Letter to our Shareholders

This past year marked a significant milestone for our company. Zareba Systems, Inc. is now totally focused on the design, manufacture and marketing of electronic perimeter protection through agri-tech fencing, access control products and perimeter security systems.

This focus has been a journey that began in 2001 when we changed the name of our American FarmWorks division to Zareba Systems, and sold our Waters Technical Systems business. Then in fiscal year 2002, we purchased North Central Plastics, a manufacturer of the Red Snap’r brand of electric fencing products. At this point, the combination of Red Snap’r and Zareba created the dominant North American manufacturer of electric fencing systems. In 2004, we acquired Rutland Electric Fencing Company, the largest electric fence manufacturer in the United Kingdom, to further enhance our electronic perimeter fence system offerings. We also sold Waters Network Systems in 2004, and finally, we successfully divested Waters Medical Systems in fiscal 2007 to complete the process.

At the beginning of the new millennium, we were a company with four eclectic divisions. Today, Zareba Systems is a leading global manufacturer of electronic perimeter fence and security systems for animal and access control. It has been a remarkable journey taken in a very short period of time. In fact, in 2004 and now again in 2007, the company has been named one of the fastest growing small public companies.

Although we hit a speed bump in fiscal 2006 as we worked toward our vision of becoming a $50 million company, we have returned to profitability and double digit growth. We have been in the business of protecting perimeters for 70 years and we plan to continue to focus our efforts in this growing business opportunity.

Financial Results
We are pleased to report that throughout fiscal year 2007 we had positive financial results and sales growth during each quarter and had a strong finish to the year.

Sales for fiscal year 2007 were $35.7 million, a 10.5 percent increase over the $32.3 million in the prior year. Net income in fiscal year 2007 was $610,000, or $0.25 per share, compared to a net loss of $301,000, or $0.12, per share in the prior year.

Due to the sale of Waters Medical Systems, we have been able to pay down a large amount of debt, putting the company in good position to be in the market again for acquisitions.

Sale of Waters Medical Systems
On August 1, 2007 we closed on the sale of Waters Medical Systems, which designs, manufactures and markets electronic medical instruments for cardiovascular care and organ preservation, to Holding GC, Inc., an affiliate of Groupe Cair. The purchase price was $5 million. We felt that Groupe Cair, located in Lyon, France, a Waters Medical Systems distributor since 2002, was the best player to make this acquisition and grow this business into the future.

While this business was successful and profitable, thanks to a five-year growth plan we had in place, it represented a small part of our overall sales and did not fit the focus of our company.

Zareba Systems
Zareba Systems is the world’s leading manufacturer of electronic perimeter fence systems for animal and access control. To leverage our core strength, we’ve taken the next step in perimeter protection by developing automatic gate openers for two different market segments – the do-it-yourself market to be sold through existing retail channels, and a professional version to be sold through a growing commercial distribution network.

New products in the Rutland Professional product line include three commercial swing gate operators and two commercial slide gate operators. Typical end users for our commercial-rated gate operators and accessories include businesses, municipalities and mini-storage sites, among other high-end consumers.

Zareba Security
Zareba’s electronic perimeter security systems provide cost effective solutions for a range of operations including correctional and prison facilities, government and military buildings, utility and water treatment companies, refineries, industrial/commercial properties and airports, among other high security areas. Two of our innovative security products include the patent-pending Guard Tower® matrix wire array perimeter protection system, and the patent-pending rapid pulse energizer.

Our security focus is becoming increasingly important to our business. We have customers in the U.S. and U.K. and we are selling products in Israel, the Caribbean and China as well. During the year, we began seeing demand from water treatment facilities looking for perimeter protection and received an order for a perimeter security system at a facility in a southern California community. In addition, in the fourth quarter, we began shipping electronic perimeter security fence products for several prisons.

Strategic Goals
Our strategies for fiscal 2008 are as follows:

• Expand our security business. We are making significant progress in this worldwide business and feel we are well positioned to provide products unmatched in the marketplace. We continue to develop a global network of security system integrators - who work with end users - to install our electronic perimeter security fence systems.
• Develop our automatic gate operator business. The launch of our commercial-rated gate operators positions us to provide more complete perimeter protection solutions. Our swing gate operators, along with our two newly released slide gate operators, allow us to more fully serve this growing business segment.
• Pursue fence system growth. We believe there are opportunities for strong growth in both North America and throughout Europe for do-it-yourself automatic gate openers and electronic fence systems marketed to the lifestyle customer interested in gardening, farming and pet/hobby activities.
• Seek out strategic opportunities. We are on the lookout for strategic opportunities that fit our focus and that will help grow the company. We are confident in our ability to invest, buy and integrate other organizations and feel that is an important next step in our growth.
• Continue our profitability. Our goal is to continue our sales growth and profitability during the coming fiscal year.

Final Comments
During the last couple of years, we have had some changes in our management team, but now the team has melded together and stepped up to obtain our goals – which have been to regain profitability and increase sales. Overall, our goal at Zareba Systems is to take the money we make and invest it appropriately in order to grow the business. We appreciate your confidence in the focused vision we have set for the company and look forward to providing our customers with the absolutely best products available in perimeter control.

Sincerely,

Jerry Grabowski
President and Chief Executive Officer
September 20, 2007

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