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					Engineering Consulting Company




  30th Anniversary
      Annual Report 2006
       Year ended March 31, 2006
                    1                          2                          3
Contents
                                    Consolidated Financial
             30th Anniversary                                    To Our Shareholders
                                         Highlights




                                               8                         10                        12
                                       Business Strategies      Organizational Structure    Innovative Solutions
                                                                     that Enables
                                    from a Global Perspective    Comprehensive Digital     in Tune with the Times
                                                                 Monozukuri 0perations



                   14                        18
              Special Feature:
           Electronics Innovation      Financial Section
           Accelerates Automotive
                  Evolution




                                             36                          37

                                         Subsidiaries           Corporate Information
                                         and Affiliates
 ZUKEN
Zooming in on our
customers’ needs
with cutting-edge
                       Utilizing potential in
                       an environment
                       conducive to quality
                                                Keeping our found-
                                                ing spirit alive over
                                                the past 30 years
                                                                           Energizing our
                                                                           pioneering “solu-
                                                                           tions business”
                                                                                                        Nurturing our formi-
                                                                                                        dable monozukuri*
                                                                                                        processes
technology precision   product creation                                    model




                           Brainpower — our global language

                                Trust Zuken. The world does.

                                                   Zuken




                                                                 * Monozukuri stands for ‘manufacturing’ in the Japanese language.

                                                                                                                   Zuken Inc. 1
Consolidated Financial Highlights
Zuken Inc. and Consolidated Subsidiaries
Years ended March 31, 2004, 2005 and 2006




                                                                                                                                                                           Thousands of
                                                                                                                                       Millions of yen                      U.S. dollars
                                                                                                                             2004          2005             2006                2006
For the Year:
Net sales .......................................................................................................           ¥16,183      ¥15,770           ¥16,799          $143,581
Operating income ..........................................................................................                   2,098         1,921             1,951             16,675
Net income ....................................................................................................                945          2,185             2,452             20,957
At Year-End:
Total assets.....................................................................................................           ¥33,288      ¥35,768           ¥34,074          $291,231
Total shareholders’ equity ..............................................................................                    26,158        28,130           25,526            218,171

                                                                                                                                            Yen                             U.S. dollars

Per Share of Common Stock:
Net income ....................................................................................................              ¥33.30        ¥77.65           ¥90.88              $0.777
Cash dividends applicable to the period .........................................................                             10.00         10.00             15.00               0.128


Number of shares issued ............................................................................... 27,903,669                    27,903,669         27,903,669
Notes: 1. Net income per share is computed based upon the weighted–average number of shares of common stock outstanding during each fiscal year.
       2. For the convenience of the reader, the financial highlights described above have been presented in Japanese yen and also in U.S. dollars by arithmetically translating all
          Japanese yen amounts using the exchange rate of ¥117 to US$1 in effect at March 31, 2006.




    Net Sales                                           Operating Income                                  Net Income
                                                                                                          (¥ millions)
    (¥ millions)                                        (¥ millions)


                        ¥16,799                                           ¥1,951                                            ¥2,452
                          




                                                                            




                                                                                                                              




                                                                                                      Œ
                                                    Œ
  Œ
  Œ
                                                    Œ




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        04         05     06                               04      05       06                              04       05       06




               15,770                                             1,921                                             2,185
      16,183                                             2,098                                             945


2 Zuken Inc.
To Our Shareholders




                                Zuken’s business performance over the past few years has been good,

                                         but by no means has the Company been resting on its laurels.

              We believe that there are still issues that need to be addressed. Looking at the situation

                      from a positive point of view, it also means that we have scope for further growth.

            This year marks our 30th anniversary, and we are more than ever determined to continue

           pushing the boundaries, and to bolster our position as a powerful partner in the process of

                                                electronics monozukuri that is trusted across the globe.




                                                                                               Zuken Inc. 3
                  Increase in Revenues and Earnings in our 30th Year of Operations
    In fiscal 2006, ended March 31, 2006, business conditions in Japan and overseas were characterized by a soft recov-
    ery. Buoyed by steady growth in the United States and Asia, the global economy experienced gradual improvement. On
    the domestic front, an increase in capital investment fueled by growth in corporate earnings contributed to overall
    positive conditions.
        In partnership with the electronics industry (one of Zuken’s primary customer bases), we strove to deliver total solu-
    tions, from electronics monozukuri infrastructure to management support, which enhance the efficiency of the overall
    design and production process.
        Under these conditions, consolidated net sales for the fiscal year under review were ¥16,799 million, an increase of
    6.5% compared with the previous fiscal year. On the earnings front, operating income climbed 1.6% year on year to
    ¥1,951 million, marking a year of increased revenues and earnings. Accounting for a gain on the sale of investment
    securities, net income rose 12.2% to ¥2,452 million.


                  Business Topics
    On April 1, 2005, the Company undertook a substantial reorganization. Historically, Zuken had engaged in business activi-
    ties across four clearly defined solution areas: electronic design automation (EDA), product lifecycle management (PLM),
    3D solutions, and System-on-Chip (SoC) solutions. In recent years, however, industry needs have continued to shift from
    sub-optimization to total optimization. Most notably, demands have increased for the integration of EDA and PLM solutions.
    Accordingly, from fiscal 2006, the sales and R&D functions of both EDA and PLM Solutions businesses have been central-
    ized to form the Company’s Sales Head Office and R&D Center. Driven by an emphasis on synergy, we are endeavoring to
    establish and develop a structure capable of advancing more comprehensive development and proposal solutions.
        In the context of the Company’s product development capabilities, Zuken announced its new CR-5000 Lightning
    high-speed design solution in June 2005. Standing at the forefront of technological innovation, the electronics industry is
    placing increased emphasis on high-speed design environments, the key to appealing products and competitive advan-
    tage. CR-5000 Lightning was created to meet this need, through the integration of technologies fostered
    separately in Japan, the United Kingdom and Germany.
        EDA systems, a mainstay business since the Company’s founding, are an integral component of design and manufactur-
    ing infrastructure. CR-5000 Lightning provides a powerful platform in establishing infrastructure. Looking ahead, Zuken will
    pursue continuous technology enhancements to maintain CR-5000’s superior functionality and quality on a global scale.
        Turning to the Company’s overseas activities, Zuken was prominent throughout the fiscal year under review. In Asia,
    we established a local company in Taiwan, while in Europe we acquired CIM-TEAM GmbH, a Germany-based
    electrical/electronic computer-aided engineering software design company with significant expertise in wire harness
    design solutions.


4 Zuken Inc.
              Software Packaging Business Revisited
Zuken’s business over the past four to five years has remained strong, but by no means are we satisfied with results or
prepared to rest on our laurels. A true measure of satisfaction is the Company’s ability to fully and continuously address
the electronics industry’s infrastructure needs of a growing number of customers both in Japan and overseas, and to
provide solutions that our competitors are unable to replicate. In reality, however, we believe there are a number of
issues that have yet to be addressed. In short, there is much more scope for growth. Looking ahead, I believe the
Company is yet to take full advantage of the operating environment that offers significant business opportunities.
   A problem that needs to be addressed by the industry is the wide range of individual proposals that require common
use and standardization. To address this problem, I believe a change of business model for software packaging is essen-
tial and have put forward the need for a new package business approach.
   This new package business should not be equated with conventional packaged software. I refer more to an industry-
based total solutions package that encompasses complete software systems including CAD technology, support and
management consulting. Our goal is to provide our customers with packages that embrace optimal monozukuri solutions
for use in automobiles, mobile phones and digital cameras. This is indeed a business that we have continued to promote
in recent years. Historically, we have provided customized products and services, a method that could be characterized
as “spot” business. In the future, Zuken must adopt a more strategic “line” and “surface” approach. Getting a head start
on its rivals, I am confident the Company is well positioned to pursue this unique business model.


              Zuken’s 30th Anniversary
December 2006 marks Zuken’s 30th anniversary. Founded in 1976 with just five employees, Zuken was the first
Japanese company to successfully develop a CAD/CAM system for electronic equipment use. In the Company’s formative
years, Zuken leveraged its expertise in analog design functions — a key component in audio equipment development —
to meet the needs of its customers and steadily expanded sales. Entering the 1980s, however, the Company confronted
its first major hurdle with the market entry of competing U.S. systems based on a digital format. Faced with more than 12
months’ work to successfully develop a fully competitive alternative, Zuken worked tirelessly to analyze this new
technology. As a result of these efforts, the Company developed value-added products based on the digital format. In
addressing the needs of engineers in Japan and enhancing operability, Zuken embarked on a path of fully fledged growth.
   Over time, as electronic products have become more sophisticated, Zuken’s role has gradually evolved. From a
supplier of systems, to partnering with its customers, and now as a solutions provider that addresses a broad spectrum
of issues, from circuit design through product commercialization. Focusing on solutions as an engineering consulting
company has provided the backbone for Zuken as it is positioned today.
   In more recent times, manufacturers from around the globe have increased their focus on electronics. From industri-
al growth founded on automobile machinery design, business has truly entered the electronics era. Following this path,


                                                                                                                     Zuken Inc. 5
    the expectations placed on the Company have grown in relative proportion, and while proud of our achievements over
    the past 30 years, Zuken must look to the challenges ahead with the knowledge that there remains a great deal to do,
    rather than dwelling on its past.


                  Enhancing Our Role as a Trusted Partner
    As a pioneer in its field, there has been no other company on which Zuken could model itself upon. Since its foundation,
    the Company has relied on in-house solutions and innovation as the means to overcome problems. At the time of its
    public listing and industry classification, Zuken placed an emphasis on electrical machinery as opposed to services. This
    emphasis was founded on the unwavering desire to become a long-term trusted partner of the global electronics indus-
    try. Through our efforts over the past 30 years, manifested in the cutting-edge CR-5000 Lightning EDA solution, Zuken
    has indeed become an accepted and trusted business partner over the long term, attracting high praise from the world’s
    leading electronics manufacturers. By leveraging the know-how and technical expertise accumulated from business
    activities in many markets including consumer sectors for companies specializing in the design of digital consumer elec-
    tronics, mobile phones and game consoles, Zuken will continue to pursue horizontal development across a broad range
    of industries. This will include focusing on the automotive industry and securing tangible growth on the back of new
    business opportunities. Going forward, Zuken will strengthen its technical and consulting prowess and promote different
    solutions businesses to enhance efficiencies across the entire manufacturing process, from design through production.
    As an integral partner to the global electronics industry, Zuken will actively pursue investment in key areas as a part of its
    continued unwavering efforts.
        To increase the value of the Zuken Group, the Company will also reinforce corporate governance and bolster its orga-
    nizational structure through highly capable human resources. Zuken recognizes the increased importance of its man-
    agement philosophy based on the principles of soundness, vigor and dignity. Distinguished from the IT and financial
    sectors, Zuken has always focused on its mainstay businesses and worked in close partnership with customers. In the
    future, we will continue along the same path, in the belief that our bond with customers provides the lifeblood and ener-
    gy for future growth and mutual prosperity.




    Makoto Kaneko
    President & Representative Director




6 Zuken Inc.
Global Network




    ZUKEN GmbH
    (European Headquarters)               ZUKEN (SHANGHAI)
    (EMC Technology Center)               TECHNICAL CENTER CO., Ltd.
    CIM-TEAM Technische Informatik GmbH   ZUKEN Inc. Shanghai Rep. Office

          ZUKEN B.V.                                   ZUKEN Inc. Beijing Rep. Office        ZUKEN USA Inc.

    ZUKEN Ltd.                                            ZUKEN KOREA Inc.
    ZUKEN UK Ltd.
    ZUKEN Group Ltd.                                           ZUKEN Inc.




                                                        ZUKEN TAIWAN Inc.
           ZUKEN S.A.
                                                     ZUKEN Inc.
             ZUKEN S.r.l.                            Shenzhen Rep. Office
                                                                                        Sales offices
                                                ZUKEN SINGAPORE Pte. Ltd.




                                                                                                          Zuken Inc. 7
                                               The implementation of initiatives is now
                                under way that will bring to fruition our third growth stage
                                in the U.S. and European markets.
                                We have started to see positive effects from the introduction of
                                our new CR-5000 Lightning high-speed design solution
                                in the global market and there is a feeling that
                                we are on to a real winner.




Business Strategies
from a Global Perspective
Jinya Katsube, COO & Representative Director




8 Zuken Inc.
               Over the past 12 months, the Zuken Group has         On the domestic front, from fiscal 2006, the sales and
made a number of announcements concerning its overseas           R&D functions of both EDA and PLM Solutions businesses
business operations. Starting with the Asian region, in August   have been centralized to form the Company’s Sales Head
2005 the Group established a Taiwanese subsidiary, ZUKEN         Office and R&D Center. Driven by the synergistic effects this
TAIWAN Inc., in a country where the Group had previously         offers, the Group is confident of providing the comprehensive
conducted business operations solely through distributors.       solutions for total optimization that the market demands.
Recently, several Taiwanese companies have appeared                 Underpinned by the aforementioned events and other initia-
among the top 10 foreign-affiliated companies that manufac-      tives, Zuken continues to adopt a global perspective in adjusting
ture products in China. Under these circumstances, and in        to fluctuating trends in the electronics industry. By delivering
keeping with the Group strategy of building a firm foundation    solutions in a timely fashion and fully satisfying customer needs,
for its operations in the region, ZUKEN TAIWAN has already       the Company is on track for future market growth.
started to show some solid results and is aiming to expand its
                                                                 History of Zuken’s Operations in the European and the U.S. Markets
business through cooperation with Zuken’s Chinese business
                                                                 November 1983 ZUKEN AMERICA Inc. (now ZUKEN USA Inc.)
bases in Shanghai, Beijing and Shenzhen.                                       established in California
  It is no exaggeration to say that the Group’s operations in    October 1988      Signed an OEM supply contract for CR-3000 soft-
Europe and the United States entered a new stage of growth                         ware with IBM Corporation of the United States

during the fiscal year under review. Zuken recognizes the        January 1991      Signed an OEM supply contract for EDS
                                                                                   software with Hewlett-Packard Company of the
period after its U.S. market entry in 1983 and the acquisition
                                                                                   United States
of the U.K. company Racal-Redac in 1994 as its first and
                                                                 January 1992      ZUKEN EUROPE GmbH (now ZUKEN GmbH)
second growth stages, respectively. Extending this concept,                        established in Germany
the Group firmly believes that the announcement of CR-5000       June 1994         Acquired Racal-Redac of the United Kingdom
Lightning in 2005 marks the beginning of the third growth        March 2000        Acquired INCASES Engineering GmbH
stage. The positive effects of the new product started to                          of Germany

become apparent in the business results from the last half of    June 2005         Announced CR-5000 Lightning, developed
                                                                                   through the integration of technologies that have
fiscal 2005.
                                                                                   been fostered in Japan, the United Kingdom and
  In December 2005, the Company signed a long-term                                 Germany
contract with the Transportation Systems Group of Siemens        December 2005 Signed a long-term contract with the
AG. Under the contract, Zuken is to provide a completely                       Transportation Systems Group of Siemens AG

integrated, enterprise-wide printed circuit board (PCB) design   March 2006        Signed a preferred vendor contract with
                                                                                   Lockheed Martin
environment, as well as consulting services. Implementation
                                                                 May 2006          Acquired CIM-TEAM GmbH of Germany
has already started through Siemens’ Rail Automation Division
in Braunschweig, Germany. A gradual rollout of Zuken’s
solutions on other sites across the globe is planned.            Overview of CIM-TEAM GmbH
  Siemens Transportation Systems have praised CR-5000,           Company name:          CIM-TEAM Technische Informatik GmbH
which lies at the heart of Zuken’s proposed solution.            Location:              Ulm, Germany
By signing this contract, Zuken has confirmed the product’s      Established:           1987
competitive edge in the European and U.S. markets.               Main products:         E3 series (software suite for wire harness and
  Announced in April 2006, Zuken acquired German-based                                  electrical/panel design, etc.)
                                                                 No. of corporate users: 1,700+ customers
CIM-TEAM GmbH, a key initiative in its overseas strategy. In
                                                                                         (No. of licenses: 12,700+)
combining the Company’s majority share of the Asian wire
harness design market with CIM-TEAM’s significant share in
Europe and the United States, Zuken is positioned to pro-
mote its business operations and wire harness design solu-
tions with even greater flexibility and accuracy.



                                                                                                                         Zuken Inc. 9
                                            Focusing on better serving our valued customers
                                 in the electronics, automotive-related and
                                 electronics components industries, we will further pursue
                                 the provision of market-needs-oriented solutions.




Organizational Structure that
Enables Comprehensive
Digital Monozukuri 0perations
Yasuo Ueno, Director and General Manager of Sales and 3D Solution Divisions




10 Zuken Inc.
               In the last few years, the Japanese electronics      The Zuken Group has high expectations for the growth of
industry has been exposed to harsh conditions, such as            its solutions business in automotive-related industries.
resilient, low-cost competition from companies in China and       By building upon the expansion of solutions that have result-
other Asian countries. In their efforts to survive such global    ed in growing adoption rates among automotive manufactur-
market conditions, companies in Japan have started to             ers, Zuken has secured a foothold for significant future
address the urgent matter of shifting away from conventional      opportunities with the associated manufacturers of automo-
monozukuri, to the virtual, utilizing the digital monozukuri      tive electronic components and devices in the fiscal year
solutions that Zuken offers. In conventional manufacturing,       under review.
for example, physical mock-ups of actual products are used          Reflecting on this achievement, the Zuken Group will
in the prototype and verification stages. If a problem such as    aggressively approach automotive-related manufacturers,
interference between components occurs at either of these         recognizing them as its key customers on a par with existing
stages, however, the product has to be sent back for              significant customers in the electronics industry.
redesign, resulting in additional development time and costs.     Furthermore, Zuken will add well-performing electronic
  Yet in manufacturing that utilizes digital monozukuri solu-     component manufacturers to the list of important customers
tions, the entire design process can be managed on a 3D           and advance the provision of manufacturer-oriented solutions
visual display, which allows for immediate redesign of digital    through the proactive development of a broad range of
mock-ups based on interference, as well as thermal and            support services.
electromagnetic-compliance analysis. This convenience               The Sales Headquarters is currently conducting several
contributes to the reduction of prototyping time and costs,       joint projects with the R&D Headquarters, and Zuken plans
enabling manufacturers to deliver highly reliable products to     to announce new products and services that are developed
market more quickly. Furthermore, as manufacturing costs          based on the integration of EDA, PLM and 3D solutions by
represent more than 45% of a company’s cost structure, the        the end of the current fiscal year. For instance, the Group is
impact of providing this kind of Zuken solution is significant.   planning to provide customers with organically combined
  In the fiscal year under review, with the aim of improving      solutions that are required for the construction of design and
our provision of solutions for more efficient manufacturing,      manufacturing infrastructure. Through such endeavors, the
Zuken integrated its sales and service departments for            Zuken Group will work to help customers achieve their own
electronic design automation (EDA) and product lifecycle          ideal digital monozukuri environments.
management (PLM) consulting services to form the Sales
Headquarters. This has brought about the establishment of
an organizational structure that enables comprehensive
digital monozukuri operations. As a result, the adoption of
Zuken’s system solutions has spread among market-
leading, reform-driven companies, both in Japan and over-
                                                                  Two views of a well-attended Zuken presentation given at the Design
seas, and within the Group’s target industries that aim to        Engineering & Manufacturing Solutions Expo/Conference, held at the
                                                                  Tokyo Big Sight International Exhibition Center in June 2006.
bring total optimization to their manufacturing processes.
  I have personally managed several global projects, and we
have brought to fruition concrete results that further
improved the prospects for the success of Zuken’s solutions
business. The Zuken Group believes that in the fiscal year
ending March 31, 2007, this market trend will take a firmer
hold. By taking advantage of this opportunity, Zuken targets
further expansion of the scale of its business.




                                                                                                                                    Zuken Inc. 11
                                          In recent years we have successfully integrated
                              the unique cutting-edge technologies developed by each team in Japan,
                              the United Kingdom and Germany through strategic collaborative development efforts.
                              This system supports high-speed design in a variety of manufacturing processes,
                              from circuit to printed circuit board (PCB) design.
                              As the adoption of our solutions gathers pace, we are sure that
                              there will be a corresponding rise in what the market can expect from them.




Innovative Solutions in Tune
with the Times
Kazuhiro Kariya, Director, ZUKEN Global Engineering and Technology Center




12 Zuken Inc.
              In the fiscal year under review, the Zuken            the CR-5000 Series. This synergy will reap significant value to
Group’s past endeavors began to bear fruit in the form of           those organizations with integrated manufacturing.
solid business results.                                               Following in the footsteps of a wide variety of solution
  The most significant achievement was the release of the           developments, the Zuken Group plans to announce new
new CR-5000 Lightning high-speed design solution. Having            products created by integrating its electronic design automa-
been under development as part of Zuken’s strategic plans           tion (EDA), PLM and 3D design technologies. The Group will
since 2003, CR-5000 Lightning is a strategic step forward           accelerate its efforts to develop new products that give due
which augments the Group’s greatest technical innovation            consideration to concept design and planning solutions. This
since the launch of the enterprise-wide PCB design solution,        approach will provide much-needed support for product
the CR-5000 series. The increased efficiency CR-5000                development leaders at client companies, and in general
Lightning brings to high-speed circuit design is eminently          greatly assist with design in semiconductor environments and
sought after in leading-edge electronics monozukuri.                the integration of System-in-Package and board design.
  Combining Japan’s expertise in state-of-the-art CAD tech-           In these development activities, it is vital that Zuken’s
nology, which is used in miniaturization and high-density           technologically innovative new products maintain data-
design for digital consumer electronics and mobile phones;          sharing features and compatibility with existing products. The
the U.K.’s competitive advantage in automatic routing as well       Zuken Group believes that its customers desire an environ-
as user interface development; along with Germany’s pre-            ment in which they are able to use Zuken’s existing products
eminence in SI analysis and EMI/EMC analysis, CR-5000               to undertake the development of new products efficiently and
Lightning provides the required inspection, analysis and veri-      at lower cost. This can only be achieved through the effective
fication features that support high-speed design at all stages      reuse of the enormous amounts of data that they have
of the design and manufacturing process, from circuit design        accumulated over the years, including design data. In
to board design.                                                    Zuken’s role as a partner, we recognize the need to support
  CR-5000 Lightning has started gaining many customers,             them, advance their competitive capabilities and bring this
including those overseas, in a market where expectations            desire to fruition.
are running high. Zuken will continuously enhance the tech-           By disseminating this sense of responsibility among all its
nological leadership of its products to help customers              engineers, the Zuken Group will advance its innovative
construct high-speed design environments for supreme                solutions development in a wide range of fields in order to
product development.                                                maximize the Group’s contribution to its customers’
  The Zuken Group has strenuously pursued solutions for             electronics monozukuri.
the challenging issues of system-oriented design and electro-
mechanical co-design since 1998, when the Group started
engaging in the development of wire harness design solu-
tions — a market which is still growing rapidly. The positive
                                                                                                         Delegates listen intently to
results of our efforts started to appear in the fiscal year under                                        a presentation at the Zuken European
                                                                                                         Design Automation Conference
review on the back of the broader application of Zuken’s                                                 (ZEDAC 2005) in Cologne, Germany,
effective design solutions, which addressed markets includ-                                              in November 2005.

ing motorcycle, construction and agricultural machinery,
vending machine, copier and automotive-related companies.
  In the field of product lifecycle management (PLM) solutions
development, the Zuken Group has acted as a catalyst in the
creation of information-sharing infrastructures that boast
expandability and versatility, and which cover all stages, from
design to manufacturing. Looking ahead, Zuken will work to
further enhance the tight integration of its PLM solutions with


                                                                                                                              Zuken Inc. 13
Zuken’s Proprietary Solutions
Electronics Innovation Accelerates Automotive Evolution

Automotive digitization has its origins in                                       Hybrid Systems
the introduction of car radios and audio       Antilock Brake System (ABS)       Fuel Cells

equipment. This trend has since expand-        Vehicle Stability Control (VSC)   Electric Vehicles
                                               Systems                           Combustion Control Systems
ed to encompass applications in automo-
                                               Vehicle Stability Assist (VSA)    Electronic Power Steering
bile control, drive-train and information      Systems                           In-Car Navigation Systems
systems. In the Advanced Safety Vehicle        Intelligent Parking Support       Automatic Driving/Self-Steering
(ASV) development project, which the           Systems                           Systems
                                               Lane Departure Warning Systems    Inter-Vehicle Communication
Japanese Ministry of Transport (now the
                                               Collision Prevention Support      Systems
Ministry of Land, Infrastructure and           Systems
Transport) has promoted since 1991 with        Intelligent Headlight Control
the participation of domestic and overseas     Systems

automobile manufacturers, electronics          Advanced Remote Vehicle
                                               Security Systems
was acknowledged as a core technology
                                               High-Speed In-Vehicle Networks
that provided significant impetus to auto-
motive evolution over recent years.


  Conserving     Improving        Pursuing
      the        Automotive     the Ultimate
 Environment       Safety        in Comfort




14 Zuken Inc.
Evolving with Car Electronics
                                     Digitization: from Engine Control and Antilock Brake Systems to
                                     Electronic Toll Collection
                                     The digitization of automobiles has advanced in the pursuit of bene-
                                     fits in three distinct areas. Taking the example of environmental con-
                                     servation measures, vehicles with engine controls that meet
                                     emission regulations and hybrid vehicles have emerged. Secondly,
                                     vehicle stability control (VSC) systems, vehicle stability assist (VSA)
                                     systems and the antilock brake system (ABS) have been introduced
                                     for improved safety. Last but by no means least, automobile users
                                     have welcomed the convenience offered by automotive navigation
                                     systems, electronic toll collection (ETC) systems and other automo-
                                     tive-related systems.
                                        These innovations have boosted the growth of electronics compo-
                                     nents across the automotive industry. Over the past 10 years, the
                                     number of ECUs used in an automobile has doubled, from around
                                     30 to 60. Wire harnesses, which connect ECUs and electronic com-
                                     ponents, have evolved and become longer and heavier, so much so
                                     that they account for approximately 30kg of a high-end vehicle’s
                                     total weight. The increased adoption of this technology means that
                                     the electronics and wire harness components of a vehicle represent
                                     approximately 20% of the total cost for a gasoline-powered vehicle
                                     and 50% for a hybrid.

                                     Addressing Tomorrow’s Environmental, Safety and Convenience
                                     Needs Today
                                     Automotive design will continue to evolve in the quest to offer
                                     enhanced eco-friendliness, safety and convenience, accelerating the
                                     pace of automotive digitization. However, many hurdles need to be
                                     overcome on the road to advanced automotive evolution. It will be
                                     necessary for in-car integrated circuits (ICs) to demonstrate superla-
                                     tive, split-second processing power to cope with vast amounts of
                                     data; in-vehicle network communication will also require higher data
                                     processing speeds and more ECUs will be used with a correspon-
                                     ding increase in the length and weight of wire harnesses.
                                        In addition, fitting all these parts within a limited space will call for
                                     miniaturization and integration of multiple functions; and noise sup-
                                     pression measures will become more essential than ever before. To
                                     exacerbate matters, development lead times will have to be short-
                                     ened and costs be continuously reduced in order to meet the ever-
                                     increasing customer demands and heightened competition.

                                     80
                                                                                                     ?
                                                                                                  Approx.
                                                                                      Approx.
                                                                                                  75 units
                                     60                                                1.5 x
  Active Suspension Systems                                                              ?
                                                                                                             Number of microcomputers
                                                                        Approx.        50 units
  Automatic Voice Recognition                                            1.5 x                               installed in successive
  Systems                            40                   Approx.                                            models of the Toyota Crown
                                                           1.5 x        30~39 units

  Electronic Toll Collection (ETC)                                                                           sedan. (Units)
                                                          20~29 units
  Systems                            20
                                            10~19 units
                                                                                                             Source: Ka Erekutoronikusu no
  Radar Cruise Control Systems                                                                               Subete (Automotive Technology
                                            9th           10th           11th          12th  13th            Special Issue 2005),
  X-by-Wire Systems, etc.             0
                                           1991           1995           1999          2003 2007?            Nikkei Business Publications, Inc.


                                                                                                                                Zuken Inc. 17
Zuken takes cars like this from the drawing board to reality.

Zuken supports advances in automobile design by providing
electronics solutions to companies involved with automo-
bile development.

    That’s why our customers in Japan and overseas say
that to maintain a competitive edge in the automotive
industry Zuken support is a must.




                                               Knowledge Management                  Aiming to
                 All design engineers          shorten the design cycle and ensure product
                                               quality, automotive-related manufacturers are
                     Design navigation         seeking solutions that use visual representa-
                                               tions to bring processes to fruition. Process
                    Knowledge database         visualization involves the standardization and
                                               manifestation of workflows, data and expertise
            essential to certain tasks, and by doing this any engineer can achieve high-quali-
            ty designs. In response to this demand, the Zuken Group combines design rules,
            bringing them together to allow the meticulous scrutiny of documents that are
            often scattered throughout a client company. By merging these rules, the princi-
            ples and workflows can be unified within an organization to encompass the
            breadth of knowledge from the entire base of experienced personnel. Zuken then
            painstakingly organizes, analyzes and structures the acquired knowledge and
            thereby builds up a knowledge database profile for each client company.
            Visualizing design and development processes and helping to navigate client
            companies through them, Zuken guides them on the way to becoming best prac-
            tice organizations. Process visualization makes clear to every engineer the
            “when,” “what,” “which,” “how” and other aspects involved in development
            activities and creates an ideal environment for a smoother flow of work. The
            Zuken Group supports the creation of environments that bring out the best in
            engineers and allows them to attain high-quality design, contributing to improved
            workload, less waste and fewer irregularities in development activities.

                                                                              Zuken Inc. 15
                                 EDA Solutions         In the case of ECU develop-                                        High-Precision Digital Mock-ups Created
                                  ment, in conjunction with higher-performance                                            through the integration of electronic circuit
                                  automotive information terminals and the installa-                                      design and 3D mechanical design, the electro-
                                  tion of various drive support systems, there is an                                      mechanical co-design solution, one of Zuken’s
                                  increasing need for electronic contiol units                                            mainstay solutions, contributes to the shortening
                                  (ECUs) to exhibit data processing capacity                                              of development lead times and greatly reduces
                                  approaching that of the human brain. As a result                                        costs. The development of high-performance,
of this trend, the operating frequency of electronic components has risen fourfold       compact vehicles is gaining momentum, especially in Japan and Europe. This in
over the past 10 years, and forecasts indicate that innovation leading to higher fre-    turn demands that equipment and functions on par with those of high-end vehi-
quencies will continue and are set to reach the gigahertz level in the near future.      cles be fitted into a limited space. As a result, the three-dimensional structure
   Zuken’s CR-5000 Lightning solution addresses this issue by enabling the effi-         behind a vehicle’s external appearance comes to resemble a maze of intricately
cient design of high-performance ECUs. This was developed from the combined              positioned mechanical components and electronic equipment, creating an envi-
expertise of research and development teams from across the globe, including             ronment that is prone to electromagnetic interference. Under these circum-
the major development centers in Japan, the United Kingdom and Germany.                  stances, conventional development procedures, which force electronic and
CR-5000 Lightning was launched in 2005 and offers a variety of functions that            mechanical design to be conducted separately, creates a development bottle-
frontload the design process; a requirement for achieving the right-first-time,          neck; if a problem occurs and a prototype has to be sent back for a complete
successful design of faster ECU’s with higher processing performance. The unifi-         redesign, the development time is prolonged and additional costs are incurred.
cation of constraints required in various design stages is achieved with a unified       On the other hand, utilizing Zuken’s BoardModeler solution, which is based on
analysis engine, which also enables multiboard development support along with            an electromechanical co-design solution, enables simultaneous thermal, electro-
support for many other functions required for the incorporation of the latest            magnetic-compliance and interference analysis when designing printed circuit
technology. CR-5000 Lightning’s unified approach is at the core of its cutting-          boards (PCBs) and electronics components. As a result, it can generate high-
edge capabilities. When incorporated into the design process, these enhanced             precision digital mock-ups on a 3D visual display. This combining of design and
capabilities can significantly assist in the development of advanced ECUs that are       re-design in one stage helps achieve shorter development times and reduces
ever-evolving toward unparalleled speed and processing capacity.                         costs in the development of right-first-time, highly reliable products.


                                    Wire Harnesses Another strongpoint of the                                                 Combating Noise The additional develop-
                                    Zuken Group is its ability to offer solutions                                             ment time and costs incurred when a prob-
                                    based on the electromechanical co-design tech-                                            lem arises and causes a prototype product to
                                    nologies that facilitate wire harness design.                                             be sent back to design can also lead to sig-
                                    Zuken’s Cabling Designer and other solutions                                              nificant difficulties related to electromagnetic
                                    work seamlessly with 3D mechanical computer-                                              compatibility (EMC).
                                    assisted design (CAD) systems, allowing design-                                                Automobiles generate high levels of elec-
ers to simultaneously conduct harness system design and signal path                                                           tromagnetic noise as they are increasingly
verification. Taking the lead from major Japanese automotive manufacturers,                                                   being fitted with faster processing LSIs and
manufacturers in other fields have also recognized the advantage this offers, and        other electronic components. Because these are incorporated in drive support
Zuken’s solutions are rapidly establishing a widespread predominance in these            and other critical systems, preventing malfunctions and assuring system reliabili-
manufacturers’ development activities. In an effort to further sharpen its competi-      ty have become today’s priority issues, and manufacturers in the automotive field
tive edge, in the fiscal year under review Zuken acquired CIM-TEAM GmbH, a               are required to incorporate proven, frontloaded electromagnetic interference
leading provider of software solutions for electrical and cabling/wire harness           (EMI) measures into their product development.
design, which holds a substantial market share in Europe. Building on this acqui-            To accommodate such needs, Zuken offers EMC Adviser, a tool that has
sition, the Zuken Group has established a business structure that is capable of          been developed in the form of a database that fully utilizes Zuken’s long-standing
providing flexible solutions adaptable to each customer’s needs in the global wire       EMC-related know-how. EMC Adviser allows circuit and layout designers to verify
harness design market. The benefits for product development reach beyond the             EMC performance, allowing them to implement frontloading techniques for
automotive industry to provide advantages for other industry sectors, including          combating EMC problems. In addition, Zuken provides solutions that help EMC-
the design and manufacture of motorcycles, construction and agricultural                 specialized engineers to investigate, analyze and pinpoint the root causes and
machinery, automatic vending machines, photocopiers, elevators, energy and               generation mechanisms of EMC problems, thereby realizing frontloaded imple-
power systems, heavy machinery and industrial applications (to name just a few).         mentation of EMC measures during the upstream design process.
In essence, Zuken’s wire harness design solutions can provide advantages to any
industry where intricate, yet efficient cabling is required to connect multiple ECUs
and components in confined spaces.

                             SoC Solutions        Semiconductors mounted in ECUs                                      PLM Solutions Environmental preservation is
                            determine the performance of a variety of automobile                                      one of the key issues in automotive development
                            functions. The Zuken Design Center plays a signifi-                                       today. This issue has a direct influence on the
                            cant role in the provision of solutions to a variety of                                   development of automotive parts and components
                            semiconductor-related needs. Providing comprehen-                                         as the number of electronic components used for a
                            sive solutions that cover a range of fields, from circuit                                 single vehicle is increasing every year. Another situ-
                            design to embedded software, the Zuken Design                ation that automotive-related manufacturers are facing is the diversification of
                            Center has made a significant contribution to the            manufacturing locations and final market destinations. Under these circum-
successful development of high-speed, high-performance semiconductors within             stances, the automotive industry is required to establish product lifecycle
short lead-times. In the realm of its expertise, which includes communications,          management (PLM) systems that give due consideration to the verification of
image processing and interface fields, the original intellectual properties (IP)         environmental regulation compliance and assist in the management of electronic
typified by Zuken’s Z-core have become widely known in the industry and deliv-           component procurement. The Zuken Group’s DS2, an electronic product
ered material results thanks to their ability to contribute to the fast-track develop-   lifecycle management (e-PLM) tool that has been developed exclusively for
ment of semiconductors. Of the Z-core lineup of products, the high-speed                 electronics manufacturers, has been widely introduced by many automotive
communication-compatible Z-core RTP Library is a solution that contributes to            manufacturers and their associated specialist electronics manufacturers. The
the realization of high-speed, in-vehicle local area network (LAN) communica-            DS2 solution enables components to be checked for lead, cadmium, and other
tions such as the controller area network (CAN) and FlexRay. High-speed                  hazardous substances during the design process and provides a framework for
in-vehicle LAN communications are expected to offer high-speed links between             selecting alternative components. In addition, the DS2 tool is capable of calculat-
engine, brake, suspension, automotive navigation and other systems on next-              ing the amount of such substances contained in a product, module or compo-
generation vehicles.                                                                     nent, and generating an environmental bill of materials (BOM) for suppliers to
   Providing automotive-related manufacturers with electronics solutions, the            pass on to their customers. By promoting e-PLM solutions and bringing innova-
Zuken Group is supporting automotive evolution. In other words, the brainpower           tion to component development, the Zuken Group supports all administrative
of the Zuken Group is at the forefront, essentially propelling the advancement of        requirements for green procurement and contributes to achieving environmentally
the world-leading automotive industry on both a domestic and global scale.               friendly automotive development.
                                                                                                                                                           Zuken Inc. 16
Financial Section



                                                  18                                 19                                  22                           24
      Contents                             Consolidated Six-Year                 Management’s                  Consolidated Balance Sheets   Consolidated Statements of
                                                                             Discussion and Analysis
                                                Summary                                                                                               Income
                                                                          Business Risks and Other Risks
                                                                          Status of Corporate Governance




                                                  25                                 26                                  27                           35
                                     Consolidated Statements of            Consolidated Statements of             Notes to Consolidated             Independent
                                           Shareholders’ Equity                    Cash Flows                      Financial Statements           Auditors’ Report




Consolidated Six-Year Summary
Zuken Inc. and Consolidated Subsidiaries
Years ended March 31
                                                                                                                                                          Thousands of
                                                                                                       Millions of yen                                     U.S. dollars
                                                                   2001          2002            2003             2004           2005        2006              2006
For the Year:
Net sales ............................................. ¥18,829 ¥15,288 ¥14,653 ¥16,183 ¥15,770 ¥16,799                                                   $143,581
Cost of sales .........................................            5,742          4,270           4,017            4,151          4,087       4,390            37,521
Selling, general and
 administrative expenses ....................... 10,863                         10,834          10,358             9,934          9,762      10,458            89,385
Operating income .................................                 2,224             184               278         2,098          1,921       1,951            16,675
Income before income taxes ...................                     5,652              53           (661)           1,549          3,387       3,002            25,658
Net income (loss) ..................................               4,809            (422)        (1,165)             945          2,185       2,452            20,957


At Year-End:
Total assets .......................................... ¥34,909 ¥33,422 ¥32,468 ¥33,288 ¥35,768 ¥34,074                                                   $291,231
Total shareholders’ equity ...................... 27,244         26,562  25,319  26,158  28,130  25,526                                                    218,171

                                                                                                            Yen                                            U.S. dollars

Per Share of Common Stock:
Net income (loss) .................................. ¥172.36 ¥ (15.12) ¥ (41.77) ¥ 33.30 ¥ 77.65 ¥ 90.88                                                  $     0.777
Diluted net income ...............................                    —              —               —                —              —           —                 —
Cash dividends applicable to the period .....                      10.00          10.00           10.00            10.00          10.00       15.00             0.128
Notes: 1. Net income (loss) per share is computed based upon the weighted-average number of shares of common stock outstanding during each fiscal year.
       2. Diluted net income per share has not been presented because the Company had no potential common stock equivalents such as convertible
          bonds for these years.
       3. For the convenience of the reader, the six-year summary described above have been presented in Japanese yen and also in U.S.dollars by
          arithmetically translating all Japanese yen amounts using the exchange rate of ¥117 to US$1 in effect at March 31, 2006.


18 Zuken Inc.
Management’s Discussion and Analysis
Zuken Inc. and Consolidated Subsidiaries




Overview of Fiscal 2006                                                        higher than a year before, at ¥8,500 million. Current liabilities shrank
                                                                               18.1% to ¥4,098 million and long-term liabilities leapt 67.0% to ¥4,402
Operating Results           In fiscal 2006, ended March 31, 2006,              million. The principal factor behind the fall in current liabilities was
consolidated net sales climbed 6.5% compared with the previous fiscal          reduced taxable income and a resulting decline in income tax payable.
year to ¥16,799 million reflecting steady progress in the Group’s              The increase in long-term liabilities largely stemmed from a new
consulting services.                                                           accounting standard for retirement allowances that was adopted at a
     The Zuken Group enjoyed an increase in revenues across all major          subsidiary company in the United Kingdom, the allowance for retirement
product lines. Revenues from circuit board design solutions increased          benefits for employees increasing by ¥1,893 million.
3.9% year on year to ¥5,847 million, and 5.3% to ¥3,345 million                    Shareholders’ equity at March 31, 2006 was ¥25,526 million, 9.3%
from circuit design and IC solutions. Sales in the IT solutions category       less than a year earlier. The main factor in this was the acquisition of
surged 20.8% to ¥2,252 million and 5.2% to ¥5,300 million in client            ¥2,524 million of treasury common stock, at cost. As a result, the
support services.                                                              shareholders’ equity ratio dipped 3.7 percentage points from the previ-
     By geographic region, sales in Japan grew 5.5% compared with              ous year’s 78.6%, to 74.9%.
the previous fiscal year to ¥13,618 million on the back of steady
consulting service results. An increase in sales mainly in Germany             Analysis of Shareholders’ Equity Resources and Cash Liquidity
was a key factor in the 6.3% year-on-year increase in European sales to        Funds for the operating capital necessary for Zuken to conduct its future
¥2,756 million. In other regions, the Group’s performance in Asia and          business and capital investment resources are obtained from cash
North America improved contributing to a robust 15.8% increase to              received from operating activities and internal funds. In terms of its
¥1,374 million.                                                                finances, the Zuken Group gives the utmost consideration to security,
     On the earnings front, gross profit rose 6.2% year on year to ¥12,409     while paying particular heed to such factors as credit exposure and
million in line with sales growth. The gross profit margin slipped slightly    interest rates, investing in financial instruments that are thought to have
from 74.1% in fiscal 2005 to 73.9% in the fiscal year under review.            the least loss potential.
Despite a 7.1% rise in selling, general and administrative expenses to             In net cash provided by operating activities totaled ¥987 million, growth
¥10,458 million, operating income edged up 1.6% year on year to                in net income of ¥2,452 million was recorded and accrued expenses and
¥1,951 million. Accounting for these factors, the operating margin was         income taxes decreased ¥1,000 million, resulting in a decrease of ¥696
11.6% in fiscal 2006.                                                          million compared with the end of the previous fiscal year.
     In the fiscal year under review, Zuken reported net other income of           Net cash provided by investing activities totaled ¥977 million. Major
¥1,051 million, down 28.3% compared with the previous fiscal year.             components were inflows of ¥956 million from the proceeds of the sale
Major components were a foreign exchange gain totaling ¥102 million,           of investments in affiliated companies and ¥575 million from the
reflecting the strong U.S. dollar against the Japanese yen and European        proceeds from sales of investment securities, and an outflow of ¥346
currencies, and equity in gains of affiliated companies of ¥36 million,        million from the acquisition of fixed assets including the purchase of
compared with equity in losses amounting to ¥42 million in the previous        R&D equipment.
fiscal year. While the Company enjoyed a gain of ¥870 million from the             Net cash used in financing activities was ¥2,761 million, mainly
sale of Real Vision Inc. shares, overall gains on issuance of stock by         consisting of an outflow of ¥2,529 million for the purchase of treasury
affiliated companies and gain on sale of affiliated companies’ securities      common stock, at cost, and cash dividends paid of ¥273 million.
declined year on year.                                                             As a result, cash and cash equivalents at the end of the fiscal year
     As a result of the foregoing, income before income taxes totaled          under review decreased ¥682 million to ¥11,251 million.
¥3,002 million. Accounting for provisions for current and deferred
income taxes, net income increased 12.2% compared with the previous            Outlook         Although the economic outlook is one that will necessitate
fiscal year to ¥2,452 million. Net income per share was ¥90.88, up from        playing close heed to movements in crude oil prices, a recovery in
¥77.65 in the previous fiscal year, while the shareholders’ equity ratio       corporate earnings and other factors have elicited predictions of a solid
improved one percentage point to 9.1%.                                         recovery in business conditions. Although there are fears of intensified
                                                                               price competition in the electronics manufacturing industry, the digital
Financial Position             Total assets at March 31, 2006, were            device market is expected to continue its expansion.
¥34,074 million, down 4.7% from a year earlier. Current assets were                In this business environment, the Zuken Group will continue its
reduced by 3.5% to ¥23,578 million compared with the end of the                efforts to become a trusted partner to its customers by providing them
previous fiscal year, and fixed assets decreased by 7.5% year on year to       with real solutions geared toward the increased efficiency of all design
¥10,496 million. The reduction in current assets was principally due to        and manufacturing processes. For that reason, exhibiting the technolo-
a ¥682 million decline in cash and cash equivalents stemming from              gies it has accumulated and the expertise it has gathered and refined,
the acquisition of treasury common stock, at cost. Under fixed assets,         from software to support services to all types of consulting, the Company
property and equipment, at cost, recorded a 2.2% drop compared with            will address the building of solutions packages that are tailor-made to
the end of the previous fiscal year, to ¥7,379 million, the principal factor   customers’ industry sectors, types of operation as well as their products.
being accumulated depreciation. Investments and other assets fell              By so doing, solutions will be speedily offered to customers, increasing
17.9% compared with the end of the previous fiscal year to ¥3,117              the efficiency of the Zuken Group’s business and improving its earnings
million, the principal component being RealVision Inc., which was              potential. In addition to strengthening its technical and consulting
eliminated from the scope of consolidation to become an equity-method          capabilities, the Group is endeavoring to expand and harmonize its
affiliate through the sale of its shares, with investment in affiliated        business domains, proactively moving forward into new technological
companies declining by ¥1,521 million.                                         domains such as 3-D mechanical design while remaining in strong
     Total liabilities at the end of the fiscal year under review were 11.3%   markets, such as automobile-related businesses. The Group will also


                                                                                                                                            Zuken Inc. 19
work to increase corporate value by securing superior human resources,       the Zuken Group has forged long-term product-development and
building organizations suited to each of its business models, and            marketing ties with many capable partner firms. However, there is a
strengthening corporate governance and other business systems.               risk that these ties could be broken if these partner firms suffer
                                                                             bankruptcy, are acquired, or change their strategic objectives. If a
Business Risks and Other Risks                                               number of alliances or important alliances are dissolved, it could have
                                                                             an effect on the performance of the Zuken Group.
Factors in the Zuken Group’s operations and accounting that have the         (5) Establishing and acquiring subsidiaries, and forging capital ties
potential to exert a significant influence on investors’ decisions           To expand and reinforce businesses, the Zuken Group establishes
include, but are not limited to, those set out below.                        subsidiaries and affiliates as needed, establishes capital ties with
    Forward-looking statements in the text are based on the judgment         friendly firms, and acquires capable firms. However, there is always a
of the Zuken Group’s management as of March 31, 2006, the end of             risk that such measures may not have the anticipated effect on
the fiscal year under review.                                                performance, or that the cost burden could balloon. In addition, if the
(1) Operating in a circumscribed market                                      performance or financial position of subsidiaries or affiliates deterio-
The core business of the Zuken Group is the provision of solutions that      rates, it could have an effect on the Zuken Group’s performance.
increase the efficiency of electronic product design and manufactur-         (6) Expansion of overseas operations
ing, primarily to the electronics manufacturing industry. Therefore, the     The Zuken Group is developing businesses in the United States, and
Zuken Group’s performance is strongly affected by business conditions        in various countries in Europe and Asia. When operating in overseas
in related manufacturing industries and trends in capital investment.        markets, a company faces risks in connection with:
The Group is striving to expand its operations by increasing its pres-          Sudden change in political or economic environments
ence in automobile-related businesses and through participation in              Changes in foreign exchange rates
promising new markets and technological domains. Should perfor-                 Unforeseen changes in statutes or regulations
mance and capital investment in the electronics manufacturing                   Difficulty securing human resources
industry remain weak, it is possible that the performance of the Zuken          Terrorism, war, infectious diseases, or other social unrest.
Group will be affected.                                                      Any of these poses a risk of affecting the performance of the Zuken
(2) Developing solutions                                                     Group.
To provide the optimum solutions for its customers’ needs, the Zuken         (7) Safeguarding of industrial secrets and personal information
Group must develop new products that reflect the latest trends and           In the course of the Zuken Group’s systems development, consulting,
technologies, while remaining committed to strengthening its own             inspection, and support operations, Group personnel have access to
capabilities. The Group must focus on improvements in quality and            customers’ design data, information on new products, and other
ensure thoroughgoing quality control, employing systems that prevent         industrial secrets. The Group is also in possession of large volumes of
defects and ensure swift response and correction should defects              personal information on customers, shareholders, and employees. To
emerge. However, if development does not proceed according to plan,          safeguard this information, we are deploying internal information
we run the risk of losing opportunities or delaying the development of       systems, entering into non-disclosure agreements, formulating internal
businesses. When there is a major defect in a new product, not only          regulations and guidelines, and conducting thorough employee
do we bear the burden of remedying it and making good our guarantee          training in information management. However, in the unlikely event of
against defects, we also run the risk of losing the confidence of our        a leak of industrial secrets or personal information, the Zuken Group
customers. Should that occur, it could have a serious effect on the          could become liable for damages, and could suffer harm to its reputa-
performance of the Zuken Group.                                              tion. This could affect the performance of the Zuken Group.
(3) Intellectual property rights                                             (8) Liabilities and expenses for severance and retirement benefits
As the Zuken Group develops and extends its solutions business using         The Company and certain consolidated subsidiaries within the Group
computer technology and IT, maintaining the security of copyrights,          adopted defined benefit retirement lump sum payment plans, while
patents, trademarks, and other intellectual property has become              certain consolidated subsidiaries overseas adopted defined benefit
extremely important. At the same time, because obtaining these               retirement pension plans. In the event of changes in calculation
requires an investigation by government organizations, it is not a           methods for liabilities and expenses for severance and retirement
foregone conclusion that they will be forthcoming. The Zuken Group           benefits, deteriorations in the performance of pension fund manage-
exercises due care to guard against infringement on third-party intel-       ment, or changes in legal systems and accounting standards regarding
lectual property rights during the course of its product development         severance and retirement benefits, the Group’s liabilities and expens-
operations, but in actual practice the research required to ensure that      es may increase. Should the liabilities and expenses exceed the
Zuken Group products do not infringe the intellectual property rights of     Company’s reserves for them, the Group’s overall performance will be
any other company can be very arduous. If the Zuken Group were to            adversely affected.
infringe on the intellectual property rights of a third party in its prod-   (9) Natural disasters
ucts, technology, or trademarks, there is a risk that payment of royal-      The Zuken Group is engaged in business activities in Japan and a
ties or damages might be required, or that we could be ordered to stop       number of other countries. The Group is exercising due care in its
using patented technology. As of March 31, 2006, there had never             preparations for natural disasters, but the risk of a major earthquake,
been an instance of the Zuken Group being served with a request for          fire or other catastrophe at a business facility causing significant
damages or ordered to stop using patented technology in connection           destruction cannot be eliminated. In such an occurrence, operations
with infringement of intellectual property rights.                           at business locations affected could be halted permanently or tem-
(4) Alliances with capable partner firms                                     porarily, resulting in significant monetary losses and affecting the
To build a solid business base and move into new businesses,                 performance of the Zuken Group.


20 Zuken Inc.
Status of Corporate Governance                                                                        on audit results to corporate auditors while discussing and exchanging
                                                                                                      views with them as required. The close collaboration between the
(1) Fundamental approach to corporate governance                                                      Internal Audit Division and corporate auditors facilitates effective
Corporate governance allows for a quick and flexible response to                                      auditing operations.
dramatic changes in the business environment. Legal, appropriate                                          Zuken has a contractual relationship with KPMG AZSA & Co.
and highly sound corporate activities are the underpinnings of corpo-                                 (“KPMG AZSA”) as Zuken’s independent auditor. Accordingly, KPMG
rate governance.                                                                                      AZSA conducts rigorous audits of the Company’s financial statements.
(2) The Company’s internal organization                                                               The independent auditors report and give explanations on audit results
Zuken uses a corporate auditor system and has built an effective                                      at biannual Board of Corporate Auditors’ meetings, where issues
corporate governance system, centered on its Board of Directors,                                      including business risks and other risks are examined and discussed.
corporate auditors and Board of Corporate Auditors, which is suitable                                 Aside from this, independent auditors and corporate auditors set up
for the scope of its operations and the type of businesses in which the                               forums for opinion exchanges and deliberations on an as-needed
Company engages. The Company’s management structure is com-                                           basis. Through these initiatives, Zuken is working to secure sound
posed of six directors (one of whom is an outside director) and four                                  audit systems.
corporate auditors (including two outside auditors). In addition to the
corporate auditors, one alternate corporate auditor was elected at the                                (4) Status of internal control and risk management system provisions
General Shareholders’ Meeting held on June 29, 2006, to guard                                         Zuken advances business operations in keeping with its corporate
against the number of corporate auditors falling below the level                                      philosophy that aims for the “establishment of a vibrant corporate
required by law.                                                                                      culture founded upon soundness, vigor and dignity.” Under this
    The Board of Directors formulates fundamental management                                          corporate philosophy, together with its fundamental policies on
policies and pinpoints important issues, analyzes and makes decisions                                 corporate governance, the Group has established and continues to
regarding legal and regulatory concerns, as well as on items contained                                strengthen its internal controls and risk management systems. To this
in the Articles of Incorporation, and provides oversight for directors in                             end, Zuken implements initiatives that include:
the course of their managerial duties. Each corporate auditor and the                                 1. Enforcement of thorough compliance through the establishment
Board of Corporate Auditors are also tasked with providing oversight of                                  and dissemination of regulations and guidelines, employee training
the directors in the execution of their duties, along with general                                       programs, periodic internal audits and other measures
oversight of the Company’s operations.                                                                2. Appropriate safekeeping of documents and information pertaining
    The Board of Directors and Board of Corporate Auditors each have                                     to the execution of its business in accordance with in-house
monthly meetings scheduled, in addition to which they convene as                                         regulations and guidelines
circumstances dictate. Their vigorous discussions lead to flexible                                    3. Effective, timely evaluations and reviews of business and other
decision making and rigorous management oversight.                                                       risks, and promotion of risk management systems through the
(3) Status of internal audits and audits by corporate and independent                                    establishment and dissemination of regulations and guidelines,
auditors                                                                                                 employee training programs, periodic internal audits and other
As set forth in the audit policy and audit plan established by the                                       measures
Board of Corporate Auditors, each corporate auditor and the Board of                                  4. Ensuring efficient business operations by facilitating flexible
Corporate Auditors attend important meetings and perform rigorous                                        decision making at Board of Directors’ meetings, clarifying authori-
audits through such methods as Group-wide investigations into                                            ty in and responsibility for the execution of business in accordance
management and business operations and the holding of hearings.                                          with in-house regulations, and conducting scheduled reporting and
Zuken has established an Internal Audit Division under the direct                                        investigation of business progress and performance
supervision of the president to act as its internal auditing organiza-                                5. Establishment of Group-wide internal control systems including the
tion. The Internal Audit Division performs periodic internal audits of                                   formulation of regulations for managing subsidiaries and affiliates,
accounts and operations based on the audit policy set out in an audit                                    the collaborative setting up of internal control systems that are
planning document. The Division then reports and gives explanations                                      suitable to each subsidiary and affiliate in terms of the scope of
                                                                                                         their operations and types of businesses
                             General Shareholders' Meeting                                            6. Creation of ideal auditing environments through the establishment
                                                                                                         of a Board of Corporate Auditors’ Office that assists corporate
    Appointment/dismissal             Appointment/dismissal                  Appointment/dismissal
                                                                                                         auditors in their duties, the formation of lines of communication
                                                                Board of Corporate Auditors
    Independent Auditor(s)
                                            Collaboration                 Corporate Auditors             between directors and employees to corporate auditors, regular
              Accounting audit                                    Oversight/audit                        provision of forums for discussions with the representative direc-
                                                                                                         tor(s), and collaboration with independent auditors and internal
                                        Board of Directors
                                            Directors
                                                                                                         audit departments
                                                                                                      Through these efforts, the Zuken Group will continue working to
                      Report/discussion          Supervision/appointment/dismissal
                                                                                                      upgrade corporate governance through more active and stronger efforts
                                    Representative Director(s)                        Collaboration   in both the operational and managerial realms, as well as through the
                                 Direction/instruction
                                                                                                      reinforcement of other management organizations.
                Report                                                    Direct supervision of
                                                                          the president
    General Managers of Each Department
                                                         Internal audit
             Business Departments/                                        Internal Audit Division
            Subsidiaries and Affiliates



                                                                                                                                                              Zuken Inc. 21
Consolidated Balance Sheets
Zuken Inc. and Consolidated Subsidiaries
As of March 31, 2005 and 2006


                                                                                                                                                 Thousands of
                                                                                                                                                  U.S. dollars
                                                                                                                      Millions of yen              (Note 1)
ASSETS                                                                                                            2005              2006            2006
Current Assets:
Cash and cash equivalents (Note 1) ............................................................. ¥11,933                         ¥11,251         $ 96,162
Time deposits ............................................................................................          221                  241          2,060
Marketable securities (Notes 1 and 2) .........................................................                    6,700                6,700       57,265
Trade notes and accounts receivable ...........................................................                    4,647                4,419       37,769
  Less–Allowance for doubtful receivables ...................................................                        (42)                 (42)         (359)
Inventories (Note 1):
  Finished goods .......................................................................................                 2                20            171
  Work in process, supplies and raw materials ..............................................                        173                  188          1,607
Deferred tax assets (Notes 1 and 3) .............................................................                   420                  309          2,641
Other current assets ...................................................................................            371                  492          4,205
     Total current assets .............................................................................. 24,425                    23,578         201,521




Property and Equipment, at Cost (Note 1):
Land ........................................................................................................      3,010                3,010       25,726
Buildings and structures .............................................................................             8,842                8,852       75,658
Furniture, fixtures, and equipment ..............................................................                  2,240                2,174       18,581
                                                                                                                  14,092           14,036         119,965
  Less–Accumulated depreciation ...............................................................                   (6,545)           (6,657)        (56,897)
                                                                                                                   7,547                7,379       63,068




Investments and Other Assets:
Investment securities (Notes 1 and 2) .........................................................                     337                 1,174       10,034
Investment in affiliated companies (Note 1) .................................................                      2,029                 508          4,342
Goodwill (Note 1) ......................................................................................            353                  305          2,607
Intangible fixed assets (Note 1) ...................................................................                323                  325          2,778
Deferred tax assets (Notes 1 and 3) .............................................................                    14                   20            171
Other ........................................................................................................      740                  785          6,710
                                                                                                                   3,796                3,117       26,642
                                                                                                                 ¥35,768         ¥34,074         $291,231
The accompanying notes to the consolidated financial statements are an integral part of these balance sheets.




22 Zuken Inc.
                                                                                                                                             Thousands of
                                                                                                                                              U.S. dollars
                                                                                                                  Millions of yen              (Note 1)
LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                          2005              2006             2006
Current Liabilities:
Accounts payable ...................................................................................... ¥ 1,713              ¥ 1,628         $ 13,915
Accrued expenses ......................................................................................         888                 1,014         8,667
Income taxes payable (Notes 1 and 3) .........................................................                 1,295                 183          1,564
Advances received .....................................................................................         957                 1,112         9,504
Other current liabilities ..............................................................................        149                  161          1,376
     Total current liabilities .........................................................................       5,002                4,098        35,026


Long-term Liabilities:
Deferred tax liabilities (Notes 1 and 3) ........................................................               904                  769          6,573
Severance and retirement plan (Notes 1 and 4)
  Employees .............................................................................................      1,628                3,521        30,094
  Directors and corporate auditors ...............................................................              101                    —                —
Other long-term liabilities ...........................................................................              3               112            957
                                                                                                               2,636                4,402        37,624


Minority Interest ........................................................................................        —                   48            410


Commitments (Note 7)


Shareholders’ Equity (Note 5):
Common stock:
  Authorized–86,525,700 shares at March 31, 2005 and 2006
  Issued–27,903,669 shares at March 31, 2005 and 2006 .......................... 10,117                                        10,117            86,470
Capital surplus ..........................................................................................     8,658                8,658        74,000
Retained earnings ......................................................................................       9,406                8,957        76,556
Net unrealized holding gain on securities (Notes 1 and 2) .............................                          64                  414          3,538
Foreign currency translation adjustments (Note 1) ........................................                      (110)                 (91)         (778)
                                                                                                              28,135           28,055          239,786
Less–Treasury common stock, at cost:
  5,352 shares at March 31, 2005 and 2,006,699 shares at March 31, 2006 .....                                        (5)        (2,529)         (21,615)
                                                                                                              28,130           25,526          218,171
                                                                                                             ¥35,768         ¥34,074         $291,231




                                                                                                                                             Zuken Inc. 23
Consolidated Statements of Income
Zuken Inc. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2006


                                                                                                                                                  Thousands of
                                                                                                                                                   U.S. dollars
                                                                                                                    Millions of yen                 (Note 1)
                                                                                                                 2005                2006            2006
Net Sales (Note 1) ..................................................................................... ¥15,770                    ¥16,799       $143,581
Cost of sales .............................................................................................      4,087                4,390          37,521
Gross profit ............................................................................................... 11,683                  12,409        106,060
Selling, General and Administrative Expenses (Notes 1 and 7) .......................                             9,762               10,458          89,385
Operating income ......................................................................................          1,921                1,951          16,675


Other Income (Expenses):
Interest and dividend income ......................................................................                 34                  46               393
Interest expense ........................................................................................               (2)                 (2)           (17)
Gain on sale of investment securities ...........................................................                   14                 543             4,641
Gain on sale of affiliated company’s securities ..............................................                     974                 327             2,795
Foreign exchange gain ................................................................................              49                 102               872
Equity in net gain (loss) of affiliated companies ............................................                     (42)                 36               308
Gain (loss) on issuance of stock by affiliated company ..................................                          325                  (17)            (145)
Retirement benefit expenses .......................................................................                 —                   (60)            (513)
Write-off of advances on purchase commitments ..........................................                                (4)             (15)            (128)
Other, net .................................................................................................       118                  91               777
     Total ...................................................................................................   1,466                1,051            8,983
     Income before income taxes                                                                                  3,387                3,002          25,658


Provision for Income Taxes (Notes 1 and 3):
Current .....................................................................................................    1,652                 820             7,009
Deferred ...................................................................................................      (450)                (270)          (2,308)
Income taxes (Notes 1 and 3) .....................................................................               1,202                 550             4,701
Net income (loss) before minority interest ....................................................                  2,185                2,452          20,957


Minority Interest ........................................................................................          —                       —               —
Net income ................................................................................................ ¥ 2,185                 ¥ 2,452       $ 20,957

                                                                                                                                                  U.S. dollars
                                                                                                                              Yen                  (Note 1)

Per Share of Common Stock (Notes 1 and 6):
Net income ............................................................................................... ¥77.65                    ¥90.88          $0.777
Diluted net income ....................................................................................             —                       —               —
Cash dividends applicable to the period .......................................................                  10.00                15.00            0.128
The accompanying notes to the consolidated financial statements are an integral part of these statements.




24 Zuken Inc.
Consolidated Statements of Shareholders’ Equity
Zuken Inc. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2006


                                                                                                                                             Thousands of
                                                                                                                                              U.S. dollars
                                                                                                                Millions of yen                (Note 1)
                                                                                                             2005              2006              2006
Common Stock:
Beginning balance ..................................................................................... ¥10,117            ¥10,117           $ 86,470
Ending balance ......................................................................................... ¥10,117           ¥10,117           $ 86,470


Capital Surplus:
Beginning balance ..................................................................................... ¥ 8,658            ¥ 8,658           $ 74,000
Ending balance ......................................................................................... ¥ 8,658           ¥ 8,658           $ 74,000


Retained Earnings:
Beginning balance ..................................................................................... ¥ 7,516            ¥ 9,406           $ 80,393
Net income ...............................................................................................   2,185                2,452          20,957
Cash dividends paid ...................................................................................       (279)                (273)          (2,333)
Directors’ bonuses .....................................................................................       (16)                 (19)            (162)
Decrease in companies accounted for by the equity method ...........................                            —                  (849)          (7,256)
Effect of adoption of a new accounting standard for retirement benefit
 by subsidiaries in the United Kingdom .......................................................                  —              (1,595)           (13,633)
Actuarial loss of retirement benefit obligation of subsidiaries
 in the United Kingdom .............................................................................            —                  (165)          (1,410)
Ending balance ......................................................................................... ¥ 9,406           ¥ 8,957           $ 76,556


Net Unrealized Holding Gain (Loss) on Securities (Notes 1 and 2):
Beginning balance ..................................................................................... ¥       77         ¥        64       $      547
  Net changes ...........................................................................................      (13)                350            2,991
Ending balance ......................................................................................... ¥      64         ¥       414       $ 3,538


Foreign Currency Translation Adjustments (Note 1):
Beginning balance ..................................................................................... ¥     (207)        ¥       (110)     $      (940)
  Change: Foreign currency translation adjustments arising
   during the period ..................................................................................         97                  19              162
Ending balance ......................................................................................... ¥    (110)        ¥        (91)     $      (778)


Treasury Common Sock:
Beginning balance ..................................................................................... ¥           (3)    ¥          (5)    $       (43)
     Net changes ........................................................................................           (2)        (2,524)           (21,572)
Ending balance ......................................................................................... ¥          (5)    ¥ (2,529)         $(21,615)
The accompanying notes to the consolidated financial statements are an integral part of these statements.




                                                                                                                                            Zuken Inc. 25
Consolidated Statements of Cash Flows
Zuken Inc. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2006


                                                                                                                                             Thousands of
                                                                                                                                              U.S. dollars
                                                                                                                  Millions of yen              (Note 1)
                                                                                                               2005              2006            2006
Cash Flows from Operating Activities:
Net Income ............................................................................................... ¥ 2,185           ¥ 2,452         $ 20,957
Adjustments to reconcile net income to net cash provided by operating activities:
  Depreciation and amortization...................................................................             534                    531         4,539
  Gain on sale of affiliated company’s securities, net ....................................                   (970)                  (327)       (2,795)
  Loss (gain) on sale of investment securities ...............................................                  14                   (543)       (4,641)
  Loss (gain) on issuance of stock by affiliated company ...............................                      (325)                    17           145
  Equity in net loss (gain) of affiliated companies .........................................                   42                    (36)         (308)
  Other, net ..............................................................................................   (171)                  (114)         (974)
Changes in assets and liabilities:
  Trade notes and accounts receivable ........................................................                (177)                 273           2,333
  Accounts payable ....................................................................................        333                 (112)           (957)
  Accrued expenses and income taxes .........................................................                  331               (1,000)         (8,547)
  Accrued severance and retirement cost .....................................................                   81                   95             812
  Other, net ..............................................................................................   (195)                (249)         (2,128)
    Net cash provided by operating activities ...............................................                1,682                  987           8,436

Cash Flows from Investing Activities:
(Increase) decrease in time deposits, net .....................................................                 (155)                   1             8
Expenditures for property and equipment .....................................................                   (208)                (216)       (1,846)
Proceeds from sales of property and equipment ............................................                        17                   22           188
Expenditures for intangible fixed assets .......................................................                (130)                (130)       (1,111)
Purchase of marketable securities ...............................................................                (22)                  —             —
Proceeds from sales of marketable securities ................................................                     44                   —             —
Purchase of investment securities ...............................................................               (109)                (211)       (1,803)
Proceeds from sales of investment securities ................................................                     36                  575         4,914
Proceeds from sales of affiliated company’s securities ...................................                     1,304                  956         8,171
Other, net .................................................................................................      44                  (20)         (171)
    Net cash provided by investing activities ................................................                   821                  977         8,350

Cash Flows from Financing Activities:
Proceeds from minority interest shareholders ................................................              —                      41               350
Purchase of treasury common stock .............................................................            (1)                (2,529)          (21,615)
Cash dividends paid ...................................................................................  (279)                  (273)           (2,333)
    Net cash used in financing activities .....................................................          (280)                (2,761)          (23,598)
Effect of Exchange Rate Changes on Cash and Cash Equivalents ....................                         119                    115               983
Net Increase in Cash and Cash Equivalents                                                               2,342                   (682)           (5,829)
Cash and Cash Equivalents at Beginning of Year ...........................................              9,591                 11,933          101,991
Cash and Cash Equivalents at End of Year .................................................... ¥11,933                        ¥11,251         $ 96,162

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
  Interest .................................................................................................. ¥     2        ¥          2    $       17
  Income taxes ..........................................................................................       1,227               1,926        16,462
The accompanying notes to the consolidated financial statements are an integral part of these statements.


26 Zuken Inc.
Notes to Consolidated Financial Statements
Zuken Inc. and Consolidated Subsidiaries




1.
                                           The following is a summary of the significant accounting and reporting policies adopted by Zuken Inc.
                                           (“Zuken” or the “Company”) and its subsidiaries in the preparation of the accompanying consolidated
                                           financial statements.
Nature of Operations                       (a) Nature of Operations
and Significant Accounting The Company is engaged in the research, development, and sale of solutions that maximize the efficiency
                                           of design and manufacturing processes for electronic products. The Company holds a leading global
and Reporting Policies                     share of the PCB/MCM/HIC software market in the field of electronic design automation. The Company
                                           also develops solutions for application-specific integrated circuits (ASICs) and large-scale integration
                                           (LSI). The Company’s operations are based in Japan but include development, sales, and support centers
                                           in 10 countries. Customers for the Company’s solutions are primarily electronics manufacturers located
                                           around the world, but also include automobile manufacturers.
                                           (b) Basis of Presenting the Consolidated Financial Statements
                                           The accompanying consolidated financial statements have been prepared in accordance with the
                                           provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations,
                                           and in conformity with accounting principles generally accepted in Japan, which are different in certain
                                           respects as to application and disclosure requirements of International Financial Reporting Standards.
                                              The accounts of overseas subsidiaries are based on their accounting records maintained in conformity
                                           with generally accepted accounting principles prevailing in the respective countries of domicile. The
                                           accompanying consolidated financial statements have been restructured and translated into English
                                           with some expanded descriptions and the inclusion of consolidated statements of shareholders’ equity
                                           from the consolidated financial statements of the Company prepared in accordance with Japanese
                                           GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by
                                           the Securities and Exchange Law. Some supplementary information included in the statutory Japanese
                                           language consolidated financial statements, but not required for fair presentation, is not presented in
                                           the accompanying consolidated financial statements.
                                              The translation of the Japanese yen amounts into U.S. dollars are included solely for the convenience
                                           of readers outside Japan, using the prevailing exchange rate at March 31, 2006, which was ¥117 to
                                           US$1. The convenience translations should not be construed as representations that the Japanese yen
                                           amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or
                                           any other rate of exchange.
                                           (c) Principles of Consolidation and Accounting for Investments in Affiliated Companies
                                           The accompanying consolidated financial statements include the accounts of the Company and its
                                           majority-owned subsidiaries. The fiscal year-ends of three subsidiaries are at the end of February.
                                           Significant transactions during March were reflected in the consolidated financial statements. All
                                           significant intercompany balances and transactions have been eliminated.
                                              Investments in which the Company has significant influence or ownership of more than 20% but
                                           less than or equal to 50% are accounted for under the equity method.
                                              The excess cost of investments in subsidiaries and affiliated companies over their equity in the net
                                           assets at the date of acquisition is generally being amortized on a straight-line basis over 15 years.
                                           (d) Translation of Foreign Accounts
                                           Foreign currency transactions are translated into Japanese yen by using the exchange rates in effect at
                                           the time of the transactions. Foreign currency receivables and payables are translated at year-end
                                           exchange rates and resulting exchange gains or losses are recognized in earnings currently.
                                              All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen
                                           at year-end exchange rates and all income and expense accounts are translated at the weighted average
                                           of the exchange rates in effect during each fiscal period. Retained earnings are translated at the historical
                                           rates. The resulting translation adjustments are accumulated as a component of shareholders' equity
                                           and minority interest.
                                           (e) Revenue Recognition
                                           Sales are recorded upon installation of the system and acceptance thereof by customers. Advances
                                           received from customers for maintenance services are treated as deferred revenue until earned.
                                           (f) Cash and Cash Equivalents
                                           In preparing the consolidated statement of cash flows, cash on hand, readily available deposits, and
                                           short-term highly liquid investments with maturities not exceeding three months at the time of purchase
                                           are considered to be cash and cash equivalents.
                                           (g) Marketable Securities and Investment Securities
                                           The Japanese accounting standard for financial instruments, including short-term investments and
                                           investment securities, requires all applicable securities to be classified and accounted for, depending
                                           on management's intent, as follows:
                                                                                                                                          Zuken Inc. 27
                   1) trading securities, 2) held-to-maturity debt securities and 3) available-for-sale securities.
                   The Company and its domestic subsidiaries hold only available-for-sale securities. In accordance with
                the standard, available-for-sale securities with available fair market values are reported at fair market
                value with unrealized gains and losses in a separate component of shareholders’ equity, net of applicable
                taxes. Realized gains and losses on sale of available-for-sale securities are determined using the moving-
                average cost method and are reflected in earnings. If the market value of available-for-sale securities
                declines significantly, such securities are stated at fair market value and the difference between fair
                market value and the carrying amount is recognized as a loss in the period of the decline. Non-marketable
                available-for-sale securities are stated at cost determined by the moving-average method.
                   With respect to investments in limited business partnerships or similar types of partnerships (regarded
                as marketable securities under Article 2-2 of the Securities Exchange Law), the net amount equivalent
                to the level of equity based on the most recently available financial statements for the reporting date
                specified in the partnership agreement is used.
                (h) Inventories
                Finished goods and work in process are stated at specific identification cost. Supplies and raw materials
                are stated at cost, determined principally by the moving-average method.
                (i) Depreciation
                As for the Company and its domestic consolidated subsidiaries, depreciation is principally computed
                by the declining-balance method or straight-line method to buildings and, for its overseas consolidated
                subsidiaries, is principally computed by the straight-line method at rates based on the estimated
                useful lives of individual assets which range as follows:
                            Buildings and structures:                 3 years to 60 years
                            Furniture, fixtures and equipment:        2 years to 20 years
                  Ordinary maintenance and repairs are charged to income as incurred and major renewals and
                improvements are capitalized.
                ( j) Goodwill
                In June 1994, the Company, through its subsidiaries, acquired 11 new subsidiaries from Racal
                Electronics P.L.C. In March 2000, the Company, through its subsidiaries, acquired two new subsidiaries.
                As a result of the above two acquisitions, approximately ¥762 million in fiscal 1995, and approximately
                ¥374 million in fiscal 2001, have been recorded as goodwill, which is amortized using the straight-line
                method over 15 years.
                (k) Intangible Fixed Assets
                Intangible fixed assets represent principally the costs of purchased software, which are amortized using
                the straight-line method over a period of up to five years in accordance with estimated useful lives.
                (l) Severance and Retirement Plans
                The Company and certain subsidiaries have unfunded defined benefit plans for employees’ severance
                and retirement. The amount of the severance and retirement cost is determined on the basis of length
                of service and basic pay rate at the time of termination or retirement. Some overseas subsidiaries also
                have unfunded defined contribution plans for severance and retirement plans (Some overseas subsidiaries
                have unfounded defined benefit plans for pension plans.)
                   Under the Japanese accounting standard for employees’ retirement benefits, the liabilities and
                expenses for severance and retirement benefits are determined based on the amounts actuarially
                calculated using certain assumptions. The Company provides allowance for employees’ severance and
                retirement benefits based on the estimated amounts of projected benefit obligations at the balance
                sheet date. Actuarial gains/losses are recognized in consolidated statements of income using the
                straight-line method over 5 years commencing the following period.
                   On June 29, 2005, the Company terminated its retirement benefits plan for directors and corporate
                auditors. The benefits granted prior to the terminate date are included in other long-term liabilities.
                   See Note1(s) for adoption of a new accounting standard by subsidiaries in the United Kingdom.
                (m) Income Taxes
                Income taxes in the accompanying consolidated statements of income comprise corporate tax, inhabitant
                taxes, and enterprise tax.
                   Under the Japanese accounting standard for income taxes, the provision for income taxes is computed
                based on the income before income tax included in the consolidated statements of income. The asset
                and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax
                consequences of temporary differences between the carrying amounts of assets and liabilities for
                financial reporting purposes and the amounts used for income tax purposes.
                (n) Derivative Financial Instruments
                The Company has no derivative financial instruments, which include foreign exchange forward con-
                tracts, foreign currency option contracts, interest rate swap agreements, and interest rate and currency
                swap agreements.



28 Zuken Inc.
                            (o) Research and Development
                            Research and development costs are charged to income as incurred. Total amounts charged to income
                            were ¥2,746 million in fiscal 2005 and ¥2,637 million (US$22,538 thousand) in fiscal 2006,
                            respectively.
                            (p) Leases
                            Finance leases, except those leases for which the ownership of the leased assets is deemed to be
                            transferred to the lessee, are accounted for in the same manner as operating leases.
                            (q) Per Share of Common Stock
                            Net income (loss) and cash dividends per share are based on the weighted average number of out-
                            standing shares of common stock, if any, as retroactively adjusted for the free share distribution and
                            stock splits.
                              Cash dividends per share shown in the accompanying consolidated statements of income have been
                            presented on an accrual basis and include, in each fiscal period, dividends approved by the sharehold-
                            ers after such fiscal period-end but applicable to the fiscal period then ended. The diluted net income
                            per share is based on the weighted average number of outstanding shares of common stock and com-
                            mon stock equivalents.
                              Diluted net income per share for 2005 and 2006 is not presented because the Company had no
                            potential common stock equivalents such as convertible bonds.
                            (r) Appropriation of Retained Earnings
                            The Company and its domestic consolidated subsidiaries record, as a charge directly to retained
                            earnings, cash dividends and bonuses to directors in the financial year in which the appropriation of
                            retained earnings is approved at the shareholders’ meeting.
                            (s) New Accounting Standard
                            On April 1, 2005, the Company adopted the new accounting standard for impairment of fixed assets
                            (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed Assets” issued
                            by the Business Accounting Deliberation Council on August 9, 2002) and the implementation guid-
                            ance for the accounting standard for impairment of fixed assets (the Financial Accounting Standard
                            Implementation Guidance No. 6 issued by the Accounting Standards Board of Japan on October 31,
                            2003).
                               The adoption of the new accounting standard had no impact.
                               Effective April 1, 2005, subsidiaries in the United Kingdom adopted a new accounting standard for
                            retirement benefits in the United Kingdom.
                               The effect of this change was to increase retirement benefit expenses by ¥48 million (US$410
                            thousand), and to increase operating income by ¥12 million (US$103 thousand), decrease ordinary
                            income and income before income taxes and minority interests by ¥48 million (US$410 thousand) for
                            the year ended March 31, 2006 as compared with the corresponding amounts which would have been
                            recorded if the previous method had been followed. Retained earnings also decreased by ¥1,761
                            million (US$15,051 thousand) since the net retirement benefit obligation at transition and actuarial
                            loss was charged directly to retained earnings for the year ended March 31, 2006.
                            (t) Reclassifications
                            Certain prior year amounts have been reclassified to conform to 2006 presentation. These changes had
                            no impact on previously reported results of operations or shareholders’ equity.




2.
                            Marketable securities and investment securities at March 31, 2005 and 2006 consist of the following:
                                                                                                      Millions of yen
                                                                                                      Gross      Gross
Marketable Securities                                                                 Acquisition   unrealized unrealized       Book
                            2005                                                         cost         gains      losses         value
and Investment Securities   Available-for-sale securities:
                              Marketable securities:
                              Debt securities including investment trusts ....... ¥6,700             ¥ —        ¥—          ¥6,700
                                                                                  ¥6,700             ¥ —        ¥—          ¥6,700

                              Investment securities:
                              Marketable equity securities ............................ ¥    93      ¥ 109      ¥—          ¥     202
                              Non-marketable equity securities .....................        135         —        —                135
                                                                                        ¥   228      ¥ 109      ¥—          ¥     337




                                                                                                                        Zuken Inc. 29
                                                                                                           Millions of yen
                                                                                                          Gross      Gross
                                                                                        Acquisition     unrealized unrealized             Book
                2006                                                                       cost           gains      losses               value
                Available-for-sale securities:
                  Marketable securities:
                  Debt securities including investment trusts ....... ¥6,700                             ¥ —          ¥—              ¥6,700
                                                                      ¥6,700                             ¥ —          ¥—              ¥6,700

                  Investment securities:
                  Marketable equity securities ............................ ¥                 127        ¥ 689        ¥—              ¥  816
                  Non-marketable equity securities .....................                      258           —          —                 258
                  Investment funds ...........................................                100           —          —                 100
                                                                               ¥              485        ¥ 689        ¥—              ¥1,174

                                                                                                      Thousands of U.S. dollars
                                                                                                         Gross      Gross
                                                                                       Acquisition     unrealized unrealized           Book
                2006                                                                      cost           gains      losses             value
                Available-for-sale securities:
                  Marketable securities:
                  Debt securities including investment trusts ....... $57,265 $                               —       $—          $57,265
                                                                      $57,265 $                               —       $—          $57,265

                  Investment securities:
                  Marketable equity securities ............................ $ 1,085 $5,889                            $—          $ 6,974
                  Non-marketable equity securities .....................         2,205     —                           —            2,205
                  Investment funds ...........................................     855     —                           —              855
                                                                               $ 4,145 $5,889                         $—          $10,034



3.
                The Company and its subsidiaries are subject to a number of income taxes, which, in the aggregate,
                indicate a statutory rate in Japan of approximately 40.6% for the years ended March 31, 2005 and 2006.
                  A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a
Income Taxes    percentage of income taxes and minority interests is as follows:

                                                                                                                                          2005
                Statutory tax rate ............................................................................................       40.6%
                  Tax credits for R&D and IT expenditures .........................................................                   –6.9
                  Effect of operating loss of overseas subsidiaries ..............................................                    –0.4
                  Effect of equity in losses of affiliated companies .............................................                    –0.2
                  Effect of operating loss of domestic subsidiaries .............................................                     –0.1
                  Effect on amortization of goodwill ..................................................................                0.6
                  Other ...........................................................................................................    1.9
                Effective tax rate .............................................................................................      35.5%


                                                                                                                                          2006
                Statutory tax rate ............................................................................................        40.6%
                  Effect of reverse of write-off of investment in subsidiary ...................................                      –27.9
                  Tax credits for R&D and IT expenditures .........................................................                    –4.0
                  Effect of adjustment of gain on sale of affiliated company’s securities ...............                               7.9
                  Effect on amortization of goodwill ..................................................................                 0.7
                  Other ..........................................................................................................      1.0
                Effective tax rate .............................................................................................       18.3%




30 Zuken Inc.
                     Significant components of the Company’s deferred tax assets and liabilities as of March 31, 2005
                   and 2006 are as follows:
                                                                                                                        Thousands of
                                                                                              Millions of yen            U.S. dollars
                                                                                            2005             2006          2006
                   Deferred tax assets:
                   (Current)
                     Excess bonuses accrued ................................... ¥             200        ¥      206     $ 1,761
                     Enterprise taxes accrued ..................................              108                16         137
                     Accrued expense .............................................             68                66         564
                     Other ..............................................................      46                24         205
                                                                                              422               312       2,667
                   Valuation allowance ............................................            —                 (1)         (9)
                                                                                              422               311       2,658
                   (Non-Current)
                     Retirement benefits .........................................            648              635          5,427
                     Net loss carryforwards ......................................             —               227          1,941
                     Other ..............................................................      91              121          1,034
                                                                                              739              983          8,402
                   Valuation allowance ............................................            —              (226)        (1,932)
                                                                                              739              757          6,470
                   Total deferred tax assets.......................................         1,161            1,068          9,128

                   Net deferred tax assets ........................................         1,161            1,068          9,128

                   Deferred tax liabilities:
                   (Current)
                     Other ..............................................................      (2)               (2)            (17)
                   (Non-Current)
                     Special reserve for software development costs ...              (1,566)              (1,210)        (10,342)
                     Net unrealized holding gains on securities .........               (42)                (283)         (2,419)
                     Reserve for special depreciation ........................          (21)                 (13)           (111)
                                                                                     (1,629)              (1,506)        (12,872)
                   Total deferred tax liabilities ................................. (1,631)               (1,508)        (12,889)
                   Net deferred tax liabilities ................................... ¥ (470)              ¥ (440)        $ (3,761)



4.
                   As explained in Note 1(l), the liabilities and expenses for severance and retirement benefits are
                   determined based on the amounts obtained by actuarial calculation. Under the Japanese accounting
                   standard, small domestic subsidiaries are allowed to provide accrued severance and retirement costs at
Severance and      the amount required had all employees retired at the balance sheet date.
Retirement Plans     Certain overseas subsidiaries have defined contribution plan. (Some overseas subsidiaries have
                   unfounded defined benefit plans for pension plans.)




                                                                                                                       Zuken Inc. 31
                         The liabilities for severance and retirement benefits recognized in the consolidated balance sheet,
                       severance cost, and actual assumptions consist of the following:
                                                                                                                         Thousands of
                                                                                                  Millions of yen         U.S. dollars
                                                                                             2005               2006        2006
                       Liabilities for severance and retirement benefits:
                       Projected benefit obligation ................................. ¥1,400                  ¥5,261      $44,966
                       Plan assets at fair value ......................................    —                   (1,899)     (16,231)
                       Unfunded projected benefit obligation ..................         1,400                  3,362       28,735
                       Unamortized actuarial gain ..................................      228                    159         1,359
                       Accrued severance and retirement cost ................. ¥1,628                         ¥3,521      $30,094

                       Severance cost:
                       Service cost ....................................................... ¥    158          ¥  223      $ 1,906
                       Interest costs on projected benefit obligation ........                    18             190        1,624
                       Expected return on plan assets ............................                —             (110)        (940)
                       Amortization of actuarial gain ..............................             (37)            (40)        (342)
                       Other .................................................................    12              12          102
                       Severance and retirement benefit expenses ........... ¥                   151          ¥ 275       $ 2,350
                       Actuarial assumptions:
                       Discount rate .....................................................       1.5% 1.5%–5.0%
                       Expected return on assets ....................................               — 4.0%–7.0%

                          The Company has pertinent rules for the unfunded termination and retirement allowance plans of
                       directors and statutory corporate auditors, to which payments are subject to the approval of the
                       General Shareholders’ Meeting.
                          The total provisions charged to income under the above plans were ¥165 million in fiscal 2005, and
                       ¥296 million (US$2,530 thousand) in fiscal 2006, respectively.




5.
                       Under Japanese laws and regulations, the entire amount of payment for new shares is required to be
                       designated as common stock, although generally a company may, by a resolution of the Board of
                       Directors, designate an amount not exceeding one-half of the price of the new shares as additional
Shareholders’ Equity   paid-in capital, which is included in capital surplus.
                         Japanese Company Law (“the Law”) became effective on May 1, 2006, and, at the same time, the
                       Commercial Code of Japan (“the Code”) was repealed.
                         Under the Code, companies were required to set aside an amount equal to at least 10% of cash
                       dividends and other cash appropriations as a legal earnings reserve until the total of the legal earnings
                       reserve and additional paid-in capital equaled 25% of common stock. Under the Law, in cases when
                       dividends are paid, an amount equal to 10% of the dividends or the excess of 25% of common stock
                       over the total of additional paid-in-capital and legal earnings reserve, whichever is the smaller, must be
                       set aside as additional paid-in-capital or legal earnings reserve. Under the Code, additional paid-in
                       capital and legal earnings reserve were available for distribution by the resolution of the shareholders’
                       meeting as long as the total amount of legal earnings reserve and additional paid-in capital remained
                       equal to or exceeded 25% of common stock. Under the Law, even when the total amount of additional
                       paid-in capital and legal earnings reserve is less than 25% of common stock, additional paid-in capital
                       and legal earnings reserve may be available for dividends if there is sufficient distributable surplus.
                       Under the Code, the legal earnings reserve and additional paid-in capital could be used to eliminate or
                       reduce a deficit by a resolution of the shareholders’ meeting or could be capitalized by a resolution of
                       the Board of Directors. Under the Law, both of those appropriations require a resolution of the share-
                       holders’ meeting. The legal earnings reserve is included in retained earnings in the accompanying
                       consolidated balance sheets.
                         The maximum amount that the Company can distribute as dividends is calculated based on the non-
                       consolidated financial statements of the Company in accordance with Japanese laws and regulations.
                         At the General Shareholders’ Meeting held on June 29, 2006, the shareholders approved the distrib-
                       ution of cash dividends totaling ¥259 million (US$2,214 thousand), which was paid to shareholders
                       on record as of March 31, 2006.




32 Zuken Inc.
6.
                      Net income (loss) and cash dividends per share are based on the weighted average number of out-
                      standing shares of common stock, if any, as retroactively adjusted for the free share distribution and
                      stock splits.
Per Share Data           Cash dividends per share shown in the accompanying consolidated statements of income have been
                      presented on an accrual basis and include, in each fiscal period, dividends approved by the shareholders
                      after such fiscal period-end but applicable to the fiscal period then ended. The diluted net income per
                      share is based on the weighted average number of outstanding shares of common stock and common
                      stock equivalents.
                         Diluted net income per share for 2005 and 2006 is not presented because the Company had no
                      potential common stock equivalents such as convertible bonds for the years ended March 31, 2005
                      and 2006.




7.
                      The Company and its subsidiaries have cancelable and noncancelable long-term lease agreements,
                      principally for office space, machinery and computer equipment. Rental and lease expenses were
                      ¥355 million in fiscal 2005 and ¥376 million (US$3,214 thousand) in fiscal 2006.
Commitments


8.
                      The Company and its subsidiaries are engaged in the development, marketing and technical support
                      of solutions in relation to the entire process from design to manufacturing, where computer-aided
                      engineering (CAE), computer-aided design (CAD) and computer-aided manufacturing (CAM) systems
Segment Information   are included, for the electric and electronic industries in one segment.
                         Geographical segment information for the Company and its subsidiaries for the year ended March 31,
                      2005 and 2006 is as follows:
                                                                                           Millions of yen
                                                                                                                 Eliminations
                                                                                                                     and
                      2005                                        Japan    Europe      Other         Total        corporate Consolidated
                      Sales to third parties ............. ¥12,331         ¥ 2,278    ¥1,161      ¥15,770         ¥       —     ¥15,770
                      Intersegment sales
                       and transfers ......................      572          314         26           912             (912)         —
                      Total sales ........................... 12,903        2,592      1,187        16,682             (912)     15,770
                      Cost of sales and
                       selling, general and
                       administrative expenses........ 11,111                2,487     1,144       14,742            (893)       13,849
                      Operating income ................. ¥ 1,792           ¥ 105      ¥ 43        ¥ 1,940         ¥   (19)      ¥ 1,921
                      Identifiable assets ................ ¥20,187         ¥ 3,414    ¥1,430      ¥25,031         ¥10,737       ¥35,768
                                                                                           Millions of yen
                                                                                                                 Eliminations
                                                                                                                     and
                      2006                                        Japan    Europe      Other         Total        corporate Consolidated
                      Sales to third parties ............. ¥13,042         ¥ 2,410    ¥1,347      ¥16,799         ¥       —     ¥16,799
                      Intersegment sales
                       and transfers ......................      576          346         27           949             (949)         —
                      Total sales ........................... 13,618        2,756      1,374        17,748             (949)     16,799
                      Cost of sales and
                       selling, general and
                       administrative expenses ....... 11,792                2,744     1,289       15,825            (977)       14,848
                      Operating income ................. ¥ 1,826           ¥    12    ¥ 85        ¥ 1,923         ¥    28       ¥ 1,951
                      Identifiable assets ................ ¥16,355         ¥ 3,409    ¥1,776      ¥21,540         ¥12,534       ¥34,074
                                                                                     Thousands of U.S. dollars
                                                                                                                 Eliminations
                                                                                                                     and
                      2006                                       Japan     Europe      Other        Total         corporate Consolidated
                      Sales to third parties .............      $111,470 $20,598 $11,513 $143,581 $                       — $143,581
                      Intersegment sales
                       and transfers ......................        4,923    2,957        231        8,111             (8,111)        —
                      Total sales ...........................    116,393   23,555     11,744      151,692             (8,111)   143,581
                      Cost of sales and
                       selling, genera and
                       administrative expenses .......           100,786 23,453 11,017 135,256      (8,350) 126,906
                      Operating income .................        $ 15,607 $ 102 $ 727 $ 16,436 $        239 $ 16,675
                      Identifiable assets ................      $139,786 $29,137 $15,180 $184,103 $107,128 $291,231

                                                                                                                            Zuken Inc. 33
                      Unallocated corporate assets consist primarily of cash and cash equivalents, marketable securities
                    and investment securities. The amounts of the above assets are ¥15,075 million in fiscal 2005 and
                    ¥15,815 million (US$135,171 thousand) in fiscal 2006, respectively.




9.
                    Overseas sales of the Company and its subsidiaries (export sales of the Company and domestic sub-
                    sidiaries plus sales of overseas consolidated subsidiaries) for the years ended March 31, 2005 and
                    2006 are summarized as follows:
Overseas                                                                                                               Thousands of
                                                                                                 Millions of yen        U.S. dollars
Sales Information
                                                                                              2005             2006       2006
                    Overseas sales:
                    Europe .............................................................. ¥ 2,239           ¥ 2,367    $ 20,231
                    Other ................................................................. 1,574             1,737      14,846
                        Total overseas sales ......................................         3,813             4,104      35,077
                    Consolidated net sales ........................................ ¥15,770                 ¥16,799    $143,581

                    Percentage of overseas sales in consolidated net sales                    2005            2006
                    Europe ..............................................................     14.2%           14.1%
                    Other .................................................................   10.0            10.3
                        Total ...........................................................     24.2%           24.4%.



10.
                    Acquisition of Company through Share Purchase
                    (1) Overview and Objective of Acquisition
                    On April 19, 2006, the Company reached an agreement on the purchase of a majority shareholding in
Subsequent Event    Germany-based CIM-TEAM Technische Informatik GmbH (CIM-TEAM) through negotiations with the
                    two sole capital contributors to the firm. With ZUKEN GmbH, a German subsidiary of the Company,
                    acting as a vehicle for the share transfer on May 24, 2006, Zuken included CIM-TEAM in its consoli-
                    dated subsidiaries.
                      The Zuken Group boasts not only strong solutions for printed circuit board (PCB) and package design
                    utilized in electronics product development, but also a robust business foundation in the Asian wire
                    harness design market. In contrast, CIM-TEAM possesses a significant share of the wire harness and
                    electrical design market in Europe and the United States.
                      By combining the strengths of both companies and effectively catering to the international market
                    with an extensive variety of solutions, the Zuken Group aims to bolster its capability to provide a wider,
                    more comprehensive global offering, thereby expanding the scope of the Group’s business operations.
                    (2) Overview of CIM-TEAM
                      Company name:                      CIM-TEAM Technische Informatik GmbH
                      Location:                          Ulm, Germany
                      Main business:                     Development and sale of wire harness design software
                      Paid in capital:                   150,000 euros
                      Sales:                             Fiscal 2005: 6,528,000 euros (non-consolidated)
                      Number of employees:               70
                      Business bases:                    Operates nine bases in eight countries:
                                                         Germany (Ulm, Hanover), the United Kingdom, the United States,
                                                         Switzerland, Italy, Norway, Sweden, Brazil
                    (3) Purchase Date                    May 24, 2006
                    (4) Purchase Price and Percentage of Shares
                      i. Purchase price
                      Payment on purchase date: 3 million euros
                      Deferred payment I:        3 million euros (Note 1)
                                                 (Scheduled in December 2006)
                      Deferred payment II:       2 million euros (Note 2)
                                                 (Five-year installment plan starting from the fiscal year ending March 31,
                                                 2008 with maximum annual payment of 400,000 euros)
                      Notes:
                      1: Payment amounts will change according to the Company’s audited total shareholders’ equity.
                      2: The amount of payment will change according to CIM-TEAM’s business results.

                      ii. Percentage of shares held by the Company: 74.9%



34 Zuken Inc.
Independent Auditors’ Report



To the Shareholders and Board of Directors of
Zuken Inc.:


We have audited the accompanying consolidated balance sheets of Zuken Inc. and consolidated subsidiaries as of
March 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and cash flows
for the years then ended, expressed in Japanese yen. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to independently express an opinion on these consolidated
financial statements based on our audits.


We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Zuken Inc. and subsidiaries as of March 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for the years then ended, in conformity with accounting principles
generally accepted in Japan.


Without qualifying our opinion, we draw attention to the following.
(1) As discussed in Note 1(s) to the consolidated financial statements, effective April 1, 2005, subsidiaries in the
United Kingdom adopted the new accounting standards for retirement benefits in the United Kingdom.


The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended
March 31, 2006 are presented solely for convenience. Our audit also included the translation of yen amounts into
U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1(b) to the
consolidated financial statements.




Tokyo, Japan
June 29, 2006




                                                                                                             Zuken Inc. 35
Subsidiaries and Affiliates
BUSINESS LOCATIONS IN JAPAN           (European Headquarters)                í ASIA                               DOMESTIC
Head Office, Sales and R&D Center     Airport Business Centre,               KOREA                                Zsas (Zuken Support and Service)
2-25-1 Edahigashi, Tsuzuki-ku,        Am Soeldnermoos 17,                    ZUKEN KOREA Inc.                     Inc.
Yokohama, Kanagawa 224-8585           D-85399 Hallbergmoos, Germany          Sales of EDA solutions, etc.         Outsourcing and personnel agency in
Tel: 81 (45) 942-1511                 Tel: 49 89 607696 00                   Capital: 500,000,000 won             the EDA and IT solution fields
                                                                             Proportion of stock held: 100%       Capital: ¥140,500,000
Center Minami Office                  (EMC Technology Center)
                                                                             DongNam YuHwa Bldg 3F, 1001-10,      Proportion of stock held: 89.8%
Zuken Center Minami Building,         Vattmannstraße 3
                                                                             Daechi-Dong, Kangnam-ku,             Zuken Shin-Yokohama Building,
32-11 Chigasaki-Chuou, Tsuzuki-ku,    D-33100 Paderborn, Germany
                                                                             Seoul 135-283, Korea                 3-1-1, Shin-Yokohama, Kouhoku-ku,
Yokohama, Kanagawa 224-8580           Tel: 49 (0) 5251-150-600
                                                                             Tel: 82 2 564 8031                   Yokohama, Kanagawa 222-8505
Tel: 81 (45) 942-1300                 CIM-TEAM Technische                                                         Tel: 81 (45) 471-2334
                                                                             SINGAPORE
Shin-Yokohama Office                  Informatik GmbH
                                                                             ZUKEN SINGAPORE Pte. Ltd.            Zuken-Tecnomatix Inc.
Zuken Shin-Yokohama Building,         Development and sale of wire harness
                                                                             Sales of EDA solutions, etc.         Sale of PCB manufacturing process
3-1-1 Shin-Yokohama, Kouhoku-ku,      design software, etc.
                                                                             Capital: S$1,250,000                 management solutions
Yokohama, Kanagawa 222-8505           Capital: 150,000 euros
                                                                             Proportion of stock held: 100%       Capital: ¥100,000,000
Tel: 81 (45) 473-6868                 Proportion of stock held: 74.9%
                                                                             152 Beach Road, #22-05 Gateway       Proportion of stock held: 51.0%
                                      Lämmerweg 55, D-89079 Ulm,
Kansai Regional Office                                                       East, Singapore 189721               Zuken Center Minami Building,
                                      Germany
Doujima Avanza,1-6-20 Doujima,                                               Tel: 65 6392 5855                    32-11 Chigasaki-Chuou, Tsuzuki-ku
                                      Tel: 49 7305 9309 0
Kita-ku, Osaka 530-0003                                                                                           Yokohama, Kanagawa 224-8580
                                      Fax: 49 7305 9309 99                   CHINA
Tel: 81 (6) 6343-1141                                                                                             Tel: 81 (45) 942-2868
                                      * Stock acquired May 24, 2006          ZUKEN (SHANGHAI) TECHNICAL
Nagoya Regional Office                                                       CENTER Co., Ltd.                     Zuken NetWave Inc.
                                      FRANCE
Asahi Kaikan,1-3-3 Sakae,                                                    EDA solution consulting and          Sale of and consulting for
                                      ZUKEN S.A.
Naka-ku, Nagoya, Aichi 460-0008                                              maintenance                          network systems
                                      Sales of EDA solutions, etc.
Tel: 81 (52) 222-3131                                                        Capital: 1,655,000 RMB               Capital: ¥150,000,000
                                      Capital: 1,287,000 euros
                                                                             Proportion of stock held: 100%       Proportion of stock held: 81.3%
Sendai Regional Office                Proportion of stock held: 100%
                                                                                                                  Zuken Shin-Yokohama Building,
Sendai Dai-ichi Seimei Tower          Bâtiment Theta 2,                      ZUKEN Inc. Shanghai Rep. Office
                                                                                                                  3-1-1 Shin-Yokohama, Kouhoku-ku,
Building,4-6-1 Ichibancho, Aoba-ku,   3 avenue du Canada,                    Room 408, No.555 Nanjing West
                                                                                                                  Yokohama, Kanagawa 222-8505
Sendai, Miyagi 980-0811               LP 803, ZAC de Courtaboeuf,            Road, Shanghai 200041,
                                                                                                                  Tel: 81 (45) 473-6821
Tel: 81 (22) 267-9055                 91974 Les Ulis Cédex, France           People’s Republic of China
                                      Tel: 33 (0) 1 69 29 48 00              Tel: 86 21 3218 1784                 Inventure Inc.
                                                                                                                  Development and sale of IP and
CONSOLIDATED SUBSIDIARIES             ITALY                                  ZUKEN Inc. Beijing Rep. Office
                                                                                                                  IP-related products
AND REP. OFFICES                      ZUKEN S.r.l.                           Room 1402, Air China Plaza No. 36,
                                                                                                                  Capital: ¥100,000,000
                                      Sales of EDA solutions, etc.           Xiao Yun Road, Chao Yang District,
OVERSEAS                                                                                                          Proportion of stock held: 100%
                                      Capital: 65,000 euros                  Beijing 100027,
í ZUKEN EAO/EUROPE                                                                                                Zuken Shin-Yokohama Building
                                      Proportion of stock held: 100%         People’s Republic of China
U.K.                                                                                                              3-1-1, Shin-Yokohama, Kouhoku-ku,
                                      Strada 2-Palazzo C4, 20090             Tel: 86 10 8447 5076
ZUKEN Ltd.                                                                                                        Yokohama, Kanagawa 222-8505
                                      Milanofiori, Assago, Milan, Italy
Development of EDA solutions, etc.,                                          ZUKEN Inc. Shenzhen Rep. Office      Tel: 81 (45) 477-3377
                                      Tel: 39 02 575921
product sales                                                                Room 705, International Culture      Fax: 81 (45) 477-3378
Capital: 5,550,000 pounds sterling    NETHERLANDS                            Building, No.3039, Shennanzhong      * Established April 3, 2006
Proportion of stock held: 100%        ZUKEN B.V.                             Road, Shenzhen, Guangdong
                                                                                                                  EQUITY-METHOD AFFILIATES
                                      Sales of EDA solutions, etc.           518033, People’s Republic of China
ZUKEN UK Ltd.                                                                                                     Chip One Stop, Inc.
                                      Capital: 15,000 euros                  Tel: 86 755 83297510
Sales of EDA solutions, etc.                                                                                      Management of an online
                                      Proportion of stock held: 100%
Capital: 1,954,000 pounds sterling                                           TAIWAN                               marketplace for urgent and/or small
                                      Schepenlaan 18/A,
Proportion of stock held: 100%                                               ZUKEN TAIWAN Inc.                    volume deliveries of electronic
                                      NL-6002 EE Weert, The Netherlands
                                                                             Sales of EDA solutions, etc.         components
ZUKEN Group Ltd.                      Tel: 31 (0) 495 583377
                                                                             Capital: NT$15,000,000               Capital: ¥940,431,000
Overall control of U.K. operations
                                      í ZUKEN EAO/NORTH AMERICA              Proportion of stock held: 100%       Proportion of stock held: 27.8%
Capital: 6,910,000 pounds sterling
                                      U.S.A.                                 9F-2, No.159, Sec.1, Keelung Road,   (Listed on the Tokyo Stock Exchange
Proportion of stock held: 100%
                                      ZUKEN USA Inc.                         Taipei, 110, Taiwan                  MOTHERS Section)
1500 Aztec West, Almondsbury,
                                      Sales of EDA solutions, etc.           Tel: 886 2 7718 1116                 Sumitomo Fudosan Shin-Yokohama
Bristol BS32 4RF, U.K.
                                      Capital: US$9,000,000                                                       Bldg. 4F, 2-5-5, Shin-Yokohama,
Tel: 44 (0) 1454 207800
                                      Proportion of stock held: 100%                                              Kouhoku-ku, Yokohama, Kanagawa
GERMANY                               238 Littleton Road, Suite 100,                                              222-8525
ZUKEN GmbH                            Westford, MA 01886, U.S.A.                                                  Tel: 81 (45) 470-8750
Development of EDA solutions, etc.,   Tel: 1 978 692 4900
                                                                                                                  Note: Figures for capital and proportion of
product sales
                                                                                                                        stock for CIM-TEAM Technische
Capital: 639,000 euros
                                                                                                                        Informatik GmbH and Inventure Inc.
Proportion of stock held: 100%                                                                                          are as of March 31, 2006



36 Zuken Inc.
Corporate Information              (As of March 31, 2006)
Zuken Inc.

Head Office, Sales and R&D Center                           Board of Directors and Auditors (As of June 29, 2006)
2-25-1 Edahigashi, Tsuzuki-ku, Yokohama,
Kanagawa 224-8585 Japan
Tel: 81 (45) 942-1511 Fax: 81 (45) 942-1599
http://www.zuken.com/

Date of Establishment                                                             President and                                            COO and
                                                                                  Representative Director                                  Representative Director
December 17, 1976                                                                 Makoto Kaneko                                            Jinya Katsube
Number of Employees
552

Common Stock
Authorized: 86,525,700 shares
Issued: 27,903,669 shares                                                         Director                                                 Director
Number of Shareholders: 18,020                                                    Yasuo Ueno                                               Kazuhiro Kariya

Paid-in Capital
¥10,117,065,000

Stock Listing
Tokyo Stock Exchange (Ticker Code: 6947)
                                                                                  Director                                                 Director
Independent Auditor                                                               Yoshikazu Soma                                           Masayuki Kojo
KPMG AZSA & Co.
                                                                                                                 Standing Corporate Auditor    Fusao Wada
Transfer Agent for Common Stock                                                                                  Corporate Auditor             Genjiro Saito
The Chuo Mitsui Trust and                                                                                        Corporate Auditor             Yoichi Arai
Banking Company, Limited                                                                                         Corporate Auditor             Kaneyuki Miyake
3-33-1 Shiba, Minato-ku, Tokyo 105-8574 Japan




Stock Data                                                  Principal Shareholders
(¥)                                                                                                                     Number of Shares Held          Percentage of
2,000
                                                                                Name                                       (Thousands)                  Shares Held
                                                            Makoto Kaneko                                                        4,500                    16.12%
                                                            Kaneko Makoto Holdings Co., Ltd.                                     3,240                    11.61%
1,500                                                       The Master Trust Bank of Japan, Ltd. (trust account)                 1,355                      4.85%
                                                            Nippon Life Insurance Company                                          803                      2.87%
                                                            Fusao Wada                                                             800                      2.86%
                                                            Japan Trustee Services Bank, Ltd. (trust account)                      660                      2.36%
1,000
                                                            Mineko Kaneko                                                          580                      2.07%
                                                            Shinko Securities Co., Ltd.                                            462                      1.65%
                                                            Credit Suisse First Boston Securities Japan Limited                    443                      1.58%
 500
                                                            Japan Securities Finance Co., Ltd.                                       309                    1.10%
  2004.4        2004.10   2005.4        2005.10   2006.3
                                                            In addition to the shares listed above, the Company holds 2,006,699 shares of treasury stock.


                                                                                                                                                       Zuken Inc. 37
Zuken Inc.
2-25-1 Edahigashi, Tsuzuki-ku, Yokohama 224-8585 Japan
Tel: 81 (45) 942-1511 Fax: 81 (45) 942-1599
http://www.zuken.com/




                                                         This report is printed on recycled paper.
                                                                                  Printed in Japan

				
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