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 May 31, 2003
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 (State or other Jurisdiction of Incorporation or Organization)	33-0033759 (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

        Indicate by Check Mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

YES                                     NO     ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of common stock, no par value, outstanding as of June 10, 2003 was 21,006,664.

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

DPAC Technologies Corp.
Condensed Balance Sheets
(Unaudited)

			May 31, 2003			February 28, 2003
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	7,629,072		$	8,197,144
	Accounts receivable, net			1,463,520			2,599,732
	Inventories, net			728,600			980,592
	Prepaid expenses and other current assets			457,905			569,331
	Deferred income taxes			209,776			209,776
		Total current assets		10,488,873			12,556,575
PROPERTY, net				4,101,558			3,863,118
DEFERRED INCOME TAXES				5,125,208			4,554,208
GOODWILL				4,528,721			4,528,721
OTHER ASSETS				605,614			250,183
TOTAL			$	24,849,974		$	25,752,805
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Current portion of capital lease obligations		$	200,437		$	286,236
	Accounts payable			645,215			1,043,913
	Accrued compensation			334,130			492,630
	Other accrued liabilities			1,110,887			433,781
		Total current liabilities		2,290,669			2,256,560
CAPITAL LEASE OBLIGATIONS, less current portion				74,466			98,829
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
	Common stock			24,949,976			24,929,987
	Additional paid-in capital			2,701,701			2,701,701
	Accumulated deficit			(5,166,838	)		(4,234,272	)
		Net stockholders' equity		22,484,839			23,397,416
TOTAL			$	24,849,974		$	25,752,805

See accompanying notes to condensed financial statements.

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DPAC Technologies Corp.
Condensed Statements of Operations
(Unaudited)

			For the quarter ended:
			May 31, 2003			May 31, 2002
NET SALES			$	5,162,663		$	11,936,850
COST OF SALES				3,972,874			9,110,902
GROSS PROFIT				1,189,789			2,825,948
COSTS AND EXPENSES:
	Selling, general and administrative			1,175,936			1,578,801
	Reserve for litigation			750,000			—
	Research and development			776,280			456,196
		Total costs and expenses		2,702,216			2,034,997
INCOME (LOSS) FROM OPERATIONS				(1,512,427	)		790,951
OTHER INCOME:
	Interest income			17,539			35,276
	Interest expense			(8,678	)		(22,973	)
		Total other income		8,861			12,303
INCOME (LOSS) BEFORE INCOME TAX BENEFIT				(1,503,566	)		803,254
INCOME TAX BENEFIT				571,000			—
NET INCOME (LOSS)			$	(932,566	)	$	803,254
NET INCOME (LOSS) PER SHARE:
	Basic		$	(0.04	)	$	0.04
	Diluted		$	(0.04	)	$	0.04
WEIGHTED AVERAGE SHARES OUTSTANDING:
	Basic			20,988,000			21,016,000
	Diluted			20,988,000			21,374,000

See accompanying notes to condensed financial statements.

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

			For the quarter ended:
			May 31, 2003			May 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)			$	(932,566	)	$	803,254
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			355,305			356,462
	Deferred income taxes			(571,000	)		—
	Compensation expense associated with stock options			1,239			—
Changes in operating assets and liabilities:
	Accounts receivable			1,136,212			941,908
	Inventories			251,992			(1,119,957	)
	Other assets			130,995			70,125
	Accounts payable			(398,698	)		766,085
	Accrued compensation			(158,500	)		(430,235	)
	Other accrued liabilities			677,106			(32,399	)
	Deferred revenue			—			(15,000	)
		Net cash provided by operating activities		492,085			1,340,243
CASH FLOWS FROM INVESTING ACTIVITIES:
	Property additions			(593,745	)		(138,139	)
	Acquired license agreement			(375,000	)		—
		Net cash used in investing activities:		(968,745	)		(138,139	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Principal payments on capital lease obligations			(110,162	)		(138,421	)
	Proceeds from issuance of common stock			18,750			76,244
		Net cash used in financing activities		(91,412	)		(62,177	)
NET INCREASE (DECREASE) IN CASH				(568,072	)		1,139,927
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD				8,197,144			6,258,836
CASH & CASH EQUIVALENTS, END OF PERIOD			$	7,629,072		$	7,398,763
SUPPLEMENTAL CASH FLOW INFORMATION:
	Interest paid		$	8,678		$	22,973
	Income taxes paid		$	—		$	—

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. Additionally, the Company announced that it had entered the wireless marketplace with plans for a new product line. The entry into the wireless market may combine DPAC's expertise in high-density packaging with the need of the marketplace for wireless products. The initial product line for entry to this marketplace has been identified, but no prototypes have yet been built and the products are not under production. 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, our stockholders voted in favor of changing the Company name to DPAC Technologies Corp.

NOTE 2—Basis of Presentation

        The accompanying unaudited interim Condensed Financial Statements of DPAC® as of May 31, 2003 and for the three months ended May 31, 2003 and 2002, 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. DPAC® and DPAC Technologies® are registered trademarks of DPAC Technologies Corp.

        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 fiscal year ended February 28, 2003. Operating results for the three months ended May 31, 2003 are not necessarily indicative of the results that may be expected for the full year ending February 29, 2004.

NOTE 3—New Accounting Pronouncements

        In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2003 and the recognition provisions of FIN 45 effective March 1, 2003. Such adoption did not have a material impact on our financial statements.

        In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure ("SFAS 148"). SFAS 148 amends Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), to provide

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alternative methods for voluntary transition to the fair value method of accounting for stock-based employee compensation prescribed by SFAS 123. SFAS 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company adopted the disclosure provisions of SFAS 148 effective February 28, 2003 and has included the additional required disclosures below under "Stock-Based Compensation." Such adoption did not impact our results of operations and financial position since we have not adopted the fair value method. However, should we be required to adopt the fair value method in the future, such adoption could have a material impact on our results of operations and financial position.

        In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). In general, a variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company adopted the provisions of FIN 46 effective March 1, 2003 and such adoption did not have a material impact on its consolidated financial statements since the Company currently has no variable interest entities.

        In May 2003, the FASB issued Statement of Financial Accounting Standards, Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS 150 will have a significant impact on its financial statements.

Stock Based Compensation

        Pursuant to SFAS 123, the Company has elected to continue using the intrinsic value method of accounting for stock-based awards granted to employees and directors in accordance with Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its stock option and purchase plans. As a result, we generally only record compensation expense for stock-based awards granted with an exercise price below the market value of the Company's stock at the date of grant.

        SFAS 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, requires the disclosure of pro forma net income and earnings per share. Under SFAS 123, and as amended by SFAS 148, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values.

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        The Company's calculations were made using the Black-Scholes option-pricing model, with the following weighted-average assumptions:

	For the three months ended May 31,
	2003		2002
Assumptions
Expected life - months	41		39
Stock volatility	103	%	106	%
Risk-free interest rate	4.1	%	5	%
Dividends during the expected term	none		none

        The Company's calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. If the fair values of the awards had been amortized to expense over the vesting period of the awards, the Company's results would have been as follows:

		For the three months ended May 31,
		2003			2002
Net income as reported		$	(932,566	)	$	803,254
Pro forma net income			(1,159,000	)		391,000
Net income per share as reported:
	Basic	$	(0.04	)	$	0.04
	Diluted	$	(0.04	)	$	0.04
Pro forma net income per share:
	Basic	$	(0.06	)	$	0.02
	Diluted	$	(0.06	)	$	0.02

NOTE 4—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 due to changes in the marketplace or 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 months ended May 31, 2003, sales to three major customers accounted for 28%, 22% and 21%, of net sales. Accounts receivable from these three customers accounted for 62% of total net accounts receivable at May 31, 2003. During the three months ended May 31, 2002, sales to two major customers accounted for 45% and 17% of net sales. Accounts receivable from these two customers accounted for 43% of total net accounts receivable at May 31, 2002. Any reduction in purchases by, or inability to collect receivables from, such customers could have a material adverse effect on the Company.

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NOTE 5—Stock Options

        The following table summarizes stock option activity under DPAC's 1985 and 1996 Stock Option Plans for the three months ended May 31, 2003:

		Number of Shares		Exercise Price Per Share		Number of Options Exercisable
Balance, February 28, 2003		2,970,770		$	0.94 - 7.56	1,767,504
	Granted	1,229,000		$	0.94 - 1.11
	Exercised	(18,750	)	$	1.00 - 1.00
	Cancelled	(65,900	)	$	0.99 - 6.00
Balance, May 31, 2003		4,115,120		$	0.94 - 7.56	2,262,395

        At May 31, 2003, a total of 2,830,132 shares were available for future grants 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.

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

	Three months ended May 31,
	2003	2002
Shares used in computing basic net income per share	20,988,000	21,016,000
Dilutive effect of stock options(1)	—	358,000
Shares used in computing diluted net income per share	20,988,000	21,374,000

⁽¹⁾

Potential common shares of 159,000 have been excluded from diluted weighted average common shares for the three-month period ended May 31, 2003, 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 24% and 15% of net sales for the three months ended May 31, 2003 and 2002, respectively.

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NOTE 8—Income Taxes

        We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax bases of assets and liabilities. DPAC regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. In the second quarter of fiscal year 2003, the Company reversed a valuation allowance on its deferred tax assets. 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. Subsequent to the reversal of the valuation allowance in fiscal year 2003, we experienced an unexpected decrease in our operating results which continued through the first quarter of fiscal year 2004. If we continue to operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to record a valuation allowance against all or a significant portion of our deferred tax assets which could substantially increase our effective tax rate for such period.

NOTE 9—Commitments and Contingencies

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 August 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. 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.

        On June 7, 2002, SimpleTech petitioned the U.S. Supreme Court for review of the U.S. Court of Appeals affirmance. 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. On March 6, 2003, the U.S. Court of Appeals vacated the September 23, 1998 lawsuit and sent the case back to the U.S. District Court for further consideration. On May 19, 2003, the U.S. District Court set a briefing schedule for the Company's motion for summary judgment of no infringement under the doctrine of equivalents. According to this schedule, a hearing on the motion will be held August 25, 2003. The Court also set a pretrial conference for October 20, 2003, and a trial

9

date of January 13, 2004. Costs of defense of this lawsuit could be substantial, and the ultimate outcome of the lawsuit, or any resulting potential loss is not presently determinable.

        As a result, the Company entered into settlement discussions with SimpleTech. Although the parties have not reached an agreement, in the quarter ended May 31, 2003, the Company recorded a reserve of $750,000 because of these discussions.

Other Contingent Contractual Obligations

        During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include: intellectual property indemnities to the Company's customers and licensees in connection with the use, sale and/or license of Company products; indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of California. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees may not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets.

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

FORWARD-LOOKING STATEMENTS

        Included in the Notes to Condensed 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.

        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 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, 2003 as filed with the Securities and Exchange Commission on May 28, 2003, 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 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 months ended May 31, 2003, sales to three major customers accounted for 28%, 22% and 21%, of net sales. Accounts receivable from these three customers accounted for 62% of total net accounts receivable at May 31, 2003. During the three months ended May 31, 2002, sales to two major customers accounted for 45% and 17% of net sales. Accounts receivable from these two customers accounted for 43% of total net accounts receivable at May 31, 2002. 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

        We intend to pursue diversification (which could include acquisitions) that will expand our 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 be identified 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

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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.

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:

•

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 material negative effect on the financial performance of DPAC, potentially reducing revenues and results of operations.

RESULTS OF OPERATIONS

Three Months Ended May 31, 2003 and 2002

        Net Sales.    Net sales for the quarter ended May 31, 2003 decreased by $6.8 million or 57% to $5.2 million from $11.9 million for the quarter ended May 31, 2002. This decrease in net sales is primarily due to three factors: a change in product mix toward a greater percentage of commercial stacking revenue that contained consigned memory as opposed to purchased memory, a significant decrease in the average selling price of the memory content of memory stacking, and a 16% decrease in the total quantity of commercial stacks shipped.

        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 purchases 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 first quarter of fiscal year 2004, approximately 52% was related to memory stacking and 32% to service

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stacking, as compared with 67% and 14%, respectively, in the first quarter of fiscal year 2003. The remaining 16% and 19% of sales in the first quarters of fiscal year 2003 and 2002, respectively, were primarily related to other goods sold to the industrial, defense and aerospace sectors.

        DPAC has seen an 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 additional changes in demand for these proprietary products. See "Forward-Looking Statements," including the discussion under "Visibility of Marketplace."

        Gross Profit.    Gross profit in the first quarter of fiscal year 2004 decreased by $1.6 million or 58% to $1.2 million from $2.8 million in the comparable prior-year period. Gross profit as a percentage of sales declined slightly to 23% for the quarter ended May 31, 2003, as compared to 24% for the quarter ended May 31, 2002. The decrease in gross profit in absolute dollars is directly attributable to the decrease in revenues. The decrease in the gross margin percentage can primarily be attributed to decreased average selling prices as well as lower revenues available to absorb fixed manufacturing costs, partially offset by the increased percentage of revenues from service stacking, which has a higher gross margin percentage than revenues derived from memory stacking.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses decreased in the first quarter of fiscal year 2004 by $403,000 or 26%, from the first quarter of the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses increased to 23% of net sales for the quarter ended May 31, 2003 as compared to 13% for the same period in the prior fiscal year. The decrease in absolute dollars in selling, general and administrative expenses is primarily attributed to decreased levels of compensation expense and acquisition search costs. The increase as a percentage of revenue is primarily due to decreased revenues.

        Reserve for Litigation.    During the quarter ended May 31, 2003, DPAC entered into settlement discussions for its outstanding patent litigation. Although we have not reached an agreement, the Company recorded a reserve of $750,000 because of these discussions. There were no similar charges in the prior year.

        Research and Development.    Research and development costs increased by $320,000 or 70% for the quarter ended May 31, 2003 from the first quarter of the prior fiscal year. For the quarter ended May 31, 2003 research and development expense represented 15% of net sales as compared to 4% of net sales from the same quarter in the previous fiscal year. The increase in absolute dollars spent on research and development is the result of the Company's efforts to expand into the wireless marketplace and develop new stacking technologies. The increase as a percentage of revenues is primarily due to decreased revenue levels. The Company is continuing to invest in research and development for new products. See "Forward-Looking Statements."

        Interest.    For the three months ended May 31, 2003, interest income decreased by $18,000 from the same period last year due primarily to the impact of declining interest rates on the amount we are able to earn on our cash balances. Interest expense decreased by $14,000 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 May 31, 2003, the Company recorded a net income tax benefit at the rate of 38% or $571,000. The effective income tax rate for the quarter ended May 31, 2002 was zero. The difference in tax rates is attributed to the fact that, in the comparable prior-year 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 determination by management that the future realization of the net deferred tax assets was judged to be more likely that not. The Company exercises significant judgment relating to projected future taxable income to determine the recoverability of any tax assets recorded on the balance sheet. If judgments regarding

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recoverability of deferred tax assets are not accurate, the Company could be required to record additional reserves against deferred tax assets in future periods.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's primary source of liquidity for the three months ended May 31, 2003 and May 31, 2002 was from our cash balances and cash provided by operations. Net cash provided by operating activities during the three months ended May 31, 2003 of approximately $492,000 was substantially provided by non-cash depreciation and amortization expense, collections of accounts receivable, an increase in accrued expenses, and partially offset by the net loss, deferred taxes, and a reduction in accounts payable. For the three months ended May 31, 2002 net cash provided by operating activities was approximately $1,340,000 and consisted primarily of net income and non-cash depreciation and amortization expense.

        The Company purchased for cash approximately $594,000 and $138,000 in new equipment during the three months ended May 31, 2003 and 2002, respectively. Additionally, during the first quarter ended May 31, 2003, the Company paid $375,000 for marketing and manufacturing rights to an advanced imaging product. The Company expects that it may incur additional 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."

        Net cash used in financing activities was approximately $91,000 and $62,000 for the three months ended May 31, 2003 and 2002, respectively, and principally relates to payments on capital leases offset by proceeds from the issuance of common stock.

        As of May 31, 2003, our future commitments under capital leases and term debt through fiscal year 2006 were $292,000.

        Additionally, we have available a line of credit with a bank providing for borrowings of up to 80% of eligible accounts receivable, as defined, not to exceed $3,000,000. The credit facility bears interest at the bank's prime rate and expires in August 2004. The agreement requires the Company to maintain certain financial covenants that the Company was in compliance with at May 31, 2003. Such covenants also restrict the Company's ability to pay dividends on its common stock.

        Management believes that our positive cash position, together with working capital, cash from operations, and the current credit facility, should be adequate to implement management's business plan and to meet our cash needs for at least the near future. The actual amount and timing of working capital and capital expenditures that we may incur in future periods may vary significantly and will depend upon numerous factors, including the amount and timing of the receipt of revenues from operations, any potential acquisitions, an increase in manufacturing capabilities, the timing and extent of the introduction of new products and services and growth in personnel and operations. There can be no assurance that additional financing will be available when needed on terms favorable to the Company, if at all. If internally generated funds are inadequate, we may scale back expenditures or seek other financing, which might include sales of equity securities that could dilute existing shareholders. See the discussion regarding "Cautionary Statements" under "Forward-Looking Statements" above.

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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

Contractual Obligations	Total		Less than 1 Year		1 to 3 Years
Capital Lease Obligations	$	292,000	$	214,000	$	78,000
Operating Lease Obligations	$	370,000	$	361,000	$	9,000
Purchase Obligations	$	1,105,000	$	1,105,000		—
Total	$	1,767,000	$	1,680,000	$	87,000

OFF-BALANCE SHEET ARRANGEMENTS

        We do not have any material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our results of operations or financial condition.

NEW ACCOUNTING PRONOUCEMENTS

        See Note 3 to financial statements in Item 1. Note 3 is incorporated herein by this reference.

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.

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PART II—OTHER INFORMATION

ITEM 1—Legal Proceedings

        The Company is engaged in a lawsuit with SimpleTech (formerly Simple Technology, Inc.) in connection with its lawsuit alleging that the Company's stacking technology infringed on a SimpleTech Stacking patent. Costs of defense of this lawsuit could be substantial, and the ultimate outcome of the lawsuit or any resulting potential loss is not presently determinable.

        As a result, the Company entered into settlement discussions with SimpleTech. Although the parties have not reached an agreement, in the quarter ended May 31, 2003, the Company recorded a reserve of $750,000 because of these discussions

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

        The Company recently expanded into the wireless marketplace through the introduction of its Airborne™ wireless engines. The Airborne™ wireless subsystem enables an original equipment manufacturer to add wireless capabilities to a wide range of systems and equipment, including industrial, scientific, medical and automotive applications. Airborne™ can easily replace cables with reliable wireless technology that incorporates data acquisition, real-time processing and an industry standard wireless interface in a single package. The integration of Airborne into an existing system or product line enables the creation of a fully integrated wireless communications network.

ITEM 6—Exhibits and Reports on Form 8-K

(a)

Exhibits



99.1

Cautionary Statements are incorporated herein by reference to pages 21 through 29, inclusive, of the Registrant's Form 10-K filed May 28, 2003 with the Securities and Exchange Commission.



99.2

Certification of Chief Executive Officer and Chief Financial Officer.



(b)

Reports on Form 8-K—We filed a Form 8-K on April 14, 2003, filing under Items 7 & 12, the news release related to our earnings for the fiscal year ended February 28, 2003 and the accompanying Condensed Balance Sheet Information (Unaudited) and Condensed Statement of Income (Unaudited).

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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)

July 10, 2003 Date	By:	/s/  TED BRUCE Ted Bruce, Chief Executive Officer
July 10, 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: July 10, 2003

    /s/ TED BRUCE Ted Bruce
Chief Executive Officer

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: July 10, 2003

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

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

DPAC Technologies Corp. Condensed Balance Sheets (Unaudited)
DPAC Technologies Corp. Condensed Statements of Operations (Unaudited)
DPAC Technologies Corp. Condensed Statements of Cash Flows (Unaudited)
DPAC TECHNOLOGIES CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

ITEM 2—Management's Discussion and Analysis of Financial Condition and Results 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 Report that are not historical facts, including all statements about our 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.

Disclosure About Terrorist Risk

        We did not experience any direct impact from the September 11, 2001 terrorist attacks on the United States other than minor delays in certain material shipments due to disruptions in the air transportation system. These delays did not have a material impact on us. We are unable to estimate or predict what future impact these events will have on us, our customers, our suppliers and the market demand for our products. Any production delays or shutdowns, reduction in demand or loss of customers due to terrorist attacks could have a negative impact on our results of operations and future sales.

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. Our memory and future wireless products are subject to obsolescence or price erosion because semiconductor manufacturers are continuously introducing chips with the same or greater memory density as our custom modules. As a result, memory products typically have a product life of not more than three to five years.

        Our future success depends on our ability to develop new products and product enhancements to keep up with technological advances and to meet customer needs. Any failure by us 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 our financial condition and results of operations. Additionally, the Company could incur new operating costs with the introduction of new products.

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

Uncertainty of Market Acceptance or Profitability of New Products

        The introduction of new products, such as our announced product plans for the wireless marketplace, will require the expenditure of an unknown amount of funds for research and development, tooling, manufacturing processes, inventory and marketing. In order to successfully develop products, we will need to successfully anticipate market needs and may need to overcome rapid technological change and competition. In order to achieve high volume production, we will need to make substantial investments in inventory and capital equipment or, as currently contemplated, we will need to out-source production to third parties or enter into licensing arrangements. We are inexperienced in the wireless industry, and our plans in that industry are unproven. We have limited marketing capabilities and resources and are dependent upon internal sales and marketing personnel and a network of independent sales representatives for the marketing and sale of our 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 that have in the past and may in the future negatively affect our operations. We are dependent on a limited

number of suppliers for semiconductor devices used in our products, and we have no long-term supply contracts with any of them.

        Due to the cyclical nature of the semiconductor industry and competitive conditions, we may experience difficulties in meeting our 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 our products, increase our cost of goods sold and have a material adverse effect on our business, financial condition and results of operations.

Concentration of Credit Risk

        We grant 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. A decision by a significant customer to substantially decrease or delay purchases from us or our inability to collect receivables from any of these customers could have a material adverse effect on our business, financial condition, and results of operations.

Dependence on Defense-Related Business

        We have historically derived a portion of our revenues from defense-related contracts. As a result, our business may be 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. We have reduced, and attempt to continue to reduce, our dependence on defense-related business by developing products with commercial applications, although such products generally have lower margins than defense-related products, and this adversely affects our results of operations and cash flows.

Intellectual Property Rights

        Our ability to compete effectively is dependent on our proprietary know-how, technology and patent rights. We hold U.S. patents on certain aspects of our three-dimensional stacking technology and have applied for additional patents. There can be no assurance that our patent applications will be approved, that any issued patents will afford our products any competitive advantage or that any of our products 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 our present or future products.

        We are involved from time to time in claims and litigation over intellectual property rights, which may adversely affect our ability to manufacture and sell our products.

        The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. We believe that it may be necessary, from time to time, to initiate litigation against one or more third parties to preserve our intellectual property rights. In addition, from time to time, we have received, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties' proprietary rights, which claims could result in litigation. Such litigation would likely result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in such litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of certain products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to use the infringed technology. Such a license may not be available on commercially reasonable terms, if at all. Our failure to obtain a license or our failure to obtain a license on commercially reasonable terms could cause us to incur substantial costs and suspend manufacturing products using the infringed technology. If we obtain a license, we would likely be required to make royalty payments for sales under the license. Such payments would increase our costs of revenues and reduce our gross profit. In addition, any litigation, whether as plaintiff or as defendant, would likely result in significant expense to us and divert the efforts of our technical and management personnel,

whether or not such litigation is ultimately determined in our favor. In addition, the results of any litigation are inherently uncertain.

Management of Growth or Diversification

        Successful expansion or diversification of the Company's operations will depend on 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 new product introductions. To manage growth or diversification effectively, we will have to continue to implement and improve our operational, financial and management information systems, procedures and controls. As we expand or diversify, we may from time to time experience constraints that will adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth or diversification effectively could adversely affect our financial condition and results of operations.

Competition

        There are memory companies that offer or are in the process of developing three-dimensional products, including ChipPac, Amcor, Staktek, Samsung, Infineon, Elpedida and others. Some of such companies have greater financial, manufacturing and marketing capabilities than we have. We could also experience competition from established and emerging computer memory companies. There can be no assurance that our products will be competitive with existing or future products, or that we will be able to establish or maintain a profitable price structure for our products.

        We expect to face competition from existing competitors and new and emerging companies that may enter our existing or future markets with similar or alternative products, which may be less costly or provide additional features. In addition, some of our significant suppliers are also our competitors, many of who have the ability to manufacture competitive products at lower costs as a result of their higher levels of integration. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally. Competition may arise due to the development of cooperative relationships among our current and potential competitors or third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors will emerge and rapidly acquire significant market share.

        We expect our competitors will continue to improve the performance of their current products, reduce their prices and introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or loss of market acceptance of our products. In addition, our competitors may develop enhancements to or future generations of competitive products that may render our technology or products obsolete or uncompetitive.

Product Liability

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

Variability of Gross Margin

        Any change in the gross margins can typically be attributed to the type of products, and the amount of purchased memory included in sales during the year as well as the amount of royalty income generated during the periods. As we market our 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 our product, prices could range from less than $5 for commercial custom modules to over a thousand dollars for high-end military specification custom modules.

        We expect that our 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 our 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 our products may decline depending upon the price changes of DRAM, SRAM and Flash semiconductors, which would have a material adverse effect on our net sales and could, have a material adverse effect on our business, financial condition and results of operation. Accordingly, our ability to maintain or increase net sales will be highly dependent upon our 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 our gross margin unless we are able to reduce our cost per unit to offset declines in product selling prices. There can be no assurance that we will be able to increase unit sales volumes, introduce and sell new products or reduce our cost per unit. We also expect that our business may experience significant seasonality to the extent it sells a material portion of our products in Europe (due to vacation cycles) and to the extent, our exposure to the personal computer market remains significant.

        Our average sales prices have historically declined, and we anticipate that the average sales prices for our products will continue to decline and could negatively impact our gross profit margins.

        Semiconductor companies and OEM's are placing increasing price pressure on module manufactures, which in turn, has resulted in downward pricing pressure on our products with certain competitors aggressively reducing prices in an effort to increase market share. Fierce competition among third-party suppliers has also increased, at the same time the major semiconductor companies, who are supplying their own stacking solutions with the goal to sell semiconductors, can result in little-to-no-value for the service providers of stacking. To offset declining average sales prices, we must reduce manufacturing costs and ultimately develop new products with lower costs or higher average sales prices. If we cannot achieve such cost reductions or product improvements, our gross margins will decline.

Decline of Demand for Product Due to Downturn of Related Industries

        We 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 or a technology shift, could have a material adverse impact on the demand for our products, and therefore, a material adverse effect on our business, financial condition and results of operations. There can be no assurance that our 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 our products.

Fluctuations in Operating Results

        Our 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 our results of operations; include, adverse changes in the mix of products sold, the inability to procure required components, the size of investments in new technologies or product lines, and the partial or complete loss of a principal customer or the reduction in 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 our results of operations include fluctuating market demand for and declines in the selling prices of our products, decreases or increases in the costs of the components of our products, market acceptance of new products and enhanced versions of our products, our competitors' selling products that compete with our products at lower prices or on better terms than we sell our products, delays in our the introduction of new products and in our making enhancements to existing products, manufacturing inefficiencies associated with the start up of new product introductions, or our 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.

        Our operating results may also be affected by the timing of new product announcements and releases by us or our 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 our inventories due to price declines, unexpected product returns, the timing of expenditures in anticipation of increased sales, cyclicality in our targeted markets, and expenses associated with acquisitions. In particular, declines in DRAM, SRAM and Flash semiconductor prices could affect the valuation of our inventory, the pricing of services, which could result in adverse changes in our business, financial condition and results of operations. Many of these same conditions apply to the products being developed for the wireless market.

        Sales of our 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. We have experienced and could continue to experience unexpected reductions in sales of products as customers anticipate new product purchases. In addition, to the extent that we manufacture 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, we 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, we have had to write-down and write-off excess or obsolete inventory. To the extent that we are unsuccessful in managing product transitions, our business, financial condition and results of operations could be materially and adversely affected.

        From time to time, our customers may purchase products from us in large quantities over a short period of time, which may cause demand for our products to change rapidly. Due to these and other uncertainties associated with semiconductor infrastructure deployments and OEMs' purchasing strategies, we may experience significant fluctuations in demand from our customers. Such fluctuations could cause a significant increase in demand that could exceed our production capacity and could negatively impact our ability to meet customers' demands as well as potentially impact product quality. Alternatively, such fluctuations could cause a significant reduction in revenues, which could have a material adverse effect on our business, results of operations and financial condition. We cannot guarantee that a major customer will not reduce, delay or eliminate purchases from us, which could have a material adverse effect on our business, results of operations and financial condition.

        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 us to reduce our operating expenses in any particular period if our expectations for net sales for that period are not met or our investment objective for future revenues streams need to continue for potential success. Accordingly, there can be no assurance that we will be able to be profitable in any future period. We believe that period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as indications of good future performance. Due to the foregoing factors, it is likely that in some future period our operating results will be below the expectations of public market analysts or investors. In such event, the market price of our Common Stock or other securities would be materially and adversely affected.

International Sales

        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 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 our

competitors may have the ability to manufacture competitive products in Asia at lower costs than we can manufacture them.

        We are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether the United States or other countries will implement quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products. Because sales of our products have been denominated to date in United States dollars, increases in the value of the United States dollar could increase the price of our 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 our results of operations. Some of our customer's purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, we may be limited in our ability to enforce any rights under such agreements and to collect damages, if awarded. These factors could have a material adverse effect on our business, financial condition and results of operations.

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, assume contingent liabilities, or use other company assets available at the time of acquisition. 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:

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Problems assimilating the purchased operations, technologies or products;



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Costs associated with the acquisition;



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Adverse effects on existing business relationships with suppliers and customers;



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Sudden market changes;



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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 products. 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 that 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 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. Additionally, as the company lease period expires the Company may be required to move to new locations, which may present risks associated with such a move.

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.

Key Personnel

        The Company may fail to attract or retain the qualified technical sales, marketing and managerial personnel required to operate its business successfully.

        DPAC's future success depends, in part, upon ability to attract and retain highly qualified technical, sales, marketing and managerial personnel. Personnel with the necessary expertise are scarce and competition for personnel with proper skills is intense. Also, attrition in personnel can result from, among other things, changes related to acquisitions, as well as retirement or disability. The Company may not be able to retain existing key technical, sales, marketing and managerial employees or be successful in attracting, assimilating or retaining other highly qualified technical, sales, marketing and managerial personnel in the future. If the Company is unable to retain existing key employees or is unsuccessful in attracting new highly qualified employees, business, financial condition and results of operations of DPAC could be materially and adversely affected.

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 us, 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 May 31, 2003, 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
July 10, 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 May 31, 2003, 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
July 10, 2003

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EXHIBIT 99.2