##### Table of Contents



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 June 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. Employerof 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)
  R £
  £ R £
  £ R
  R £




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##### Table of Contents



DDi CORP.
FORM 10-Q for the Quarterly Period Ended June 30, 2006
 TABLE OF CONTENTS
 PageNoPART I  FINANCIAL INFORMATION
    
    3Item 1.
    
    Financial Statements (Unaudited):
    
    3Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    34Item 4.
    
    Controls and Procedures
    
    34PART II  OTHER INFORMATION
    
    35Item 1.
    
    Legal Proceedings
    
    35Item 1A.
    
    Risk Factors
    
    35Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    36Item 5.
    
    Other Information
    
    37Item 6.
    
    Exhibits
    
    38Signatures
    
    39Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 DDi CORP.
 June 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    19,107
    
    
    $
    25,985Restricted cash (see Note 7)
    
    
    2,401
    
    
    
    2,972Accounts receivable, net
    
    
    31,266
    
    
    
    29,710Inventories
    
    
    19,745
    
    
    
    16,117Prepaid expenses and other
    
    
    1,427
    
    
    
    1,506Total current assets
    
    
    73,946
    
    
    
    76,290Property and equipment, net
    
    
    28,143
    
    
    
    31,063Goodwill
    
    
    40,844
    
    
    
    41,845Intangible assets, net
    
    
    11,112
    
    
    
    13,411Other
    
    
    1,333
    
    
    
    1,719Total assets
    
    $
    155,378
    
    
    $
    164,328Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders EquityCurrent liabilities:Revolving credit facility
    
    $
    10,000
    
    
    $
    19,929Accounts payable
    
    
    18,433
    
    
    
    15,443Accrued expenses and other current liabilities
    
    
    15,423
    
    
    
    14,709Total current liabilities
    
    
    43,856
    
    
    
    50,081Other long-term liabilities
    
    
    4,626
    
    
    
    4,745Series A preferred stock
    
    
    
    
    
    
    Total liabilities
    
    
    48,482
    
    
    
    54,826Commitments and contingenciesSeries B mandatorily redeemable preferred stock
    
    
    4,255
    
    
    
    1,513Stockholders equity:Common stock  $0.001 par value, 190,000,000
shares authorized, 18,311,701 and 18,259,356
shares issued and outstanding at June 30,
2006 and December 31, 2005, respectively
    
    
    18
    
    
    
    18Additional paid-in-capital
    
    
    228,913
    
    
    
    231,821Deferred compensation
    
    
    
    
    
    
    (349
    )Accumulated other comprehensive income
    
    
    210
    
    
    
    346Accumulated deficit
    
    
    (126,500
    )
    
    
    (123,847
    )Total stockholders equity
    
    
    102,641
    
    
    
    107,989Total liabilities, mandatorily
redeemable preferred stock and
stockholders
equity
    
    $
    155,378
    
    
    $
    164,328
  3




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##### Table of Contents



DDi CORP.
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    52,511
    
    
    $
    45,538
    
    
    $
    103,464
    
    
    $
    90,487Cost of goods sold:Cost of goods sold
    
    
    42,320
    
    
    
    38,105
    
    
    
    82,862
    
    
    
    75,322Non-cash compensation
    
    
    130
    
    
    
    700
    
    
    
    251
    
    
    
    421Restructuring-related inventory impairment
    
    
    
    
    
    
    1,253
    
    
    
    
    
    
    
    1,253Total cost of goods sold
    
    
    42,450
    
    
    
    40,058
    
    
    
    83,113
    
    
    
    76,996Gross profit
    
    
    10,061
    
    
    
    5,480
    
    
    
    20,351
    
    
    
    13,491Operating expenses:Sales and marketing:Sales and marketing expenses
    
    
    4,003
    
    
    
    3,718
    
    
    
    8,006
    
    
    
    7,204Non-cash compensation
    
    
    30
    
    
    
    105
    
    
    
    43
    
    
    
    (349
    )Officers severance
    
    
    
    
    
    
    
    
    
    
    240
    
    
    
    Total sales and marketing
    
    
    4,033
    
    
    
    3,823
    
    
    
    8,289
    
    
    
    6,855General and administration:General and administration expenses
    
    
    3,099
    
    
    
    2,625
    
    
    
    6,883
    
    
    
    6,576Non-cash compensation
    
    
    264
    
    
    
    156
    
    
    
    373
    
    
    
    405Total general and administration
    
    
    3,363
    
    
    
    2,781
    
    
    
    7,256
    
    
    
    6,981Litigation reserve
    
    
    1,727
    
    
    
    
    
    
    
    1,727
    
    
    
    Amortization of intangible assets
    
    
    1,149
    
    
    
    1,149
    
    
    
    2,299
    
    
    
    2,299Restructuring and other related charges
    
    
    475
    
    
    
    4,390
    
    
    
    872
    
    
    
    4,390Goodwill impairment
    
    
    
    
    
    
    31,129
    
    
    
    
    
    
    
    31,129Operating loss
    
    
    (686
    )
    
    
    (37,792
    )
    
    
    (92
    )
    
    
    (38,163
    )Interest expense, net
    
    
    415
    
    
    
    1,227
    
    
    
    862
    
    
    
    2,472Other (income) expense, net
    
    
    (160
    )
    
    
    72
    
    
    
    (58
    )
    
    
    18Loss from continuing operations before
income taxes
    
    
    (941
    )
    
    
    (39,091
    )
    
    
    (896
    )
    
    
    (40,653
    )Income tax expense (benefit)
    
    
    1,209
    
    
    
    (403
    )
    
    
    1,757
    
    
    
    648Loss from continuing operations
    
    
    (2,150
    )
    
    
    (38,688
    )
    
    
    (2,653
    )
    
    
    (41,301
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,740Net loss
    
    
    (2,150
    )
    
    
    (38,688
    )
    
    
    (2,653
    )
    
    
    (31,561
    )Less: Series B preferred stock dividends and
accretion
    
    
    (1,800
    )
    
    
    (1,341
    )
    
    
    (3,600
    )
    
    
    (2,683
    )Net loss applicable to common
stockholders
    
    $
    (3,950
    )
    
    $
    (40,029
    )
    
    $
    (6,253
    )
    
    $
    (34,244
    )Loss per share from continuing operations
applicable to common stockholders  basic and
diluted
    
    $
    (0.22
    )
    
    $
    (9.63
    )
    
    $
    (0.34
    )
    
    $
    (10.87
    )Net loss per share applicable to common
stockholders  basic and diluted
    
    $
    (0.22
    )
    
    $
    (9.63
    )
    
    $
    (0.34
    )
    
    $
    (8.46
    )Weighted-average shares used in per share
computations  basic and diluted
    
    
    18,307,766
    
    
    
    4,157,679
    
    
    
    18,292,550
    
    
    
    4,047,591
  4




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##### Table of Contents



DDi CORP.
 
 Six months ended June 30,2006
    
    
    2005Cash flows from operating activities:Loss from continuing operations
    
    $
    (2,653
    )
    
    $
    (41,301
    )Adjustments to reconcile loss from continuing operations to cash
provided by (used in) operating activities:Depreciation
    
    
    5,140
    
    
    
    4,927Amortization of debt issuance costs and discount
    
    
    358
    
    
    
    350Amortization of intangible assets
    
    
    2,299
    
    
    
    2,299Goodwill impairment
    
    
    
    
    
    
    31,129Non-cash compensation
    
    
    667
    
    
    
    477Non-cash and accrued restructuring and other related charges
    
    
    1,112
    
    
    
    4,575Other
    
    
    83
    
    
    
    123Change in operating assets and liabilities:Accounts receivable
    
    
    (1,313
    )
    
    
    (860
    )Inventories
    
    
    (3,531
    )
    
    
    6Prepaid expenses and other assets
    
    
    125
    
    
    
    (889
    )Accounts payable
    
    
    2,904
    
    
    
    1,318Accrued expenses and other liabilities
    
    
    (692
    )
    
    
    (2,254
    )Income tax payable
    
    
    1,050
    
    
    
    1,035Net cash provided by operating activities from continuing operations
    
    
    5,549
    
    
    
    935Net cash used in operating activities from discontinued operations
    
    
    
    
    
    
    (1,975
    )Net cash provided by (used in) operating activities
    
    
    5,549
    
    
    
    (1,040
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,185
    )
    
    
    (3,305
    )Proceeds from the release of restricted cash
    
    
    571
    
    
    
    Cash outflows related to acquisition earn out
    
    
    
    
    
    
    (300
    )Net cash used in investing activities from discontinued operations
    
    
    
    
    
    
    (10
    )Net cash used in investing activities
    
    
    (1,614
    )
    
    
    (3,615
    )Cash flows from financing activities:Principal payments on capital leases
    
    
    (9
    )
    
    
    (473
    )Net
(repayments) borrowings on revolving credit facility
    
    
    (9,929
    )
    
    
    1,511Refund of debt issuance costs
    
    
    
    
    
    
    206Payment of Series B preferred stock dividend
    
    
    (580
    )
    
    
    (915
    )Proceeds from exercise of stock options
    
    
    96
    
    
    
    30Net cash provided by financing activities from discontinued
operations
    
    
    
    
    
    
    884Net cash provided by (used in) financing activities
    
    
    (10,422
    )
    
    
    1,243Effect of exchange rate changes on cash and cash equivalents
    
    
    (391
    )
    
    
    93Net increase (decrease) in cash and cash equivalents
    
    
    (6,878
    )
    
    
    (3,319
    )Cash and cash equivalents, beginning of period
    
    
    25,985
    
    
    
    23,526Cash and cash equivalents, end of period
    
    $
    19,107
    
    
    $
    20,207
  5




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##### Table of Contents



DDi CORP.
 NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
 Basis of Presentation
     Description of Business
  Common Stock Reverse Split
  Recently Adopted Accounting Standards
  6




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##### Table of Contents



DDi CORP.
    NOTE 2. INVENTORIES
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    10,915
    
    
    $
    8,630Work-in-process
    
    
    6,508
    
    
    
    5,059Finished goods
    
    
    2,322
    
    
    
    2,428Total
    
    $
    19,745
    
    
    $
    16,117
 NOTE 3. REVOLVING CREDIT FACILITY
   7




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##### Table of Contents



DDi CORP.
  NOTE 4. PRODUCT WARRANTY
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    606
    
    
    $
    665
    
    
    $
    527
    
    
    $
    656Current period warranty charges
    
    
    956
    
    
    
    769
    
    
    
    1,762
    
    
    
    1,599Actual warranty costs incurred
    
    
    (921
    )
    
    
    (762
    )
    
    
    (1,648
    )
    
    
    (1,583
    )Ending balance
    
    $
    641
    
    
    $
    672
    
    
    $
    641
    
    
    $
    672
 NOTE 5. NET INCOME (LOSS) PER SHARE
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Loss from continuing operations
    
    $
    (2,150
    )
    
    $
    (38,688
    )
    
    $
    (2,653
    )
    
    $
    (41,301
    )Less: Series B preferred stock dividends and
accretion
    
    
    (1,800
    )
    
    
    (1,341
    )
    
    
    (3,600
    )
    
    
    (2,683
    )Loss from continuing operations applicable to
common stockholders
    
    $
    (3,950
    )
    
    $
    (40,029
    )
    
    $
    (6,253
    )
    
    $
    (43,984
    )Weighted-average shares of common stock
outstanding (basic and diluted)
    
    
    18,307,766
    
    
    
    4,157,679
    
    
    
    18,292,550
    
    
    
    4,047,591Loss per share from continuing operations
applicable to common stockholders
    
    $
    (0.22
    )
    
    $
    (9.63
    )
    
    $
    (0.34
    )
    
    $
    (10.87
    )Net income from discontinued operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,740Weighted-average shares of common stock
outstanding (basic and diluted)
    
    
    18,307,766
    
    
    
    4,157,679
    
    
    
    18,292,550
    
    
    
    4,047,591Net income per share of common stock from
discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2.41Net loss
    
    $
    (2,150
    )
    
    $
    (38,688
    )
    
    $
    (2,653
    )
    
    $
    (31,561
    )Less: Series B preferred stock dividends and
accretion
    
    
    (1,800
    )
    
    
    (1,341
    )
    
    
    (3,600
    )
    
    
    (2,683
    )Net loss applicable to common stockholders
    
    $
    (3,950
    )
    
    $
    (40,029
    )
    
    $
    (6,253
    )
    
    $
    (34,244
    )Weighted average shares of common stock
outstanding (basic and diluted)
    
    
    18,307,766
    
    
    
    4,157,679
    
    
    
    18,292,550
    
    
    
    4,047,591Net loss per share applicable to common
stockholders
    
    $
    (0.22
    )
    
    $
    (9.63
    )
    
    $
    (0.34
    )
    
    $
    (8.46
    )
 8




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##### Table of Contents



NOTE 6. SERIES B MANDATORILY REDEEMABLE PREFERRED STOCK
    9




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##### Table of Contents




    
    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.
   10




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##### Table of Contents



DDi CORP.
   NOTE 7. SUBSCRIPTION RIGHTS OFFERING AND STANDBY PURCHASE AGREEMENT
  NOTE 8. STOCK-BASED COMPENSATION
 Stock-Based Compensation Plans
    11




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##### Table of Contents



DDi CORP.
  WeightedWeighted
    
    AverageAverage Exercise
    
    RemainingPrice
    
    Contractual Life in
    
    Aggregate IntrinsicOptions Outstanding
    
    per Option
    
    Years
    
    ValueBalance as of December
31, 2005
    
    
    1,164,836
    
    
    $
    12.43
    
    
    
    8.7Granted
    
    
    60,000
    
    
    $
    7.44Exercised
    
    
    (43,662
    )
    
    $
    1.80Forfeited
    
    
    (74,634
    )
    
    $
    10.62Balance as of March 31, 2006
    
    
    1,106,540
    
    
    $
    12.70
    
    
    
    9.1
    
    
    $
    1,942Granted
    
    
    686,000
    
    
    $
    7.83Exercised
    
    
    (8,733
    )
    
    $
    1.96Forfeited
    
    
    (53,284
    )
    
    $
    36.29Balance as of June 30, 2006.
    
    
    1,730,523
    
    
    $
    10.10
    
    
    
    9.7
    
    
    $
    2,278Options exercisable as of
June 30, 2006
    
    
    236,273
    
    
    $
    32.03
    
    
    
    
    
    
    $
    84
  Accelerated Vesting of Certain Stock Options
  Adoption of SFAS 123-R
  12




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##### Table of Contents



DDi CORP.
   Determining Fair Value
 Valuation and amortization method
 Expected Term
 Expected Stock Price Volatility 
 Expected Dividend Yield
 Risk-Free Interest Rate
 Expected Forfeiture Rate
 Fair
Value
 13




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##### Table of Contents



DDi CORP.
 Three months endedJune 30,
    
    June 30,2006
    
    2005Expected term (years)
    
    
    4
    
    
    
    4Expected stock price volatility
    
    
    74
    %
    
    
    60
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    5.12
    %
    
    
    3.78
    %Expected forfeiture rate
    
    
    10
    %
    
    
    N/AWeighted average fair value per share
    
    $
    4.57
    
    
    $
    53.62
 Stock Compensation Expense
    Three months
    
    
    Six Monthsended
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Net loss applicable to common stockholders:As reported  basic and diluted
    
    $
    (40,029
    )
    
    $
    (34,244
    )Add: non-cash compensation (expense) credit under APB 25, net of tax
    
    
    962
    
    
    
    (124
    )Less: non-cash compensation (expense) under FAS 123, net of tax
    
    
    (1,362
    )
    
    
    (614
    )Pro forma  basic and diluted
    
    $
    (40,429
    )
    
    $
    (34,982
    )Net loss per share applicable to common stockholders  basic and diluted:As reported
    
    $
    (9.63
    )
    
    $
    (8.46
    )Pro forma
    
    $
    (9.72
    )
    
    $
    (8.64
    )
 NOTE 9. SEGMENT REPORTING
   14




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##### Table of Contents



DDi CORP.
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales:North America (a)
    
    $
    49,083
    
    
    $
    44,010
    
    
    $
    96,086
    
    
    $
    86,724Asia
    
    
    2,959
    
    
    
    1,051
    
    
    
    6,041
    
    
    
    2,912Other
    
    
    469
    
    
    
    477
    
    
    
    1,337
    
    
    
    851Total
    
    $
    52,511
    
    
    $
    45,538
    
    
    $
    103,464
    
    
    $
    90,487
 
 (a)
    
    The majority of sales in North America represent sales to customers located in the United States. NOTE 10. GOODWILL AND INTANGIBLES
    NOTE 11. RESTRUCTURING
   15




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##### Table of Contents



DDi CORP.
    EmployeeTermination
    
    
    Contract
    
    
    Facility
    
    
    Other ExitBenefits
    
    
    Terminations
    
    
    Closure
    
    
    Costs
    
    
    TotalAccrued restructuring costs at
December 31, 2005
    
    $
    
    
    
    $
    16
    
    
    $
    999
    
    
    $
    67
    
    
    $
    1,082Additional accruals:Arizona closure
    
    
    24
    
    
    
    312
    
    
    
    433
    
    
    
    92
    
    
    
    861Colorado closure
    
    
    4
    
    
    
    12
    
    
    
    
    
    
    
    2
    
    
    
    18Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Payments
    
    
    (28
    )
    
    
    (340
    )
    
    
    (985
    )
    
    
    (97
    )
    
    
    (1,450
    )Accrued restructuring costs at June 30, 2006
    
    $
    
    
    
    $
    
    
    
    $
    447
    
    
    $
    57
    
    
    $
    504
  NOTE 12. COMPREHENSIVE INCOME (LOSS)
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (2,150
    )
    
    $
    (38,688
    )
    
    $
    (2,653
    )
    
    $
    (31,561
    )Other comprehensive loss:Foreign currency translation
    
    
    (229
    )
    
    
    (42
    )
    
    
    (136
    )
    
    
    180Comprehensive loss
    
    $
    (2,379
    )
    
    $
    (38,730
    )
    
    $
    (2,789
    )
    
    $
    (31,381
    )
 NOTE 13. COMMITMENTS AND CONTINGENCIES
  16




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##### Table of Contents



DDi CORP.
 In re DDi Corp. Securities Litigation,
    17




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##### Table of Contents



DDi CORP.
   NOTE 14. SUBSEQUENT EVENTS
    18




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##### Table of Contents



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 June 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 on Form 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 elsewhere in
this Form 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; 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
  19




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##### Table of Contents



Market Overview
  
    
    Increasing customer demand for quick-turn production and integrated solutions.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 and assembly services 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 for the Three Months ended June 30, 2006 Compared to the Three months Ended June 30, 2005
  Three months endedJune 30,
    
    June 30,2006
    
    2005
    
    $ Change
    
    % ChangeNet sales
    
    $
    52,511
    
    
    $
    45,538
    
    
    $
    6,973
    
    
    
    15.3
    %Cost of goods sold
    
    
    42,450
    
    
    
    40,058
    
    
    
    2,392
    
    
    
    6.0
    %Gross profit
    
    
    10,061
    
    
    
    5,480
    
    
    
    4,581
    
    
    
    83.6
    %Gross profit as a percentage of net sales
    
    
    19.2
    %
    
    
    12.0
    %
 Net Sales
  20




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##### Table of Contents



Gross Profit
  Non-Cash Compensation
  Three months endedJune 30,
    
    
    June 30,2006
    
    
    2005Non-cash compensation:Cost of good sold
    
    $
    130
    
    
    $
    700Sales and marketing expenses
    
    
    30
    
    
    
    105General and administrative expenses
    
    
    264
    
    
    
    156Total non-cash compensation
    
    $
    424
    
    
    $
    961
  Sales and Marketing Expenses
  Three months endedJune 30,
    
    June 30,2006
    
    2005
    
    $ Change
    
    % ChangeSales and marketing expenses
    
    $
    4,033
    
    
    $
    3,823
    
    
    $
    210
    
    
    
    5.5
    %Percentage of net sales
    
    
    7.7
    %
    
    
    8.4
    %
  General and Administration Expenses
  21




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##### Table of Contents



Three months endedJune 30,
    
    June 30,2006
    
    2005
    
    $ Change
    
    % ChangeGeneral and administration expenses
    
    $
    3,363
    
    
    $
    2,781
    
    
    $
    582
    
    
    
    20.9
    %Percentage of net sales
    
    
    6.4
    %
    
    
    6.1
    %
  Litigation Reserve
  Amortization of Intangibles
  Restructuring
    22




---



##### Table of Contents



EmployeeTermination
    
    
    Contract
    
    
    Facility
    
    
    Other ExitBenefits
    
    
    Terminations
    
    
    Closure
    
    
    Costs
    
    
    TotalAccrued restructuring costs at March
31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    467
    
    
    $
    11
    
    
    $
    478Additional accruals:Arizona closure
    
    
    7
    
    
    
    117
    
    
    
    273
    
    
    
    72
    
    
    
    469Colorado closure
    
    
    2
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    7Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Payments
    
    
    (9
    )
    
    
    (122
    )
    
    
    (293
    )
    
    
    (25
    )
    
    
    (449
    )Accrued restructuring costs at June 30, 2006
    
    $
    
    
    
    $
    
    
    
    $
    447
    
    
    $
    57
    
    
    $
    504
  Goodwill Impairment
  Interest
  Other Expense/(Income), Net
  Income Tax Expense
  23




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##### Table of Contents



Series B Preferred Stock Dividends and Accretion
  Results of Operations for the Six Months ended June 30, 2006 Compared to the Six months Ended June 30, 2005
  Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    $ Change
    
    % ChangeNet sales
    
    $
    103,464
    
    
    $
    90,487
    
    
    $
    12,977
    
    
    
    14.3
    %Cost of goods sold
    
    
    83,113
    
    
    
    76,996
    
    
    
    6,117
    
    
    
    7.9
    %Gross profit
    
    
    20,351
    
    
    
    13,491
    
    
    
    6,860
    
    
    
    50.8
    %Gross profit as a percentage of net sales
    
    
    19.7
    %
    
    
    14.9
    %
 Net Sales
  Gross Profit
  Non-Cash Compensation
  24




---



##### Table of Contents



Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005Non-cash compensation:Cost of good sold
    
    $
    251
    
    
    $
    421Sales and marketing expenses
    
    
    43
    
    
    
    (349
    )General and administrative expenses
    
    
    373
    
    
    
    405Total non-cash compensation
    
    $
    667
    
    
    $
    477
  Sales and Marketing Expenses
  Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    $ Change
    
    % ChangeSales and marketing expenses
    
    $
    8,289
    
    
    $
    6,855
    
    
    $
    1,434
    
    
    
    20.9
    %Percentage of net sales
    
    
    8.0
    %
    
    
    7.6
    %
  General and Administration Expenses
  Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    $ Change
    
    % ChangeGeneral and administration expenses
    
    $
    7,256
    
    
    $
    6,981
    
    
    $
    275
    
    
    
    3.9
    %Percentage of net sales
    
    
    7.0
    %
    
    
    7.7
    %
 25




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##### Table of Contents



Litigation Reserve
  Amortization of Intangible Assets
  Restructuring and other related charges
     26




---



##### Table of Contents



EmployeeTermination
    
    
    Contract
    
    
    Facility
    
    
    Other ExitBenefits
    
    
    Terminations
    
    
    Closure
    
    
    Costs
    
    
    TotalAccrued restructuring costs at
December 31, 2005
    
    $
    
    
    
    $
    16
    
    
    $
    999
    
    
    $
    67
    
    
    $
    1,082Additional accruals:Arizona closure
    
    
    24
    
    
    
    312
    
    
    
    433
    
    
    
    92
    
    
    
    861Colorado closure
    
    
    4
    
    
    
    12
    
    
    
    
    
    
    
    2
    
    
    
    18Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Payments
    
    
    (28
    )
    
    
    (340
    )
    
    
    (985
    )
    
    
    (97
    )
    
    
    (1,450
    )Accrued restructuring costs at June 30, 2006
    
    $
    
    
    
    $
    
    
    
    $
    447
    
    
    $
    57
    
    
    $
    504
  Goodwill Impairment
  Interest, Net
  Other
(Income)/Expense Net
  Income Tax Expense
  Net Income From Discontinued Operations
  27




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##### Table of Contents



Series B Preferred Stock Dividends and Accretion
  Liquidity and Capital Resources
 June 30,
    
    December 31,(Dollars in thousands)
    
    2006
    
    2005Working capital
    
    $
    30,090
    
    
    $
    26,209Current ratio (current assets to current liabilities)
    
    
    1.69 : 1.0
    
    
    
    1.52 : 1.0Cash and cash equivalents, excluding restricted cash
    
    $
    19,107
    
    
    $
    25,985Short term borrowings
    
    $
    10,000
    
    
    $
    19,929
    Revolving Credit Facility
   28




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##### Table of Contents



Series B Preferred Stock
     29




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##### Table of Contents




    
    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.
      30




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##### Table of Contents



Consolidated Cash Flows
  Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005Net cash provided by (used in):Operating activities from continuing operations
    
    $
    5,549
    
    
    $
    935Investing activities from continuing operations
    
    
    (1,614
    )
    
    
    (3,605
    )Financing activities from continuing operations
    
    
    (10,422
    )
    
    
    359Effect of exchange rates on cash
    
    
    (391
    )
    
    
    93Effect of discontinued operations on cash
    
    
    
    
    
    
    (1,101
    )Net decrease in cash and cash equivalents
    
    $
    (6,878
    )
    
    $
    (3,319
    )
      Critical Accounting Policies and Estimates
  31




---



##### Table of Contents



Revenue recognition
 Valuation of long-lived assets
 Goodwill impairment
 Inventory obsolescence
 Receivables and Allowance for Doubtful Accounts
 Income taxes
 Stock-Based Compensation
 32




---



##### Table of Contents



Litigation and other contingencies
 Recently Adopted Accounting Standards
     33




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
  Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  34




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A.
   If we are not able to satisfy the conditions to consummate the proposed acquisition, Sovereign will
be able to terminate the merger agreement.
  If we make unprofitable acquisitions or are unable to successfully integrate future acquisitions,
our business could suffer.
  
    
    difficulties in integrating the operations, technologies, products
and personnel of the acquired companies, especially given the
specialized nature of our business;
    
    diversion of managements attention from normal daily operations of the business;
    
    potential difficulties in completing projects associated with in-process research and development;
    
    initial dependence on unfamiliar supply chains or relatively small supply partners; and
    
    the potential loss of key employees of the acquired companies.
  
    
    issue stock that would dilute our current stockholders percentage ownership;
    
    assume liabilities;
    
    record goodwill and non-amortizable intangible assets that will be
subject to impairment testing and potential periodic impairment
charges;
    
    incur amortization expenses related to certain intangible assets;
 35




---



##### Table of Contents




    
    incur large and immediate write-offs; or
    
    become subject to litigation.
  If we are not able to satisfy the conditions of closing the proposed divestiture of our assembly
business, Veritek will be able to terminate the asset purchase agreement.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
    Votes For
    
    Votes WithheldRobert J. Amman
    
    
    16,284,829
    
    
    
    4,196Robert Guezuraga
    
    
    16,248,545
    
    
    
    40,480Jay B. Hunt
    
    
    16,245,693
    
    
    
    43,332Andrew E. Lietz
    
    
    16,248,516
    
    
    
    40,509Carl Vertuca, Jr.
    
    
    16,248,616
    
    
    
    40,409Steven C. Schlepp
    
    
    16,287,752
    
    
    
    1,273Mikel H. Williams
    
    
    16,287,752
    
    
    
    1,273
  Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes16,288,257
    
    
    481
    
    
    
    287
    
    
    
    0
 36




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##### Table of Contents



Item 5. Other Information
 37




---



##### Table of Contents



Item 6. Exhibits
 Exhibit No.
    
    Description31.1
    
    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




---



##### Table of Contents



SIGNATURES
  DDi CORP.Date: August 9, 2006
    /s/ MIKEL H. WILLIAMSMikel H. WilliamsPresident and Chief Executive OfficerDate: August 9, 2006
    /s/ SALLY L. GOFFSally L. GoffChief Financial Officer 39




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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Description31.1
    
    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.