The annual report of Sarah, Inc.

CEO's message

2006 was another banner year for Sarah Inc. Despite an uncertain economy and an 11th straight year of net losses, our company is on track to meet initial projections. We are confident that shareholders who are committed to the long term will inevitably realize significant gains on their original investment.

As with any modern, high-tech enterprise, Sarah Inc. is a knowledge-based company. Our value at this stage is not in our physical assets but can be found in our ever-expanding intellectual property. In fact, capitalization costs have continued to grow, and we anticipate further heavy demands on the expenditure side, particularly in the areas of clothing, music, and dance.

To those shareholders thinking of divesting their holdings at this time, I urge you to hang tough for the near term. Although Sarah Inc. does not issue dividends, any capital appreciation can be partially sheltered due to the preferential treatment of capital gains. The fact that there have been no capital gains to date is only further evidence of soon-to-be-realized double-digit increases.

We at Sarah Inc. look forward to another year of steady, albeit unprofitable, growth and urge all members of the Sarah family to join us on this continuing financial adventure.

Sincerely,

Cheryl Brooks, CEO, Sarah Inc.

Conceived as a joint venture in late 1994, Sarah Inc. was incorporated as a going concern on Sept. 20, 1995. Sarah Inc. was launched during the high-tech boom of the 1990s and thus created expectations for rapid growth. During the early years, those expectations were exceeded with a 300 percent increase in weight and a 400 percent jump in length.

The advent of the 21st century spelled the end for many high-tech endeavors. But thanks to a renewed commitment to education, Sarah Inc. managed to weather the storm and stay afloat in the troubled waters that resulted from the collapse of the high-tech bubble.

The past few years have seen steady advances in the realm of skills acquisition. Early on, an investment in soccer looked promising but, after two years, proved to be noninterest bearing. However, losses realized from the soccer venture have been more than offset by the long-term performance of the dance sector. Early success in jazz led to last year's expansion into ballet with the expectation of more classes in both disciplines and, subject to cash reserves, a possible future move into tap.

There are a number of Class B shareholders comprising grandparents, aunts, uncles, and family friends who have a vested, long-term interest in Sarah Inc. Class B shares are nonvoting.

The CEO and CFO each own one Class A share, which is a voting share. In the case of a tie, the vote of the CEO will generally govern. On occasion, however, the management of Sarah Inc. is able to override the unanimous vote of both Class A shareholders by means of tantrums, pouts, and assorted tears.

Expenditures
Food $3,450.00
Clothing 1,100.00
Dance 675.00
Birthday 225.00
Christmas 166.00
Music 75.00
Candy 56.00
Allowance (at $6 weekly rate) 312.00
Braces 2,300.00
College fund contribution 2,000.00
Total Expenditures $10,359.00

Revenues

Sale of fully depreciated capital items (see note 3 below) 43.00

Total Revenues $43.00

Operating Profit/Loss ($10,316.00)

*NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Future liabilities are expected due to last year's acquisition of the following capital items: MP3 player, ministereo, Sims 2 video game.

2. Unlike fiscal 2004-05, there was no major pet-related purchase. However, ongoing expenses for previous canine purchase have been greater than anticipated. See vet bills, special dog food, molding replacement and painting, window repair, etc.

3. The basement storage center formerly operated for Sarah Inc.'s benefit has been discontinued. Sales of several nonessential, fully depreciated capital items including crib, car seat, and assorted Disney videotapes resulted in one-time revenue of $43.

4. A contingency fund has been set aside for the next three years to cover anticipated future capital purchases including a cellphone, jewel-encrusted jeans, and one of those really cool sweaters – you know, the brown one with, like, the zipper and the awesome logo on the back.

Signed this 19th day of January, 2007

Cheryl ("Mommy") Brooks, chief executive officer

and David ("Daddy") Martin, chief financial officer