DDi (DDICQ) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to                       

Commission File Number: 000-30241

DDi CORP.

(Exact name of registrant as specified in its charter)

Delaware	06-1576013
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

1220 Simon Circle
Anaheim, California 92806

(Address of principal executive offices) (Zip code)

(714) 688-7200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

Yesþ       Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero       Accelerated filerþ       Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso       Noþ

     Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yesþ       Noo

     As of November 6, 2006, DDi Corp. had 20,630,299 shares of common stock, par value $0.001 per share, outstanding.

DDi CORP.
FORM 10-Q for the Quarterly Period Ended September 30, 2006

TABLE OF CONTENTS

	Page
	No
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):	3
Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005	4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	35
Item 4. Controls and Procedures	35
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	35
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults Upon Senior Securities	36
Item 4. Submission of Matters to a Vote of Security Holders	36
Item 5. Other Information	36
Item 6. Exhibits	37
Signatures	39
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

DDi CORP.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)
(Unaudited)

	September 30,			December 31,
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	27,191		$	25,985
Restricted cash (see Note 7)		—			2,972
Accounts receivable, net		25,772			29,710
Inventories		13,123			16,117
Prepaid expenses and other		1,725			1,506
Total current assets		67,811			76,290
Property and equipment, net		24,584			31,063
Goodwill		38,146			41,845
Intangible assets, net		9,962			13,411
Other assets		646			1,719
Total assets	$	141,149		$	164,328
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity
Current liabilities:
Revolving credit facility	$	—		$	19,929
Accounts payable		15,189			15,443
Accrued expenses and other current liabilities		15,454			14,709
Total current liabilities		30,643			50,081
Other long-term liabilities		4,267			4,745
Series A preferred stock		—			—
Total liabilities		34,910			54,826
Commitments and contingencies (Note 13)
Series B mandatorily redeemable preferred stock		3,203			1,513
Stockholders’ equity:
Common stock — $0.001 par value, 190,000,000 shares authorized, 20,625,835 and 18,259,356 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		21			18
Additional paid-in-capital		233,818			231,821
Deferred compensation		—			(349	)
Accumulated other comprehensive income		182			346
Accumulated deficit		(130,985	)		(123,847	)
Total stockholders’ equity		103,036			107,989
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity	$	141,149		$	164,328

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

DDi CORP.

Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share data)
(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
Net sales	$	51,374		$	45,974		$	154,838		$	136,461
Cost of goods sold:
Cost of goods sold		42,177			38,758			125,039			114,080
Non-cash compensation		86			670			337			1,091
Restructuring-related inventory impairment		—			—			—			1,253
Total cost of goods sold		42,263			39,428			125,376			116,424
Gross profit		9,111			6,546			29,462			20,037
Operating expenses:
Sales and marketing:
Sales and marketing expenses		3,879			3,748			11,885			10,952
Non-cash compensation		—			99			43			(250	)
Officer’s severance		—			—			240			—
Total sales and marketing		3,879			3,847			12,168			10,702
General and administration:
General and administration expenses		3,033			3,242			9,916			9,818
Non-cash compensation		298			131			671			536
Total general and administration		3,331			3,373			10,587			10,354
Amortization of intangible assets		1,150			1,149			3,449			3,448
Restructuring and other related charges		120			182			992			4,572
Litigation reserve		—			—			1,727			—
Goodwill impairment		—			23,540			—			54,669
Loss on sale of assembly business		4,544			—			4,544			—
Operating loss		(3,913	)		(25,545	)		(4,005	)		(63,708	)
Interest expense, net		230			1,215			1,092			3,686
Other (income) expense, net		35			383			(23	)		402
Loss from continuing operations before income taxes		(4,178	)		(27,143	)		(5,074	)		(67,796	)
Income tax expense		307			160			2,064			808
Loss from continuing operations		(4,485	)		(27,303	)		(7,138	)		(68,604	)
Income from discontinued operations		—			496			—			10,236
Net loss		(4,485	)		(26,807	)		(7,138	)		(58,368	)
Less: Series B preferred stock dividends and accretion		(1,798	)		(1,986	)		(5,398	)		(4,669	)
Net loss applicable to common stockholders	$	(6,283	)	$	(28,793	)	$	(12,536	)	$	(63,037	)
Loss per share from continuing operations applicable to common stockholders — basic and diluted	$	(0.32	)	$	(5.15	)	$	(0.67	)	$	(15.92	)
Net loss per share applicable to common stockholders — basic and diluted	$	(0.32	)	$	(5.06	)	$	(0.67	)	$	(13.70	)
Weighted-average shares used in per share computations — basic and diluted		19,819,165			5,692,210			18,807,216			4,601,347

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

DDi CORP.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)
(Unaudited)

	Nine months ended September 30,
	2006			2005
Cash flows from operating activities:
Loss from continuing operations	$	(7,138	)	$	(68,604	)
Adjustments to reconcile loss from continuing operations to cash provided by (used in) operating activities:
Depreciation		7,513			7,311
Amortization of intangible assets		3,449			3,449
Amortization of debt issuance costs and discount		895			525
Goodwill impairment		—			54,669
Non-cash compensation		1,051			1,377
Non-cash and accrued restructuring and other related charges		1,232			3,972
Loss on sale of assembly business		4,544			—
Other		142			228
Change in operating assets and liabilities (net of sale of assembly business):
Accounts receivable		(1,556	)		(785	)
Inventories		(4,194	)		(48	)
Prepaid expenses and other assets		(233	)		(283	)
Accounts payable		3,085			227
Accrued expenses and other liabilities		(1,722	)		(4,490	)
Income tax payable		1,289			1,744
Net cash provided by (used in) operating activities from continuing operations		8,357			(708	)
Net cash used in operating activities from discontinued operations		—			(1,975	)
Net cash provided by (used in) operating activities		8,357			(2,683	)
Cash flows from investing activities:
Purchases of property and equipment		(4,669	)		(5,279	)
Changes in restricted cash		2,972			(3,262	)
Cash outflows related to acquisition earn out		—			(300	)
Proceeds from sale of assembly business		12,000			—
Payment of costs incurred in connection with sale of assembly business		(49	)		—
Net cash used in investing activities from discontinued operations		—			(9	)
Net cash provided by (used in) investing activities		10,254			(8,850	)
Cash flows from financing activities:
Proceeds from exercise of Standby Warrants		12,085			—
Proceeds from issuance of common stock		—			75,000
Payments of costs incurred with the issuance of common stock		—			(482	)
Redemption payments of Series B preferred stock		(8,333	)		(40,667	)
Principal payments on capital leases		(9	)		(717	)
Net repayments on revolving credit facility		(19,929	)		(12,404	)
Refund of debt issuance costs		—			206
Payment of Series B preferred stock dividend		(870	)		(1,987	)
Proceeds from exercise of stock options		105			23
Net cash provided by financing activities from discontinued operations		—			885
Net cash (used in) provided by financing activities		(16,951	)		19,857
Effect of exchange rate changes on cash and cash equivalents		(454	)		76
Net increase in cash and cash equivalents		1,206			8,400
Cash and cash equivalents, beginning of period		25,985			23,526
Cash and cash equivalents, end of period	$	27,191		$	31,926

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

DDi CORP.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Basis of Presentation

The unaudited condensed consolidated financial statements of DDi Corp. include the accounts of its wholly-owned subsidiaries: (i) DDi Intermediate Holdings Corp. (“DDi Intermediate”) and its wholly-owned subsidiary, DDi Capital Corp., which includes the accounts of its wholly-owned subsidiary Dynamic Details, Incorporated and its wholly-owned subsidiaries (“Dynamic Details”) and (ii) DDi Europe Limited (“DDi Europe” f/k/a MCM Electronics Limited (“MCM”)). Collectively, DDi Corp. and its subsidiaries are referred to as the “Company” or “DDi.” All intercompany transactions have been eliminated in consolidation.

The Company announced the discontinuation of its European business and the placement into administration of DDi Europe on February 9, 2005. As a discontinued operation, revenues, expenses and cash flows of DDi Europe have been excluded from the respective captions in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.

On September 29, 2006, the Company completed the sale of substantially all of the assets and liabilities of its assembly business to VMS LLC (see Note 14). Revenues and costs of the assembly business through September 29, 2006 have been included in the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2006.

On October 23, 2006, the Company completed the acquisition of Sovereign Circuits, Inc. (“Sovereign Circuits”), a privately-held printed circuit board manufacturer in North Jackson, Ohio (see Note 15). As this acquisition occurred subsequent to September 30, 2006, revenues and costs of Sovereign Curcuits are not included in the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2006.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of the financial position of DDi as of September 30, 2006, the results of its operations for the three and nine months ended September 30, 2006 and 2005 and its cash flows for the nine months ended September 30, 2006 and 2005. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of results of operations to be expected for the full year.

The Company has prepared these financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations, although the Company believes the disclosures provided are adequate to prevent the information presented from being misleading. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. This report on Form 10-Q for the quarter ended September 30, 2006 should be read in conjunction with the audited financial statements presented in DDi’s Annual Report on Form 10-K for the year ended December 31, 2005.

Description of Business

DDi is a leading provider of time-critical, technologically-advanced printed circuit board (“PCB”) engineering and manufacturing and other value-added services. The Company specializes in engineering and fabricating complex multi-layer printed circuit boards on a quick-turn basis, with lead times as short as 24 hours. DDi has approximately 1,000 customers in the communications and networking, medical, test and industrial instruments, high-end computing, military and aerospace equipment markets. The Company operates primarily in one geographical area, North America.

6

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Common Stock Reverse Split

On February 3, 2006, the Company effected a one-for-seven reverse stock split. All share and per share information has been retroactively adjusted to reflect the reverse stock split.

Recently Adopted Accounting Standards

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123-R”) using the modified prospective application transition method. As a result, the Company has included stock-based compensation costs under the fair value method in its results of operations for the three and nine month periods ended September 30, 2006, as more fully described in Note 8 to the Company’s condensed consolidated financial statements.

Effective January 1, 2006, the Company adopted SFAS No. 151, “Inventory Costs” (“SFAS 151”). SFAS 151 amends guidance in Accounting Release Bulletin (“ARB”) No. 43 Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). It requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 did not have a material impact on the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2006.

Effective January 1, 2006, the Company adopted SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes” (“APB 20”) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”) and applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle whereas SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable. The adoption of SFAS 154 did not have a material impact on the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2006.

Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is assessing FIN 48 and has not determined the impact that the adoption of FIN 48 will have on its consolidated financial statements.

In June 2006, the FASB ratified Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. This issue provides that a company may adopt a policy of presenting taxes either gross within revenue or net. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis. The Company does not believe the adoption of EITF 06-3 will have a material impact on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect SAB 108 to have a material impact on its consolidated financial statements.

7

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the requirements of SFAS 157 and the impact that the adoption of this statement will have on its consolidated financial statements.

NOTE 2. INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and consisted of the following (in thousands):

	September 30,		December 31,
	2006		2005
Raw materials	$	7,054	$	8,630
Work-in-process		3,449		5,059
Finished goods		2,620		2,428
Total	$	13,123	$	16,117

In connection with the sale of substantially all of the assets of the Company’s assembly business on September 29, 2006, $7.4 million in inventory was sold to VMS, LLC (see Note 14).

NOTE 3. REVOLVING CREDIT FACILITY

In March 2004, the Company entered into a three-year, $40.0 million asset-based credit facility (the “Credit Facility”) with General Electric Capital Corporation, as agent and lender. In June 2004, the asset base on the Credit Facility was expanded to include the Company’s Canadian operations. In November 2005, the Company amended the Credit Facility to reduce the interest rate and the fee for non-use of available funds, to permit the Company to incur up to an additional $25.0 million of future indebtedness and release the security interest on the equipment securing the Credit Facility. Revolving credit advances bear interest at the prime rate plus 1% to 2% depending on the Company’s EBITDA (“Index Rate”). The Company can elect to have any new revolving credit advances, or convert any outstanding revolving credit advances, in excess of $1.0 million and in increments of $500,000, made as a LIBOR-based loan with a term of one, two, three or six months and the rate would be LIBOR plus 2.5% to 3.5% depending on the Company’s EBITDA (“LIBOR Rate”). As of September 30, 2006, the Index Rate was 9.75%.

Availability under the Credit Facility is based on various liquidity and borrowing base tests including the Company’s eligible accounts receivable. The Credit Facility requires the Company to make standard representations and warranties and maintain certain financial covenants. As of September 30, 2006, the Company was in compliance with all required covenants. The Credit Facility provides that an occurrence of a change in control constitutes an event of default, which could require immediate repayment. A change of control, as defined under the Credit Facility, has never occurred through September 30, 2006. The Credit Facility is guaranteed by DDi Corp. and its subsidiaries, DDi Intermediate and DDi Capital Corp., and is collateralized by the accounts receivable and inventories of the Company’s domestic operating subsidiary, Dynamic Details. The Credit Facility restricts the Company’s ability to pay cash dividends on its common stock and restricts its subsidiaries’ ability to pay dividends to the Company without the lender’s consent. As a result of the sale of the Company’s assembly business and the related accounts receivable (see Note 14), the Company’s availability under the Credit Facility has decreased. As of September 30, 2006, the borrowing capacity under the credit facility was $14.1 million, however, no amounts were outstanding.

NOTE 4. PRODUCT WARRANTY

Warranty costs are estimated at the time of sale and recorded as an accrued liability, with a corresponding provision to cost of sales. Estimated costs are based on historical experience, future anticipated return rates and estimated costs of repair. The Company assesses the adequacy of the warranty accrual each quarter. The changes in the Company’s warranty accrual were as follows (in thousands):

8

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2006			2005			2006			2005
Beginning balance	$	641		$	672		$	527		$	656
Current period warranty charges		751			658			2,513			2,238
Actual warranty costs incurred		(774	)		(678	)		(2,422	)		(2,242	)
Ending balance	$	618		$	652		$	618		$	652

NOTE 5. NET INCOME (LOSS) PER SHARE

The following table is a calculation of net income (loss) per share of common stock from continuing operations and discontinued operations (in thousands except share and per share data):

	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2006			2005			2006			2005
Loss from continuing operations	$	(4,485	)	$	(27,303	)	$	(7,138	)	$	(68,604	)
Less: Series B preferred stock dividends and accretion		(1,798	)		(1,986	)		(5,398	)		(4,669	)
Loss from continuing operations applicable to common stockholders	$	(6,283	)	$	(29,289	)	$	(12,536	)	$	(73,273	)
Weighted-average shares of common stock outstanding (basic and diluted)		19,819,165			5,692,210			18,807,216			4,601,347
Loss per share from continuing operations applicable to common stockholders	$	(0.32	)	$	(5.15	)	$	(0.67	)	$	(15.92	)
Net income from discontinued operations, net of tax	$	—		$	496		$	—		$	10,236
Weighted-average shares of common stock outstanding (basic and diluted)		19,819,165			5,692,210			18,807,216			4,601,347
Net income per share of common stock from discontinued operations	$	—		$	0.09		$	—		$	2.22
Net loss	$	(4,485	)	$	(26,807	)	$	(7,138	)	$	(58,368	)
Less: Series B preferred stock dividends and accretion		(1,798	)		(1,986	)		(5,398	)		(4,669	)
Net loss applicable to common stockholders	$	(6,283	)	$	(28,793	)	$	(12,536	)	$	(63,037	)
Weighted average shares of common stock outstanding (basic and diluted)		19,819,165			5,692,210			18,807,216			4,601,347
Net loss per share applicable to common stockholders	$	(0.32	)	$	(5.06	)	$	(0.67	)	$	(13.70	)

As a result of the net losses from continuing operations incurred during the three and nine months ended September 30, 2006 and 2005, common shares issuable upon exercise of outstanding stock options, restricted stock vesting, or upon conversion of Series B Preferred stock of 2,201,923 were excluded from the diluted net loss per common share calculation for those periods as their impact would have been anti-dilutive. As a result of the net losses from continuing operations incurred during the three and nine months ended September 30, 2005, common shares issuable upon exercise of outstanding stock options and warrants, restricted stock vesting, or upon conversion of Series B Preferred stock of 2,832,279, were excluded from the diluted net loss per common share calculation for those periods as their impact would have been anti-dilutive.

A subscription rights offering commenced in August of 2005 resulted in a bonus element to be accounted for in a manner similar to a stock dividend in accordance with SFAS No. 128, “Earnings per Share.” Accordingly, common stock outstanding reflects this bonus element of 272,554 shares of common stock for all periods presented.

NOTE 6. SERIES B MANDATORILY REDEEMABLE PREFERRED STOCK

In March 2004, the Company completed a private placement of 147,679 shares of Series B-1 Preferred Stock and 1,139,238 shares of Series B-2 Convertible Preferred Stock (collectively, the “Series B Preferred Stock”) to certain institutional investors at a price of $47.40 per share for an aggregate sales price of $61.0 million before issuance cost

9

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

of $3.5 million. Each share of the Series B Preferred Stock was initially convertible into 0.5714 shares of common stock at any time at a conversion price of $82.95 per share, subject to certain anti-dilution adjustments. In general, the Series B Preferred Stock vote together with the common shares based on the number of shares into which the Series B Preferred Stock could convert on the day that the Series B Preferred Stock was issued. In addition, the Series B Preferred Stock is entitled to elect a member of the Company’s Board of Directors in the event the Company fails to redeem the Series B Preferred Stock when required. The Series B Preferred Stock bears dividends at the rate of 6% per annum, payable quarterly commencing March 31, 2005 and is subject to mandatory redemption five years from the original date of issuance. In addition, the holders of the Series B Preferred Stock initially had the option to require the Company to redeem the shares in three equal installments in 18 months, 24 months and 30 months from issuance or earlier upon a change of control, certain events of default or other specified occurrences. The Company also has the right to redeem the Series B Preferred Stock if the Company’s common stock trades above $35.28 for 30 consecutive trading days. The redemption price equals cost plus accrued dividends, except in the case of certain defaults where there are premiums to the redemption cost. On May 26, 2004, the Company’s shareholders approved a proposal to allow the Company to have the option to make dividend and redemption payments using its common stock provided that no more than 1,428,571 shares of common stock in the aggregate are used for redemption payments. Shares of the Company’s common stock issued as dividends or redemption payments are issued at a 5% discount to the volume weighted-average market price over the 20 trading days prior to the dividend payment date. The Series B Preferred Stock Certificate of Determination also has covenants that restrict the Company from incurring additional indebtedness in excess of the greater of (a) in the aggregate, $80.0 million, or (b) three times the Company’s EBITDA for the most recent four consecutive fiscal quarters.

The Company recorded the redemption value of the Series B Preferred Stock, $61.0 million, net of issuance costs of $3.5 million. The Company amortized the $3.5 million of issuance costs into additional paid-in capital using the effective interest rate method based on the Series B Preferred Stock holders’ initial redemption option to require the Company to redeem shares in three equal installments in 18 months, 24 months and 30 months from issuance. The issuance costs were fully amortized on September 30, 2006. For the three and nine months ended September 30, 2006 the amortization of these issuance costs was $138,000 and $414,000, respectively. The amortization of these issuance costs for the three and nine months ended September 30, 2005, including a $347,000 adjustment due to the early redemption of shares in the third quarter of 2005, was $773,000 and $1.6 million, respectively.

As a result of the commencement of a rights offering in August 2005, the related issuance of warrants to the standby purchasers in September 2005, and the reverse stock split in February 2006, the anti-dilution provision of the Series B Preferred Stock was triggered to provide an adjustment to the conversion formula. Accordingly, each share of Series B Preferred Stock is now convertible into 2.3512 shares of common stock at a conversion price of $20.16 per share. The additional shares issuable upon conversion as a result of the anti-dilution adjustment are treated as a beneficial conversion feature, not to exceed the carrying value of the Series B Preferred Stock, to the holders of the Series B Preferred Stock and was initially recorded as a reduction to the carrying value of the Series B Preferred and an increase to additional paid-in-capital of $20.3 million. This beneficial conversion feature will be accreted to the Series B Preferred Stock carrying value over its remaining term as a reduction of earnings applicable to common stockholders. As of September 30, 2006, an aggregate of $5.6 million of the beneficial conversion feature had been accreted to the Series B Preferred Stock carrying value plus adjustments of $5.9 million and $1.0 million for redemption of shares in September of 2006 and October of 2005, respectively. As of September 30, 2006 $7.8 million of the beneficial conversion feature remained to be accreted.

In February 2005, the Board of Directors of the Company declared a dividend on the Company’s Series B Preferred Stock of $3.6 million, for dividends accrued and payable as of March 31, 2005. This $3.6 million reflected a full year of dividends. As permitted by the Certificate of Designation of the Series B Preferred Stock, the Company irrevocably elected to pay the dividend in the form of shares of the Company’s common stock. On March 31, 2005, the Company issued 211,830 shares of common stock to pay the dividend.

In May 2005, the Board of Directors of the Company declared a dividend on the Company’s Series B Preferred Stock of $915,000 for dividends accrued and payable as of June 30, 2005. The dividend was paid in cash in June 2005.

10

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

In August 2005, the Board of Directors of the Company declared a dividend on the Company’s Series B Preferred Stock in the amount of $305,000 for dividends accrued and payable as of September 30, 2005. The dividend was paid in cash in September 2005.

In August 2005, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of the State of Delaware (the “Certificate of Amendment”). The Certificate of Amendment amended Section 5 of the Certificate of Designation of the Series B Preferred Stock to:

• provide that upon completion of a rights offering and/or related standby purchase commitments that raise aggregate gross proceeds of at least $65 million (a “Qualified Rights Offering”), the Company would redeem one-third of the outstanding shares of Series B Preferred Stock at a redemption price payable in cash equal to the stated value of the Series B Preferred Stock plus all accrued but unpaid dividends on such shares through the date of redemption;

• provide that upon completion of a Qualified Rights Offering, the Company would redeem an additional one-third of the outstanding shares of Series B Preferred Stock at a redemption price payable in cash equal to 101% of the Stated Value of such shares;

• eliminate upon the completion of a Qualified Rights Offering, the option of the holders of the Series B Preferred to require the Company to redeem a portion of the Series B Preferred Stock on September 30, 2005 and March 30, 2006; and

• provide that the issuance of the Company’s common stock pursuant to a Qualified Rights Offering, related standby agreement and related warrants (each as defined in the Certificate of Designation) would not constitute a change of control as defined in the Certificate of Designation.

In September 2005, the Company called for the redemption of two-thirds, or 857,944 shares, of its outstanding shares of Series B Preferred Stock. The Company paid $41.4 million to redeem the two-thirds of the outstanding shares of Series B Preferred Stock including accrued and unpaid dividends of $564,000 and a 1% early repayment fee of $203,000. As a result of the redemption, the Company amortized $347,000 of issuance costs related to the 857,944 shares redeemed during the three months ended September 30, 2005.

In October 2005, a holder of the Company’s Series B Preferred Stock exercised its conversion option to convert 21,097 shares of Series B Preferred Stock, which were each convertible into 2.3512 shares of common stock at a conversion price of $20.16 per share. This transaction reduced the Company’s aggregate redemption commitment on the Series B Preferred Stock by $1.0 million to $19.3 million.

In December 2005, the Board of Directors of the Company declared a dividend on the Company’s Series B Preferred Stock in the amount of $277,000 for dividends accrued and payable as of December 31, 2005. The dividend was paid in cash in December 2005.

The Board of Directors of the Company declared dividends on the Series B Preferred Stock in February, May and August, 2006 of $290,000 per quarter. The dividends were paid in cash in March, June and September 2006, respectively.

In September 2006, four holders of the Company’s Series B Preferred Stock exercised their right to call for the redemption of 175,809 of the outstanding Series B shares. The Company redeemed the shares at a redemption price of cash equal to the stated value of the Series B Preferred Stock plus all accrued and unpaid dividends on such shares through the date of redemption. As a result of this transaction, the Company paid $8.3 million in cash to redeem the 175,809 shares at face value in addition to cash dividends paid for the quarter. This transaction reduced the aggregate redemption commitment on the Series B Preferred Stock by $8.3 million to $11.0 million.

11

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

As of September 30, 2006, 232,067 shares of Series B-2 Convertible Preferred Stock remained outstanding. The holders of the Series B Preferred Stock have the option to require the Company to redeem the shares upon a change of control, certain events of default or other specified occurrences. The redemption price is $47.40 per preferred share plus accrued dividends, except in the case of certain defaults where there are premiums to the redemption cost. The Company has the option to make dividend and redemption payments using its common stock; provided that the Company may use no more than 1,428,571 shares of common stock in the aggregate for redemption payments. See Note 15. “Subsequent Events” for a discussion regarding additional transactions with the holders of the Series B Preferred Stock.

NOTE 7. SUBSCRIPTION RIGHTS OFFERING AND STANDBY PURCHASE AGREEMENT

On August 23, 2005, the Company commenced a rights offering for up to 14,285,714 shares of its common stock at $5.25 per share up to $75.0 million. Under the rights offering, each holder of the Company’s common stock was given the opportunity to purchase 0.5186 shares of common stock at $5.25 per share for each share of common stock held. The rights offering closed on September 16, 2005 and rights to purchase 11,429,872 shares of the Company’s common stock were exercised resulting in proceeds of $60.0 million before offering costs of $3.0 million. The Company used $41.4 million of the proceeds of the rights offering to redeem two-thirds of the outstanding shares of Series B Preferred Stock plus accrued and unpaid dividends. In addition, $3.6 million of the proceeds were restricted for the payment of future dividend and principal payments of the Series B Preferred Stock. In October 2005, the Company used $18.7 million from the proceeds of the rights offering to redeem all of the then outstanding senior accreting notes plus accrued and unpaid dividends. In September 2006, the Company used the remaining $2.4 million of the restricted cash to pay dividends relating to the quarter ended September 30, 2006 and to redeem a portion of the Series B Preferred stock.

Immediately following the rights offering, pursuant to a standby purchaser’s agreement, standby purchasers purchased the remaining shares offered of 2,855,842 shares, at $5.25 per share, or $15.0 million. On September 21, 2005, pursuant to the terms of the standby purchase agreement, the Company also issued to the standby purchasers warrants (the “Standby Warrants”) to purchase an aggregate of 2,302,005 shares of the Company’s common stock at an exercise price equal of $5.25 per share. During July 2006, Standby Warrants to purchase 2,302,001 shares of the Company’s common stock were exercised resulting in cash proceeds to the Company of $12.1 million.

NOTE 8. STOCK-BASED COMPENSATION

Stock-Based Compensation Plans

In 2003, the Company adopted the DDi Corp. 2003 Management Equity Incentive Plan (the “2003 Plan”). Stock options granted under the 2003 Plan vest in equal installments, with one-third vesting immediately upon grant, one-third in eighteen months and one-third in thirty-six months. The Company no longer grants options under the 2003 Plan.

In 2003, the Company also adopted the DDi Corp. 2003 Directors Equity Incentive plan (the “2003 Directors Plan”) for non-employee directors of the Company. Stock options granted under the 2003 Directors Plan vest 40% immediately upon approval of grant by shareholders and 20% each year thereafter on December 19th from 2004 through 2006. The Company no longer grants options under the 2003 Directors Plan.

In 2005, the Company adopted the DDi Corp. 2005 Stock Incentive Plan (the “2005 Plan”). Awards under the 2005 Plan may be made to key employees and directors of DDi whose participation in the 2005 Plan is determined to be in the best interests of the Company by the Compensation Committee of the Board of Directors (the “Compensation Committee”). The 2005 Plan permits the granting of options (both incentive and nonqualified stock options), share appreciation rights, restricted common stock, deferred share units and performance awards. The Company has reserved an aggregate of 2,142,857 shares of its common stock for issuance under the 2005 Plan. Of these shares, 1,071,429 shares are available for awards in a form other than stock options and stock appreciation rights. Options granted under the 2005 Plan vest annually over three years from the date of grant in equal installments, and have a contractual term of 10 years.

12

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes the Company’s stock option activity under all the plans for the nine months ended September 30, 2006:

						Weighted
				Weighted		Average
				Average Exercise		Remaining
				Price		Contractual Life in		Aggregate Intrinsic
	Options Outstanding			per Option		Years		Value
Balance as of December 31, 2005		1,164,836		$	12.43		8.7
Granted		766,000		$	7.80
Exercised		(57,385	)	$	1.84
Forfeited		(228,946	)	$	14.72
Balance as of September 30, 2006		1,644,505		$	10.33		9.5	$	1,433
Options exercisable as of September 30, 2006		256,204		$	29.82		7.7	$	132

The aggregate intrinsic value represents the difference between the exercise price of the underlying awards and the quoted price of DDi’s common stock for those awards that have an exercise price below the quoted price at September 30, 2006. The Company had outstanding at September 30, 2006 options to purchase an aggregate of 715,027 shares with an exercise price below the quoted price of the Company’s stock resulting in an aggregate intrinsic value of $1.4 million. During the three and nine months ended September 30, 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $24,000 and $268,000, respectively, determined as of the date of exercise. During the three and nine months ended September 30, 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $89,000, determined as of the date of exercise.

Accelerated Vesting of Certain Stock Options

On December 7, 2005, the Compensation Committee and the Board of Directors of the Company approved the accelerated vesting of all unvested stock options with an exercise price greater than the current market price of the Company’s common stock that were granted under the 2003 Plan and the 2003 Directors Plan to current employees, officers and directors, so that each such option became fully vested. The closing market price of the Company’s common stock on December 7, 2005 was $5.04 per share. As a result of this action, options to purchase 118,490 shares with exercise prices ranging from $15.54 per share to $73.15 per share became fully vested. The Company recorded $1.4 million in non-cash compensation expense in the fourth quarter of 2005 related to the acceleration of these options. The primary purpose of the accelerated vesting was to reduce future compensation expense the Company would otherwise recognize in its consolidated statements of operations with respect to these accelerated options upon the adoption of SFAS 123-R in the first quarter of 2006.

Adoption of SFAS 123-R

Prior to January 1, 2006, the Company’s stock-based employee compensation plans were accounted for under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB 25, the difference between the exercise price of employee stock options granted and the fair value of the Company’s common shares on the date of grant is recorded as deferred compensation and amortized on a straight-line basis over the vesting periods of the underlying stock options. Upon adoption of SFAS 123-R in the first quarter of 2006, the Company’s deferred compensation balance was reduced to zero.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123-R using the modified prospective application transition method. Under this transition method, stock-based compensation cost recognized in the quarter ended September 30, 2006 included: (i) compensation cost for all unvested stock-based awards granted prior to January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (ii) compensation cost for all unvested stock-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123-R. Results for prior periods have not been revised.

13

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Due to the adoption of SFAS 123-R, the Company’s loss from continuing operations before income taxes, loss from continuing operations and net loss applicable to common stockholders for the three months ended September 30, 2006 were each lower than if the Company had continued to account for stock-based compensation under APB 25 by $309,000. Loss from continuing operations before income taxes, loss from continuing operations and net loss applicable to common stockholders for the nine months ended September 30, 2006 were each lower than if the Company had continued to account for stock-based compensation under APB 25 by $853,000. Basic and diluted earnings per share applicable to common stockholders for the three and nine months ended September 30, 2006 were lower by $0.02 and $0.05, respectively, as a result of the adoption of SFAS 123-R.

Determining Fair Value

Valuation and amortization method— The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model and a single option award approach. The Black-Scholes option-pricing model requires the input of certain assumptions that require management’s judgment including the expected term and the expected stock price volatility of the underlying stock option. The fair value of stock options is amortized on a straight-line basis over the requisite service periods of the awards, which is the vesting period.

Expected Term— The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined based on historical option exercise patterns of similar awards, the contractual terms and vesting schedules of the stock-based awards and expectations of future employee stock option exercise behavior.

Expected Stock Price Volatility —Effective January 1, 2006, pursuant to the SEC’s Staff Accounting Bulletin No. 107, the Company evaluated the assumptions used to estimate its expected volatility, including whether the Company’s own historical volatility appropriately reflects management’s expectations of future volatility. As a result of this analysis, the Company determined that its own historical volatility in conjunction with the historical volatility of its two most closely related competitors provide a reasonable indicator of expected future stock price volatility.

Expected Dividend Yield— The Company does not pay dividends on its common stock, and management does not have any plan in the foreseeable future to do so.

Risk-Free Interest Rate— The Company uses the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term as a risk-free interest rate. Where the expected term of the Company’s stock-based awards do not correspond with the terms for which interest rates are quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities.

Expected Forfeiture Rate— The Company’s expected forfeiture rate represents the percentage of granted stock options that are not expected to vest due to employee termination. The estimated forfeiture rate was determined based on historical stock option forfeitures taking into account workforce reductions and the discontinued operations of the Company’s European subsidiaries in 2005.

Fair Value— The fair value of the Company’s stock options granted to employees for the three months ended September 30, 2006 was estimated using the following assumptions:

	September 30,
	2006
Expected term (years)		4
Expected stock price volatility		70.2	%
Expected dividend yield		0	%
Risk-free interest rate		4.6	%
Expected forfeiture rate		10	%
Weighted average fair value per share	$	4.54

14

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

There were no options granted to employees during the three months ended September 30, 2005.

The fair value of the Company’s stock options granted to employees for the nine months ended September 30, 2006 and September 30, 2005 was estimated using the following weighted average assumptions:

	September 30,			September 30,
	2006			2005
Expected term (years)		4			4
Expected stock price volatility		73.6	%		60.0	%
Expected dividend yield		0	%		0	%
Risk-free interest rate		5.1	%		4.0	%
Expected forfeiture rate		10	%		10	%
Weighted average fair value per share	$	4.56		$	8.83

Stock Compensation Expense

During the three and nine months ended September 30, 2006, the Company recorded $384,000 and $1.1 million, respectively, of stock-based compensation, which included $73,000 of incremental cost resulting from the modification of pre-existing awards to five employees terminated in connection with the sale of the Company’s assembly business (see Note 14). As required by SFAS 123-R, the Company made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

At September 30, 2006, the total compensation cost related to non-vested stock options granted to employees under the Company’s stock option plans but not yet recognized was $3.8 million, net of estimated forfeitures of approximately $1.4 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 2.4 years and will be adjusted for subsequent changes in estimated forfeitures.

Prior to January 1, 2006, the Company accounted for stock-based compensation cost using the disclosure only provisions of SFAS 123. The Company elected to provide the pro forma disclosures as if the fair value based method had been applied to its financial statements. Had non-cash compensation expense for all stock-based compensation plans been determined consistent with SFAS 123, the Company’s net loss applicable to common stockholders and net loss per share applicable to common stockholders would have been the following (in millions):

	Three months			Nine months
	ended			ended
	September 30,			September 30,
	2005			2005
Net loss applicable to common stockholders:
As reported — basic and diluted	$	(28,793	)	$	(63,037	)
Add: non-cash compensation credit under APB 25, net of tax		900			775
Less: non-cash compensation (expense) under FAS 123, net of tax		(1,315	)		(1,928	)
Pro forma — basic and diluted	$	(29,208	)	$	(64,190	)
Net loss per share applicable to common stockholders — basic and diluted:
As reported basic and diluted	$	(5.06	)	$	(13.70	)
Pro forma basic and diluted	$	(5.13	)	$	(13.95	)

NOTE 9. SEGMENT REPORTING

Based on evaluation of the Company’s financial information, management believes that the Company operates in one reportable segment which designs, develops, manufactures, assembles and tests complex printed circuit boards, back panels and related electronic products. On September 29, 2006, the Company sold substantially all of the assets and liabilities of its assembly business (See Note 14). The Company will continue to operate in one reportable segment which designs, develops and manufactures complex printed circuit boards. Since early 2005, the Company has operated primarily in one geographical area, North America. Revenues are attributed to the country in which the customer buying the product is located.

15

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes net sales by geographic area (in thousands):

	Three months ended				Nine months ended
	September 30,		September 30,		September 30,		September 30,
	2006		2005		2006		2005
Net sales:
North America (a)	$	47,168	$	44,366	$	143,254	$	131,070
Asia		2,878		785		8,919		3,698
Other		1,328		823		2,665		1,693
Total	$	51,374	$	45,974	$	154,838	$	136,461

(a) The majority of sales in North America represent sales to customers located in the United States.

NOTE 10. GOODWILL AND INTANGIBLES

In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) goodwill and other intangible assets with indeterminate lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. Because the Company operates in one operating segment and has one reporting unit, the Company tests goodwill for impairment at the consolidated level against the fair market value of the Company. Under SFAS 142, the fair value of a reporting unit refers to the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. The Company assesses potential impairment on an annual basis on December 31 and compares the book value of the Company to its market capitalization.

The Company’s goodwill balance, which was $38.1 million at September 30, 2006 and $41.8 million at December 31, 2005, relates to the allocation of the reorganized value of the Company resulting from fresh-start accounting subsequent to the Company’s emergence from bankruptcy in December 2003. The Company has not determined or recorded an impairment of goodwill during the nine months ended September 30, 2006, as there were no events or changes in circumstances that indicated a potential impairment. During the second quarter of 2006, the Company reduced goodwill by approximately $1.0 million resulting from the reversal of pre-fresh start accounting tax valuation allowances. During the third quarter of 2006, the Company increased goodwill by approximately $400,000 resulting from the reestablishment of pre-fresh start accounting tax valuation allowances due to a change in full year projected taxable income.

In connection with the sale of its assembly business in the third quarter of 2006 (see Note 14), the Company allocated $3.1 million of goodwill to the carrying value of the disposed business based on the fair value of the assembly business in relation to the fair value of the consolidated entity on the closing date of the transaction. Pursuant to SFAS 142, when a company determines the gain or loss resulting from the disposal of a portion of a reporting unit, it must first determine the relative fair value of the disposed business and the retained portion of the reporting unit. Those relative fair values are used to calculate the portion of the reporting unit’s goodwill that is to be included in the carrying value of the disposed business.

Other intangible assets with finite lives continue to be subject to amortization, and any impairment is determined in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” The allocation of the reorganized value of the Company subsequent to its emergence from bankruptcy in 2003 resulted in identified intangible assets totaling $24.9 million, of which $23.0 million related to customer relationships and the balance to backlog which became fully amortized in the first quarter of 2004. The customer relationships are being amortized over their estimated useful life of five years, and had accumulated amortization of $13.0 million and $9.6 million as of September 30, 2006 and December 31, 2005, respectively. Amortization expense related to these intangible assets will be approximately $1.15 million per quarter through November 2008.

16

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

NOTE 11. RESTRUCTURING

In May 2005, the Board of Directors of the Company approved plans to close the Company’s Arizona facility in order to increase operational efficiency. The Arizona facility, encompassing three buildings, produced mass lamination cores for four of the Company’s North American PCB plants. The Company’s Virginia PCB facility has assumed the majority of the internal mass lamination work previously manufactured by the Arizona facility.

The Company announced the exit plan to the affected workforce in May 2005, with all production activity completed by the end of that same month. The Company completed remediation of the Arizona facility (encompassing three separate buildings) and exited the last building in the third quarter of 2006. The Company has incurred the following types of restructuring costs in connection with the closure of its Arizona facility: termination benefits; facility exit costs; fixed asset and inventory write-offs; taxes; and other miscellaneous charges. During the three and nine months ended September 30, 2006, the Company incurred a total of $114,000 and $975,000, respectively, in restructuring and other related charges relating to the closure of the Arizona-based mass lamination operation. As of September 30, 2006, the Company had incurred a total of $5.6 million in charges relating to the closure and does not anticipate any additional charges other than ongoing legal fees and expenses related to pending litigation with the landlord of one of the buildings (see Note 13).

In May 2005, the Company announced the closure of the corporate human resources center located in Colorado Springs, Colorado and the relocation of this function into the corporate offices located in Anaheim, California. As of the end of the second quarter of 2005, this restructuring was essentially complete and the Company did not incur any additional significant restructuring charges related to the closure of the Colorado facility.

A reconciliation of accrued restructuring costs from December 31, 2005 to September 30, 2006 is as follows (in thousands):

	Employee
	Termination			Contract			Facility			Other Exit
	Benefits			Terminations			Closure			Costs			Total
Accrued restructuring costs at December 31, 2005	$	—		$	16		$	999		$	67		$	1,082
Additional accruals:
Arizona closure		43			347			433			152			975
Colorado closure		6			15			—			4			25
Other		—			—			—			(8	)		(8	)
Payments		(49	)		(378	)		(1,398	)		(215	)		(2,040	)
Accrued restructuring costs at September 30, 2006	$	—		$	—		$	34		$	—		$	34

The Company expects to complete payment of the remaining costs in the fourth quarter of 2006.

NOTE 12. COMPREHENSIVE INCOME

SFAS No. 130, “Reporting Comprehensive Income” establishes requirements for reporting and disclosure of comprehensive loss and its components. Comprehensive loss includes unrealized holding gains and losses and other items that have previously been excluded from net loss and reflected instead in stockholders’ equity. The following table summarizes the Company’s comprehensive loss (in thousands):

	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2006			2005			2006			2005
Net loss	$	(4,485	)	$	(26,807	)	$	(7,138	)	$	(58,368	)
Other comprehensive loss: Foreign currency translation		(28	)		324			(164	)		504
Comprehensive loss	$	(4,513	)	$	(26,483	)	$	(7,302	)	$	(57,864	)

17

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

NOTE 13. COMMITMENTS AND CONTINGENCIES

In October and November 2003, several class action complaints were filed in the United States District Court for the Central District of California on behalf of purchasers of our common stock, alleging violations of the federal securities laws between December 19, 2000 and April 29, 2002 (the “Class Period”). Named as defendants in these complaints are Bruce D. McMaster, the Company’s former President and Chief Executive Officer, Joseph P. Gisch, former Chief Financial Officer, Charles Dimick, former Chairman of the Board of Directors, Gregory Halvorson, former Vice President of Operations and John Peters, former Vice President of Sales and Marketing. Neither the Company nor any of its subsidiaries were named in these lawsuits. The complaints seek unspecified damages and allege that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) by, among other things, misrepresenting and/or failing to disclose material facts about the Company’s reported and projected financial results during the Class Period. In December 2003, a related class action complaint was filed in the Central District of California alleging similar claims against the same parties and seeking unspecified damages, but also adding causes of action under the Securities Act of 1933, as amended (the “Securities Act”) in connection with the Company’s February 2001 primary offering of convertible notes and secondary offering of common stock. This complaint alleges that the defendants misrepresented and/or failed to disclose material facts about the Company’s reported and projected financial results in connection with the registration statement and prospectus for the secondary offering. This complaint also added former directors David Dominik, Steven Pagliuca, Steven Zide and Mark Benham as defendants, as well as Bain Capital, Inc. and the underwriters of the February 2001 offering. On December 16, 2003, a federal district court judge consolidated the Central District of California actions in to a single action,In re DDi Corp. Securities Litigation,Case No. CV 03-7063 MMM (SHx). On May 21, 2004, the Court appointed as Lead Plaintiffs Paul Poppe, LeRoy Schneider, and Rand Skolmick. On July 26, 2004, Lead Plaintiffs filed a consolidated amended complaint on behalf of all persons or entities who purchased Company common stock between December 19, 2000 and April 29, 2002, including those who acquired Company common stock pursuant to, or traceable to, the February 14, 2001 secondary offering. The consolidated amended complaint seeks unspecified damages and alleges that defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act by, among other things, misrepresenting and/or failing to disclose material facts about the Company’s reported and projected financial results during the Class Period, including reported and projected financial results in connection with the registration statement and prospectus for the secondary offering. Neither the Company nor any of it subsidiaries were named as a defendant in this consolidated amended complaint.

Pursuant to a June 13, 2004 scheduling order, the defendants responded to the consolidated amended complaint on September 9, 2004 with a motion to dismiss. The plaintiffs filed their opposition on October 25, 2004. The defendants filed a reply in support of the motion to dismiss in November 2004. On January 7, 2005, without the necessity of oral argument, the Court entered an Order Denying in Part and Granting in Part Defendants’ Motions to Dismiss the Consolidated Amended Complaint. The Court’s Order denied the motions to dismiss to the extent they relied upon statutes of limitations arguments. The Court’s Order granted the motions to dismiss on the grounds that the Consolidated Amended Complaint failed to adequately allege any materially false or misleading representations or omissions. The Court’s Order also granted Defendants’ motions to the extent the Consolidated Amended Complaint inappropriately relied upon the group pleading or group published information doctrine. As a consequence of this, the totality of plaintiffs’ claims were dismissed with leave to file a Second Amended Consolidated Complaint. The plaintiffs filed a Second Amended Complaint on February 22, 2005 stating only Securities Act claims. Multiple defendant groups filed motions to dismiss the plaintiffs’ Second Amended Complaint on March 25, 2005. Plaintiffs filed an opposition to the motions to dismiss on April 25, 2005. On May 16, 2005, the defendants filed replies in support of the motions to dismiss. On May 6, 2005, the individual defendants also filed a supplemental brief in further support of the motion to dismiss. On May 20, 2005, the plaintiffs filed an opposition to this supplemental brief. On July 20, 2005, without oral argument, the Court entered an Opinion and Order Granting in Part and Denying in Part Defendants’ Motions to Dismiss the Second Amended Consolidated Class Action Complaint. The Court’s Order granted the motions to dismiss with prejudice to the extent the plaintiffs asserted claims on behalf of those who purchased the convertible notes. The Court’s Order granted the motions to dismiss with prejudice as to the plaintiffs’ Section 12(a)(2) of the Securities Act claim against the individual defendants. The Court’s Order denied the motions to dismiss with respect to the plaintiffs’ Section 11 and 15 of the Securities Act claims. The plaintiffs filed a notice on August 4, 2005 that the Second Amended Complaint remains the operative complaint in the case. On September 21, 2005, the multiple defendant groups filed their respective Answers to the operative complaint.

18

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

The Company’s Directors & Officers Insurance Policy in place at the time of the claims has a $2.5 million deductible. In the second quarter of 2006 the Company accrued its remaining exposure on the deductible of approximately $1.7 million ($2.5 million deductible less legal fees incurred through June 30, 2006 of $773,000) because the Company believes that although the claims are without merit and it intends to vigorously defend the action, based on preliminary settlement discussions it is probable that the case will settle for an amount in excess of the insurance deductible. Legal fees and expenses incurred after June 30, 2006 have been and will continue to be applied against this reserve and any remaining accrual will go toward any settlement negotiated by the insurance company.

On May 2, 2006, SMDI Company filed a lawsuit against the Company in Arizona Superior Court for Maricopa County. SMDI Company was the property manager for the landlord for two buildings that constituted a portion of the Company’s now-closed Arizona facility. The complaint alleges that the Company breached the leases for the two buildings by failing to adequately maintain the buildings, failing to timely pay rent and causing environmental damage to the property. The complaint seeks an unspecified amount of damages. On June 2, 2006, the plaintiff filed an amended complaint, which added Dynamic Details, Incorporated as a defendant to the action. The original complaint named only the Company’s Laminate Technology Corp. subsidiary as a defendant. On June 30, 2006, the defendants removed the state court action to the U.S. Federal District Court for the District of Arizona on the basis of diversity jurisdiction. On July 5, 2006, the Company filed a motion to dismiss. On August 15, 2006, the court denied the Company’s motion to dismiss the complaint, but ruled that the plaintiffs must amend their complaint to name the owners of the property as the plaintiffs in the action, instead of SMDI Company, which was the property manager for the property. On August 29, 2006, the plaintiffs filed a second amended complaint to (a) substitute Barbara Ann Ball, as Special Trustee of the Barbara Ann Ball Revocable Trust, Mary Ball Glimpse, as Special Trustee of the Mary Ball Glimpse Trust, Barbara Ann Ball and Germain H. Ball, as Co-Trustees of the Leona Harmon Rickenbach Trust, and NELCO-WF, L.L.C. as the plaintiffs in the action and (b) add Nelco Technology, Inc., the previous tenant of the property, as a co-defendant. On September 28, 2006, the Company filed an answer, cross-claim and counterclaim, in which it asserts a cross-claim against Nelco Technology, Inc. for indemnification and contribution and a counterclaim against the plaintiffs for breach of the implied covenant good faith and fair dealing. A scheduling conference is set for December 1, 2006. The Company believes the plantiff's claims lack merit and intends to vigorously defend the action.

NOTE 14. SALE OF ASSEMBLY BUSINESS

On September 29, 2006, the Company completed the sale of substantially all of the assets and liabilities of its assembly business to VMS, LLC for $12.0 million in cash subject to adjustment based on final working capital acquired above or below $9.5 million. The transaction was accounted for pursuant to the provisions of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) and EITF 03-13 “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations.” The Company recorded a $4.5 million loss on the sale in the third quarter of 2006, which included $3.1 million of goodwill allocated to the assembly business in accordance with SFAS 142.

In accordance with EITF 03-13, the operations and cash flows of the disposed assembly business have not been presented as a discontinued operation as a result of expected significant continuing direct cash flows pursuant to a supply agreement with VMS for the sale of DDi printed circuit boards to be used in VMS’s assembly business. The supply agreement provides for a preferred, but not exclusive, supplier arrangement and has a term of 12 months which automatically renews for an additional 12-month period until either party gives 90-days notice to terminate. The agreement was entered into with the purpose of establishing a long-term supply relationship between the parties. As prescribed by EITF 03-13, significance was measured based on a comparison of the expected continuing cash flows to be generated from future sales to VMS subsequent to the closing of the transaction and the cash flows that would have been generated by the assembly business absent the disposal transaction.

The amounts that will be presented in continuing operations after the disposal transaction include a continuation of revenues and expenses that have been intercompany transactions which have been eliminated in consolidated financial statements issued for periods prior to the closing of the transaction. These intercompany sales transactions totaled approximately $1.0 million and $3.0 million, respectively, for the three and nine month periods ended September 30, 2006 and $825,000 and $2.5 million, respectively, for the three and nine month periods ended September 30, 2005.

19

DDi CORP.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

NOTE 15. SUBSEQUENT EVENTS

Acquisition of Sovereign Circuits

On October 23, 2006, the Company completed the acquisition of Sovereign Circuits, a privately held printed circuit board manufacturer, for a combination of $5.2 million in cash, 1,201,964 shares of DDi common stock and the assumption of Sovereign Circuits' debt of approximately $2.3 million. Under the terms of the merger agreement, 15% of the purchase price will be held in escrow by a third-party escrow agent for up to one year to cover any indemnification claims that may arise.

Repurchase of Series B Preferred Stock

On October 27, 2006, the Company entered into separate agreements with the remaining four holders of the Series B Preferred Stock to repurchase all of the 232,067 remaining outstanding shares of Series B Preferred with a face value of $11.0 million in exchange for $5.5 million in cash and the issuance of 731,737 shares of common stock, plus the payment of approximately $49,000 in accrued dividends. This repurchase constitutes an induced conversion and as such, the Company will reflect a $10.7 million one-time, non-cash reduction of earnings applicable to common shareholders used in the calculation of earnings per share in the fourth quarter of 2006 equal to the difference between the fair value of the cash and shares issued in October and the fair value of shares that would have been issuable using the original stated conversion price of $20.16 per share, plus the remaining unaccreted balance of the beneficial conversion feature created in 2005 in connection with the rights offering for the portion of the repurchase paid in shares. Upon completion of this transaction, the Company has retired all outstanding shares of its Series B Preferred Stock.

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion of the financial condition and results of operations for our fiscal quarter and year to date period ended September 30, 2006. As used herein, the “Company,” “we,” “us,” or “our” means DDi Corp. and its wholly-owned subsidiaries, including DDi Intermediate Holdings Corp., DDi Capital Corp. and Dynamic Details, Incorporated. This discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in DDi Corp.’s Annual Report onForm 10-K for the year ended December 31, 2005.

On February 3, 2006, we effected a one-for-seven reverse stock split. All share and per share information has been retroactively adjusted to reflect the reverse stock split.

Some of the statements in this section contain forward-looking statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events, which involve risks and uncertainties. All statements other than statements of historical facts included in this section relating to expectation of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this section involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A in our most recently filed 10-K and 10-Qs and elsewhere in thisForm 10-Q, including, but not limited to, changes in general economic conditions in the markets in which we may compete and fluctuations in demand in the electronics industry; increased competition; increased costs; our ability to retain key members of management; our ability to address changes to environmental laws and regulations; risks associated with acquisitions; adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; and other factors identified from time to time in our filings with the Securities and Exchange Commission.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Our Company

We are a leading provider of time-critical, technologically-advanced printed circuit board (“PCB”) engineering and manufacturing. We specialize in engineering and fabricating complex multi-layer printed circuit boards on a quick-turn basis, with lead times as short as 24 hours. We have approximately 1,000 customers in the communications and networking, medical, test and industrial instruments, high-end computing, military and aerospace equipment markets. With such a broad customer base and approximately 50 new printed circuit board designs tooled per day, we have accumulated significant process and engineering expertise. Our core strength is developing innovative, high-performance solutions for customers during the engineering, test and launch phases of their new electronic product development. Our entire organization is focused on rapidly and reliably filling complex customer orders and building long-term customer relationships. Our engineering capabilities and manufacturing facilities in the United States and Canada enable us to respond to time-critical orders and technology challenges for our customers.

On September 29, 2006, we completed the sale of substantially all of the assets and liabilities of our assembly business to VMS LLC. The divestiture of the lower margin assembly business will allow us to realign our business around our core PCB operations. Revenues and costs of the assembly business through September 29, 2006 have been included in our results for the three and nine months ended September 30, 2006.

21

On October 23, 2006, we completed the acquisition of Sovereign Circuits, a privately-held printed circuit board manufacturer. The acquisition of Sovereign Circuits will extend our presence in key PCB markets, such as the military and aerospace markets, as well as expand our technical capabilities to include flex and rigid-flex technologies. We believe these markets are less vulnerable to competition from off-shore, low-cost manufacturers. Further, acquiring Sovereign will add flex and rigid-flex product capabilities to our product offering, which will allow for improved market penetration by the DDi sales team. We also believe the Sovereign acquisition should enable us to improve the loading of customer demand across our collective facilities. As this acquisition occurred subsequent to September 30, 2006, results of operations of Sovereign are not included in our results discussed below.

Market Overview

Printed circuit boards are a fundamental component of virtually all electronic equipment. The level of printed circuit board complexity is determined by several characteristics, including size, layer count, density, materials, functionality and design features. High-end commercial equipment manufacturers require complex printed circuit boards fabricated with higher layer counts, greater density and advanced materials and demand highly complex and sophisticated manufacturing capabilities. We see several significant trends within the printed circuit board manufacturing industry, including:

• Increasing customer demand for quick-turn production.Rapid advances in technology are significantly shortening product life-cycles and placing increased pressure on original equipment manufacturers to develop new products in shorter periods of time. In response to these pressures, original equipment manufacturers look to printed circuit board manufacturers that can offer design and engineering support and quick-turn manufacturing to reduce time-to-market.

• Increasing complexity of electronic equipment.Original equipment manufacturers are continually designing more complex and higher performance electronic equipment, which requires sophisticated printed circuit boards that accommodate higher speeds and frequencies and increased component densities and operating temperatures. In turn, original equipment manufacturers rely on printed circuit board manufacturers that can provide advanced engineering and manufacturing services early in the new product development cycle.

• Shifting of high volume production to Asia.Asian based manufacturers of printed circuit boards are capitalizing on their lower labor costs and are increasing their production and market share of printed circuit boards used, for example, in high-volume consumer electronics applications, such as personal computers and cell phones. Asian-based manufacturers have been generally unable to meet the lead time requirements for the production of complex printed circuit boards on a quick-turn basis.

Results of Operations

The following tables set forth select data from our Condensed Consolidated Statement of Operations (in thousands):

	Three months ended											Nine months ended
	September 30,			September 30,			$		%			September 30,			September 30,			$		%
	2006			2005			Change		Change			2006			2005			Change		Change
Net sales	$	51,374		$	45,974		$	5,400		11.7	%	$	154,838		$	136,461		$	18,377		13.5	%
Cost of goods sold		42,263			39,428			2,835		7.2	%		125,376			116,424			8,952		7.7	%
Gross profit		9,111			6,546			2,565		39.2	%		29,462			20,037			9,425		47.0	%
Gross profit as a percentage of net sales		17.7	%		14.2	%							19.0	%		14.7	%

22

Net Sales

Net sales are primarily derived from the engineering and manufacture of complex, technologically-advanced multi-layer PCBs and, to a lesser extent, value added PCB assembly services up through September 29, 2006, when we sold our assembly business.

Net sales increased $5.4 million, or 11.7%, to $51.4 million for the third quarter of 2006, from $46.0 million for the same period in 2005. The increase in net sales consisted of a 12.3% increase in PCB sales and a 9.0% increase in assembly sales. The increase in PCB sales was primarily attributable to an increase in total layers shipped and an increase in average layer pricing in the third quarter of 2006 as compared to the same period in 2005. The increase in assembly sales was primarily due to improved market conditions.

Net sales increased $18.4 million, or 13.5%, to $154.8 million for the nine months ended September 30, 2006, as compared to $136.5 million for the same period in 2005. The increase in net sales was led by a 17.5% increase in PCB sales, partially offset by a 4.5% decline in assembly sales. The increase in PCB sales was primarily attributable to an increase in total layers shipped and an increase in average layer pricing in the first nine months of 2006 as compared to the same period in 2005. The decrease in assembly sales was primarily due to several significant turnkey programs that matured in the second half of 2005, which negatively impacted the first quarter of 2006.

Gross Profit

Gross profit for the third quarter of 2006 was $9.1 million, or 17.7% of net sales, compared to $6.5 million, or 14.2% of net sales, for the same period in 2005. The increase in gross profit as a percentage of net sales was primarily the result of: (i) higher average pricing in the third quarter of 2006 as compared to the third quarter of 2005, (ii) a reduction of certain administrative and technology resources focused on production and operations activities and (iii) a $584,000 reduction in non-cash compensation in the third quarter of 2006 compared to the third quarter of 2005.

Gross profit for the nine months ended September 30, 2006 was $29.5 million, or 19.0% of net sales, compared to $20.0 million, or 14.7% of net sales, for the same period in 2005. The increase in gross profit as a percentage of net sales was primarily the result of: (i) higher average pricing in the first nine months of 2006 as compared to the first nine months of 2005, (ii) operational efficiencies associated with the closure of our Arizona facility, (iii) a reduction of certain administrative and technology resources focused on production and operations activities, (iv) a $1.3 million restructuring related inventory impairment charge incurred in the nine months ended September 30, 2005 associated with the closure of our Arizona facility compared to no impairment in the nine months ended September 30, 2006, and (v) a $754,000 reduction in non-cash compensation for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005.

Non-Cash Compensation

The following table sets forth select data related to non-cash compensation (in thousands):

	Three months ended				Nine months ended
	September 30,		September 30,		September 30,		September 30,
	2006		2005		2006		2005
Non-cash compensation:
Cost of good sold	$	86	$	670	$	337	$	1,091
Sales and marketing expenses		—		99		43		(250	)
General and administrative expenses		298		131		671		536
Total non-cash compensation	$	384	$	900	$	1,051	$	1,377

In 2006, non-cash compensation expense was recorded in accordance with the fair value recognition provisions of SFAS 123-R using the modified prospective application transition method. Under this transition method, stock-based compensation cost recognized in 2006 included: (i) compensation cost for all unvested stock-based awards granted prior to January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, net of estimated forfeitures and (ii) compensation cost for all unvested stock-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123-R, net of estimated forfeitures. In 2005, non-cash compensation related to amortization of

23

deferred compensation net of actual forfeitures for stock options that were granted with exercise prices that were less than the fair market value of our common stock at the date of grant and restricted stock.

Sales and Marketing Expenses

The following table sets forth select data from our Condensed Consolidated Statement of Operations (in thousands):

	Three months ended											Nine months ended
	September 30,			September 30,								September 30,			September 30,			$		%
	2006			2005			$ Change		% Change			2006			2005			Change		Change
Sales and marketing expenses	$	3,879		$	3,847		$	32		0.8	%	$	12,168		$	10,702			1,466		13.7	%
Percentage of net sales		7.6	%		8.4	%							7.9	%		7.8	%

Sales and marketing expenses increased by $32,000, or 0.8%, to $3.9 million, or 7.6% of net sales, for the third quarter of 2006, from $3.8 million, or 8.4% of net sales, for the third quarter of 2005. The absolute dollar increase in expenses is primarily due to commissions that increased proportionately with the increase in sales, offset partially by a decrease of $99,000 in non-cash compensation in the third quarter of 2006 as compared to the third quarter of 2005. The decrease in expenses as a percentage of net sales reflects the operating leverage we benefit from as our sales increase.

Sales and marketing expenses increased by $1.5 million, or 13.7%, to $12.2 million, or 7.9% of net sales, for the nine months ended September 30, 2006, from $10.7 million, or 7.8% of net sales, for the nine months ended September 30, 2005. The increase was primarily due to commissions and other selling expenses that increased proportionately with the increase in sales, a $240,000 charge for officer’s severance in 2006 and an increase in non-cash compensation of $293,000 resulting from a favorable adjustment related to the forfeiture of certain unvested options and restricted stock that reduced sales and marketing expenses in the first nine months of 2005.

General and Administration Expenses

The following table sets forth select data from our Condensed Consolidated Statement of Operations (in thousands):

	Three months ended												Nine months ended
	September 30,			September 30,									September 30,			September 30,			$		%
	2006			2005			$ Change			% Change			2006			2005			Change		Change
General and administration expenses	$	3,331		$	3,373		$	(42	)		(1.2	%)	$	10,587		$	10,354		$	233		2.3	%
Percentage of net sales		6.5	%		7.3	%								6.8	%		7.6	%

General and administration expenses decreased $42,000, or 1.2%, to $3.3 million, or 6.5% of net sales, for the third quarter of 2006, from $3.4 million, or 7.3% of net sales, for the third quarter of 2005. The decrease in general and administrative expenses was primarily a result of a $400,000 reduction in professional services primarily related to legal fees and various reductions in other administrative expenses including service charges, utilities, taxes and insurance of approximately $200,000, partially offset by additional resources focused on certain administrative and technology activities related to corporate-wide governance and systems initiatives of $398,000 and an increase in non cash compensation of $167,000.

For the nine months ended September 30, 2005, general and administrative expenses increased $233,000, or 2.3%, to $10.6 million, or 6.8% of net sales, from $10.4 million, or 7.6% of net sales, for the nine months ended September 30, 2005. The increase in general and administrative expenses was primarily attributable to additional resources focused on certain administrative and technology activities related to corporate-wide governance and systems initiatives of $1.2 million, an increase in non cash compensation of $135,000 and an increase in incentive bonus compensation related to an accrual based on year to date EBITDA performance against the 2006 plan of $103,000, partially offset by a reduction in professional fees of approximately $635,000 primarily associated with strategic reviews of our capital structure that occurred in the first quarter of 2005 and legal fees, as well as various other decreases in miscellaneous general and administration expenses such as taxes, travel, insurance, service charges and fees of approximately $600,000.

24

Loss on Sale of Assembly Business

On September 29, 2006, we completed the sale of substantially all of the assets and liabilities of our assembly business to VMS, LLC for $12.0 million in cash subject to adjustment based on final working capital. As a result of the sale, we recorded a $4.5 million loss on the sale in the third quarter of 2006, which included $3.1 million of goodwill allocated to the assembly business.

Litigation Reserve

In 2003, several class action complaints were filed in the United States District Court for the Central District of California on behalf of purchasers of our common stock, alleging violations of the federal securities laws between December 19, 2000 and April 29, 2002. The Directors & Officers Insurance Policy in place at the time of the claims has a $2.5 million deductible. In the second quarter of 2006, we accrued the remaining exposure on the deductible to us of approximately $1.7 million ($2.5 million deductible less legal fees incurred through June 30, 2006 of $773,000) because we believe that although the claims are without merit and we intend to vigorously defend the action, based on preliminary settlement discussions it is probable that the case will settle for an amount in excess of the insurance deductible. Legal fees and expenses incurred after June 30, 2006 have been and will continue to be applied against this reserve and any remaining accrual will go toward any settlement negotiated by the insurance company.

Amortization of Intangibles

Amortization of intangible assets relates to customer relationships identified during the allocation of the reorganized value of the Company subsequent to our emergence from bankruptcy in 2003. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $1.15 million of amortization expense each quarter through November 2008.

Restructuring

In May 2005 our Board of Directors approved plans to close our Arizona facility in order to increase operational efficiency. The Arizona facility, encompassing three buildings, produced mass lamination cores for four of our North American PCB plants. Our Virginia facility has assumed the majority of the internal mass lamination work previously manufactured by the Arizona facility. We announced the exit plan to the affected workforce in May 2005, with all production activity completed by the end of that same month. We completed remediation of the Arizona facility (encompassing three separate buildings) and exited the last building in the third quarter of 2006. We have incurred the following types of restructuring costs in connection with the closure of the Arizona facility: termination benefits; facility exit costs; fixed asset and inventory write-offs; taxes; and other miscellaneous charges. During the three and nine months ended September 30, 2006, we incurred a total of $114,000 and $975,000, respectively, in restructuring and other related charges relating to the closure of the Arizona-based mass lamination operation. As of September 30, 2006 we had incurred a total of $5.6 million in charges relating to the closure and do not anticipate any additional charges other than ongoing fees and expenses related to pending litigation with the landlord of one of the buildings. For a discussion of pending litigation, see Part II, Item I herein.

In May 2005, we announced the closure of our corporate human resources center located in Colorado Springs, Colorado and the relocation of this function into our corporate offices located in Anaheim, California. As of the end of the second quarter of 2005, this restructuring was essentially complete and we have not incurred any additional significant restructuring charges related to the closure of our Colorado facility.

25

A reconciliation of accrued restructuring costs for the three months ended September 30, 2006 is as follows (in thousands):

	Employee
	Termination			Contract			Facility			Other Exit
	Benefits			Terminations			Closure			Costs			Total
Accrued restructuring costs at June 30, 2006	$	—		$	—		$	447		$	57		$	504
Additional accruals:
Arizona closure		19			35			—			60			114
Colorado closure		2			3			—			2			7
Other		—			—			—			(1	)		(1	)
Payments		(21	)		(38	)		(413	)		(118	)		(590	)
Accrued restructuring costs at September 30, 2006	$	—		$	—		$	34		$	—		$	34

A reconciliation of accrued restructuring costs for the nine months ended September 30, 2006 is as follows (in thousands):

	Employee
	Termination			Contract			Facility			Other Exit
	Benefits			Terminations			Closure			Costs			Total
Accrued restructuring costs at December 31, 2005	$	—		$	16		$	999		$	67		$	1,082
Additional accruals:
Arizona closure		43			347			433			152			975
Colorado closure		6			15			—			4			25
Other		—			—			—			(8	)		(8	)
Payments		(49	)		(378	)		(1,398	)		(215	)		(2,040	)
Accrued restructuring costs at September 30, 2006	$	—		$	—		$	34		$	—		$	34

We expect to complete payment of the remaining accrued costs in the fourth quarter of 2006.

Goodwill Impairment

Due to a decline in our stock price during the third quarter 2005, a test of impairment was performed at September 30, 2005. The analyses indicated that our book value at September 30, 2005 was in excess of our fair value, as determined by our market capitalization. After assessing the goodwill impairment, we calculated and recorded a goodwill impairment charge of $23.5 million in the quarter ended September 30, 2005. We also recorded a goodwill impairment charge in the second quarter of 2005 of $31.1 million. Total goodwill impairment charges recorded for the nine months ended September 30, 2005 were $54.6 million.

Interest expense, net

Interest expense consists of amortization of debt issuance costs, interest and fees related to our Credit Facility and interest expense associated with long-term leases. In 2005, interest expense also included interest related to our senior accreting notes. Interest expense decreased by 81.1% to $230,000 for the third quarter of 2006 from $1.2 million for the third quarter of 2005. The decrease primarily related to $654,000 of interest incurred on our senior accreting notes in the third quarter of 2005 that was not incurred in the third quarter of 2006 as a result of their redemption in October 2005. Also contributing to the decrease was a $167,000 reduction in interest and fees associated with our revolving Credit Facility as a result of decreased borrowings on our Credit Facility during the third quarter of 2006 compared to the third quarter of 2005.

Interest expense decreased by 70.4% to $1.1 million for the nine months ended September 30, 2006 from $3.7 million for the nine months ended September 30, 2005. The decrease primarily related to $2.0 million of interest incurred on our senior accreting notes in the first nine months of 2005 that was not incurred in the first nine months of 2006 as a result of their redemption in October of 2005. Also contributing to the decrease was a $456,000 reduction in interest and fees associated with our revolving Credit Facility for the first nine months of 2006 as a result of decreased borrowings on the Credit Facility during the nine months of 2006 compared to the prior year comparable period and a decrease of $135,000 of interest expense associated with capital leases that expired in 2005.

26

Other (Income) Expense, Net

Net other (income) expense consists of foreign exchange transaction gains or losses related to our Canadian subsidiary and other miscellaneous non-operating items. For the third quarter of 2006, net other expense decreased by $348,000 to $35,000 from $383,000 in the third quarter of 2005. The decrease in net other expense over the prior year period was primarily related to a decrease in foreign exchange losses from our Canadian operations during the third quarter of 2006 compared to the third quarter of 2005.

For the nine months ended September 30, 2006, we recorded net other income of $23,000 compared to net other expense of $402,000 for the nine months ended September 30, 2005. The change from the prior year period was primarily related to net foreign exchange gains from our Canadian operations during the nine months ended September 30, 2006 compared to net foreign exchange losses during the prior year comparable period.

Income Tax Expense

For the three months ended September 30, 2006, income tax expense increased by $147,000 to $307,000 from $160,000 in the prior year comparable period. The increase was primarily due to an increase in Canadian taxable income in 2006. Our Canadian subsidiary had taxable income in the third quarters of 2006 and 2005.

For the nine months ended September 30, 2006, income tax expense increased by $1.3 million over the prior year to $2.1 million in 2006 from $808,000 in 2005. The increase was primarily due to increased Canadian taxable income resulting in additional income tax expense in 2006 as compared to the first nine months of 2005. In addition, during the nine months ended September 30, 2005, a tax benefit of $500,000 was recorded primarily in connection with intercompany transfer pricing.

Series B Preferred Stock Dividends and Accretion

For the three months ended September 30, 2006, we reported $1.8 million of Series B Preferred Stock dividends and accretion ($290,000 represented cash dividends, $138,000 represented amortization of the issuance costs, and $1.4 million represented accretion of the beneficial conversion feature to the Series B Preferred Stock carrying value). For the three months ended September 30, 2005, we reported $2.0 million of Series B Preferred Stock dividends and accretion ($868,000 represented cash dividends, $203,000 represented a 1% early repayment fee paid in cash, $774,000 represented amortization of issuance costs including $347,000 associated with the early redemption of $40.7 million of the Series B preferred stock and the remaining $141,000 represented accretion of the beneficial conversion feature).

For the nine months ended September 30, 2006, we reported $5.4 million of Series B Preferred Stock dividends and accretion ($870,000 represented cash dividends, $415,000 represented amortization of issuance costs and $4.1 million represented accretion of the beneficial conversion feature to the Series B Preferred Stock carrying value). For the nine months ended September 30, 2005, we reported $4.7 million of Series B Preferred Stock dividends and accretion ($1.8 million represented cash dividends, $915,000 represented dividends paid in our common stock, $1.6 million represented amortization of issuance costs, including $347,000 associated with the early redemption of $40.7 million of the Series B preferred stock, $203,000 represented a 1% early repayment fee paid in cash and the remaining $141,000 represented accretion of the beneficial conversion feature).

As a result of the early redemption of the remaining Series B Preferred shares in October, we will reflect a $10.7 million one-time, non-cash reduction of earnings applicable to common shareholders used in the calculation of earnings per share in the fourth quarter of 2006 equal to the difference between the fair value of the cash and shares issued in October and the fair value of shares that would have been issued using the original stated conversion price of $20.16 per share, plus the remaining unaccreted balance of the beneficial conversion feature created in 2005 in connection with the rights offering for the portion of the repurchase paid in shares. Upon completion of this transaction, we have retired all outstanding shares of the Series B Preferred Stock.

27

Net Income From Discontinued Operations

In February 2005, we placed our European operations, DDi Europe, into administration. We reported income from discontinued operations of $10.2 million for the nine months ended September 30, 2005, which included a non-cash gain of $11.1 million on the disposition of DDi Europe. The gain represented DDi Corp.’s net investment in DDi Europe as of January 31, 2005 (the effective date of disposition used for financial reporting purposes), net of foreign currency translation adjustments. The gain was partially offset by pre tax-losses of $1.3 million incurred though January 31, 2005 by DDi Europe.

Liquidity and Capital Resources

	(Dollars in thousands)
	September 30,		December 31,
	2006		2005
Working capital	$	37,168	$	26,209
Current ratio (current assets to current liabilities)		2.21 : 1.0		1.52 : 1.0
Cash and cash equivalents (excluding restricted cash at December 31, 2005)	$	27,191	$	25,985
Short term borrowings	$	—	$	19,929

As of September 30, 2006, we had total cash and cash equivalents of $27.2 million. The increase in our cash and cash equivalents, current ratio and working capital is primarily from cash received from the exercise of warrants of $12.1 million and the proceeds from the sale of our assembly business of $12.0 million, offset by the cash used to redeem a portion of the Series B Preferred stock of $8.3 million.

During July 2006, Standby Warrants, originally issued on September 21, 2005 to the standby purchasers during the 2005 rights offering, to purchase 2,302,001 shares of our common stock with an exercise price equal to the rights offering subscription price of $5.25 and an expiration of July 31, 2006 were exercised resulting in cash proceeds to us of $12.1 million.

On September 29, 2006, we completed the sale of substantially all of the assets and liabilities of our assembly business to VMS LLC for $12.0 million in cash.

Our principal sources of liquidity to fund ongoing operations have been existing cash on hand, cash generated from operations and our asset-based revolving Credit Facility, along with proceeds from various equity offerings. We believe that our current cash balance, in combination with net cash expected to be generated from operations and the continued use of our Credit Facility, will fund ongoing operations for at least the next twelve months. In the event that we require additional funding during the next twelve months, we will attempt to raise capital through either debt or equity arrangements. We cannot provide assurance that the required capital would be available on acceptable terms, if at all, or that any financing activity would not be dilutive to our current stockholders.

Revolving Credit Facility

In March 2004, we entered into a three-year, $40.0 million asset-based credit facility (the “Credit Facility”) with General Electric Capital Corporation, as agent and lender. During June 2004, the asset base on the Credit Facility was expanded to include our Canadian operations. In November 2005, we amended the Credit Facility to reduce the interest rate and the fee for non-use of available funds, to permit us to incur up to an additional $25.0 million of future indebtedness and release the security interest on the equipment securing the Credit Facility. Revolving credit advances bear interest at the prime rate plus 1% to 2% depending on our EBITDA (“Index Rate”). We can elect to have any new revolving credit advances, or convert any outstanding revolving credit advances, in excess of $1.0 million and in increments of $500,000, made as a LIBOR-based loan with a term of one, two, three or nine months and the rate would be LIBOR plus 2.5% to 3.5% depending on our EBITDA (“LIBOR Rate”). As of September 30, 2006, the Index Rate was 9.75%.

28

Availability under the Credit Facility is based on various liquidity and borrowing base tests including eligible accounts receivable. In connection with the acquisition of Sovereign Circuits in October of 2006, we agreed with the lender under the Credit Facility that Sovereign Circuits would not be a borrower or a credit party under the Credit Facility. As a result, the accounts receivable of Sovereign Circuits. will not be considered in calculating the available borrowings under the Credit Facility, the financial statements of Sovereign Circuits will not be taken into account in the calculation of the Company’s financial covenants and none of the assets of Sovereign Circuits will be used to secure the Credit Facility.

The Credit Facility requires us to make standard representations and warranties and maintain certain financial covenants. As of September 30, 2006, we were in compliance with all required covenants. The Credit Facility provides that an occurrence of a change in control constitutes an event of default, which could require immediate repayment. A change of control, as defined under the Credit Facility, has never occurred through September 30, 2006. The Credit Facility is guaranteed by DDi Corp. and its subsidiaries, DDi Intermediate and DDi Capital Corp., and is collateralized by the accounts receivable and inventories of our domestic operating subsidiary, Dynamic Details. The Credit Facility restricts our ability to pay cash dividends on our common stock and restricts our subsidiaries’ ability to pay dividends to us without the lender’s consent. As a result of the sale of our assembly business and the related accounts receivable in the third quarter of 2006, our availability under the Credit Facility has decreased. As of September 30, 2006, the borrowing capacity under the credit facility was $14.1 million, however, no amounts were outstanding.

Series B Preferred Stock

In March 2004, we completed a private placement of 147,679 shares of Series B-1 Preferred Stock and 1,139,238 shares of Series B-2 Convertible Preferred Stock (collectively, the “Series B Preferred Stock”) to certain institutional investors at a price of $47.40 per share for an aggregate sales price of $61.0 million before issuance cost of $3.5 million. Each share of the Series B Preferred Stock was initially convertible into 0.5714 shares of common stock at any time at a conversion price of $82.95 per share, subject to certain anti-dilution adjustments. In general, the Series B Preferred Stock vote together with the common shares based on the number of shares into which the Series B Preferred Stock could convert on the day that the Series B Preferred Stock was issued. In addition, the Series B Preferred Stock is entitled to elect a member of our Board of Directors in the event that we fail to redeem the Series B Preferred Stock when required. The Series B Preferred Stock bears dividends at the rate of 6% per annum, payable quarterly commencing June 30, 2005 and is subject to mandatory redemption five years from the original date of issuance. In addition, the holders of the Series B Preferred Stock initially had the option to require us to redeem the shares in three equal installments in 18 months, 24 months and 30 months from issuance or earlier upon a change of control, certain events of default or other specified occurrences. We also have the right to redeem the Series B Preferred Stock if our common stock trades above $35.28 for 30 consecutive trading days. The redemption price equals cost plus accrued dividends, except in the case of certain defaults where there are premiums to the redemption cost. On May 26, 2004, our shareholders approved a proposal to allow us to have the option to make dividend and redemption payments using our common stock provided that no more than 1,428,571 shares of common stock in the aggregate are used for redemption payments. Shares of our common stock issued as dividends or redemption payments are issued at a 5% discount to the volume weighted-average market price over the 20 trading days prior to the dividend payment date. The Series B Preferred Stock Certificate of Determination also has covenants that restrict us from incurring additional indebtedness in excess of the greater of (i) in the aggregate, $80.0 million, or (ii) three times our EBITDA for the most recent four consecutive fiscal quarters.

We recorded the redemption value of the Series B Preferred Stock, $61.0 million, net of issuance costs of $3.5 million. We amortized the $3.5 million of issuance costs into additional paid-in capital using the effective interest rate method based on the Series B Preferred Stock holders’ initial redemption option to require us to redeem shares in three equal installments in 18 months, 24 months and 30 months from issuance. The issuance costs were fully amortized on September 30, 2006. For the three and nine months ended September 30, 2006 the amortization of these issuance costs was 138,000 and $414,000, respectively. The amortization of these issuance costs for the three and nine months ended September 30, 2005, including a $347,000 adjustment due to the early redemption of shares in the third quarter of 2005, was $773,000 and $1.6 million, respectively.

As a result of the commencement of a rights offering in August 2005, the related issuance of warrants to the standby purchasers in September 2005, and the reverse stock split in February 2006, the anti-dilution provision of the Series B Preferred Stock was triggered to provide an adjustment to the conversion formula. Accordingly, each share of Series B Preferred Stock is now convertible into 2.3512 shares of common stock at a conversion price of $20.16 per

29

share. The additional shares issuable upon conversion as a result of the anti-dilution adjustment are treated as a beneficial conversion feature, not to exceed the carrying value of the Series B Preferred Stock, to the holders of the Series B Preferred Stock and was initially recorded as a reduction to the carrying value of the Series B Preferred and an increase to additional paid-in-capital of $20.3 million. This beneficial conversion feature will be accreted to the Series B Preferred Stock carrying value over its remaining term as a reduction of earnings applicable to common stockholders. As of September 30, 2006, an aggregate of $5.6 million of the beneficial conversion feature had been accreted to the Series B Preferred Stock carrying value plus adjustments of $5.9 million and $1.0 million for redemption of shares in September 2006 and October 2005, respectively. As of September 30, 2006, $7.8 million of the beneficial conversion feature remained to be accreted.

In February 2005, our Board of Directors declared a dividend on the Series B Preferred Stock of $3.6 million, for dividends accrued and payable as of March 31, 2005. This $3.6 million reflected a full year of dividends. As permitted by the Certificate of Designation of the Series B Preferred Stock, we irrevocably elected to pay the dividend in the form of shares of our common stock. On March 31, 2005, we issued 211,830 shares of common stock to pay the dividend.

In May 2005, our Board of Directors declared a dividend on the Series B Preferred Stock of $915,000 for dividends accrued and payable as of June 30, 2005. The dividend was paid in cash in June 2005.

In August 2005, our Board of Directors declared a dividend on the Series B Preferred Stock in the amount of approximately $300,000 for dividends accrued and payable as of September 30, 2005. The dividend was paid in cash in September 2005.

In August 2005, we filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of the State of Delaware (the “Certificate of Amendment”). The Certificate of Amendment amended Section 5 of the Certificate of Designation of the Series B Preferred Stock to:

• provide that upon completion of a rights offering and/or related standby purchase commitments that raise aggregate gross proceeds of at least $65 million (a “Qualified Rights Offering”), we would redeem one-third of the outstanding shares of Series B Preferred Stock at a redemption price payable in cash equal to the stated value of the Series B Preferred Stock plus all accrued but unpaid dividends on such shares through the date of redemption;

• provide that upon completion of a Qualified Rights Offering, we would redeem an additional one-third of the outstanding shares of Series B Preferred Stock at a redemption price payable in cash equal to 101% of the Stated Value of such shares;

• eliminate upon the completion of a Qualified Rights Offering, the option of the holders of the Series B Preferred to require us to redeem a portion of the Series B Preferred Stock on September 30, 2005 and March 30, 2006; and

• provide that the issuance of our common stock pursuant to a Qualified Rights Offering, related standby agreement and related warrants (each as defined in the Certificate of Designation) would not constitute a change of control as defined in the Certificate of Designation.

In September 2005, we called for the redemption of two-thirds, or 857,944 shares, of its outstanding shares of Series B Preferred Stock. We paid $41.4 million to redeem the two-thirds of the outstanding shares of Series B Preferred Stock including accrued and unpaid dividends of $564,000 and a 1% early repayment fee of $203,000. As a result of the redemption, we amortized $347,000 of issuance costs related to the 857,944 shares redeemed during the three months ended September 30, 2005.

In October 2005, a holder of our Series B Preferred Stock exercised its conversion option to convert 21,097 shares of Series B Preferred Stock, which were each convertible into 2.3512 shares of common stock at a conversion price of $20.16 per share. This transaction reduced the aggregate redemption commitment on the Series B Preferred Stock by $1.0 million to $19.3 million.

30

In December 2005, our Board of Directors declared a dividend on the Series B Preferred Stock in the amount of $305,000 dividends accrued and payable as of December 31, 2005. The dividend was paid in cash in December 2005.

Our Board of Directors declared dividends on the Series B Preferred Stock in February, May and August, 2006 of $290,000 per quarter. The dividends were paid in cash in March, June and September of 2006, respectively.

In September 2006, four holders of the Series B Preferred Stock called for the redemption of 175,809 of the outstanding Series B shares. We redeemed the shares at a redemption price of cash equal to the stated value of the Series B Preferred Stock plus all accrued and unpaid dividends on such shares through the date of redemption. As a result of this transaction, we paid $8.3 million in cash to redeem the 175,809 shares at face value in addition to cash dividends paid for the quarter. This transaction reduced the aggregate redemption commitment on the Series B Preferred Stock by $8.3 million to $11.0 million.

As of September 30, 2006, 232,067 shares of Series B-2 Convertible Preferred Stock remained outstanding. On October 27, 2006, we entered into separate agreements with four shareholders to repurchase all of the 232,067 remaining outstanding shares of the Series B Preferred in exchange for $5.5 million in cash, the issuance of 731,737 shares of common stock, and the payment of approximately $49,000 in accrued dividends. As a result of the September 2006 redemption and the October 2006 repurchase, we have now retired all outstanding shares of our Series B Preferred Stock.

Acquisition of Sovereign Circuits

On October 23, 2006, we completed the acquisition of Sovereign Circuits, a privately held printed circuit board manufacturer, for $5.2 million in cash, and 1,201,964 shares of our common stock and the assumption of $2.3 million in debt. Under the terms of the merger agreement, 15% of the purchase price will be held in escrow by a third-party escrow agent for up to one year to cover any indemnification claims that may arise. In connection with the acquisition, we assumed approximately $2.3 million in term loans and capital leases of Sovereign Circuits, as well as revolving credit facilities discussed below. The terms loans require monthly principal payments of approximately $42,000, plus interest based on Libor plus 1.5% to 2.10%, and are secured by substantially all of the assets of Sovereign Circuits.

Sovereign Circuits Revolving Line of Credit

Sovereign Circuits currently has a $1.1 million revolving credit facility with Key Bank, as lender. Interest on the revolving line of credit is payable at the lender’s prime borrowing rate less 0.375%, (7.88 % at September 30, 2006). The credit facility contains standard representations and warranties, covenants and events of default for a facility of this size. The revolving line of credit, which currently expires on March 31, 2007, is secured by substantially all of the assets of Sovereign Circuits. As of September 30, 2006, Sovereign Circuits had $1.1 million available for borrowing under the revolving line of credit, of which no borrowings were outstanding.

Sovereign Circuits Capital Expenditures Line of Credit

Sovereign Circuits currently has a $1.2 million revolving capital expenditures line of credit with Key Bank, as lender. Interest on the revolving line of credit is payable at the lender’s prime borrowing rate (8.26% at September 30, 2006). The revolving capital expenditures line of credit contains standard representations and warranties, covenants and events of default for a facility of this size. The revolving capital expenditures line of credit, which currently expires on March 31, 2007, is secured by substantially all of the assets of Sovereign Circuits. As of September 30, 2006, Sovereign Circuits had $1.2 million available for borrowing under the revolving capital expenditures line of credit, of which no borrowings were outstanding.

31

Consolidated Cash Flows

The following table summarizes our statements of cash flows for the nine months ended September 30, 2006, and 2005 (in thousands):

	Nine months ended
	September 30,			September 30,
	2006			2005
Net cash provided by (used in):
Operating activities from continuing operations	$	8,357		$	(708	)
Investing activities from continuing operations		10,254			(8,841	)
Financing activities from continuing operations		(16,951	)		18,972
Effect of exchange rates on cash		(454	)		76
Effect of discontinued operations on cash		—			(1,099	)
Net increase in cash and cash equivalents	$	1,206		$	8,400

Net cash provided by (used in) operating activities from continuing operations represents net income, adjusted for non-cash charges and working capital changes. The $9.1 million increase in net cash provided by operating activities from continuing operations for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was primarily due to a $9.6 million improvement in operating income excluding the loss on the sale of our assembly business and non-cash goodwill impairment charges.

The $19.1 million increase in net cash provided by investing activities from continuing operations for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was due to: (i) proceeds of $12.0 million from the sale of our assembly business; (ii) a $6.2 million change in restricted cash available to fund the payment of our Series B Preferred stock dividends and redemption; and (iii) a $610,000 decrease in capital expenditures in 2006.

The $35.9 million increase in net cash used in financing activities from continuing operations for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was primarily due to the rights offering in 2005 of $74.5 million net of costs and an increase in net repayments under our credit facility of $7.5 million, partially offset by $12.1 million received in connection with the exercise of Standby Warrants in 2006, a decrease in Series B Preferred dividend and redemption payments of $33.5 million, and a decrease in payments on capital leases of $708,000.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period.

We believe our critical accounting policies, defined as those policies that we believe are: (i) the most important to the portrayal of our financial condition and results of operations; and (ii) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain, are as follows:

Revenue recognition— Our revenue consists primarily of the sale of printed circuit boards using customer supplied engineering and design plans, and other value-added services. Our revenue recognition policy complies with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.” Revenue from the sale of products is recognized when title and risk of loss has passed to the customer, typically at the time of shipment, persuasive evidence of an arrangement exists, including a fixed price, and collectibility is reasonably assured. We do not have customer acceptance provisions, but we do provide our customers a limited right of return for defective printed circuit boards. We record warranty expense at the time revenue is recognized and we maintain a warranty accrual for the estimated future warranty obligation based upon the relationship between historical sales volumes and anticipated costs. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the estimated cost of repair. We assess the adequacy of the warranty accrual each quarter.

32

Valuation of long-lived assets— We assess the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Changes in our operating strategy, such as the closure of a facility, can significantly reduce the estimated useful life of such assets.

Goodwill impairment— We assess the potential impairment of goodwill at least annually, at the end of the year, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value may not be recoverable, then an impairment of goodwill may be recorded.

Inventory obsolescence— We purchase raw materials in quantities that we anticipate will be fully used in the near term. Changes in operating strategy, however, such as the closure of a facility, can limit our ability to effectively utilize all of the raw materials purchased. If inventory is not utilized, then an inventory impairment may be recorded.

Receivables and Allowance for Doubtful Accounts— Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience and specific account review. We review our allowance for doubtful accounts at least quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.

Income taxes— As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The process incorporates a determination of the proper current tax balances together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. Such differences result in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent that recovery is not likely, we establish a valuation allowance. If our ultimate tax liability differs from the periodic tax provision reflected in the Consolidated Statements of Operations, additional tax expense may be recorded.

Stock-Based Compensation— Under the fair value recognition provisions of SFAS 123-R, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. We use the Black-Scholes option-pricing model to estimate the fair values of stock options. The Black Scholes option-pricing model requires the input of certain assumptions that require our judgment including the expected term and the expected stock price volatility of the underlying stock options. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period.

Litigation and other contingencies— Management regularly evaluates our exposure to threatened or pending litigation and other business contingencies. Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses relating to such exposures requires significant judgment about the potential range of outcomes. In June 2006, we recorded an accrual of $1.7 million for our estimated exposure for certain pending litigation. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expense relating to the contingencies. Such additional expense could potentially have a material impact on our results of operations, cash flows and financial position.

33

Recently Adopted Accounting Standards

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123-R”) using the modified prospective application transition method. As a result, we have included stock-based compensation costs under the fair value method in our results of operations for the three and nine months ended September 30, 2006.

Effective January 1, 2006, we adopted SFAS No. 151, “Inventory Costs” (“SFAS 151”). SFAS 151 amends guidance in Accounting Release Bulletin (“ARB”) No. 43 Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). It requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 did not have a material impact on our condensed consolidated financial statements for the three and nine months ended September 30, 2006.

Effective January 1, 2006, we adopted SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes” (“APB 20”) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”) and applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle whereas SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable. The adoption of SFAS 154 did not have a material impact on our condensed consolidated financial statements for the three and nine months ended September 30, 2006.

Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are assessing FIN 48 and have not determined the impact that the adoption of FIN 48 will have on our consolidated financial statements.

In June 2006, the FASB ratified Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. This issue provides that a company may adopt a policy of presenting taxes either gross within revenue or net. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis. We do not believe the adoption of EITF 06-3 will have a material impact on our consolidated financial statements.

In September 2006, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006. We do not expect SAB 108 to have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the requirements of SFAS 157 and the impact that the adoption of this statement will have on our consolidated financial statements.

34

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Advances under the Credit Facility bear interest at the prime rate plus 1% to 2% (the “Index Rate”). As of September 30, 2006, the Index Rate on the Credit Facility was 9.75%. If the prime rate increased, thereby increasing our effective borrowing rate by the same amount, cash interest expense related to the Credit Facility would increase dependent on outstanding borrowings. There were no outstanding borrowings at September 30, 2006.

Foreign Currency Exchange Risk

Sales and expenses of our Canadian operations are primarily denominated in Canadian dollars, which is deemed to be the functional currency for our Canadian entity. Thus, assets and liabilities are translated to U.S. dollars at period end exchange rates in effect. Sales and expenses are translated to U.S. dollars using an average monthly exchange rate. Translation adjustments are included in accumulated other comprehensive income (loss) in stockholders’ equity, except for translation adjustments related to an intercompany note denominated in Canadian Dollars between our U.S. entity and our Canadian entity. Settlement of the note is planned in the foreseeable future; therefore currency adjustments are included in determining net income (loss) for the period in accordance with SFAS No. 52 “Foreign Currency Translation” and could have a material impact on results of operations and cash flows in the event of currency fluctuations. Gains and losses on foreign currency transactions are included in operations. We have foreign currency translation risk equal to our net investment in those operations. We do have some exposure to foreign currency transaction risk for sales denominated in U.S. dollars, but translated to the Canadian dollar at period end. We do not use forward exchange contracts to hedge exposures to foreign currency denominated transactions and do not utilize any other derivative financial instruments for trading or speculative purposes.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Act of 1934, as amended) are effective to ensure that all information required to be disclosed by us in the reports filed or submitted by us under the Securities and Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate and allow timely decisions regarding required disclosure.

Changes in Internal Controls

No change in our internal control over financial reporting occurred during our last fiscal quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to our Annual Report on Form 10-K for the period ended December 31, 2005 our Quarterly Reports on Form 10-Q for the periods ended March 31, 2006 and June 30, 2006 for a summary of our previously reported legal proceedings. Since the date of the Quarterly Report on Form 10-Q for the period ended June 30, 2006 (the “June 2006 10-Q”), there have been no material developments in previously reported legal proceedings, except as set forth below.

35

On July 5, 2006, we filed a motion to dismiss Dynamic Details, Incorporated as a defendant inSMDI v. Laminate Technologies Corp.(Case No. CV06-1661-PHX-FJM). On August 15, 2006, the court denied our motion to dismiss, but ruled that the plaintiffs must amend their complaint to name the owners of the property as the plaintiffs in the action, instead of SMDI Company, which was the property manager for the property. On August 29, 2006, the plaintiffs filed a second amended complaint to (a) substitute Barbara Ann Ball, as Special Trustee of the Barbara Ann Ball Revocable Trust, Mary Ball Glimpse, as Special Trustee of the Mary Ball Glimpse Trust, Barbara Ann Ball and Germain H. Ball, as Co-Trustees of the Leona Harmon Rickenbach Trust, and NELCO-WF, L.L.C. as the plaintiffs in the action and (b) add Nelco Technology, Inc., the previous tenant of the property, as a co-defendant. On September 28, 2006, we filed an answer, cross-claim and counterclaim, in which we assert a cross-claim against Nelco Technology, Inc. for indemnification and contribution and a counterclaim against the plaintiffs for breach of the implied covenant good faith and fair dealing. A scheduling conference is set for December 1, 2006.

Item 1A.

There have been no significant changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, or our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

36

Item 6. Exhibits

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.2	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.3	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.4	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.5	Certificate of Amendment to Amended and Restated Certificate of Incorporation, previously filed with the Commission on February 8, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference.
3.6	Amended and Restated Bylaws of DDi Corp. previously filed with the Commission on August 9, 2005 as an exhibit to DDi Corp.’s Quarterly Report on Form 10-Q and incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans or Arrangements
10.1	Separation Agreement and Release dated October 2, 2006 between DDi Corp. and Brad Tesch, previously filed with the Commission on October 5, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
10.2	Independent Director Compensation Policy, previously filed with the Commission on October 23, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
Other Material Contracts
10.3	Agreement and Plan of Merger dated August 8, 2006, by and among DDi Corp., DDi Acquisition Corp., Sovereign Circuits, Inc., Beverly John Berryman, Hugh David Turner and Carole Fahy, as trustees of a settlement dated December 21, 1965 and made between Herbert Anthony Cann, Kenneth Robert Woodford and John Michael Geoffrey Andrews and a Deed of Appointment dated October 6, 1976 by Kenneth Robert Woodford and Michael Geoffrey Andrews, together a trust formed under English law, Beverly John Berryman, Hugh David Turner and Carole Fahy, as trustees of a settlement dated September 10, 1985 and made between Tonio Christian Hoch as settlor and Bermuda Trust Company Limited as original trustee, which is a trust established under Bermuda law and known as the “Hoch Settlement”, and Robert Q. Buss, an individual, previously filed with the Commission on October 30, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
10.4	Asset Purchase Agreement dated August 8, 2006, by and among Dynamic Details Incorporated, Silicon Valley, solely for the purpose of guaranteeing the performance of all obligations of Dynamic Details Incorporated, Silicon Valley under Section 8.2 of the Asset Purchase Agreement, Dynamic Details, Incorporated, VMS, LLC and, solely for the purpose of guaranteeing the performance of all obligations of VMS, LLC under Section 8.3 of the Asset Purchase Agreement, VERITEK Manufacturing Services, LLC, previously filed with the Commission on October 30, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
10.5	Letter Agreement dated September 29, 2006 by and among Dynamic Details Incorporated, Silicon Valley, Dynamic Details, Incorporated, VMS, LLC and VERITEK Manufacturing Services, LLC, previously filed with the Commission on October 5, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.

37

Exhibit No.	Description
31.1	Certification of Chief Executive Officer of DDi Corp., pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	Certification of Chief Financial Officer of DDi Corp., pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32.1	Certification of Chief Executive Officer of DDi Corp., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer of DDi Corp., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

	DDi CORP.
Date: November 9, 2006	/s/ MIKEL H. WILLIAMS
	Mikel H. Williams
	President and Chief Executive Officer
Date: November 9, 2006	/s/ SALLY L. GOFF
	Sally L. Goff
	Chief Financial Officer

39

Exhibit Index

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.2	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.3	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.4	Amended and Restated Certificate of Incorporation of DDi Corp. previously filed with the Commission on December 17, 2003 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference
3.5	Certificate of Amendment to Amended and Restated Certificate of Incorporation, previously filed with the Commission on February 8, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K and incorporated herein by reference.
3.6	Amended and Restated Bylaws of DDi Corp. previously filed with the Commission on August 9, 2005 as an exhibit to DDi Corp.’s Quarterly Report on Form 10-Q and incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans or Arrangements
10.1	Separation Agreement and Release dated October 2, 2006 between DDi Corp. and Brad Tesch, previously filed with the Commission on October 5, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
10.2	Independent Director Compensation Policy, previously filed with the Commission on October 23, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
Other Material Contracts
10.3	Agreement and Plan of Merger dated August 8, 2006, by and among DDi Corp., DDi Acquisition Corp., Sovereign Circuits, Inc., Beverly John Berryman, Hugh David Turner and Carole Fahy, as trustees of a settlement dated December 21, 1965 and made between Herbert Anthony Cann, Kenneth Robert Woodford and John Michael Geoffrey Andrews and a Deed of Appointment dated October 6, 1976 by Kenneth Robert Woodford and Michael Geoffrey Andrews, together a trust formed under English law, Beverly John Berryman, Hugh David Turner and Carole Fahy, as trustees of a settlement dated September 10, 1985 and made between Tonio Christian Hoch as settlor and Bermuda Trust Company Limited as original trustee, which is a trust established under Bermuda law and known as the “Hoch Settlement”, and Robert Q. Buss, an individual, previously filed with the Commission on October 30, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
10.4	Asset Purchase Agreement dated August 8, 2006, by and among Dynamic Details Incorporated, Silicon Valley, solely for the purpose of guaranteeing the performance of all obligations of Dynamic Details Incorporated, Silicon Valley under Section 8.2 of the Asset Purchase Agreement, Dynamic Details, Incorporated, VMS, LLC and, solely for the purpose of guaranteeing the performance of all obligations of VMS, LLC under Section 8.3 of the Asset Purchase Agreement, VERITEK Manufacturing Services, LLC, previously filed with the Commission on October 30, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.
10.5	Letter Agreement dated September 29, 2006 by and among Dynamic Details Incorporated, Silicon Valley, Dynamic Details, Incorporated, VMS, LLC and VERITEK Manufacturing Services, LLC, previously filed with the Commission on October 5, 2006 as an exhibit to DDi Corp.’s Current Report on Form 8-K, which is incorporated herein by reference.

40

Exhibit No.	Description
31.1	Certification of Chief Executive Officer of DDi Corp., pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	Certification of Chief Financial Officer of DDi Corp., pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32.1	Certification of Chief Executive Officer of DDi Corp., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer of DDi Corp., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

41