolution of the Board, to seek independent legal or financial advice at the expense of Rakon for the proper performance of their duties.

The Board comprises six Directors: a non-executive Chairman, two executive Directors and three non-executive Directors. Under the Constitution, the Independent Chairman holds a casting vote at Board meetings. Board members have an appropriate range of proficiencies, experience and skills to ensure that all governance responsibilities are fulfilled and to 15

achieve the best possible management of resources.

In accordance with the Constitution the Board have resolved that the Managing Director will not be required to retire by rotation.

Directors Meetings The Board plan to meet not less than nine times during any financial year including sessions to consider the strategic direction of Rakon and Rakon’s forward-looking business plans. Video and/or phone conferences are also used as required. In the 4 month period from the appointment of Bryan Mogridge, Bruce Irvine and Peter Maire to the Board until the year ended 31 March 2006 there were three Board Meetings held.

Director

Meetings Held

Meetings Attended

Bryan Mogridge

3

3

Brent Robinson

3

3

Darren Robinson

3

3

Warren Robinson

3

3

Peter Maire

3

3

Bruce Irvine

3

2

Board Committees The Board has three formally constituted committees of Directors. Committees established by the Board review and analyse policies and strategies, usually developed by management, which are within their terms of reference.

They examine proposals and, where appropriate, make recommendations to the full Board. Committees do not take action or make decisions on behalf of the Board unless specifically mandated by prior Board authority to do so. The Committees are as follows: Audit and Risk Management Committee The Audit and Risk Management Committee is responsible for overseeing the risk management (including treasury and financing policies), treasury, insurance, accounting and audit activities of Rakon, and reviewing the adequacy and effectiveness of internal controls, meeting with and reviewing the performance of external auditors, reviewing the consolidated financial statements, and making recommendations on financial and accounting policies.

The members of the Audit and Risk Management Committee are Bruce Irvine (Chairman), Bryan Mogridge and Warren Robinson.

16

Director

Meetings Held

Meetings Attended

Bruce Irvine

1

1

Bryan Mogridge

1

1

Warren Robinson

1

1

Remuneration Committee The Remuneration Committee is responsible for overseeing management succession planning, establishing employee incentive schemes, reviewing and approving the compensation arrangements for the executive Directors and senior management, and recommending to the full Board the compensation of Directors.

The members of the Remuneration Committee are Bryan Mogridge (Chairman), Peter Maire and Warren Robinson.

Director

Meetings Held

Meetings Attended

Bryan Mogridge

1

1

Peter Maire

1

1

Warren Robinson

1

1

Nomination Committee The Nomination Committee is responsible for ensuring the Board is composed of Directors who contribute to the successful management of the company, ensuring formal review of the performance of the Board, individual Directors and the Board’s committees and ensuring effective induction and training programmes are in place for new and existing Directors.

The members of the Nomination Committee are Bryan Mogridge (Chairman), Peter Maire and Warren Robinson.

Directors’ Report

Bryan Mogridge

Brent Robinson

The Directors are responsible for ensuring that the financial statements give a true and fair view of the financial position of the Company and the Group as at 31 March 2006 and their financial performance and cash flows for the year ended on that date.

The Directors consider that the financial statements of the Company and the Group have been prepared using appropriate accounting policies, consistently applied and supported by reasonable judgments and estimates and that all relevant financial reporting and accounting standards have been followed.

The Directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Company and Group and facilitate compliance of the financial statements with the Financial Reporting Act 1993.

The Directors consider they have taken adequate steps to safeguard the assets of the Company and the Group and to prevent and detect fraud and other irregularities.

The Directors note there has not been any material change in the nature of the business undertaken by the Company and the Group in the past year.

The Directors have pleasure in presenting the financial statements set out in pages 21 to 41, of Rakon Limited and subsidiaries for the year 1 April 2005 to 31 March 2006.

by $3.0 million (4.1%). The net surplus after tax increased by 65.0%, from $2.9 million to $4.8 million. The increase resulted from improved sales mix and lower material and labour costs.

Rakon improved its financial position with shareholders’ equity of $24.0 million, funding 48.9% of total assets as at 31 March 2006. Net cash flow from operations was $9.7 million up from $3.8 million last year. This increase resulted primarily from the improved operating surplus and lower inventory.

A dividend of $1.6 million was paid in July 2005 as part of a capital restructuring of the Company. Consistent with Policy adopted by the Board since this date the Board declared that no further dividend would be paid.

Donations & Audit Fees The Group made donations totaling $1,123 during the past year. Amounts paid to PricewaterhouseCoopers for audit services and for other services are shown in notes 3 and 17 of the Financial Statements.

Other Statutory Information Additional information required by the Companies Act 1993 is set out in Shareholder Information.

Retirement of Directors Mr Warren Robinson and Mr Darren Robinson retire by rotation, and being eligible offer themselves for re-election.

On behalf of the Directors

The Board of Directors of Rakon Limited and subsidiaries authorised these financial statements for issue on 25 May 2006.

Financial Results Sales for the year were $74.4 million, up on the previous year

B W Mogridge Chairman

B J Robinson Managing Director

17

Management

Executive Management Team Brent Robinson Managing Director

27 years

Darren Robinson Marketing Director

16 years

Graham Leaming Chief Financial Officer David Grant General Manager – Operations Hugh Tucker General Manager – Global Sales

7 months 7 years 7 months

Brian Karl Product Manager – IT & Crystal Products

6 years

Graham Ockleston Product Manager – New Products

2 years

Michael McIlroy Engineering Manager – Crystal Products

14 years

Oleg Sheynin Engineering Manager – Oscillators

6 years

Phil Brownlie Engineering Manager – Equipment

13 years

Malcolm Leuchars Human Resources Manager

6 months

Regional Market Managers Dean Ransom North America Dee Shahidi Asia Sinan Altug Europe

4 years 12 years 4 years

Rakon has a strong management team and expert staff across all functions. Many of Rakon’s key management and staff have been with the Company for a number of years and contributed strongly to Rakon’s past success. Three of these individuals are profiled below.

Sinan Altug Director of Applications, Manager – Europe Sinan has over 10 years experience in the industry spanning US and Europe. Sinan joined Rakon in 2002 as Director of Applications working out of Rakon’s Chicago marketing office and now runs the recently established European marketing office. Prior to joining Rakon, Sinan was the Director of Operations for Champion Technologies (a US manufacturer of frequency control products).

The Rakon overseas marketing offices offer highly technical and commercial expertise to customers, so that products can be selected or developed that best meet their requirements.

Sinan and other Rakon staff in these offices have been key in understanding end customer requirements resulting in diversification of Rakon’s products and product range.

Sinan holds BS, MS and PhD degrees in Electrical Engineering, and holds a Master of Business Administration (MBA).

18

Ravi Ramalingam Manufacturing Manager Ravi has over 10 years experience at Rakon and has seen the team grow from around one hundred, to what it has become today (currently almost 500 staff ). He credits the initial small team size as giving him the opportunity to understand the whole business.

“Growth brings its own challenges. Business systems needed to be revamped to meet these challenges. We rely on our staff so much. Personally I have learnt a lot about the nature of our business, customers and staff. I still continue to learn”.

The production team is constantly striving to achieve zero defects at the customers end. They help Rakon to grow year after year by increasing volume without compromising quality.

Ravi says the focus is to make improvements in quality and productivity and to pass these benefits to customers.

Ravi has a first class Bachelor of Engineering Degree, a Post Graduate Diploma in Operations Management, is a member of the New Zealand Institute of Management and holds certification as a Quality Manager from the New Zealand Organisation for Quality.

Michael McIlroy Engineering Manager - Crystal Products Michael has been with Rakon for over 14 years. Michael has a wide perspective of the business having held a range of positions within the Company covering Production Management, Prototyping Engineering Management and Software Systems Development before taking on his existing role.

The Crystal Engineering department has developed high performing products and are a strong technical support team.

Within the Crystal Engineering department achievements have included the development of a 3.2mmx2.5mm SMD strip crystal resonator, and the development of a Rakon Patented Acceleration Tolerant SMD strip crystal resonator. The Crystal Engineering team have achieved production of SMD strip crystal resonators at a highly competitive quality and performance level.

Michael has a Bachelor of Science Degree in Physics and Electronics.

“At Rakon I enjoy the fast paced environment. Our products and end-user applications are continuously evolving, and Rakon has a dynamic business environment to match this...no two days are the same.”

“We have a dedicated Rakon team. Long days and nights are spent co-ordinating business and keeping in touch across the globe”.

Sinan Altug

“Customers are not just looking for products to be delivered on time or to meet their specification. At Rakon we listen to their requirements and aim to support them fully by being flexible as well as providing consistent quality”.

“The technology and people make the whole place more vibrant. At Rakon we are continually faced with challenges which open up new avenues for improvement and creativity”.

“Growth brings its own challenges... at Rakon learning is continuous”.

Ravi Ramalingam

“Our Engineering team has a broad range of skills, knowledge and experience which is coupled with an enthusiasm to produce the best products possible”.

“Rakon is a Company where a fascinating mix of technical fields are used and required such as Electronic, Mechanical, Materials, and Chemical Engineering, as well as Physics, Mathematics and Software Development”.

Michael McIlroy

19

Financials

Statements of Financial Performance For the year ended 31 March 2006

Group

Parent

2006

2005

2006

2005

Note

($000s)

($000s)

($000s)

($000s)

2 3

74,371 (67,124)

71,422 (67,128)

74,370 (67,228)

71,419 (67,344)

11

7,247 (2,445)

4,294 (1,384)

7,142 (2,434)

4,075 (1,370)

8

4,802 -

2,910 -

4,708 -

2,705 -

Net surplus attributable to parent Shareholders

4,802

2,910

4,708

2,705

Operating surplus comprises: Operating surplus from continuing activities Operating surplus from discontinued activities

4,802 -

2,899 11

4,708 -

2,705 -

4,802

2,910

4,708

2,705

Operating revenue Operating expenses Operating surplus before income tax Income tax Operating surplus after income tax Net surplus attributable to minority interests

The accompanying notes form an integral part of these ďŹ nancial statements.

Statements of Movements in Equity For the year ended 31 March 2006

Group Note

Equity at beginning of the year Recognised revenues and expenses Net surplus after tax and minority interests Total recognised revenues and expenses Other movements Capitalisation of Shareholders’ loan Distributions to owners Movements in minority interests

Equity at end of the year

5

4 6 8

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

7,957

5,058

7,922

5,217

4,802

2,910

4,708

2,705

4,802

2,910

4,708

2,705

12,886 (1,600) -

(11)

12,866 (1,600) -

-

11,286

(11)

11,286

-

24,045

7,957

23,916

7,922

The accompanying notes form an integral part of these ďŹ nancial statements.

21

Statements of Financial Position As at 31 March 2006

Group

Parent

2006

2005

2006

2005

Note

($000s)

($000s)

($000s)

($000s)

17 16

853 13,614 19,735

704 12,567 21,117

803 13,585 19,735

677 12,733 21,116

34,202

34,388

34,123

34,526

14,880 118

12,513 -

14,879 118

12,512 -

Total non-current assets

14,998

12,513

14,997

12,512

Total assets

49,200

46,901

49,120

47,038

6,901 1,314 8,940

3,440 497 8,091

6,901 1,314 8,989

3,538 497 8,165

17,155

12,028

17,204

12,200

8,000 -

26,751 165

8,000 -

26,751 165

8,000

26,916

8,000

26,916

Total liabilities

25,155

38,944

25,204

39,116

Net assets

24,045

7,957

23,916

7,922

Share capital Retained earnings

13,136 10,909

250 7,707

13,136 10,780

250 7,672

Total equity

24,045

7,957

23,916

7,922

Assets Current assets Cash and bank Accounts receivable Inventory Total current assets Non-current assets Property, plant and equipment Deferred tax

Liabilities Current liabilities Bank overdraft Borrowings Payables and accruals

14 10

9 9 12

Total current liabilities Non-current liabilities Borrowings Deferred tax Total non-current liabilities

9 10

Equity

The accompanying notes form an integral part of these ďŹ nancial statements.

22

Statements of Cash Flows For the year ended 31 March 2006

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

75,639 62 -

67,750 36 1 819

75,829 61 -

68,215 36 1 833

75,701

68,606

75,890

69,085

(42,469) (18,739) (203) (1,444) (3,121)

(42,366) (20,326) (2,065) -

(43,071) (18,304) (203) (1,444) (3,111)

(43,417) (19,872) (2,061) -

(65,976)

(64,757)

(66,133)

(65,350)

9,725

3,849

9,757

3,735

Investing activities Cash was applied to Purchase of property, plant and equipment

(5,395)

(2,853)

(5,391)

(2,847)

Net cash flow from investing activities

(5,395)

(2,853)

(5,391)

(2,847)

11,264

-

11,387

-

11,264

-

11,387

-

(15,621) (915) (492) (1,600)

(1,363) -

(15,620) (915) (492) (1,600)

(1,204) -

(18,628)

(1,363)

(18,627)

(1,204)

Net cash flow from financing activities

(7,364)

(1,363)

(7,240)

(1,204)

Net decrease in cash held Foreign currency translation adjustment Cash at the beginning of the year

(3,034) (278) (2,736)

(367) (836) (1,533)

(2,874) (363) (2,861)

(316) (836) (1,709)

Cash at the end of the year

(6,048)

(2,736)

(6,098)

(2,861)

Composition of cash Cash and bank balances Bank overdraft

853 (6,901)

704 (3,440)

803 (6,901)

677 (3,538)

(6,048)

(2,736)

(6,098)

(2,861)

Operating activities Cash was provided from Receipts from customers Interest received Dividends received Income tax refunds

Cash was applied to Payments to suppliers and others Payments to employees Finance lease charges Interest paid Income tax paid

Net cash flow from operating activities

Financing activities Cash was provided from Proceeds from borrowings

Cash was applied to Repayment of principal on borrowings Finance lease principal payments IPO costs paid Dividends paid to Shareholders

The accompanying notes form an integral part of these financial statements.

23

Statements of Cash Flows For the year ended 31 March 2006

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Reported surplus after tax

4,802

2,910

4,708

2,705

Items not involving cash flow Depreciation expense Gain in liquidation of Australian subsidiary Increase in estimated doubtful debts Movement in foreign currency Deferred tax Loss on disposal of property, plant and equipment

2,958 158 489 (283) 74

2,412 (11) 836 570 -

2,953 158 574 (283) 74

2,405 (11) 836 569 -

3,396

3,807

3,476

3,799

468 1,381 (141) 188 37 (406)

(1,988) (2,351) 426 (1,502) 914 1,633

658 1,381 (140) 41 37 (404)

(1,715) (2,328) 390 (1,663) 914 1,663

1,527

(2,868)

1,573

(2,769)

9,725

3,849

9,757

3,735

Reconciliation of operating surplus to net cash flows from operating activities

Impact of changes in working capital items Accounts receivable Inventory Prepayments Trade creditors and accruals GST receivable Tax provisions

Net cash flow from operating activities

The accompanying notes form an integral part of these financial statements.

24

Statements of Accounting Policies For the year ended 31 March 2006 Reporting entity The financial statements are for the economic entity comprising Rakon Limited and its subsidiaries. Rakon Limited is a company registered under the Companies Act 1993.

Basis of preparation The financial statements have been prepared in accordance with the requirements of the Financial Reporting Act 1993 and the Companies Act 1993.

The reporting currency used in the preparation of these financial statements is New Zealand dollars.

The financial statements have been prepared on the historical cost basis. The following specific accounting policies have been applied.

Accounting policies The financial statements are prepared in accordance with New Zealand Generally Accepted Accounting Practice.

Basis of consolidation The consolidated financial statements and the financial statements of subsidiaries have been prepared using the purchase method. All material Intercompany transactions between Group companies have been eliminated. The accounting policies for the subsidiaries are consistent with the policies adopted by the Parent company. Subsidiaries are listed in note 15.

Subsidiaries Subsidiaries are companies that are controlled, either directly or indirectly by the Parent.

Revenue Goods and services Sales revenue comprises the amounts received and receivable for goods and services supplied to customers in the ordinary course of business. Sales are made on ex-works basis and recognised on dispatch with the exception of consignment stock sales that are recognised on a drawdown basis.

Investment income Dividend income is recognised in the period the dividend is declared. Interest and rental income are accounted for as earned.

Foreign currency translation Transactions Transactions denominated in a foreign currency are converted to New Zealand dollars at the exchange rates in effect at the date of the transaction. Where short term forward currency contracts have been taken out, the contract is valued on a mark to market basis and the corresponding asset or liability recognised in the statement of financial position. Gains and losses on the valuation of forward currency contracts are recognised in the statement of financial performance.

Monetary assets and liabilities arising from trading transactions are translated at closing rates. Gains and losses due to currency fluctuations on these items are included in the statement of financial performance.

Foreign operations Integrated overseas subsidiaries are translated to New Zealand dollars in the same manner as if all transactions of the foreign operation had been entered into by the Parent and Group itself.

Goods and Services Tax (GST) All items in the statement of financial performance are net of GST. All items in the statement of financial position are stated net of GST, with the exception of receivables and payables, which include GST invoiced.

Inventory Finished goods, raw materials, stores and work in progress are stated at the lower of cost and net realisable value. Costs have been assigned to inventory quantities on hand at balance date using the first in first out basis. Costs comprise of direct materials and direct labour together with an appropriate portion of fixed and variable production overheads.

Accounts receivable Accounts receivable are carried at estimated realisable value after providing against debts where collection is doubtful.

Property, plant and equipment Property, plant and equipment are recorded at historical cost, being the value of the consideration given to acquire the assets.

Assets under construction are recorded as capital work in progress. Depreciation is applied once these assets are complete and transferred to appropriate asset category.

25

Depreciation is calculated on a straight line basis using the rates detailed below.

Building Property Improvements

10% 3.6 - 16.9%

Computer Hardware

36.0%

Computer Software

36.0%

Plant and Equipment Motor Vehicles Fixtures and Fittings Capital Work in Progress

5.0 - 8.33% 21.6%

Leased assets Finance leases Assets under finance leases are recognised as non-current assets in the statement of financial position. Leased assets are recognised initially at the lower of the present value of the minimum lease payments or their fair value. A corresponding liability is established and each lease payment allocated between the liability and interest expense. Leased assets are depreciated on the same basis as equivalent property, plant and equipment.

7.4 - 48.0% Nil

Asset lives are reviewed annually. All major spare parts held for specific machinery are capitalised and depreciated on the same basis as the specific machinery for which they are held.

Impairment Annually, the Directors assess the carrying value of each asset. Where the estimated recoverable amount of the asset is less than its carrying amount, the asset is written down. The impairment loss is recognised in the statement of financial performance.

Distinction between capital and revenue expenditure Capital expenditure is defined as all expenditure on the creation of a new asset and any expenditure which increases the economic benefits over the total life of an existing asset.

Revenue expenditure is defined as expenditure which restores an asset to its original condition and all expenditure incurred in maintaining and operating Rakon’s activities.

Statement of cash flows The following are the definitions of the terms used in the statement of cash flows: a) Operating activities include all transactions and other events that are not investing or financing activities. b) Investing activities are those that are related to holding and disposal of assets and investments. c) Financing activities are those that result in changes in the size and composition of the capital structure. This includes both debt and equity not falling within the definition of cash.

26

d) Cash is considered to be cash on hand and current accounts in bank, net of bank overdraft.

Operating leases Leases that are not finance leases are classified as operating leases. Operating lease payments are recognised as an expense in the periods the amounts are payable.

Income tax Income tax expense recognised for the year is based on the accounting surplus, adjusted for permanent differences between accounting and tax rules.

The impact of timing difference between accounting and taxable income is recognised as a deferred tax liability or asset. This is the comprehensive basis for the calculation of deferred tax under the liability method.

A deferred tax asset or the effect of the losses carried forward that exceed the deferred tax liability, is recognised in the financial statements only where there is a virtual certainty that the benefit of the timing differences, or losses, will be utilised.

Research and development All research costs are recognised as an expense when incurred. When a project reaches the stage where it is reasonably certain that future expenditure can be recovered through the process or products produced, development expenditure is recognised as a development asset. The asset is amortised from the commencement of commercial production or use of the product to which it relates on a straight line basis over the period of expected benefit.

Employee entitlements Employee entitlements to salaries and wages, annual leave, long service leave and other benefits are recognised when they accrue to employees. The liability for employee entitlements is carried at the present value of the estimated future cash outflows.

Financial instruments Recognised Financial instruments carried on the statement of financial position include bank balances, trade receivables, trade creditors and borrowings. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item.

Financial instruments that are designated as hedges of specific items are recognised on the same basis as the underlying hedged items.

Where short term forward currency contracts have been taken out, the contract is valued on a mark to market basis and the corresponding asset or liability recognised in the statement of financial position. Gains and losses on the valuation of forward currency contracts are recognised in the statement of financial performance.

Unrecognised The net differential paid or received on interest swap is recognised as a component of interest expense or revenue over the period of the agreement.

Adoption of International Financial Reporting Standards In December 2002 the New Zealand Accounting Standards Review Board announced that reporting entities would be required to comply with New Zealand equivalents of International Financial Reporting Standards (NZ IFRS) for financial statements covering annual reporting periods starting on or after 1 January 2007, with earlier adoption for periods starting on or after 1 January 2005 permitted. In the case of Rakon Limited and subsidiaries (Rakon), the first financial year for which fully compliant financial statements must be produced will be for the year commencing on 1 April 2007 (and ending 31 March 2008) at which time the comparative figures for the previous year will also be restated to comply with NZ IFRS.

to changes in the standards, changes in the Company, or changes in management’s interpretation of the standards.

At the date these financial statements were issued Rakon had not performed any further analysis of the differences between NZ IFRS and current New Zealand Financial Reporting Standards and as such cannot determine if there will be a significant impact on the financial statements presented by Rakon. A project will be initiated within the coming months to identify the full implications of NZ IFRS on Rakon and to prepare for the implementation of systems to capture the necessary information to comply with the new standards.

As the Company progresses toward 1 April 2007, Rakon will continue to provide users of the financial statements with updated information about the likely impacts of NZ IFRS on Rakon’s earnings, cash flows and financial position.

Comparatives Certain prior year comparative figures have been reclassified to conform to the current year’s presentation.

Accounting policies There have been no changes in accounting policies during the year.

Although early implementation is an option, the Board of Directors has determined that Rakon will adopt NZ IFRS for the first time in its reports to shareholders for the year ending 31 March 2008.

The Board has considered the impact of NZ IFRS as regards to the appropriate functional currency for Rakon and determined that Rakon should continue to report using NZ dollars as its functional currency when it adopts NZ IFRS. This is based on management’s current interpretation of the standards that have been released to date. There is potential for the significance of the impact to change when Rakon prepares its first set of NZ IFRS financial statements due 27

Notes to the Financial Statements For the year ended 31 March 2006

1. Segment information The Group operates in one industry, namely the development and manufacture of electronic components for timing reference and frequency control in GPS and Microwave Communications.

The Group operates from one geographic segment being New Zealand. For sales by geographic regions refer to note 2.

2. Operating revenue Trading revenue by region

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

40,217 23,270 8,038 2,784

33,944 26,071 6,994 4,365

40,217 23,270 8,038 2,784

33,944 26,071 6,994 4,362

74,309

71,374

74,309

71,371

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Continuing activities Trading revenue Dividends Interest Other Income

74,309 62 -

71,374 1 36 -

74,309 61 -

71,371 1 36 11

Total revenue from continuing activities

74,371

71,411

74,370

71,419

Discontinued activities Gain on liquidation of Australian subsidiary

-

11

-

-

Total revenue from discontinued activities

-

11

-

-

74,371

71,422

74,370

71,419

Asia North America Europe Others

Group

Operating revenue

Total operating revenue

Parent

Discontinued activities In the previous ďŹ nancial year, the Australian subsidiary, Rakon Australia (Pty) Limited was liquidated. There was no trading revenue from that entity for the year ended 31 March 2005. The liquidation resulted in $11,000 gain to the Group in the previous ďŹ nancial year. There were no expenses to disclose in note 3.

28

3. Operating expenses

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Operating expenses Include : Continuing activities Depreciation of property, plant and equipment Buildings Leasehold improvements Plant and equipment Motor vehicles Furniture and fittings Computer hardware Computer software

1 193 1,954 4 50 320 436

201 1,568 5 57 336 245

1 192 1,954 4 49 317 436

201 1,568 5 57 329 245

Total depreciation

2,958

2,412

2,953

2,405

Loss on disposal of plant and equipment Rental costs Research and development expense Net foreign currency loss / (gain) Directors’ fees Donations

74 1,114 129 (20) 67 1

1,894 261 836 2

74 917 129 64 67 1

1,848 261 836 2

Costs of offering credit Bad debts written off Increase/(decrease) in estimated doubtful debts

62 158

39 (25)

62 158

39 (25)

Cost of borrowings Interest Financing charge related to finance leases Interest and break fee charge on change of bank

1,386 203 144

2,009 -

1,386 203 144

2,005 -

79 4

70 4

79 -

70 -

Audit fees Audit fee paid to principal auditors Audit fee paid to other auditors

Research and development expense includes cost of material but excludes the cost of internal labour.

29

4. Share capital

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Issued and paid up capital Ordinary shares Balance at beginning of year Shares issued for capitalised shareholders’ loan

250 12,886

250 -

250 12,886

250 -

Balance at end of year

13,136

250

13,136

250

On 19 October 2005, shareholder loans were capitalised and 68,377 ordinary shares were issued at $188.46 per share. On 17 March 2,759 shares were issued under a Management Share Ownership Plan at $188.46 per share. At 31 March 2006 there were 318,377 ordinary shares issued and fully paid (31 March 2005: 250,000) and 2,759 ordinary shares issued and unpaid. All ordinary shares rank equally with one vote attached to each fully paid ordinary share.

5. Retained earnings

Group 2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Balance at beginning of year Net surplus for the year Dividends paid

7,707 4,802 (1,600)

4,797 2,910 -

7,672 4,708 (1,600)

4,967 2,705 -

Balance at end of year

10,909

7,707

10,780

7,672

6. Dividends

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Ordinary dividends Declared ďŹ nal On ordinary shares: Cash

1,600

-

1,600

-

Total dividends

1,600

-

1,600

-

The dividends were fully imputed.

30

Parent

2006

7. Imputation balances

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Imputation credit account Balance at beginning of year Tax payments, net of refunds Imputation credits attached to dividends paid

3,051 3,119 (788)

2,874 177 -

3,051 3,119 (788)

2,874 177 -

Balance at end of year

5,382

3,051

5,382

3,051

As at 16 May 2006 the outstanding imputation credits will not be able to be utilised by Rakon.

8. Minority interests

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Balance at beginning of year Movement in minority interest

-

11 (11)

-

-

Balance at the end of the year

-

-

-

-

9. Borrowings and bank overdraft

Borrowings due within 12 months Capitalised lease obligations (note 13) Owing to Directors Owing to related parties

Non-current borrowings Borrowings Owing to related parties

Bank overdraft due within 12 months

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

1,314 -

57 440

1,314 -

57 440

1,314

497

1,314

497

8,000 -

15,000 11,751

8,000 -

15,000 11,751

8,000

26,751

8,000

26,751

6,901

3,440

6,901

3,538

Security Bank loans and overdraft The bank overdraft is secured by ďŹ rst mortgage over all the undertakings of Rakon Limited and any other wholly owned present and future subsidiaries.

Capitalised lease obligation Capitalised lease obligations are secured over the property under lease.

Directors’ loans Loans from Directors and related parties are unsecured.

31

Interest rates The weighted average interest rate on amounts owing to related parties excludes the advance from Ahuareka Trust which was advanced on an interest free basis.

Group 2005

2006

2005

($000s)

($000s)

($000s)

($000s)

8.29% 9.69%

8.90% 8.78%

8.29% 9.69%

8.90% 8.78%

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

(165) 283

(7) (158)

(165) 283

(7) (158)

118

(165)

118

(165)

Unrecognised tax losses available Balance at beginning of year Losses utilised

-

411 (411)

-

411 (411)

Balance at end of year

-

-

-

-

Weighted average effective interest rates on borrowings Borrowings and bank overdraft Owing to related parties

10. Deferred tax

Balance at beginning of year On surplus for the year Balance at end of year

Group

11. Income tax

32

Parent

2006

Parent

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

Operating surplus before tax Permanent differences

7,247 244

4,294 88

7,142 234

4,075 78

Surplus subject to tax Tax at 33% Foreign tax credit

7,491 2,472 (27)

4,382 1,446 (62)

7,376 2,434 -

4,153 1,370 -

Income tax recognised in statement of financial performance

2,445

1,384

2,434

1,370

Attributable to continuing activities Attributable to discontinued activities

2,445 -

1,384 -

2,434 -

1,370 -

Total tax expense recognised for the year

2,445

1,384

2,434

1,370

Comprising: Estimated current year tax assessment Deferred tax asset

2,728 (283)

1,226 158

2,717 (283)

1,212 158

2,445

1,384

2.434

1,370

12. Payables and accruals

Trade creditors Employee entitlements Accrued expenses Payable to related parties Income tax payable

Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

4,069 1,511 2,953 407

4,940 1,161 954 223 813

4,069 1,511 2,896 117 396

4,939 1,161 1,042 223 800

8,940

8,091

8,989

8,165

13. Commitments The following amounts have been committed by the Group or Parent, but not recognised in the financial statements: Group

Operating leases Non-cancellable operating lease commitments: Within one year Later than one, not later than two years Later than two, not later than five years More than five years

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

637 688 1,845 2,560

354 125 15 -

621 686 1,845 2,560

354 125 15 -

5,730

494

5,712

494

The Group leases premises, and plant and equipment. Operating leases held over properties give Rakon Limited the right to renew the lease subject to a redetermination of the lease rental by the lessor. There are no other renewal options or options to purchase in respect of premises, plant and equipment held under operating and finance leases.

Group

Finance leases Non-cancellable finance lease commitments: Within one year Later than one, not later than two years Later than two, not later than five years More than five years

Capital expenditure Amounts committed to capital expenditure

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

1,314 -

-

1,314 -

-

1,314

-

1,314

-

117

-

117

-

33

14. Property, plant and equipment

2006 Accumulated Cost ($000s)

Depreciation ($000s)

2005 Accumulated Book value ($000s)

Cost ($000s)

Depreciation ($000s)

Book value ($000s)

Group Plant and equipment Capital finance lease assets

27,676 2,229

18,298 154

9,378 2,075

25,611 -

16,498 -

9,113 -

Total plant and equipment

29,905

18,452

11,453

25,611

16,498

9,113

Leasehold improvements Buildings Motor vehicles Furniture and fittings Computer hardware Computer software Capital work in progress

2,755 28 32 800 2,140 2,614 1,120

1,761 1 26 585 1,711 1,978 -

994 27 6 215 429 636 1,120

2,689 32 766 1,844 2,424 714

1,568 22 546 1,391 1,542 -

1,121 10 220 453 882 714

39,394

24,514

14,880

34,080

21,567

12,513

2006 Accumulated Cost ($000s)

Depreciation ($000s)

2005 Accumulated Book value ($000s)

Cost ($000s)

Depreciation ($000s)

Book value ($000s)

Parent Plant and equipment Capital finance lease assets

27,676 2,229

18,298 154

9,378 2,075

25,611 -

16,498 -

9,113 -

Total plant and equipment

29,905

18,452

11,453

25,611

16,498

9,113

Leasehold improvements Buildings Motor vehicles Furniture and fittings Computer hardware Computer software Capital work in progress

2,751 28 32 797 2,109 2,614 1,120

1,758 1 26 584 1,678 1,978 -

993 27 6 213 431 636 1,120

2,689 32 766 1,822 2,424 714

1,568 22 546 1,370 1,542 -

1,121 10 220 452 882 714

39,356

24,477

14,879

34,058

21,546

12,512

15. Investment in subsidiaries Significant subsidiaries comprise: Name of entity

Rakon America LLC Rakon Singapore (Pte) Limited

Interest held by Group (%) Principal activities

2006

2005

Marketing support Marketing support

100 100

100 100

All subsidiaries have a balance date of 31 March.

In the previous financial year, the Australian subsidiary, Rakon Australia (Pty) Limited was liquidated. The liquidation resulted in a gain to the Group of $11,000. Rakon America LLC is incorporated in America. Rakon Singapore (Pte) Limited is incorporated in Singapore.

34

16. Inventory

Raw materials and stores Work in progress Finished goods

Group 2005

2006

2005

($000s)

($000s)

($000s)

($000s)

10,217 7,449 2,069

9,040 10,772 1,305

10,217 7,449 2,069

9,039 10,772 1,305

19,735

21,117

19,735

21,116

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

12,446 (158) 327 999

12,052 364 11 140

12,446 (158) 327 970

12,052 364 206 111

13,614

12,567

13,585

12,733

17. Accounts receivable

Trade receivables Provision for doubtful debts GST receivable Receivable from related parties Prepayments and other assets

Parent

2006

Group

Parent

Included within prepayments and other assets were deferred costs relating to Rakon’s initial public offering of $721,000 including $307,000 of fees to the Company’s auditors.

18. Financial instruments The Group is subject to a number of financial risks which arise as a result of its activities.

To manage and limit the effects of those financial risks, the Board of Directors has approved policy guidelines and authorised the use of various financial instruments. The policies approved, and financial instruments being utilised at balance date, are outlined below.

Currency risk Policies During the normal course of the business the Group exports products, and imports raw material and inventory. As a result of these transactions exposures to fluctuations in foreign currency exchange rates arise. The currencies in which the Group primarily deals are the United States Dollar and Japanese Yen. It is Group’s policy to enter into foreign currency forward contracts to manage the exposure to fluctuations in currency rates.

Unrecognised balances The notional or principal contract amounts of foreign exchange instruments outstanding at balance date are: Group and Parent

Forward foreign exchange contracts

2006

2005

($000s)

($000s)

24,008

1,404

The cash settlement requirement of the forward exchange contracts approximates the notional amounts shown above.

35

Interest rate risk Policies To manage interest expense appropriately, the Group engages fixed and variable loan facilities.

Rakon Limited uses interest rate swaps to manage its interest rate risk. These are entered for periods up to five years, with the level and maturity of core debt determining the proportion of fixed cover required to be maintained. The interest rate on borrowings is either converted from floating to fixed or vice-versa through entering into an interest rate swap.

Unrecognised balances The notional principal or contract amounts of interest rate contracts outstanding at balance date is: Group

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

5,000

5,000

5,000

5,000

Interest rate swaps

The cash settlement requirement for interest rate swaps as at 31 March 2006 net interest is nil (31 March 2005: $14,667). The maturity date of the interest rate swap is 16 May 2008.

Repricing analysis Trade receivables, trade creditors, sundry receivables and sundry payables have not been included in the following repricing analysis as they are not interest rate sensitive.

There are no repayment terms for the advances from related parties and the loan from the bank is a flexible facility and continues to rollover each year, therefore is not included in the repricing table. Bank balance with effective interest rate of 3.38% (31 March 2005: 3.75%) comprises predominantly US Dollar denominated funds.

Group - 2006 Effective interest rates

1-2 years ($000s)

2-5 years ($000s)

>5 years ($000s)

Total ($000s)

Asset Bank

3.38%

853

-

-

-

853

Liabilities Bank overdraft

8.29%

(6,901)

-

-

-

(6,901)

Unrecognised Interest rate swap

6.54%

5,000

5,000

5,000

-

15,000

(1,048)

5,000

5,000

-

8,952

Repricing gap

36

Current ($000s)

Group - 2005 Effective interest rates

Current ($000s)

1-2 years ($000s)

2-5 years ($000s)

>5 years ($000s)

Total ($000s)

Asset Bank

3.75%

704

-

-

-

704

Liabilities Bank overdraft

8.90%

(3,440)

-

-

-

(3,440)

Unrecognised Interest rate swap

6.54%

5,000

5,000

10,000

-

20,000

2,264

5,000

10,000

-

17,264

Repricing gap

Parent - 2006 Effective interest rates

Current ($000s)

1-2 years ($000s)

2-5 years ($000s)

>5 years ($000s)

Total ($000s)

Asset Bank

3.38%

803

-

-

-

803

Liabilities Bank overdraft

8.29%

(6,901)

-

-

-

(6,901)

Unrecognised Interest rate swap

6.54%

5,000

5,000

5,000

-

15,000

(1,098)

5,000

5,000

-

8,902

Repricing gap

Parent - 2005 Effective interest rates

Current ($000s)

1-2 years ($000s)

2-5 years ($000s)

>5 years ($000s)

Total ($000s)

Asset Bank

3.75%

677

-

-

-

677

Liabilities Bank overdraft

8.90%

(3,538)

-

-

-

(3,538)

Unrecognised Interest rate swap

6.54%

5,000

5,000

10,000

-

20,000

2,139

5,000

10,000

-

17,139

Repricing gap

Credit risk Rakon Limited incurs credit risk from transactions with trade receivables in the normal course of its business.

Rakon Limited has a credit policy which restricts exposure to individual trade receivables and the Board of Directors reviews exposure to trade receivables on a regular basis. The Group does not have any significant concentrations of credit risk. Amounts owed by trade receivables are unsecured.

37

Fair values Method and assumptions The following methods and assumptions are used to estimate the fair value of each class of ďŹ nancial instruments: Cash at bank, bank overdraft, term deposits, loans issued, receivables and trade creditors The carrying value of these items is equivalent to their fair value. As such, they have been excluded from the table below.

Borrowings Fair values of borrowings are estimated, based on current market interest rates available to the Group for debt of similar maturity at balance date.

Interest rates swap and foreign currency forward exchange contracts The above derivatives are based on valuations provided by the Group’s bankers at balance date.

Fair value summary

Group and Parent 2006

Liabilities Current borrowings Non-current borrowings Foreign exchange contracts Unrecognised Interest rate swaps

2005

Carrying Value

Fair Value

Carrying Value

Fair Value

($000s)

($000s)

($000s)

($000s)

(1,314) (8,000) (1,079)

(1,314) (8,000) (1,079)

(497) (26,751) (16)

(497) (26,751) (16)

-

186

-

363

19. Currency The following currency conversion rates have been applied at balance date:

NZ$1.00 = USD JPY AUD GBP SGD EUR

38

Group and Parent 2006

2005

($000s)

($000s)

0.6121 71.8200 0.8563 0.3503 0.9905 0.5035

0.7091 76.2300 0.9196 0.3773 1.1706 0.5482

Unhedged foreign currency monetary assets and liabilities At balance date, the company had the following unhedged foreign currency monetary assets and liabilities: Group

Asset Euro British Pounds Australian Dollars US Dollars Liabilities Japanese Yen

Parent

2006

2005

2006

2005

($000s)

($000s)

($000s)

($000s)

15 23 2 -

14 8 147 7,503

15 23 2 -

14 8 147 1,553

-

1,288

-

1,308

20. Contingent liabilities At 31 March 2006 there were no contingent liabilities. (31 March 2005: nil).

21. Related party information General In October 2005, Rise Holdings Limited (formerly Rakon Holdings Limited) sold 63,675 shares to Tahia Investments (53,062 shares) and Zeus Zeta Limited (10,613 shares). Also in October 2005, shareholders’ loans amounting to $12,886,009 were capitalised and additional 68,377 ordinary shares were issued to the Ahuareka Trust. In November 2005, Rise Holdings Limited, the former major Shareholder of Rakon Limited was liquidated and the shares in Rakon Limited were transferred to Ahuareka Trust.

At 31 March 2006, Ahuareka Trust owns 60% (31 March 2005: indirectly 80%) of the ordinary shares in Rakon Limited. The balance is owned by Tahia Investments Limited 17% (31 March 2005: nil), BJ Robinson 10% (31 March 2005: 10%), DP Robinson 10% (31 March 2005: 10%) and Zeus Zeta Limited 3% (31 March 2005: nil).

Related party transactions and balances Advances Ahuareka Trust advanced monies to Rakon Limited on an interest free basis. The outstanding advance was repaid in full on 31 March 2006 (2005: $11,794,992).

Sigma Electronics Limited, a wholly owned company of Ahuareka Trust, advanced monies to Rakon Limited. The outstanding advance was repaid in full on 31 March 2006 (31 March 2005: $75,787). Interest was charged at 90 day bank bill rate plus an additional 2.25% on an interest only basis. Interest charged to 31 March 2006 $7,230 (31 March 2005: $6,647).

Directors’ advances Certain advances from Directors attract interest at 90 day bank bill rate plus an additional 2.25% and the majority is repayable on flexible terms that extend to a period over twelve months. Advances to the Directors attract interest at fringe benefit tax rate. The outstanding advance balance was paid in full at the end of current year (31 March 2005 payable by Rakon: BJ Robinson $47,114, DP Robinson $10,269). Net interest charges for the year ended 31 March 2006 were: BJ Robinson $3,339 paid (31 March 2005: $10,940 paid) and DP Robinson $1,499 received (31 March 2005: $10,493 paid).

Other related transactions Rakon Limited provides accounting and administrative services to Rakon America LLC, Rakon Singapore (Pte) Limited, Sigma Electronics Limited, Trident Investments Limited and Ahuareka Trust free of charge.

Rakon Limited leases premises from Trident Investments Limited, a Robinson family company. Normal commercial lease

39

agreements are in place for the premises. The lease costs charged by Trident Investments Limited to Rakon Limited for the year is $557,000 (31 March 2005: $570,000).

No amounts owed by related parties have been written off or forgiven during the year.

22. Management Share Ownership Plan Rakon Limited has established a Share Purchase Plan to enable selected managers of Rakon Limited to acquire shares in the Company through the Plan Trustee, Rakon ESOP Trustee Limited. Under the Share Purchase Plan, Rakon offered selected managers the opportunity to acquire shares at deemed market value established by the purchase price paid for the sale of shares from Rise Holdings Limited to Tahia Investments Limited and Zeus Zeta Limited in October 2005. Rakon Limited will loan participating managers the purchase price of the shares offered on an interest-free limited recourse basis.

Under the terms of the Share Purchase Plan, 2,759 ordinary shares were issued to Rakon ESOP Trustee Limited to hold on behalf of the participating managers on 17 March 2006. All shares issued to Rakon ESOP Trustee Limited have been allocated. The shares rank equally in all respects with all other ordinary shares issued by the Company. The selected managers may exercise voting rights attached to the shares by directing the Trustee in writing to vote on his or her behalf. In the absence of any written direction the Trustee may exercise voting rights as it considers appropriate in its absolute discretion. No amounts have been paid up on the shares. The total aggregate amount to be loaned by Rakon Limited to the participating managers is $520,000 subsequent to 31 March 2006. No repayments of this loan have been received.

Shares issued under the Share Purchase Plan are held on trust by Rakon ESOP Trustee Limited. The shares cannot be sold or otherwise dealt with by the participating managers for a period of 18 months from the date of issue. At any time after the end of this period the participating manager may request the Trustee to transfer the relevant shares to him or her. The Trustee will not transfer the Shares to a participating manager until the loan to that manager has been repaid in full.

The Company may remove and appoint trustees at any time. The Directors and Shareholders of Rakon ESOP Trustee Limited are Bryan Mogridge and Bruce Irvine.

Shares held by the Share Purchase Plan represent approximately 0.86% of the Company’s total shares on issue as at balance date (2005: nil).

23. Comparison against Prospectus Forecast The following is a comparison of the actual financial performance for the Group compared to the forecast as per the Group’s prospectus for the year ended 31 March 2006 and the financial position as at that date.

Group

Group

Actual

Forecast

2006

2006

($000s)

($000s)

Summary statement of financial performance Operating revenue

74,371

73,291

Operating surplus before income tax Income tax

7,247 (2,445)

6,685 (2,290)

4,802

4,395

Operating surplus after income tax

Operating revenue is slightly ahead of forecast results due to the substantial weakening in the NZ$/US$ exchange rate during March and higher than forecast sales of consignment stock.

Operating surplus before income tax and net surplus are both up as a result of the increase in operating revenue.

40

Group

Group

Actual

Forecast

2006

2006

($000s)

($000s)

Summary statement of financial performance Total equity Total non-current liabilities Total current liabilities

24,045 8,000 17,155

24,162 8,502 16,845

Total equity and liabilities

49,200

49,509

Total non-current assets Total current assets

14,998 34,202

16,131 33,378

Total assets

49,200

49,509

Total equity is in line with forecast, higher earnings were offset by the impact of accounting for shares issued under the Management Share Ownership Plan.

Total non-current liabilities are below forecast due to the deferred tax balance being in debit rather than credit balance at year end.

Total current liabilities are fractionally higher than forecast due to the timing of creditor payments.

Total non-current assets are below forecast due to the timing of capital expenditure and the impact of accounting for shares issued under the Management Share Ownership Plan.

Total current assets are above forecast due to higher than forecast closing cash position.

Group

Group

Actual

Forecast

2006

2006

($000s)

($000s)

Cash flow summary Net cash flow from operating activities Net cash flow from investing activities Net cash flow from financing activities

9,725 (5,395) (7,364)

8,758 (6,065) (8,674)

Net decrease in cash

(3,034)

(5,981)

Net cash flow from operating activities is higher than forecast due to higher customer receipts.

Net cash flow applied to investing activities is lower than forecast due to the timing of capital expenditure.

Net cash flow applied to financing activities is lower than forecast due to classification of a finance lease arrangement.

24. Subsequent Events On 13 April 2006, Rakon undertook a share split of 311.394549 to 1. This resulted in the number of shares on issue increasing to 100 million shares of which 859,137 shares are held under the Management Share Ownership Plan.

On 16 May 2006, Rakon listed on the NZSX and simultaneously issued a further 6.25 million fully paid shares. Additionally 1.1 million partly paid shares and 1.9 million share options were issued to selected employees immediately preceding the listing.

41

Auditors’ Report to the shareholders of Rakon Limited We have audited the financial statements on pages 21 to 41. The financial statements provide information about the past financial performance and cash flows of the Company and Group for the year ended 31 March 2006 and their financial position as at that date.

This information is stated in accordance with the accounting policies set out on pages 25 to 27.

Directors’ Responsibilities The Company’s Directors are responsible for the preparation and presentation of the financial statements which give a true and fair view of the financial position of the Company and Group as at 31 March 2006 and their financial performance and cash flows for the year ended on that date.

Auditors’ Responsibilities We are responsible for expressing an independent opinion on the financial statements presented by the Directors and reporting our opinion to you.

Basis of Opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: (a) the significant estimates and judgements made by the Directors in the preparation of the financial statements; and (b) whether the accounting policies are appropriate to the circumstances of the Company and Group, consistently applied and adequately disclosed.

We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

We have no relationship with or interests in the Company or any of its subsidiaries other than in our capacities as auditors and transaction services advisers.

Unqualified Opinion We have obtained all the information and explanations we have required.

In our opinion: (a) proper accounting records have been kept by the Company as far as appears from our examination of those records; and (b) the financial statements on pages 21 to 41: (i) comply with generally accepted accounting practice in New Zealand; and (ii) give a true and fair view of the financial position of the Company and Group as at 31 March 2006 and their financial performance and cash flows for the year ended on that date.

Our audit was completed on 25 May 2006 and our unqualified opinion is expressed as at that date.

42

PricewaterhouseCoopers Chartered Accountants Auckland

43

Shareholder Information Directors Non-executive directors receive fees determined by the Board on the recommendation of the Remuneration Committee plus reasonable travelling, accommodation and other expenses incurred in the course of performing duties or exercising powers as Directors. Shareholders approved a total pool of $240,000 for the remuneration of non-executive directors in December 2005.

Annual Directors’ fees were set at $80,000 for the Chairman and $40,000 for each non-executive director with effect from 1 December 2005. Directors’ fees were not paid previous to this date.

Brent Robinson and Darren Robinson are employed by Rakon as Managing Director and Marketing Director respectively and receive salary and other remuneration and benefits in respect of their employment. Until the end of March 2006 Warren Robinson was also employed as a consultant for which he received a monthly fee of $3,000.

The following people held office or ceased to hold office as a Director during the year and received the following remuneration including benefits during the year.

Directors Name

Category

Remuneration

Current Director or Date Appointed or Resigned

Bryan Mogridge

Independent Chairman

$26,667

Appointed 18 November 2005

Brent Robinson

Executive

$105,980

Current

Darren Robinson

Executive

$110,355

Current

Warren Robinson

Non-executive

$91,877

Current

Peter Maire

Non-executive

$13,333

Appointed 18 November 2005

Bruce Irvine

Independent

$13,333

Appointed 18 November 2005

Marjorie Robinson

Non-executive

$0

Resigned 18 November 2005

Directors’ Interests Reflecting the listing of Rakon Limited on the NZX on 16 May 2006, disclosures of Directors interests include all disclosures made until 31 May 2006. Those disclosures made in the period 1 April 2006 to 31 May 2006 are denoted with an asterisk (*).

Tahia Investments Limited, Brent Robinson, Darren Robinson and Ahuareka Trustee Limited have each agreed that shares held by each of them cannot be transferred (except in limited circumstances) until 30 days after the date Rakon makes its preliminary announcement to NZSX for the financial year ending 31 March 2007.

Trident Investments Limited, a company associated with Warren Robinson, Brent Robinson and Darren Robinson have leased premises to Rakon on arms-length, commercial terms under Deeds of Lease dated 23 August 2005 between Rakon and Trident Investments Limited and will receive rental payments from Rakon.

As permitted by the Companies Act 1993, the Company has granted certain indemnities to the Directors and specified employees of the Company or any related company in respect of liability and legal costs incurred by those Directors and specified employees in their capacity as Directors and/or employees of the Company or any related company. As permitted by the Companies Act 1993, the Company has arranged a policy of Directors’ and Officers’ Liability Insurance which insures those persons indemnified for certain liabilities and costs.

44

In accordance with Section 140(2) of the Companies Act 1993 and Section 19(U) of the Securities Markets Act 1988, the Directors named below have made a general disclosure of interest, by a general notice disclosed to the Board and entered in the Company’s interests register. General notices were given by these Directors which remain current at 31 May 2006: Bryan William Mogridge Chairman & Director of: • Guardian Healthcare Limited • Momentum Energy Limited • Designworks Enterprises IG Limited • Waitakere City Holdings Limited • Enterprise Waitakere Director of: • Mainfreight Limited • Pyne Gould Corporation Limited • TRIO Print Limited • West Auckland Trust Services Limited Sole Shareholder & Director of: • Mogridge and Associates Limited Trustee & Beneficiary of: • Mogridge Family Trust Shareholder in: • Beneficial interest in 400,000 ordinary shares in Rakon Limited held by Bryan Mogridge.* • Non-beneficial interest in 859,137 ordinary shares in Rakon Limited, as director of trustee company Rakon ESOP Trustee Limited.

• Non-beneficial interest in 1,100,000 redeemable ordinary shares in Rakon Limited, as director of trustee company Rakon PPS Trustee Limited.* Brent John Robinson Shareholder in: • Beneficial interest in 31,838 ordinary shares in Rakon Limited as result of transfer by Ahuareka Trustee Limited.

• Beneficial interest in 9,914,180 ordinary shares in Rakon Limited, following share split of 31,838 ordinary shares at a ratio of 311.394549.* • Beneficial interest in 9,914,180 ordinary shares in Rakon Limited.* • Beneficial interest in 270,449 redeemable ordinary shares in Rakon Limited (Rakon PPS Trustee Limited as registered holder).*

• Beneficial interest in 24,060,024 ordinary shares in Rakon Limited (Ahuareka Trustee Limited as the registered holder).* Darren Paul Robinson Shareholder in: • Beneficial interest in 31,838 ordinary shares in Rakon Limited as result of transfer by Ahuareka Trustee Limited.

• Beneficial interest in 9,914,180 ordinary shares in Rakon Limited, following share split of 31,838 ordinary shares at a ratio of 311.394549.* • Beneficial interest in 9,914,180 ordinary shares in Rakon Limited.* • Beneficial interest in 234,043 redeemable ordinary shares in Rakon Limited (Rakon PPS Trustee Limited as registered holder).* • Beneficial interest in 24,060,024 ordinary shares in Rakon Limited (Ahuareka Trustee Limited as the registered holder).* Warren John Robinson Shareholder in: • Beneficial and non-beneficial interest in 134,962 ordinary shares in Rakon Limited held by Ahuareka Trustee Limited, as a result of the distribution in specie on liquidation of Rise Holdings Limited.

• Beneficial and non-beneficial interest in 128,124 ordinary shares in Rakon Limited held by Ahuareka Trustee Limited, as result of transfer to Brent Robinson.

• Beneficial and non-beneficial interest in 121,286 ordinary shares in Rakon Limited held by Ahuareka Trustee Limited, as result of transfer to Darren Robinson.

• Beneficial interest in 21,292,225 ordinary shares in Rakon Limited held by Simon Palmer as nominee for the Ahuareka Trust, following share split of 68,377 ordinary shares at a ratio of 311.394549.* • Beneficial and non-beneficial interest in 37,767,799 ordinary shares in Rakon Limited held by Ahuareka Trust, following share split of 121,286 ordinary shares at a ratio of 311.394549.* • Beneficial interest in 59,060,024 ordinary shares in Rakon Limited held by Ahuareka Trustee Limited, following transfer of 21,292,225 ordinary shares held by Simon Palmer.* • Beneficial and non-beneficial interest in 24,060,024 ordinary shares in Rakon Limited held by Ahuareka Trustee Limited, following transfer of 35,000,000 ordinary shares to new investors.*

45

Marjorie Susan Robinson Director of:

Bruce Robertson Irvine Chairman and Director of:

• Resigned as a director of Rakon Limited on November 18, 2006.

• Jade Stadium Limited

Shareholder in:

• Pyne Gould Corporation Limited

• Beneficial interest in 1,363 ordinary shares in Rakon Limited, as a result of the distribution in specie on liquidation of Rise Holdings Limited.

• Christchurch City Holdings Limited

Director of:

• Market Gardeners Limited and Subsidiaries • Kathmandu Limited

Charles Peter Maire Director of:

• Skope Industries Limited

• Non-beneficial interest as director of Tahia Investments Limited which holds 53,062 ordinary shares in Rakon Limited.

• Syft Technologies Limited

Shareholder in: • Joint shareholder in Tahia Investments Limited, which holds 53,062 ordinary shares in Rakon Limited.

• Beneficial interest in 100 ordinary shares in Tahia Investments Limited.

• Non-beneficial interest in 16,523,218 ordinary shares in Rakon Limited, following share split of 53,062 ordinary shares at a ratio of 311.394549.* • Non-beneficial interest in 16,523,218 ordinary shares in Rakon Limited held by Tahia Investments Limited.* Other:

• Canterprise Limited

• Paulsen Holdings Limited (Owner of the House of Travel Group) • Godfrey Hirst Limited and subsidiaries • Christchurch City Facilities Limited Shareholder in: • Beneficial interest in 40,000 ordinary shares in Rakon Limited held by Bruce Irvine.* • Non-beneficial interest in 859,137 ordinary shares in Rakon Limited, as director of trustee company Rakon ESOP Trustee Limited.

• Non-beneficial interest in 1,100,000 redeemable ordinary shares in Rakon Limited, as director of trustee company Rakon PPS Trustee Limited.*

• Consultant to Navman NZ Limited, a customer of Rakon.

There were no notices from Directors of the Company requesting to use Company information received in their capacity as Directors which would not otherwise have been available to them.

Directors’ Shareholdings Directors’ shareholdings are shown as at balance date and as at 31 May 2006 reflecting the change in ownership that occurred on 15 May 2006 immediately prior to the company listing on the NZSX. Name Bryan Mogridge shares held with beneficial interest shares held with non-beneficial interest 1 shares held with non-beneficial interest 2 Brent Robinson shares held with beneficial interest shares held with beneficial interest 3 held by associated persons held by associated persons 3

46

31 May 2006

31 March 2006

400,000 859,137 1,100,000

2,759 -

33,974,204 270,449 10,363,611 234,043

221,501 33,201 -

Darren Robinson - shares held with beneficial interest - shares held with beneficial interest 3 - held by associated persons - held by associated persons 3

33,974,204 234,043 10,342,361 270,449

221,501 33,201 -

Warren Robinson - shares held with beneficial interest - held by associated persons - held by associated persons 3

24,060,024 20,252,791 504,492

189,663 65,039 -

Peter Maire - shares held with beneficial interest

16,523,218

53,062

40,000 859,137 1,100,000

2,759 -

Bruce Irvine - shares held with beneficial interest - shares held with non-beneficial interest 1 - shares held with non-beneficial interest 2

1

Bryan Mogridge and Bruce Irvine jointly hold the same parcel of 859,137 ordinary shares as trustees of the Rakon ESOP Trustee Limited.

2

Bryan Mogridge and Bruce Irvine jointly hold the same parcel of 1,100,000 partly paid redeemable ordinary shares as trustees of the Rakon PPS Trustee Limited. As at 31 May 2006 5 cents of the $1.60 issue price was paid up on each of these securities.

3

Partly paid redeemable ordinary shares currently held by the Rakon PPS Trustee Limited. As at 31 May 2006 5 cents of the $1.60 issue price was paid up on each of these securities.

Employees’ Remuneration During the year the number of employees or former employees not being Directors of Rakon Limited received remuneration including the value of other benefits in excess of $100,000 in the following bands: Remuneration $100,000 - $110,000 $110,001 - $120,000 $120,001 - $130,000 $130,001 - $140,000 $140,001 - $150,000 $150,001 - $160,000 $160,001 - $170,000 $170,001 - $180,000 $180,001 - $190,000 $190,001 - $200,000 $200,001 - $210,000 $210,001 - $220,000 $220,001 - $230,000 $230,001 - $240,000 $240,001 - $250,000 $250,001 - $260,000 $260,001 - $270,000 $270,001 - $280,000

Number of Employees 2 3 1 1 1 1 2 1

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Substantial Security Holders The following information is given pursuant to Section 26 of the Securities Markets Act 1988.

The following are recorded by the Company as at 31 May 2006 as Substantial Security Holders in the Company, and have declared the following relevant interest in voting securities under the Securities Markets Act 1988:

Name

Shareholder

Ahuareka Trustee Limited - Non-Beneficial Relevant Interest

24,060,024

Warren John Robinson - Beneficial Relevant Interest

24,060,024

Tahia Investments Limited - Beneficial Relevant Interest

16,523,218

Charles Peter Maire - Non-Beneficial Relevant Interest

16,523,218

Brent John Robinson - Direct Beneficial Relevant Interest - Direct Beneficial Relevant Interest1 - Beneficial Relevant Interest

9,914,180 270,449 24,060,024

Darren Paul Robinson - Direct Beneficial Relevant Interest - Direct Beneficial Relevant Interest1 - Beneficial Relevant Interest

9,914,180 234,043 24,060,024

Fisher Funds Management Limited - Non-Beneficial Relevant Interest

6,101,040

1

Partly Paid Redeemable Ordinary Shares

106,250,000 fully paid voting securities of the Company were on issue as at 31 May 2006. A further 1,100,000 partially paid securities were on issue as at 31 May 2006. These partly paid voting securities entitle the holder (Rakon PPS Trustee Limited) to proportionate voting rights to the extent of the issue price paid. As at 31 May 2006 5 cents of the $1.60 issue price was paid up on each of these securities.

Spread of Security Holders as at 31 May 2006

48

Size of Shareholding

Number of Holders

%

Total Number Held

%

1 - 999 1,000 - 4,999 5,000 - 9,999 10,000 - 49,999 50,000 - 99,999 100,000 - 999,999 1,000,000 - PLUS

77 1,316 387 260 26 25 7

3.67% 62.73% 18.45% 12.39% 1.24% 1.19% 0.33%

37,818 3,615,901 2,261,019 4,399,902 1,582,949 5,651,030 88,701,381

0.04% 3.40% 2.13% 4.14% 1.49% 5.32% 83.48%

TOTAL

2,098

100.00%

106,250,000

100.00%

Largest Security Holders as at 31 May 2006 Name

Shareholding

%

Ahuareka Trustee Limited

24,060,024

22.64%

New Zealand Central Securities Depository Limited

23,848,699

22.44%

Tahia Investments Limited

16,523,218

15.55%

Brent John Robinson

9,914,180

9.33%

Darren Paul Robinson

9,914,180

9.33%

Zeus Zeta Limited

3,304,830

3.11%

Custodial Services Limited

1,136,250

1.06%

Rakon ESOP Trustee Limited

859,137

0.80%

Marjorie Susan Robinson

424,431

0.39%

Custodial Services Limited

415,300

0.39%

Bryan Mogridge & Philip Wells

400,000

0.37%

First NZ Capital Custodians Limited

390,162

0.36%

Peter Hanbury Masfen & Joanna Alison Masfen

340,000

0.32%

UBS New Zealand Limited

300,000

0.28%

South Canterbury Finance Limited

250,000

0.23%

Macquarie Equities Custodians Limited

240,000

0.22%

Hubbard Churcher Trust Management Limited John Heywood Taylor & Marie Roberta Taylor & Richard Heywood Taylor

195,000

0.18%

156,000

0.14%

Forbar Custodians Limited

151,500

0.14%

David Joseph Gammage

147,000

0.13%

In addition 1,100,000 redeemable ordinary shares are held by Rakon PPS Trustee Limited. As at 31 May 2006 5 cents of the $1.60 issue price was paid up on each of these securities.

New Zealand Central Securities Depository Limited (NZCSD) is a depository system which allows electronic trading of securities to member. As at 31 May 2006, the ten largest shareholdings in the company held through the NZCSD were: Name Tea Custodians Limited

Shareholding 4,833,855

NZ Superannuation Fund Nominees Limited

3,121,234

Westpac Banking Corporation - Client Assets No 2

2,625,864

National Nominees New Zealand Limited

2,138,344

Accident Compensation Corporation

1,550,000

New Zealand Equity Nominee Pool

1,300,000

Custody and Investment Nominees Limited

1,026,500

AMP Investments Strategic Equity Growth Fund

992,113

Citibank Nominees (New Zealand) Limited

852,100

AMP Life Limited

739,247

NZX Waiver NZX granted a waiver from the requirements of NZSX Listing Rule 8.1.5 in relation to the non-voting partly paid shares held by Brent Robinson and Darren Robinson under the Employee Share Growth Plan. NZSX Listing Rule 8.1.5 provides for partly paid shares to have voting rights in proportion to the amount paid up and the waiver provides that Brent & Darren Robinson’s shares can remain non-voting so as to avoid triggering Takeovers Code obligations.

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Employee Share Plans Management Share Purchase Plan Rakon established a share purchase plan to enable selected managers of Rakon to acquire Shares in the Company through the Plan Trustee, Rakon ESOP Trustee Limited. Under the Share Purchase Plan, Rakon offered selected managers the opportunity to acquire Shares and loaned participating managers the purchase price of the Shares offered on an interest-free basis.

Under the terms of the Share Purchase Plan, 2,759 Shares were issued to Rakon ESOP Trustee Limited to hold on behalf of the participating managers on 17 March 2006 (now 859,137 Shares following the share split of 311.394549 to one), and the total aggregate amount loaned by Rakon to participating managers is $520,000.

Shares issued under the Share Purchase Plan are held on trust

by Rakon ESOP Trustee Limited. The Shares cannot be sold or otherwise dealt with by the participating managers for a period of 18 months from the date of issue. At any time after the end of this period the participating manager may request the Trustee to transfer the relevant Shares to him or her. The Trustee will not transfer the Shares to a participating manager until the loan owed by that manager has been repaid in full.

Employee Share Option Scheme Rakon has established an Employee Share Option Scheme for selected employees of Rakon. Options are granted free of charge to Eligible Employees, as part of their remuneration, but are only exercisable if specified share price performance benchmarks are met. Each Option entitles the holder to purchase one Share in Rakon pursuant to the terms of the Employee Share Option Scheme. As at 31 May 2006, Rakon has granted to Eligible Employees a total of 1.9 million Options.

There is no application fee or other sum payable by Eligible Employees for Options, but Option Holders wishing to exercise their Options will be required to pay an Exercise Price, which, in the case of the Options currently granted, is $1.60 per Share.

Provided certain conditions are met, Options become exercisable at the following times: a) one third of the Options granted on any date of grant become exercisable on the 1st anniversary of that date of grant;

50

b) a further one third of the Options granted on any date of grant become exercisable on the 2nd anniversary of that date of grant; c) a further one third of the Options granted on any date of grant become exercisable on the 3rd anniversary of that date of grant, provided that all Options become exercisable where there is a change of control of Rakon whereby a person (excluding Rakon and the Robinson family and interests associated with the Robinson family) and that person’s Associates hold or control more than 50% of the total voting rights of Rakon.

Exercisable Options may only be exercised if, at the time of exercise, the volume weighted average selling price per Share for all the Shares in Rakon traded on the NZSX during the 10 NZSX trading days prior to the exercise date is at least equal to the benchmark price applicable at that date.

The initial benchmark price will apply to the period from the date of grant to the date when Rakon announces its results for the 6 months ending 30 September 2007. A new benchmark price will subsequently be calculated at 6 monthly intervals by increasing the last calculated benchmark price be 14% per annum compounded total shareholder return.

All Options which have not been exercised by the 4th anniversary of the date of grant will lapse and will automatically cancel.

Options do not carry voting rights or rights to participate in any dividends or future Share issues. Shares issued upon the exercise of Options or on cancellation of Options will carry the same rights and will be issued on the same terms as existing Shares then on issue and will rank equally in all respects with existing Shares.

Share Growth Plan Rakon has established a Share Growth Plan to enable selected senior executives of Rakon to acquire Shares through a Trustee, Rakon PPS Trustee Limited.

1.1 million Plan Shares, were issued to participating executives on 16 May 2006. The Plan Shares have an issue price of $1.60. On the issue date, each of the participating executives made an initial payment of 5c per Plan Share.

While the Plan Shares remain held by the Trustee, an annual payment of 5c per Plan Share will also be required.

Provided certain conditions are met including that the transfer request is received by the Trustee at a time when the volume weighted average selling price per Share for all the Shares in Rakon traded on the NZSX during the 10 NZSX trading days prior to the date of the request is at least equal to the benchmark price (as described under the Employee Share Option Scheme) applicable at that date, an executive may request the Trustee to transfer the Plan Shares held by the Trustee on behalf of that executive as follows: a) no request may be made prior to the 1st anniversary of the issue date; b) a request may be made in respect of one third of the Plan Shares issued on any issue date from the 1st anniversary of that issue date; c) a request may be made in respect of a further one third of the Plan Shares issued on any issue date from the 2nd anniversary of that issue date; d) a request may be made in respect of a further one third of the Plan Shares issued on any issue date from the 3rd anniversary of that issue date,

provided that a request may be made in respect of all of those Plan Shares that remain held by the Trustee from the date when there is a change of control of Rakon, meaning that a person (excluding Rakon and the Robinson family and interests associated with the Robinson family) and that person’s Associates hold or control more than 50% of the total voting rights of Rakon.

An executive ceases to be entitled to require the Trustee to transfer any relevant Plan Shares to the executive if the executive does not request that such a transfer be made before the 4th anniversary of the issue date or if the executive ceases to be employed by Rakon other than by reasons of death or total and permanent disablement.

The Plan Shares carry proportionate dividends and rights to share in the surplus assets of the Company on a liquidation to the extent of the proportion of the issue price paid up on the Plan Shares. The Plan Shares carry no voting rights until such time as the holder elects for the relevant Plan Shares to carry voting rights to the extent of the proportion of the issue price paid up on the Plan Shares. Subject to the voting position described above, Plan Shares transferred to the executive will be fully paid ordinary shares ranking equally with all other ordinary shares in Rakon.

51

Glossary of Terms

52

CAGR

Cumulative average growth rate

CDXO

Calibrated dual crystal oscillator

Crystal

A solid formed by the solidification of a chemical and having a highly regular atomic structure

E-911

Enhanced-911, an US Federal Communications Commissioned mandate

EBIT

Earnings before interest and tax

EBITDA

Earnings before interest, tax, depreciation and amortisation

EPS

Earnings per share

Form Factor

The physical size of a device as measured by outside dimensions

GPS

Global positioning system

Oscillator

An electronic circuit that generates a specific tone or frequency

OCXO

Oven controlled crystal oscillator

OEM

Original equipment manufacturer

PDA

Personal digital assistant

Piezoelectric Effect

A physical phenomenon exhibited by quartz crystals which change their dimensions when subjected to an electrical charge. Conversely, when subjected to mechanical stress it creates an electrical charge

Quartz Crystal

A hexagonal crystal of silicon dioxide

RSX Crystal

An AT-cut quartz crystal encased in ceramic packaging

SMD

Surface mount device

TCXO

Temperature compensated crystal oscillator

Telematics

The integration of wireless communications, vehicle monitoring systems and location devices

VCXO

Voltage controlled crystal oscillator

UM Crystal

A high performance AT-cut crystal that is packaged in metal, with formed legs for a surface mounting

Directory Registered Office Rakon Limited One Pacific Rise Mt Wellington AUCKLAND Telephone: 09 573 5554 Facsimile: 09 573 5559 Website: www.rakon.co.nz Mailing Address Rakon Limited Private Bag 99943 Newmarket AUCKLAND Directors Bryan Mogridge Brent Robinson Bruce Irvine Peter Maire Darren Robinson Warren Robinson Principal Lawyers Bell Gully PO Box 4199 AUCKLAND Auditors PricewaterhouseCoopers Private Bag 92162 AUCKLAND Share Registrar Computershare Investor Services Limited 159 Hurstmere Road North Shore Private Bag 92119 AUCKLAND 1020 Telephone: 09 488 8700 Facsimile: 09 488 8787 Bankers ASB Bank PO Box 35 Auckland

54

ANNUAL REPORT 2006

RAKON LIMITED

ANNUAL REPORT 2006

Contents

2

Notice of Meeting

3

Financial Highlights

4

Chairman’s Report

5

Rakon at a Glance

6

Managing Director’s Report

8

Customers & Products

10

Board of Directors

14

Corporate Governance

15

Directors’ Report

17

Management

18

Statements of Financial Performance

21

Statements of Movements in Equity

21

Statements of Financial Position

22

Statements of Cash Flows

23

Statement of Accounting Policies

25

Notes to Financial Statements

28

Auditors’ Report

42

Shareholder Information

44

Glossary of Terms

52

Directory

54