Overview

We are a leading provider of time-critical, technologically-advanced PCB engineering and manufacturing services. We specialize in engineering and fabricating complex multi-layer PCBs on a quick-turn basis, with lead times as short as 24 hours. We have approximately 1,000 customers in various market segments including communications and computing, military and aerospace, industrial electronics, instrumentation, medical, and high-durability commercial markets.

On October 23, 2006, we completed the acquisition of Sovereign Circuits, Inc. ("Sovereign"), a privately-held PCB manufacturer. Revenues and costs of Sovereign's business beginning October 23, 2006, the date of acquisition, are included in our results of operations.

On September 29, 2006, we completed the sale of our assembly business to VMS. In accordance with Emerging Issues Task Force ("EITF") Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations ("EITF 03-13"), the operations and cash flows of the disposed assembly business have not been presented as a discontinued operation because of expected significant continuing direct cash flows pursuant to a supply agreement with VMS for the sale of DDi PCBs to be used in VMS's assembly business. As a result, revenues and costs of the assembly business through September 29, 2006, the date of the sale, were included in our results of operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our audited 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 PCBs using customer supplied engineering and design plans. Prior to September 29, 2006 our revenue also included other value-added assembly services. Our revenue recognition policy complies with SEC 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 PCBs. 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. To date, actual warranty claims and costs have been in line with our estimates.

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 age 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.

Goodwill and other long-lived assets - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill and other intangible assets with indefinite 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. We operate in one operating segment and have one reporting unit; therefore, we test goodwill for impairment at the consolidated level against the fair value of the Company. Per 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 are used as the basis on the last day of the year for the measurement, if available. We assess potential impairment on an annual basis on the last day of

the year and compare our market capitalization to the book value of the Company including goodwill. A significant decrease in our stock price could indicate a material impairment of goodwill which, after further analysis, could result in a material charge to operations. If goodwill is considered impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the goodwill exceeds the implied fair value of that goodwill. Inherent in our fair value determinations are certain judgments and estimates, including projections of future cash flows, the discount rate reflecting the risk inherent in future cash flows, the interpretation of current economic indicators and market valuations, and strategic plans with regard to operations. A change in these underlying assumptions would cause a change in the results of the tests, which could cause the fair value of the reporting unit to be less than its respective carrying amount.

In connection with our annual impairment test as of December 31, 2008 required under SFAS 142, we recorded a non-cash charge of $38.9 million to write-off the entire carrying value of our goodwill. The charge was driven by a decrease in our stock price and market capitalization as a result of the weakened economy and adverse capital market conditions. The impairment charge did not affect our normal business operations, liquidity position or availability under our credit facility (as amended, the "Credit Facility"), and we believe does not reflect the actual performance of the business. We move forward with no goodwill on our balance sheet and therefore we will not be faced with any future impairment issues related to our business as it exists at this time.

We account for long-lived assets, including intangible assets subject to amortization, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment, such as changes in our operations strategy, reductions in demand for our products or significant economic slowdowns in the PCB industry, are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using discounted expected future cash flows.

Inventory obsolescence - We purchase raw materials in quantities that we anticipate will be fully used in the near term. However, changes in operating strategy, such as the closure of a facility or changes in technology 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.

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 will be recorded.

Effective January 1, 2009, we adopted the provisions of SFAS 141R, Business Combinations ("SFAS 141R"). SFAS 141R requires the benefit from the release of the U.S. valuation allowance related to net deferred tax assets that were in existence as of applying fresh-start accounting should be recorded into tax expense, consistent with the treatment for other liabilities and contingencies. Prior to the adoption of SFAS 141R, under fresh-start accounting rules applied during our emergence from bankruptcy in 2003, any reduction of the U.S. valuation allowance that was related to net deferred tax assets that were inexistence as of applying fresh accounting was recognized as a credit first to goodwill and second to additional-paid-in-capital ("APIC") and not as a U.S. tax benefit for book purposes even though our net operating loss carryforwards resulted in a reduction of cash taxes paid. In addition, under fresh-start accounting rules, any adjustments to uncertain tax positions for tax years prior to our emergence from bankruptcy in 2003 were an adjustment first to goodwill and next to APIC. Under SFAS 141R there is no longer a difference in tax accounting for assets and liabilities that were in existence as of applying fresh-start accounting.

Effective January 1, 2007, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

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. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of expense relating to the contingencies. Such additional expense could potentially have a material impact on our results of operations, cash flows and financial position.

Stock-based compensation - Under the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"), 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, the expected stock price volatility of the underlying stock options and expected forfeiture rate. 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, 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.

Results of Operations and Other Financial Data

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



                                                                Year Ended December 31,
                                                          2008           2007           2006
Net sales                                               $ 190,842      $ 181,054      $ 198,115
Cost of goods sold                                        152,058        146,195        160,188

Gross profit                                               38,784         34,859         37,927
                                                             20.3 %         19.3 %         19.1 %
Operating expenses:
Sales and marketing                                        12,540         12,207         15,228
General and administrative                                 14,004         14,468         14,543
Amortization of intangible assets                           4,975          5,358          4,744
Loss on sale of assembly business                              -              -           4,544
Litigation reserve                                             -              -           1,727
Restructuring and other related charges                       295            646          1,140
Goodwill impairment                                        38,898             -              -

Operating income (loss)                                   (31,928 )        2,180         (3,999 )
Interest expense, net                                         371            461          1,362
Other (income) expense, net                                  (562 )           46             44

Income (loss) before income taxes                         (31,737 )        1,673         (5,405 )
Income tax expense                                          1,702            985          1,828

Net income (loss)                                         (33,439 )          688         (7,233 )
Less: Series B Preferred Stock dividends, accretion
and repurchase charge                                          -              -          16,419

Net income (loss) applicable to common stockholders     $ (33,439 )    $     688      $ (23,652 )

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

During 2008, the overall economy faced significant challenges, and the PCB industry as a whole experienced reduced demand, particularly in the fourth quarter and primarily in the commercial markets. However, even given this softening, we achieved year-over-year sales growth and continued to increase our market share based on industry data published by the IPC. Our efforts to extend our presence in the military/aerospace market have been very successful, serving both as a revenue growth driver for the Company and also as a counter balance to the cyclical commercial markets. We support the leading OEMs and have no customer that accounts for more than 10% of our revenue. Our overall customer base expanded in 2008, and we believe this diversification lowers our risk in periods of slower demand. Further, despite softness in the market, we were able to manage our costs and deliver year-over-year sales growth and a gross margin over 20%. During 2008, we invested over $11 million in our capital infrastructure, completing several major programs and upgrading key areas of technology to better support our customers' requirements. With this strengthened asset base in place, we expect to reduce our capital expenditures in 2009. While we expect the overall market to remain challenging in 2009, with our focus on the high-mix, low-volume, quick-turn and proto-type commercial markets, coupled with our success in the military/aerospace sector, we believe we are well positioned and have the right strategy and operational assets for these market conditions.

Net Sales

Net sales are derived from the engineering and manufacture of complex, technologically-advanced multi-layer PCBs.

Net sales increased by $9.7 million, or 5.4%, to $190.8 million in 2008 from $181.1 million in 2007. The increase in net sales was primarily a result of strengthening and extending our sales team and geographic coverage, particularly in the military/aerospace market where we have doubled our business each year. In the fourth quarter of 2008, sales to the military/aerospace market represented approximately 27% of total sales, as well as higher average pricing related to the mix of products shipped.

Gross Profit

Gross profit for 2008 was $38.8 million, or 20.3% of net sales, compared to $34.9 million, or 19.3% of net sales, in 2007. The increase in gross profit as a percentage of net sales was primarily a function of better absorption of overhead on higher sales, improved operational performance related to yields and overage, and to a lesser extent, to slightly higher unit pricing relative to the product mix shift towards higher technology products. These improvements were partially offset by an increase in depreciation expense related to capital equipment upgrades to increase our technological capabilities as well as expanded capacity in certain manufacturing process areas and to an increase in non-cash compensation and factory and management compensation expenses.

Non-Cash Compensation

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



                                                  Year Ended December 31,
                                                    2008            2007
          Non-cash compensation:
          Cost of goods sold                    $        528    $        374
          Sales and marketing expenses                   298             120
          General and administrative expenses          1,825           1,808

          Total non-cash compensation           $      2,651    $      2,302

Non-cash compensation expense was recorded in accordance with the fair value recognition provisions of SFAS 123R using the modified prospective application transition method. Under this transition method, stock-based compensation cost recognized in 2008 and 2007 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 No.123, Accounting for Stock-Based Compensation ("SFAS 123"), net of estimated forfeitures; and (ii) compensation cost for all stock-based awards granted or modified subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R, net of estimated forfeitures. The increase in non-cash compensation expense is related to additional stock option and restricted stock grants to management, directors, and other key employees in 2008. We expect non-cash compensation expense to be approximately $1.9 million in 2009 based on unvested stock-based awards outstanding as of December 31, 2008.

Sales and Marketing Expenses

Sales and marketing expenses in 2008 increased on an absolute dollar basis by $333,000, or 2.7%, to $12.5 million, or 6.6% of net sales, from $12.2 million, or 6.7% of net sales, in 2007. The dollar increase was primarily due to higher non-cash compensation and management incentives compensation expenses as a result of strengthening our sales team. We expect sales and marketing expenses to remain relatively constant in 2009 and decrease as a percentage of sales if higher sales levels are achieved.

General and Administrative Expenses

General and administrative expenses decreased by $464,000, or 3.2%, to $14.0 million, or 7.3% of net sales in 2008, compared to $14.5 million, or 8.0% of net sales in 2007. The decrease was primarily due to reductions in Sarbanes-Oxley and other consulting fees, communications expense and insurance costs, partially offset by higher management incentive compensation expense and depreciation. We expect general and administrative expenses in terms of absolute dollars to remain relatively constant in 2009 and decrease as a percentage of sales if higher sales levels are achieved.

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 December 2003 and to customer relationships identified in connection with the purchase of Sovereign in the fourth quarter of 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $1.3 million of amortization expense per quarter through November 2008, when the customer relationships identified in the bankruptcy became fully amortized, and thereafter $190,000 per quarter for the remaining Sovereign customer relationships through October 2011. Amortization expense for 2009 is expected to be approximately $760,000 based on customer relationships that are recorded as of December 31, 2008.

Restructuring

In May 2005, our Board of Directors approved plans to close our Arizona-based mass lamination operation. We completed remediation of the Arizona facility (encompassing three separate buildings) and exited the last building in the third quarter of 2006. During 2008, we incurred approximately $295,000 in ongoing fees and expenses related to litigation with the landlord of one of the buildings. A ruling was issued in July 2008 in the plaintiff's favor awarding them $52,000. This award was accrued for in the second quarter of 2008 and paid to the plaintiff in January 2009, following which the case was dismissed with prejudice. As of December 31, 2008, we had incurred a total of $6.7 million in charges relating to the closure and do not anticipate any additional charges.

We had no accrued restructuring costs as of December 31, 2008, 2007 or 2006.

Goodwill Impairment

In connection with our annual impairment test as required under SFAS 142, we recorded a non-cash charge of $38.9 million to write-off the entire carrying value of our goodwill. The charge was driven by a decrease in our stock price and market capitalization as a result of the weakened economy and adverse capital market conditions. Substantially all of the goodwill written off was established in fresh-start accounting when we exited from the 2003 restructuring and was not related to any acquisition or transaction for which we paid cash.

The impairment charge did not affect our normal business operations, liquidity position or availability under our Credit Facility, and we believe does not reflect the actual performance of the business. We move forward with no goodwill on our balance sheet and therefore we will not be faced with any future impairment issues related to our business as it exists at this time.

Interest Expense, Net

Net interest expense consists of amortization of debt issuance costs, interest and fees related to our asset-based Credit Facility, interest on our note payable on our Ohio facility, and expense associated with long-term leases, net of interest income. Net interest expense decreased to $371,000 for the year ended December 31, 2008 from $461,000 for 2007. The decrease was primarily the result of a reduction in interest expense when one of the leases on our Milpitas, California facility expired in 2007 and a reduction in interest on our note payable as a result of a declining principal balance and declining interest rates, partially offset by a reduction in interest income due to lower interest rates in 2008 compared to 2007.

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 year ended December 31, 2008, net other income was $562,000 compared to net other expense of $46,000 for the year ended December 31, 2007 and was primarily due to the change in currency exchange rates between the U.S. and Canadian dollar.

Income Tax Expense

Income tax expense increased by $717,000 to $1.7 million for the year ended December 31, 2008 compared to $985,000 for the year ended December 31, 2007. Our income tax expense consists of both U.S. and Canadian jurisdictional taxes. U.S. and Canadian taxable income was higher in 2008, resulting in higher U.S. and Canadian income tax expense.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Net Sales

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

Net sales decreased by $17.0 million, or 9%, to $181.1 million in 2007 from $198.1 million in 2006. The decrease in net sales was due to the sale of the assembly business in the third quarter of 2006 which accounted for approximately $23.7 million in sales in the first three quarters of 2006. Year over year, PCB sales increased approximately $6.7 million, or 4%, primarily attributable to an increase in volume and average pricing in 2007 compared to 2006 due to a full year of Sovereign's results in 2007.

Gross Profit

Gross profit for 2007 was $34.9 million, or 19.3% of net sales, compared to $37.9 million, or 19.1% of net sales, in 2006. Excluding the impact of the divested assembly business, PCB gross margin decreased from approximately 20.5% of net sales in 2006. The decrease in PCB gross profit as a percentage of sales was primarily due to: (i) higher material costs as a percentage of sales due to a shift in mix to higher technology products and to raw material price increases; (ii) an increase in depreciation expense related to capital equipment upgrades to increase our technological capabilities as well as expand capacity in certain manufacturing process areas; and (iii) lower overall plant capacity utilization. These increases were partially offset by a decrease in factory and management incentive bonus compensation.

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