Letter to Shareholders

Our mission is to improve the lives of all of our stakeholders. More specifically for shareholders, our mission is to increase the value of our investments consistently over time by building a perpetual earnings per share growth engine. It was with this mission in mind, combined with our vision to be the best in the world at what we do and our “golden rule” operating philosophies, that we began a journey to transform our Company just a few short years ago. Over that time, our mission, vision and operating philosophies have not changed, and I am pleased to report significant progress in building value for our shareholders.

We have built a strong management team to drive our future. This management group has significantly refined our business strategies, greatly improved our execution, and achieved substantial improvements in our business development and delivery, as well as our financial profile. We have refined our sales strategies and organization and are benefiting from new standard platforms for product sales, focusing on higher margin opportunities, adding customers in the defense industry, and actively growing our global service/repair capabilities. In addition, we have successfully adopted Lean manufacturing methods, including 5s and value-stream mapping, and are delivering improved quality, on-time delivery, better customer relations and more efficient use of working capital. As a result, today we have more scalable processes capable of responding efficiently to both current and future production requirements. To further increase the focus of our business development resources, improve their effectiveness and capture additional efficiencies, we recently organized our sales and engineering resources into two vertically aligned business development teams – the Embedded Products Group and the Services Group. This change already has resulted in more
refined business development strategies and increased market presence.

Over the past two years, we have strategically reduced less profitable programs and diligently worked on the sales and development of higher value, more profitable products and services. However, this has resulted in lower sales without immediate improvement in margins as we adjust our cost structure to the reduced sales volume. We expect to achieve improved margins as we complete this transition in 2009, new programs ramp-up, and the global economy begins to recover. Our performance also will benefit from increased financial flexibility due to the reduction in our debt outstanding (which was reduced by more than $8 million, or 60% during the past two years) and reduced working capital (inventory and customer credit) achieved by elimination of these low-margin programs, combined with the improved operational efficiencies mentioned previously. Our strategy is to grow PDSi’s product and service offerings to achieve increased market share in the embedded computer product and outsourced reverse logistics markets. Reverse logistics include all of those activities involved with product returns and in-warranty or out-of-warranty repair following the initial sale of a product to the end-user. Over the past two decades, we have enhanced both our product and service capabilities consistent with key aspects of our customers’ lifecycle needs. We are now leveraging those strengths to build a more profitable portfolio of long-lived customer programs and relationships. We are committed to profitability and have demonstrated this commitment by taking the tough actions necessary to build a strong foundation for more consistent and growing profitability over a much longer period of time. We remain steadfast in adhering to our operating philosophies and working toward our vision, which we expect to ultimately drive the accomplishment of our mission to increase shareholder value.

During 2008 and already into 2009, we are benefiting from our growing line of products that highlight PDSi’s capabilities. Through efficient use of our capacity, working capital and technical resources, we provide our customers with platforms that can be built upon to provide the products they really need while providing shorter development timeframes, reduced lead-times and lower overall cost. We launched a number of new products during 2008 that reflect PDSi’s emergence as a stronger partner with our customers. Our goal is to achieve higher gross profit margins, consistent with those realized in the higher value-added spaces of our markets, based on improved products with higher PDSi content. Increasing PDSi’s product content further strengthens our position as a valued partner and is expected to lead to improved profitability. We have achieved initial progress in these efforts, and considerable opportunity exists for additional success. We especially benefit when our products are incorporated into multi-year product programs, both in the near-term through increased sales, and over the longer-term through additional opportunities to partner with our customers and provide their next-generation solutions. Our larger competitors generally are too narrowly focused on their own products, lack the flexibility to meet customers’ needs, and are often too slow to respond to customers’ preferences. We excel in these areas with our customer-centric focus, which creates more profitable opportunities for PDSi.

The products we are developing have market appeal across multiple industries, including our traditional defense, medical, telecommunications, imaging and industrial customers. During periods of weak economic activity like we are experiencing today, the defense and medical industries tend to be more recession resistant. Therefore, we increased our product sales emphasis in those markets during 2008, leading to additional program wins.

In February 2008, we successfully completed the acquisition of Aspan BV, a company in the Netherlands providing repair services for products utilizing computer technologies to some of the world’s largest OEMs. This significantly expanded our services footprint and established PDSi as a global provider of high-end computer related repair and logistics services. Our expanded capabilities and increased level of regional commitment are now much more attractive to global OEM customers – in both the Product and Service segments of our business. Customers are seeking a qualified, single source provider of depot repair services for their products in a time-efficient and cost-effective manner around the world. We plan to continue to leverage our global presence through our facilities in the North American, the Europe, Middle East and Africa (EMEA), and Asia Pacific (APAC) regions. By year-end 2008, our EMEA operations moved into a larger facility in order to accommodate increased business. We also moved our APAC repair operations to a new location in Hong Kong so that they could operate more effectively.

Moving into 2009, we have added great talent and skills across the organization, sharpened our focus in the Embedded Products Group and the Services Group, and are targeting specific industries and customers with a defined set of products and services. These efforts are reflected in our increased level of service and are supported by an array of metrics we track and share with our customers on a regular basis. Our expanded capabilities enable us to be more proactive in seeking new business while remaining responsive to our customers’ global needs. We have a deep understanding of what it takes to be more profitable than in the past, and we are driving forward with great intensity toward the accomplishment of our mission. This is the direction and culture of PDSi today!

How do we know these efforts are building more value in our Company? Our customers have told us so, especially during the past several months. For example, a global repair director and top engineer from one of our largest repair customers stated in a recent visit that PDSi is the first truly global company they have found among their current vendors. They continued, saying that many of our competitors own facilities around the globe, but they were all acquired and still act like individual businesses, with different people with which to work, different operating philosophies, different processes and systems – while PDSi’s talent is truly leveraged worldwide with the same operating philosophies, processes and systems deployed in all its locations!

In conclusion, the unprecedented economic and financial conditions that disrupted business globally last year are expected to continue throughout 2009. We continue to monitor and proactively manage our business under such fast-changing conditions by controlling the controllable to the best of our abilities. As our transformation continues, we remain focused on profitable growth opportunities, and are positive and hopeful about our future. However, we also know that hope is not a strategy. We are positive and hopeful because we aren’t sitting around waiting for something to happen. We’ve adopted a motto from a quote by Arnold H. Glasow: “Success is not a result of spontaneous combustion…you have to set yourself on fire!”

PDSi’s carefully engineered transition over the past few years has improved our product and service offerings, our operations, and our financial strength. We have positioned ourselves to fulfill our mission to all stakeholders, and remain confident that we have the right people, processes and enhanced business portfolio to adapt to the current economic environment and emerge an even stronger company as global market conditions improve. We look forward to achieving additional progress in each of these areas during 2009.

Thank you for your continued interest in and support of PDSi.

Respectfully, 

/s/ Michael R. Sayre
Michael R. Sayre
President and Chief Executive Officer

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