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Sep 19, 2007 - HO Scale

Important News from Pacific Western Rail Systems

Dear Modelers:

We would like to take this opportunity to share some exciting news with you.

As many of you know, Pacific Western Rail Systems (PWRS) was formed in 1998 to produce products we and our fellow model railroaders wanted. We saw the need for PWRS roughly ten years ago because many of the products and models we wanted were not being produced by any of the traditional manufacturers. Hence, PWRS was formed to meet a customer need that was going unmet and enabled the production of models with road names and decorations that were desired by the marketplace. Many of you have become friends (and customers), have cheered us on and have thanked us for our efforts. And we thank you for your support and patronage.

Over the past nine years, the number of PWRS shareholders has grown to 160 of you. Almost all of our shareholders are customers of PWRS. In essence, we are probably the first retail train establishment owned by its customers.

During the period that PWRS has existed, we have learned a lot about the business-side of model railroading and have dreamed about ways to enhance PWRS while benefiting model railroaders and strategized about creating the means to make some of those dreams a reality.

In that vein, we sold shares in PWRS during the past three years to fund these dreams. To date, we have raised over C$800,000. Some of these funds have been used to provide you with what we feel is the best combined database, management information system, and on-line ordering system in our industry.

A few of you have been invited in the past few weeks to experience our new "Customer Extra Net". The reaction from the 300 or so of you that have seen the new "Customer Extra Net" has been overwhelming. We will be contacting as many of you as possible over the coming months to offer to set you up as Extra Net customers and explain how the new system works and how to use it.

There will be additional enhancements to the "Customer Extra Net" over the coming months and we will be explaining these to you in the near future.

Many of you may be wondering: where is PWRS going to go from here?

Well, since we started the company in December 1998, there have been many changes in our industry. Some of you are aware of these changes and others are not. Two of the biggest changes are the advent of the internet and the increased speed at which data and information are shared, and; where our models come from and how they are produced.

Who in 1998 would have believed that in nine years we would be able to have high-resolution images on a website and we could order all our trains at the mere "click" of a button? Who would have predicted the dramatic reduction in the cost of communication that we now take for granted? (That reduction in communications costs has resulted in vastly expanded and increased conversations with customers who have become friends in places such as England, Switzerland, New Zealand, and Australia.)

The expansion of the internet has enabled PWRS to leverage our business model and expand our business model at very low cost while at the some time improving our operational efficiencies.

Just as dramatic are the changes that have occurred on the "product side" of the business:

Shift from kit to feature-rich "ready-to-run" products. Ten years ago many of our model trains were produced as kits requiring end-user assembly. It was common to buy a great Atlas engine, take it home and fuss for hours enhancing it with detail parts. Now we open a new GP7 and are disappointed if we do not see metal photo etched parts included on the model. Further, we now have products that - out of the box - have DCC and sound.

Shift from supply-driven to demand-driven manufacturing. The industry has changed from an "inventory-based" business to an "order-based" business. What does this mean? In the past, manufacturers produced a fixed number of units of a particular product, would sell what they could immediately and would inventory the rest in hopes of being able to sell the remainder at a reasonable price. Today, the effectiveness and efficiency of the internet (the low cost of good communications) has resulted in the ability of model railroaders to know immediately what new products are coming and being able to order them as soon as they are announced and produced. As a result, units of new products that aren't sold immediately often don't get sold at all (or at prices so low as to make the production of extra units "uneconomic", e.g., they lose money). Manufacturers have quickly figured this out and now require customers to pre-order new products and they produce only enough to fill the known demand, eliminating the risk of having unsold (and unwanted) inventory.

Why should you care? Quite simply, it means that you need to stay informed about what new products are coming so you are not shut-out of products that you want but don't otherwise learn of and you need to deal with retailers and companies in whom you have confidence so that you know you will get the products you ordered and that you know the models you ordered will be of high quality. (As in most industries, quality and reputation mean a great deal.)

Shift from domestic to outsourced manufacturing. Most of manufacturing companies whose products we buy today are, in fact, no longer "manufacturers" in the traditional sense of the word. As many of you know, the vast majority of our industry's products originate from overseas: they are fabricated and/or assembled by Chinese companies and are branded and sold by North American companies. The reason for this is quite simple: it is far less expensive to have these products produced overseas than it is to have the work done on this side of the Pacific.

But many of you might be surprised to learn that a great deal of the model railroad products that we buy (and that we hold near and dear) come from one company in China which owns many factories overseas. (Hence, as surprising as it may be, it is possible to go there and see Brand X being built in the morning only to see Brand Y being assembled that afternoon by the same workers.)

All of these changes experienced by our industry are having an impact on the participants in the industry (manufacturers/providers of product, distributors, retailers and model railroaders). As we have studied and thought about these changes and as we have contemplated the impacts of these changes, we at PWRS concluded a while ago that there was a great opportunity - and necessity - for us to become providers of products.

As such, we have spent the past year or two exploring different means to begin manufacturing products. We first approached our traditional suppliers/manufacturers to see if they would be willing to partner with us to invest in product molds to produce models our customers and shareholders wanted. Unfortunately they indicated to us that they were not interested in such partnerships. We then explored other means to begin manufacturing including the purchase of existing manufacturing brands and/or collections of product molds and starting as a manufacturer on a "de novo" basis. After extensive conversations and research, we concluded that the most prudent way to enter product manufacturing was as a start-up. We concluded that this was the best option for PWRS because it did not require an excessively large up-front investment and allowed us to choose exactly which models we wanted to produce to fill unmet customer demand.

Part of our research included our traveling to China last fall to visit with these manufacturers and see where North American model trains are made. It was during this trip that we both confirmed much of what we had learned about model train manufacturing and refined our understanding of our options for commencing product manufacturing.

That trip ultimately confirmed our desire to become a manufacturer AND to do so as a new entrant with new product molds. Why?

Many of you are familiar with the many Special Run cars we have produced with a number of model companies. During the past nine years, we have always emphasized the importance of high quality and functionality to those suppliers making special run cars for PWRS. For example, we have pushed for brand-name couplers that we know will work versus cheaper ones that are less reliable, we decided eight years ago that our HO cars would be made with metal roof-walks not the traditional plastic because of their appearance.

Well, during our visit to China we learned that we can control product content, quality and features and get EXACTLY what we want.

Therefore, Pacific Western Rail Systems will now develop, fund and own our own prototypically-correct molds. And we will use these molds to produce high quality models. Since PWRS is a retail operation, we have formed a sister company called "North American Railcar Corporation" (NARC) which will be the manufacturing entity within the PWRS family. NARC's primary focus will be to research, design and produce top quality prototypically-correct rolling stock and engines. PWRS will make these products available to you by way of the PWRS website.

It's all well and good to say that we will be producing "high quality" models. But what level of quality can you really expect in the models from North American Railcar Corporation? Well, the same people in Hong Kong and China who bring you the very best from the traditional brands we all respect will be building our cars.

We said one thing to the management in China that we want all of you - our fellow model railroaders - to know: "We didn't come to Hong Kong to demand lower prices, we came to demand better product".

We at PWRS/NARC are going to try to impress you. There will be additional announcements coming in the future. We encourage you to visit North American Railcar Corporation's new website at www.northamericanrailcarcorporation.com. We know it's a long name, but we encourage you to add it to your favorites for we have a feeling you will be going there a lot in the future.

We have set high standards for ourselves but we are guided by the advice: "Aim High...Shoot High". To all of you who have supported us these past nine years, we thank you. And to those of you who haven't, we are going to try hard to win you over.

On behalf of the Board of Directors and the Shareholders, we appreciate your attention and consideration and we ask you to "stay tuned" for future announcements and developments.


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