10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 30, 2002

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 0-14843

DPAC TECHNOLOGIES CORP.
(Exact Name of Registrant as Specified in Its Charter)

CALIFORNIA	33-0033759
(State or other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

7321 LINCOLN WAY
GARDEN GROVE, CALIFORNIA 92841
(Address of Principal Executive Offices) (Zip)

(714) 898-0007
(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. YES ý    NO o

        Indicate by Check Mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) YES o    NO ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

        The number of shares of common stock, no par value, outstanding as of November 30, 2002 was 20,987,914.

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements.

DPAC Technologies Corp.
Condensed Balance Sheets

			November 30, 2002			February 28, 2002
			(unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents		$	8,795,335		$	6,258,836
	Accounts receivable, net			2,335,049			3,673,779
	Inventories, net			689,942			1,172,384
	Deferred income taxes			87,822			—
	Prepaid expenses and other current assets			443,984			505,221
		Total current assets		12,352,132			11,610,220
Property, net				4,075,944			4,580,929
Goodwill				4,528,721			4,782,921
Deferred income taxes				4,513,893			—
Other assets				269,461			367,283
			$	25,740,151		$	21,341,353
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of capital lease obligations		$	357,794		$	472,577
	Accounts payable			783,866			943,930
	Accrued compensation			355,228			1,013,707
	Other accrued liabilities			360,564			298,913
	Deferred revenue			—			15,000
		Total current liabilities		1,857,452			2,744,127
Capital lease obligations, less current portion				134,701			421,176
Commitments and contingencies (Note 9)
Stockholders' equity
	Common stock			24,924,931			24,868,200
	Additional paid-in capital			2,665,253			—
	Accumulated deficit			(3,842,186	)		(6,692,150	)
		Total stockholders' equity		23,747,998			18,176,050
			$	25,740,151		$	21,341,353

See accompanying notes to condensed financial statements.

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DPAC Technologies Corp.
Condensed Statements of Operations
(Unaudited)

			For the quarter ended:						For the nine months ended:
			November 30, 2002			November 30, 2001			November 30, 2002			November 30, 2001
NET SALES			$	5,420,672		$	6,260,637		$	28,240,412		$	21,915,100
COST OF SALES				3,963,255			3,892,869			21,038,640			14,817,637
GROSS PROFIT				1,457,417			2,367,768			7,201,772			7,097,463
COSTS AND EXPENSES:
	Selling, general and administrative			1,350,370			1,112,238			4,603,073			4,028,225
	Research and development			464,631			460,877			1,368,815			1,352,332
	Amortization of goodwill			—			195,000			—			582,939
		Total costs and expenses		1,815,001			1,768,115			5,971,888			5,963,496
INCOME (LOSS) FROM OPERATIONS				(357,584	)		599,653			1,229,884			1,133,967
OTHER INCOME:
	Interest income			25,996			42,868			94,750			151,274
	Interest expense			(17,854	)		(32,386	)		(61,546	)		(103,049	)
		Total other income		8,142			10,482			33,204			48,225
INCOME (LOSS) BEFORE INCOME TAX BENEFIT				(349,442	)		610,135			1,263,088			1,182,192
INCOME TAX BENEFIT				142,000			—			1,586,876			—
NET INCOME (LOSS)			$	(207,442	)	$	610,135		$	2,849,964		$	1,182,192
NET INCOME (LOSS) PER SHARE:
	Basic		($	0.01	)	$	0.03		$	0.14		$	0.06
	Diluted		($	0.01	)	$	0.03		$	0.13		$	0.06
WEIGHTED-AVERAGE SHARES OUTSTANDING:
	Basic			21,007,000			20,934,000			21,018,000			20,945,000
	Diluted			21,007,000			21,177,000			21,335,000			21,198,000

See accompanying notes to condensed financial statements.

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DPAC Technologies Corp.
Condensed Statements of Cash Flows
(Unaudited)

		For the nine months ended
		November 30, 2002			November 30, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income	$	2,849,964		$	1,182,192
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Depreciation and amortization		1,069,151			1,676,372
	Deferred income taxes		(1,682,262	)		—
Changes in operating assets and liabilities:
	Accounts receivable		1,338,730			(127,848	)
	Inventories		482,442			240,945
	Other assets		159,059			(4,481	)
	Accounts payable		(160,064	)		552,127
	Accrued compensation		(658,479	)		(95,419	)
	Other accrued liabilities		61,651			(377,945	)
	Deferred revenue		(15,000	)		(363,000	)
Net cash provided by operations:			3,445,192			2,682,943
CASH FLOWS FROM INVESTING ACTIVITIES:
	Property additions		(564,166	)		(417,840	)
	Payment of acquisition-related income tax obligation		—			(1,545,649	)
Net cash used in investing activities:			(564,166	)		(1,963,489	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Principal payments on other long-term debt		(401,258	)		(387,661	)
	Proceeds from issuance of common stock		82,024			66,589
	Repurchase of common stock		(25,293	)		(106,488	)
Net cash used in financing activities			(344,527	)		(427,560	)
NET INCREASE IN CASH			2,536,499			291,894
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD			6,258,836			5,346,525
CASH & CASH EQUIVALENTS, END OF PERIOD		$	8,795,335		$	5,638,419
SUPPLEMENTAL CASH FLOW INFORMATION:
	Interest paid	$	61,546		$	103,049
	Income taxes paid	$	30,155		$	1,545,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
	Acquisition of property under capital leases	$	—		$	177,980
	Reversal of valuation allowance to paid-in capital	$	2,665,253		$	—

See accompanying notes to condensed financial statements.

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DPAC TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1—General Background

        DPAC Technologies Corp. (formerly Dense-Pac Microsystems, Inc.) ("we," "us," "DPAC" or the "Company") is a technology company that provides patented component packaging technology to create high-density, space-saving surface mount electronic components. High-density design and manufacturing allows our customers to meet their electronic system performance and time-to-market objectives for maximum system integration. Our products are used in applications such as network servers, computer storage devices, guidance systems, medical instrumentation and communication electronics. The Company also provides outsourced engineering design services to aid customers in creating cost-saving circuit designs as well as contract manufacturing of prototype designs and medium volume production runs of circuit boards. We were formed as a California corporation on September 7, 1983. On August 10, 2001, Dense-Pac Microsystems, Inc. stockholders voted in favor of changing the Company name to DPAC Technologies Corp.

NOTE 2—Concentration of Customers

        DPAC's customer base is largely comprised of DRAM manufacturers, memory module manufacturers, and related businesses. These businesses are subject to volatility and the cyclical nature of the DRAM marketplace. There is risk of a significant impact to DPAC's revenues if one of our major customers were to be acquired, merge, consolidate, or close. There is no guarantee that current business relationships will prevail in the event of one of the above occurrences. Also, during the three and nine months ended November 30, 2002, sales to two major customers accounted for 35% and 18%, and 37% and 22%, respectively, of net sales. Accounts receivable from these two customers accounted for 20% of total net accounts receivable at November 30, 2002. During the three and nine months ended November 30, 2001, sales to two major customers accounted for 20% and 30%, and 33% and 25%, respectively, of net sales. Accounts receivable from these two customers accounted for 34% of total net accounts receivable at November 30, 2001. Any reduction in purchases by, or inability to collect receivables from, such customers could have a material adverse effect on our results of operations.

NOTE 3—Basis of Presentation

        The accompanying unaudited interim Condensed Financial Statements of DPAC as of November 30, 2002 and for the three and nine months ended November 30, 2002 and 2001, reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for completed-year financial statements.

        These financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended February 28, 2002. Operating results for the three and nine months ended November 30, 2002 are not necessarily indicative of the results that may be expected for the full year ending February 28, 2003.

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NOTE 4—Recent Accounting Pronouncements

        On March 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards, ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives are not amortized into results of operations, but instead, are evaluated at least annually for impairment and written down when the recorded value exceeds the estimated fair value. As a result, the Company has ceased amortization of goodwill. The effect of the change in accounting during the three and nine-month periods ended November 30, 2002 was to increase, relative to the net amounts obtained under the prior accounting practices, net income by $195,000, or, approximately, $0.01 per basic and diluted share, and by $583,000, or, approximately, $0.02 per basic and diluted share, respectively.

        SFAS No. 142 also required the Company to perform a transition impairment test for goodwill by determining if the fair value of the Company's reporting units is less than the carrying value of the reporting units. The Company completed the transition impairment testing during the quarter ended May 31, 2002 and determined that it did not have a transition impairment of goodwill. The Company will perform subsequent annual impairment reviews during the fourth fiscal quarter of each year, or earlier if indicators of potential impairment exists. Future impairment reviews may result in charges against earnings to write-down the value of goodwill.

		For the three months ended November 30,					For the nine months ended November 30,
		2002			2001		2002		2001
Net income (loss) as reported		$	(207,442	)	$	610,135	$	2,849,964	$	1,182,192
Add back amortization of goodwill			0			195,000		0		582,939
Adjusted net income (loss)		$	(207,442	)	$	805,135	$	2,849,964	$	1,765,131
Net income (loss) per share, basic
	As reported	$	(0.01	)	$	0.03	$	0.14	$	0.06
	Amortization of goodwill		0.00			0.01		0.00		0.02
	Adjusted net income (loss) per share	$	(0.01	)	$	0.04	$	0.14	$	0.08
Net income (loss) per share, diluted
	As reported	$	(0.01	)	$	0.03	$	0.13	$	0.06
	Amortization of goodwill		0.00			0.01		0.00		0.02
	Adjusted net income (loss) per share	$	(0.01	)	$	0.04	$	0.13	$	0.08
Basic shares			21,007,000			20,934,000		21,018,000		20,945,000
Diluted shares			21,007,000			21,177,000		21,335,000		21,198,000

        In August 2001, the Financial Accounting Standards Board, (FASB) issued Statement of Financial Accounting Standard No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This new statement also supersedes certain aspects of Accounting Principles Board ("APB 30"), "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as presently required by APB 30). In addition, more dispositions may qualify for discontinued operations treatment. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company has adopted SFAS

6

No. 144 effective March 1, 2002, and such adoption did not have a material impact on the Company's financial statements.

        In July 2002, The FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3"). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS 146 is effective for exit and disposal activities initiated after December 31, 2002. The Company is currently evaluating the provisions of SFAS 146 but expects that the adoption of SFAS 146 will not have a material impact on its results of operations and financial position.

        In December 2002, the FASB issued Statement of Financial Accounting Standard No. 148 ("SFAS No. 148"), Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002. The Company has not determined whether it will adopt the fair value based method of accounting for stock-based employee compensation.

NOTE 5—Stock Options

        The following table summarizes stock option activity under DPAC's 1985 and 1996 Stock Option Plans for the nine months ended November 30, 2002:

		Number of Shares		Exercise Price Per Share	Number of Options Exercisable
Balance, February 28, 2002		2,579,520		$  .94—7.56	1,210,628
	Granted	503,500		$1.39—3.50
	Exercised	(63,500	)	$1.00—2.56
	Cancelled	(62,750	)	$1.00—6.00
Balance, November 30, 2002		2,956,770		$  .94—7.56	1,767,504

        At November 30, 2002, a total of 3,000,215 shares were available for grant under all of the Company's stock option plans.

NOTE 6—Earnings (Loss) Per Share

        The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by including other common stock equivalents, such as stock options, in the weighted-average number of shares outstanding, if dilutive.

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        The table below sets forth the reconciliation of the denominator of the earnings per share calculations:

	Three months ended November 30,
	2002		2001
Shares used in computing basic net income per share	21,007,000		20,934,000
Dilutive effect of stock options		(1)	243,000
Shares used in computing diluted net income per share	21,007,000		21,177,000
	Nine months ended November 30,
	2002		2001
Shares used in computing basic net income per share	21,018,000		20,945,000
Dilutive effect of stock options	317,000		253,000
Shares used in computing diluted net income per share	21,335,000		21,198,000

(1)

Potential common shares of 151,000 have been excluded from diluted weighted average common shares for the three-month period ended November 30, 2002, as the effect would be anti-dilutive.

NOTE 7—Segment Information

        Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

        As the Company's CEO reviews financial information and makes operational decisions based upon the Company as a whole, the Company reports as a single segment.

        The Company had export sales (primarily to Western European customers) accounting for approximately 19% and 9% of net sales for the three months ended November 30, 2002 and 2001, and 21% and 4% for the nine months ended November 30, 2002 and 2001, respectively.

NOTE 8—Income Taxes

        In the quarter ended August 31, 2002, the Company reversed a valuation allowance on its deferred tax assets totaling $4,359,715. Based on the nature of the underlying deferred tax assets, the reversal of the valuation allowance resulted in an increase to additional paid-in capital of $2,665,253, a reduction of Goodwill in the amount of $254,200, and a net income tax benefit of $1,444,876. This reversal is the result of the Company's recent sustained history of operating profitability and the determination by management that the future realization of the net deferred tax assets was judged to be more likely than not. The Company exercises significant judgment relating to the projection of future taxable income to determine the recoverability of any tax assets recorded on the balance sheet. If judgments regarding recoverability of deferred tax assets are not accurate, the Company could be required to record additional reserves against deferred tax assets in future periods.

NOTE 9—Commitments and Contingenticies

Legal Proceedings

        Use of the name DPAC below also includes a reference to the name Dense-Pac Microsystems, Inc., the Company's corporate name until changed in fiscal year 2001.

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        On September 23, 1998, DPAC was served with a complaint from SimpleTech (formerly Simple Technology, Inc.), filed in U.S. District Court for the Central District of California, Santa Ana Division, alleging that DPAC's stacking technology infringed on a SimpleTech stacking patent. On October 23, 1998, DPAC filed a counterclaim in the same action for patent infringement against SimpleTech alleging that SimpleTech was infringing upon DPAC's earlier issued patent.

        On April 11, 2000, DPAC filed suit, in Superior Court for the State of California, Orange County, against SimpleTech and its Chief Operating Officer. The complaint alleged trade secret misappropriation, unfair competition and intentional and negligent interference with prospective business advantages. DPAC dismissed the suit without prejudice on February 28, 2001.

        On February 8, 2001, the U.S. District Court for the Central District of California ruled that SimpleTech did not infringe DPAC's patent. On March 29, 2001, the U.S. District Court for the Central District of California ruled that DPAC did not infringe on the SimpleTech patent and entered a final judgment of no liability. As part of the ruling, DPAC was awarded court costs. On April 17, 2001, SimpleTech's appeal was docketed in the U.S. Court of Appeals for the Federal Circuit.

        On March 5, 2002, the U.S. Court of Appeals heard the appeal. A decision on the appeal was reached on March 6, 2002, confirming the lower court's ruling that DPAC did not infringe on the SimpleTech patent and awarded DPAC court costs.

        On February 21, 2001, DPAC was served with a new complaint from SimpleTech, filed in U.S. District Court for the Central District of California, for an undetermined amount, alleging that DPAC's stacking technology infringes on SimpleTech's reissued stacking patent. DPAC intends to vigorously defend itself against these charges. The ultimate outcome or any resulting potential loss is not presently determinable.

        On June 7, 2002, SimpleTech petitioned the U.S. Supreme Court for review of the U.S. Court of Appeals affirmance.

        On September 9, 2002, the lawsuit filed on February 21, 2001 was dismissed without prejudice by joint stipulation of SimpleTech and DPAC. On October 7, 2002, the U.S. Supreme Court vacated the September 23, 1998 lawsuit and sent the case back to the U.S. Court of Appeals for the Federal Circuit for further consideration.

ITEM 2—Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

        Included in the Notes to Consolidated Financial Statements, this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Report are statements that do not present historical information. These are forward-looking statements, which reflect the Company's current expectations. Although the Company believes that its expectations are based on reasonable assumptions, there can be no assurance that the Company's financial goals or expectations will be realized. Numerous factors may affect the Company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company. Our website is at www.DPACtech.com. The information on our website is not part of this Report.

        Some of these factors include risks and uncertainties in regard to demand for and acceptance of new and existing products, technological advances and product obsolescence, availability of semiconductor devices at reasonable prices, competitive factors, costs and risks concerning litigation, the ability to protect proprietary intellectual property, limited experience in acquisitions, business interruptions due to acts of terrorism or natural disasters, the availability of capital to finance growth, and changes in gross margin as a result of changes in product mix toward commercial memory stacking

9

where the Company purchases and sells the memory. These and other factors, which could cause actual results to differ materially from those in the forward-looking statements, are discussed in greater detail in the Company's Annual Report on Form 10-K for the year ended February 28, 2002 as filed with the Securities and Exchange Commission on May 28, 2002, under the headings "Risk Factors" and "Cautionary Statements." Such Cautionary Statements are incorporated herein by this reference. Investors are cautioned against ascribing undue weight to any forward-looking statements herein or elsewhere. Additional cautionary statements are set forth below.

Concentration of Customers

        DPAC's customer base is largely comprised of DRAM manufacturers, memory module manufacturers, and related businesses. These businesses are subject to volatility and the cyclical nature of the DRAM marketplace. There is risk of a significant impact to DPAC's revenues if one of our major customers was to be acquired, merge, consolidate, or close. There is no guarantee that current business relationships will prevail in the event of one of the above occurrences. Also, during the three and nine months ended November 30, 2002, sales to two major customers accounted for 35% and 18%, and 37% and 22%, respectively, of net sales. Accounts receivable from these two customers accounted for 20% of total net accounts receivable at November 30, 2002. During the three and nine months ended November 30, 2001, sales to two major customers accounted for 20% and 30%, and 33% and 25%, respectively, of net sales. Accounts receivable from these two customers accounted for 34% of total net accounts receivable at November 30, 2001. Any reduction in purchases by, or inability to collect receivables from, such customers could have a material adverse effect on our results of operations.

Plans for Diversification

        While we have no agreements or negotiations currently underway, we intend to pursue diversification (which could include acquisitions), that will expand our company's plans for internal growth. The company's plan for diversification includes, but is not limited to partnerships, joint ventures, acquisitions, marketing and production agreements. However, we are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. If we make any future acquisitions, we could issue stock that would dilute our shareholders' percentage ownership, incur substantial debt or assume contingent liabilities. We have limited experience in acquiring other businesses, product lines and technologies. In addition, the attention of our small management team may be diverted from our core business if we undertake an acquisition. An inability to overcome problems encountered in connection with such acquisitions also could divert the attention of management, utilize scarce corporate resources and harm our business. Potential acquisitions also involve numerous risks, including, among others:

•

Problems assimilating the purchased operations, technologies or products;



•

Costs associated with the acquisition;



•

Adverse effects on existing business relationships with suppliers and customers;



•

Risks associated with entering markets in which we have no or limited prior experience;



•

Potential loss of key employees of purchased organizations; and



•

Potential litigation arising from the acquired company's operations before the acquisition.

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Visibility of Marketplace

        DPAC's visibility into the marketplace is limited due to increasing consolidation within the semiconductor market. This consolidation has resulted in turmoil and uncertainty as to some future developments of technology. As a result, the risks are high that:

•

The semiconductor companies may attempt or may be successful in bringing stacking in- house, using not only pre-packaged parts, but also "die" level stacking;



•

Competitors may introduce other stacking methodology;



•

Module manufacturers and semiconductor packaging companies may develop in-house stacking services;



•

DRAM pricing may create a volatile marketplace reducing the demand for stacking; and



•

The transition to new technology, such as fBGA packaging could eliminate the need for stacking.

        As a result, any of the above could have a negative effect on the financial performance of DPAC, potentially reducing revenues and/or placing future quarters into losses.

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RESULTS OF OPERATIONS

Three Months Ended November 30, 2002 and 2001

        Net Sales.    Net sales for the quarter ended November 30, 2002 decreased by $840,000 or 13% to $5.4 million from $6.3 million for the quarter ended November 30, 2001. The decrease in net sales was primarily due to a 27% decrease in unit volume shipments of commercial stacks during the third quarter from the comparable prior-year period, as a result of competitive pressures and market place consolidation. The reduction in units shipped was partially offset by a change in product mix toward a greater percentage of commercial stacking revenue that contained purchased memory. Stacking revenues containing purchased memory, or "memory stacking", involves DPAC purchasing memory chips, stacking them, and then selling the stacked product to the customer. In these cases where the costs of memory chips are included in the sales price of products, the Company will purchase material for the commercial order concurrently with finalizing the sales price thereof, in order to avoid any price volatility in the components. Revenues from memory stacking may vary significantly from period-to-period based not only on quantities shipped but also on the current market price of purchased memory. The balance of commercial stacking revenues is from "service stacking", where customers provide us with consigned memory chips and we configure and stack the memory to customer specifications. As there is no memory chip component cost to service stacking, revenues per unit are significantly lower than revenues per unit of memory stacking sales. Of total revenue in the third quarter of fiscal year 2003, approximately 53% was related to memory stacking and 23% to service stacking, as compared with 33% and 45%, respectively, in the third quarter of fiscal year 2002. The remaining sales are primarily related to the industrial, defense and aerospace sectors.

        The Company believes that it has been able to define a niche for products that use a unique proprietary stacking technology and has been marketing these products to a defined market. During the third quarter of fiscal year 2003, the Company continued its offering of commercial products and focused on those products that relate to the Company's proprietary packaging technology. Additionally, the Company has numerous products that have been designed into industrial, defense and aerospace applications. DPAC is beginning to see some impact on its business due to competitive products and technologies, and the continued turmoil in the semiconductor industry, and it is unknown at this time whether or not there will be a change in demand for these proprietary products. See "Forward-Looking Statements."

        Gross Profit.    Gross profit in the third quarter of fiscal year 2003 decreased by $910,000 or 38% from the comparable prior-year period. Gross profit as a percentage of sales decreased to 27% for the quarter ended November 30, 2002, as compared to 38% for the quarter ended November 30, 2001. The decrease in gross profit in absolute dollars and as a percentage of sales is attributable to the decrease in revenues and the increased percentage of revenues from memory stacking. Memory stacking has a lower gross margin than revenues derived from service stacking, due to low margins on the memory component of the sales price.

        Selling, General and Administrative.    Selling, general and administrative expenses increased in the third quarter of fiscal year 2003 by $238,000 or 21% from the third quarter of the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses increased to 25% of net sales for the quarter ended November 30, 2002 as compared to 18% for the same period in the prior fiscal year. The increase in absolute dollars in selling, general and administrative expenses is mainly attributed to increased levels of expense associated with compensation, legal fees, acquisition search costs and insurance.

        Research and Development.    Research and development costs increased by $4,000 or 1% for the quarter ended November 30, 2002 from the third quarter of the prior fiscal year. For the quarter ended November 30, 2002, research and development expense represented 9% of net sales as compared to

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7% of net sales from the same quarter in the previous fiscal year. The amount in absolute dollars spent on research and development has remained relatively constant year over year. The continued investment in research and development is primarily due to continued efforts to allocate resources to the development and production of unique new technologies. The Company is continuing to invest in research and development for new products in the advanced technology marketplace. See "Forward-Looking Statements."

        Interest.    For the three months ended November 30, 2002, interest income decreased by $17,000 from the same period last year. This change primarily relates to the impact that declining interest rates have on the amount we are able to earn on our cash balances. Interest expense decreased by $15,000 for the same period due to the decline in the amount of our debt balances, which are at fixed interest rates.

        Income Taxes.    During the quarter ended November 30, 2002, the Company recorded a net income tax benefit at the rate of 40% or $142,000. The effective income tax rate for the quarter ended November 30, 2001 was zero. The difference in tax rates is attributed to the fact that, in the prior-year comparable quarter, the Company had a full valuation allowance against deferred income tax assets. This valuation allowance was reversed in the quarter ended August 31, 2002 as a result of the Company's recent sustained history of operating profitability and the prospects of the realization of the deferred tax benefits. The Company exercises judgment relating to projected future taxable income to determine the recoverability of any tax assets recorded on the balance sheet. If judgments regarding recoverability of deferred tax assets are not accurate, the Company could be required to record additional income tax expense in future periods. The Company expects to record income taxes in future periods at approximately the statutory tax rates.

Nine Months Ended November 30, 2002 and 2001

        Net Sales.    Net sales for the nine months ended November 30, 2002 of $28.2 million increased by $6.3 million or 29% from $21.9 million for the nine months ended November 30, 2001. The increase in net sales was primarily due to a change in product mix toward a greater percentage of commercial stacking revenue that contained purchased memory, or memory stacking. Of total revenue in the first nine months of fiscal year 2003, approximately 67% related to memory stacking and 15% to service stacking, as compared with 39% and 35%, respectively, in the first nine months of fiscal year 2002. Additionally, the total quantity of stacks shipped during the first nine months of fiscal year 2003 increased by 9% over the same period in the previous fiscal year. This increase in units shipped was partially offset from a revenue perspective by a decrease in pricing for stacking services.

        Gross Profit.    Gross profit for the nine months ended November 30, 2002 increased by $104,000 or 2% from the same period in the previous fiscal year. The increase in gross profit is attributable to the increase in stacks shipped and partially offset by lower prices for stacking services. Gross profit as a percentage of sales decreased to 26% for the nine months ended November 30, 2002, as compared to 32% for the same period in the prior fiscal year. The decrease in the gross margin percentage can primarily be attributed to the increased percentage of revenues from memory stacking, which has a lower gross margin than revenues derived from service stacking, due to low margins on the memory component on the sales price.

        Selling, General and Administrative.    Selling, general and administrative expenses increased by $575,000 or 14% for the nine months ended November 30, 2002, as compared to the same period in the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses decreased to 16% of net sales for the period ended November 30, 2002, as compared to 18% for the same period in the prior fiscal year. The increase in absolute dollars in selling, general and administrative expenses is primarily attributed to incurred acquisition search costs of $230,000, and

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increased levels of compensation expense, recruitment fees, insurance premiums, and investor relations. These increases were partially offset by lower legal fees and savings realized with the consolidation of facilities, completed in fiscal year 2002.

        Research and Development.    For the nine months ended November 30, 2002, research and development, in terms of absolute dollars, increased slightly as compared to the same period in the previous fiscal year. For the first nine months of fiscal year 2003, research and development expense represented 5% of net sales as compared to 6% of net sales for the same period in the previous fiscal year. The continued investment in research and development is primarily due to continued efforts to allocate resources to the development and production of unique new technologies. The Company is continuing to invest in research and development for new products in the advanced technology marketplace. See "Forward-Looking Statements."

        Interest.    For the nine months ended November 30, 2002, interest income decreased by $57,000 from the same period last year. This change primarily relates to the impact that declining interest rates have on the amount we are able to earn on our cash balances. Interest expense decreased by $42,000 for the same period due to the decline in the amount of our debt balances, which are at fixed interest rates.

        Income Taxes.    During the nine months ended November 30, 2002, the Company recorded a net income tax benefit of $1,587,000, of which $1,444,876 reflects the reversal of a previously recorded valuation allowance against deferred income tax assets. This reversal is the result of the Company's recent sustained history of operating profitability and the prospects of the realization of the deferred tax benefits. The Company exercises judgment relating to projected future taxable income to determine the recoverability of any tax assets recorded on the balance sheet. If judgments regarding recoverability of deferred tax assets are not accurate, the Company could be required to record additional income tax expense in future periods. The effective income tax rate for the nine months ended November 30, 2001 was zero. The Company expects to record income taxes in future periods at approximately the statutory tax rates.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's primary source of liquidity for the nine months ended November 30, 2002 and November 30, 2001 was from cash provided by operations. The Company believes that our working capital position, including cash and cash equivalents, and the expected cash flow from operations will be sufficient to meet the Company's operating cash needs for the next 12 months. Additionally, the Company has available at November 30, 2002 a credit facility for $3 million from a financial institution, which we can utilize if the need should arise for additional working capital to support operations. The credit facility contains certain financial covenants, with which the Company was in full compliance with at November 30, 2002. See "Forward-Looking Statements."

        Net cash provided by operating activities was approximately $3,445,000 during the nine months ended November 30, 2002 and substantially consisted of net income, non cash depreciation expense, and a decrease in accounts receivable, partially offset by an increase in deferred income taxes. For the nine months ended November 30, 2001, net cash provided by operating activities was approximately $2,683,000 and consisted primarily of net income and non-cash depreciation and amortization expense.

        The Company purchased for cash approximately $564,000 and $418,000 in new equipment during the nine months ended November 30, 2002 and 2001, respectively. Additionally, the Company paid a $1.5 million acquisition related income tax obligation during the first quarter ended May 31, 2001. The Company expects that it may incur additional lease debt with the acquisition of additional equipment during the next 12 months. The Company expects that it will not acquire more than $1 million in additional equipment for the remainder of the fiscal year. See "Forward-Looking Statements."

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        Net cash used in financing activities was approximately $345,000 and $428,000 for the nine months ended November 30, 2002 and 2001, respectively, and principally relates to debt repayments offset by proceeds from the issuance of common stock.

New Accounting Pronouncements

        See Note 4 to financial statements in Item 1.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

        The Company invests excess cash in money market funds. Money market funds do not have maturity dates and do not present a material market risk. For the three-month period covered by this Report, interest expense was not sensitive to any changes in the general level of United States interest rates because our debt instruments, consisting principally of capital lease agreements, were based on fixed interest rates.

ITEM 4. Controls and Procedures.

        The Chief Executive Officer and Chief Financial Officer, with the assistance of other management, conducted an evaluation of our disclosure controls and procedures within 90 days prior to the filing date of this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

        We did not make any significant changes, nor take any corrective actions with regard to significant deficiencies or material weaknesses, in our internal controls or in other factors that could significantly affect these controls subsequent to such date of their evaluation. We review our internal controls for effectiveness on an ongoing basis, including routine reviews during the period covered by this Report. We plan to continue our review process, including both internal and external audit examinations, as part of our future evaluation of our disclosure controls and procedures and internal controls.

PART II—OTHER INFORMATION

Item 1—Legal Proceedings

        Use of the name DPAC below also includes a reference to the name Dense-Pac Microsystems, Inc., the Company's corporate name until changed in fiscal year 2001.

        On September 23, 1998, DPAC was served with a complaint from SimpleTech (formerly Simple Technology, Inc.), filed in U.S. District Court for the Central District of California, Santa Ana Division, alleging that DPAC's stacking technology infringed on a SimpleTech stacking patent. On October 23, 1998, DPAC filed a counterclaim in the same action for patent infringement against SimpleTech alleging that SimpleTech was infringing upon DPAC's earlier issued patent.

        On April 11, 2000, DPAC filed suit, in Superior Court for the State of California, Orange County, against SimpleTech and its Chief Operating Officer. The complaint alleged trade secret misappropriation, unfair competition and intentional and negligent interference with prospective business advantages. DPAC dismissed the suit without prejudice on February 28, 2001.

        On February 8, 2001, the U.S. District Court for the Central District of California ruled that SimpleTech did not infringe DPAC's patent. On March 29, 2001, the U.S. District Court for the Central District of California ruled that DPAC did not infringe on the SimpleTech patent and entered a final judgment of no liability. As part of the ruling, DPAC was awarded court costs. On April 17, 2001, SimpleTech's appeal was docketed in the U.S. Court of Appeals for the Federal Circuit.

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        On March 5, 2002, the U.S. Court of Appeals heard the appeal. A decision on the appeal was reached on March 6, 2002, confirming the lower court's ruling that DPAC did not infringe on the SimpleTech patent and awarded DPAC court costs.

        On February 21, 2001, DPAC was served with a new complaint from SimpleTech, filed in U.S. District Court for the Central District of California, for an undetermined amount, alleging that DPAC's stacking technology infringes on SimpleTech's reissued stacking patent. DPAC intends to vigorously defend itself against these charges. The ultimate outcome or any resulting potential loss is not presently determinable.

        On June 7, 2002, SimpleTech petitioned the U.S. Supreme Court for review of the U.S. Court of Appeals affirmance.

        On September 9, 2002, the lawsuit filed on February 21, 2001 was dismissed without prejudice by joint stipulation of SimpleTech and DPAC. On October 7, 2002, the U.S. Supreme Court vacated the September 23, 1998 lawsuit and sent the case back to the U.S. Court of Appeals for the Federal Circuit for further consideration.

Item 2—Changes in 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

Item 6—Exhibits and Reports on Form 8-K

(a)

Exhibits

99.1	Cautionary Statements are incorporated herein by reference to pages 19 through 25, inclusive, of the Registrant's Form 10-K filed May 28, 2002 with the Securities and Exchange Commission.
99.2	Certification of Chief Executive Officer and Chief Financial Officer.

(b)

Reports on Form 8-K—No reports on Form 8-K were filed during the three months of fiscal year 2003 covered by this Form 10-Q.

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SIGNATURES

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

DPAC TECHNOLOGIES CORP.
(Registrant)

January 13, 2003 Date	By:	/s/  TED BRUCE Ted Bruce Chief Executive Officer
January 13, 2003 Date	By:	/s/  WILLIAM M. STOWELL William M. Stowell Chief Financial Officer

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CERTIFICATIONS

        I, Ted Bruce, certify that:

        1.    I have reviewed this quarterly report on Form 10-Q of DPAC Technologies Corp.;

        2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4.    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: January 13, 2003

/s/  TED BRUCE Ted Bruce
Chief Executive Officer

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        I, William M. Stowell, certify that:

        1.    I have reviewed this quarterly report on Form 10-Q of DPAC Technologies Corp.;

        2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4.    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: January 13, 2003

/s/  WILLIAM M. STOWELL William M. Stowell
Chief Financial Officer

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EXHIBIT INDEX

Exh. No.	Description
99.1	Cautionary Statements
99.2	Periodic Report Certification of the Chief Executive Officer and Chief Financial Officer

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PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements.

Condensed Balance Sheets
Condensed Statements of Operations
Condensed Statements of Cash Flows
NOTES TO CONDENSED FINANCIAL STATEMENTS

ITEM 2—Management's Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
ITEM 4. Controls and Procedures.

PART II—OTHER INFORMATION

Item 1—Legal Proceedings
Item 2—Changes in Securities and Use of Proceeds
Item 3—Defaults Upon Senior Securities
Item 4—Submission of Matters to a Vote of Security Holders
Item 5—Other Information
Item 6—Exhibits and Reports on Form 8-K

SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX

EX-99.1

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EXHIBIT 99.1

Cautionary Statements

        Statements in this document that are not historical facts, including all statements about the Company's business strategy or expectations, or information about new and existing products and technologies or market characteristics and conditions, are forward-looking statements that involve risks and uncertainties. These include, but are not limited to, the factors described below which could cause actual results to differ from those contemplated by the forward-looking statements.

Product Development and Technological Change

        The semiconductor and memory module industries are characterized by rapid technological change and are highly competitive with respect to timely product innovation. The Company's memory products are subject to obsolescence or price erosion because semiconductor manufacturers are continuously introducing chips with the same or greater memory density as the Company's custom modules. As a result, memory products typically have a product life of not more than three to five years.

        The Company's future success depends on its ability to develop new products and product enhancements to keep up with technological advances and to meet customer needs. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's financial condition and results of operations.

        There can be no assurance that the Company will be successful in its product development or marketing efforts, or that the Company will have adequate financial or technical resources for future product development and promotion.

Uncertainty of Market Acceptance or Profitability of New Products

        The introduction of new products will require the expenditure of funds for research and development, tooling, manufacturing processes, inventory and marketing. In order to achieve high volume production, the Company will need to make substantial investments in inventory and capital equipment or, as currently contemplated, the Company will need to out-source production to third parties. The Company has limited marketing capabilities and resources and is dependent upon internal sales and marketing personnel and a network of independent sales representatives for the marketing and sale of its products. There can be no assurance that our products will achieve or maintain market acceptance, result in increased revenues, or be profitable.

Parts Shortages and Over-Supplies and Dependence on Suppliers

        The semiconductor industry is characterized by periodic shortages or over-supplies of parts which have in the past and may in the future negatively affect the Company's operations. The Company is dependent on a limited number of suppliers for semiconductor devices used in its products, and it has no long-term supply contracts with any of them. For example, the Company was not able to market its second-generation Dense-Stack product when it lost its source of SRAM die.

        Due to the cyclical nature of the semiconductor industry and competitive conditions, the Company may experience difficulties in meeting its supply requirements in the future. Any inability to obtain adequate deliveries of parts, either due to the loss of a supplier or industry-wide shortages, could delay shipments of the Company's products, increase its cost of goods sold and have a material adverse effect on its business, financial condition and results of operations.

Concentration of Credit Risk

        The Company grants credit to customers included in the military, aerospace, and a variety of commercial industries. Credit is extended based on an evaluation of the customer's financial condition

and collateral is not required. Estimated credit losses are provided for in the financial statements. During the year ended February 28, 2002, sales to three major customers accounted for 23%, 22% and 11% of net sales. Accounts receivable from these three customers accounted for 46% of total accounts receivable at February 28, 2002. During the year ended February 28, 2001, 45% of net sales were to one major customer. Accounts receivable from this customer accounted for 44% of total net accounts receivable at February 28, 2001. During the year ended February 29, 2000, sales to three major customers accounted for 29%, 12% and 11% of net sales. Accounts receivable from these three customers accounted for 38% of total net accounts receivable at February 29, 2000. A decision by a significant customer to substantially decrease or delay purchases from the Company or the Company's inability to collect receivables from these customers could have a material adverse effect on the Company's business, financial condition, and results of operations.

Dependence on Defense-Related Business

        The Company has historically derived a portion of its revenues from defense-related contracts. As a result, the Company's business has been impacted by reductions in the federal defense budget and will continue to be subject to risks affecting the defense industry, including changes in governmental appropriations and changes in national defense policies and priorities. The Company has sought to reduce its dependence on defense-related business by developing products with commercial applications, although such products generally have lower margins than defense-related products.

Intellectual Property Rights

        The Company's ability to compete effectively is dependent on its proprietary know-how, technology and patent rights. The Company holds U.S. patents on certain aspects of its 3-D stacking technology and has applied for additional patents. There can be no assurance that the Company's patent applications will be approved, that any issued patents will afford the Company's products any competitive advantage or will not be challenged or circumvented by third parties, or that patents issued to others will not adversely affect the sales, development or commercialization of the Company's present or future products.

Management of Growth

        Successful expansion of the Company's operations will depend on, among other things, the ability to obtain new customers, to attract and retain skilled management and other personnel, to secure adequate sources of supply on commercially reasonable terms and to successfully manage growth. To manage growth effectively, the Company will have to continue to implement and improve its operational, financial and management information systems, procedures and controls. As the Company expands, it may from time to time experience constraints that will adversely affect its ability to satisfy customer demand in a timely fashion. Failure to manage growth effectively could adversely affect the Company's financial condition and results of operations.

Competition

        There are memory companies which offer or are in the process of developing three-dimensional products, including Irvine Sensors, Staktek, Samsung and others. Some of such companies have greater financial, manufacturing and marketing capabilities than the Company. The Company could also experience competition from established and emerging computer memory companies. There can be no assurance that the Company's products will be competitive with existing or future products, or that the Company will be able to establish or maintain a profitable price structure for its products.

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Product Liability

        In the course of its business, the Company may be subject to claims for product liability for which its insurance coverage is excluded or inadequate.

Variability of Gross Margin

        Gross profit as a percentage of sales was 33% for fiscal year ended February 28, 2002 as compared to 28% for the fiscal year ended February 28, 2001, and 34% for the fiscal year ended February 29, 2000. Any change in the gross margins can typically be attributed to the type of products, and the amount of purchased memory included in sales, that the Company was selling during the year as well as the royalty income generated during the periods. As the Company markets its products both to military and aerospace, and commercial customers, the product mix that each category of the customers orders may be different and result in changes in the gross margin. Due to the various configuration and applications of the Company's product, prices range from less than $5 for commercial custom modules to over two thousand dollars for high-end military specification custom modules.

        The Company expects that its net sales and gross margin may vary significantly based on these and other factors, including the mix of products sold and the manufacturing services provided, the channels through which the Company's products are sold, changes in product selling prices and component costs, the level of manufacturing efficiencies achieved and pricing by competitors. The selling prices of the Company's products may decline depending upon the price changes of DRAM, SRAM and Flash semiconductors, which would have a material adverse effect on the Company's net sales and could have a material adverse effect on the Company's business, financial condition and results of operation. Accordingly, the Company's ability to maintain or increase net sales will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in selling prices. Declining product selling prices may also materially and adversely affect the Company's gross margin unless the Company is able to reduce its cost per unit to offset declines in product selling prices. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products or reduce its cost per unit. The Company also expects that its business may experience significant seasonality to the extent it sells a material portion of its products in Europe and to the extent its exposure to the personal computer market remains significant.

Decline of Demand for Product Due to Downturn of Related Industries

        The Company may experience substantial period-to-period fluctuations in operating results due to factors affecting the semiconductor, computer, telecommunications and networking industries. From time to time, each of these industries has experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions. A decline or significant shortfall in growth in any one of these industries could have a material adverse impact on the demand for the Company's products and therefore a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the semiconductor, computer, telecommunications, networking or other industries utilizing the Company's products.

Fluctuations in Operating Results

        The Company's results of operations and gross margin have been subject to fluctuations from period to period. The primary factors that have affected and may in the future affect the Company's results of operations include adverse changes in the mix of products sold, the inability to procure required components, and the partial or complete loss of a principal customer or the reduction in

3

orders from a customer due to, among other things, excess product inventory accumulation by such customer. Other factors that have affected and may in the future affect the Company's results of operations include fluctuating market demand for and declines in the selling prices of the Company's products, decreases or increases in the costs of the components of the Company's products, market acceptance of new products and enhanced versions of the Company's products, the Company's competitors selling products that compete with the Company's products at lower prices or on better terms than the Company's products, delays in the introduction of new products and enhancements to existing products, manufacturing inefficiencies associated with the start up of new product introductions, and the Company's semiconductor customers manufacturing memory custom modules, internally or with other third parties, outside of the United States due to concerns about United States antidumping investigations and laws.

        The Company's operating results may also be affected by the timing of new product announcements and releases by the Company or its competitors, the timing of significant orders, the ability to produce products in volume, delays, cancellations or rescheduling of orders due to customer financial difficulties or other events, inventory obsolescence, including the reduction in value of the Company's inventories due to price declines, unexpected product returns, the timing of expenditures in anticipation of increased sales, cyclicality in the Company's targeted markets, and expenses associated with acquisitions. In particular, declines in DRAM, SRAM and Flash semiconductor prices could affect the valuation of the Company's inventory which could result in adverse changes in the Company's business, financial condition and results of operations.

        Sales of the Company's individual products and product lines toward the end of a product's life cycle are typically characterized by steep declines in sales, pricing and gross margin, the precise timing of which may be difficult to predict. The Company has experienced and could continue to experience unexpected reductions in sales of products as customers anticipate new product purchases. In addition, to the extent that the Company manufactures products in anticipation of future demand that does not materialize, or in the event a customer cancels outstanding orders during a period of either declining product selling prices or decreasing demand, the Company could experience an unanticipated decrease in sales of products. These factors could give rise to charges for obsolete or excess inventory, returns of products by distributors, or substantial price protection charges or discounts. In the past, the Company has had to write-down and write-off excess or obsolete inventory. To the extent that the Company is unsuccessful in managing product transitions, its business, financial condition and results of operations could be materially and adversely affected.

        The need for continued significant expenditures for capital equipment purchases, research and development and ongoing customer service and support, among other factors, will make it difficult for the Company to reduce its operating expenses in any particular period if the Company's expectations for net sales for that period are not met. Accordingly, there can be no assurance that the Company will be able to continue to be profitable. The Company believes that period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future period the Company's operating results will be below the expectations of public market analysts or investors. In such event, the market price of the Company's securities would be materially and adversely affected.

International Sales

        In fiscal year 2002, approximately 12% of the Company's sales were export sales, primarily to Western Europe as compared to 4% in fiscal 2001 and 5% in fiscal year 2000. Foreign sales are made in U.S. dollars. The increase was primarily due to the addition of a significant new international customer in fiscal year 2002. International sales may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, timing and availability of export licenses, political and economic instability, difficulties in accounts receivable collections, natural disasters, difficulties in

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staffing and managing foreign subsidiary and branch operations, difficulties in managing distributors, difficulties in obtaining governmental approvals for telecommunications and other products, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties, potentially adverse tax consequences and uncertainties relative to regional, political and economic circumstances. Moreover and as a result of currency changes and other factors, certain of the Company's competitors may have the ability to manufacture competitive products in Asia at lower costs than the Company.

        The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the United States or other countries. Because sales of the Company's products have been denominated to date in United States dollars, increases in the value of the United States dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations. Some of the Company's customer's purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations.

Dependence Upon Key Personnel

        The Company's future performance also depends in significant part upon the continued service of its key technical and senior management personnel, many of whom have been with the Company for a significant period of time. The Company does not maintain key man life insurance on any of its employees. Because the Company has a relatively small number of employees when compared to other leading companies in the same industry, its dependence on retaining its employees is particularly significant. The Company is also dependent on its ability to attract high quality personnel, particularly in the areas of sales and applications development.

        The industry in which the Company operates is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurance that the Company's current employees will continue to work for the Company.

        The loss of the services of key employees could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, the Company may need to grant additional stock options to key employees and provide other forms of incentive compensation to attract and retain such key personnel.

Limited Experience in Acquisition

        We may pursue selective acquisitions to complement our internal growth. If we make any future acquisitions, we could issue stock that would dilute our shareholders' percentage ownership, incur substantial debt or assume contingent liabilities. We have limited experience in acquiring other businesses, product lines and technologies. In addition, the attention of our small management team may be diverted from our core business if we undertake an acquisition. Potential acquisitions also involve numerous risks, including, among others:

•

Problems assimilating the purchased operations, technologies or products;

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•

Costs associated with the acquisition;



•

Adverse effects on existing business relationships with suppliers and customers;



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Risks associated with entering markets in which we have no or limited prior experience;



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Potential loss of key employees of purchased organizations; and



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Potential litigation arising from the acquired company's operations before the acquisition.

        Our inability to overcome problems encountered in connection with such acquisitions could divert the attention of management, utilize scarce corporate resources and harm our business. In addition, we are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed.

Cyclical Nature of Semiconductor Industry

        The semiconductor industry, including the memory markets in which we compete, is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies' and their customers' products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our ICs. Such shortages could have a material adverse effect on our business and operating results.

Product Returns And Order Cancellation

        To the extent we manufacture products in anticipation of future demand that does not materialize, or in the event a customer cancels outstanding orders, we could experience an unanticipated increase in our inventory. In addition, while we may not be contractually obligated to accept returned products, we may determine that it is in our best interest to accept returns in order to maintain good relations with our customers. Product returns would increase our inventory and reduce our revenues. We have had to write-down inventory in the past for reasons such as obsolescence, excess quantities and declines in market value below our costs.

        We have no long-term volume commitments from our customers except those subject to cancellation by the customer. Sales of our products are made through individual purchase orders and, in certain cases, are made under master agreements governing the terms and conditions of the relationships. Customers may change, cancel or delay orders with limited or no penalties. We have experienced cancellations of orders and fluctuations in order levels from period-to-period and we expect to continue to experience similar cancellations and fluctuations in the future which could result in fluctuations in our revenues.

Additional Capital Funding to Impair Value of Investment

        If we expand more rapidly than currently anticipated or if our working capital needs exceed our current expectations, we may need to raise additional capital through public or private equity offerings or debt financings. Our future capital requirements depend on many factors including our research, development, sales and marketing activities. We do not know whether additional financing will be available when needed, or will be available on terms favorable to us. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future

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opportunities or respond to competitive pressures or unanticipated requirements. To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution and the new equity securities may have greater rights, preferences or privileges than our existing common stock.

Geographic Concentration of Operation

        All of our manufacturing operations are located in our facility in Garden Grove, California. Due to this geographic concentration, a disruption of our manufacturing operations, resulting from sustained process abnormalities, human error, government intervention or natural disasters such as earthquakes, fires or floods could cause us to cease or limit our manufacturing operations and consequently harm our business, financial condition and results of operations.

Compliance with Environmental Laws and Regulations

        We are subject to a variety of environmental laws and regulations governing, among other things, air emissions, waste water discharge, waste storage, treatment and disposal, and remediation of releases of hazardous materials. Our failure to comply with present and future requirements could harm our ability to continue manufacturing our products. Such requirements could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The imposition of additional or more stringent environmental requirements, the results of future testing at our facilities, or a determination that we are potentially responsible for remediation at other sites where problems are not presently known to us, could result in expenses in excess of amounts currently estimated to be required for such matters.

Stock Price Volatility

        The stock market in general, and the market for shares of technology companies in particular, has experienced extreme price fluctuations. These price fluctuations are often unrelated to the operating performance of the affected companies. Many technology companies, including the Company, have experienced dramatic volatility in the market prices of their common stock. If our future operating results are below the expectations of stock market analysts and investors, our stock price may decline. We cannot be certain that the market price of our common stock will remain stable in the future. Our stock price may undergo fluctuations that are material, adverse and unrelated to our performance.

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EXHIBIT 99.1

EX-99.2

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EXHIBIT 99.2

Periodic Report Certification
Of the Chief Executive Officer and Chief Financial Officer

        I, Ted Bruce, Chief Executive Officer of DPAC Technologies Corp. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge the Quarterly Report of DPAC Technologies Corp. on Form 10-Q for the quarterly period ended November 30, 2002, as filed with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  TED BRUCE Ted Bruce
Chief Executive Officer
January 13, 2003

        I, William M. Stowell, Chief Financial Officer of DPAC Technologies Corp. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge the Quarterly Report of DPAC Technologies Corp. on Form 10-Q for the quarterly period ended November 30, 2002, as filed with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  WILLIAM M. STOWELL William M. Stowell
Chief Financial Officer
January 13, 2003

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EXHIBIT 99.2