Filed by Bowne Pure Compliance

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2008


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.)

5675 HUDSON INDUSTRIAL PARK, HUDSON, OHIO		44236
(Address of Principal Executive Offices)		(Zip Code)

(800) 553-1170
(Issuer’s Telephone Number, Including Area Code)

(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 þ NO o

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


Large Accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller Reporting Company þ
		(Do not check if a smaller reporting company)

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

YES o NO þ

The number of shares of common stock, no par value, outstanding as of July 22, 2008 was 95,015,142.

CAUTIONARY STATEMENT RELATED TO FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, market conditions, demand and pricing trends, future expense levels, competition in our industry, trends in average selling prices and gross margins, product and infrastructure development, market demand and acceptance, the timing of and demand for next generation products, customer relationships, employee relations, and the level of expected future capital and research and development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to DPAC Technologies Corp.’s (“DPAC” or the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect that DPAC or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The actual results of DPAC may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those discussed under Part I, Item 2, “Management’s Discussion and Analysis or Plan of Operation.” Because of these and other factors that may affect DPAC’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that DPAC files from time to time with the Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q or 10-QSB and Annual Reports on Form 10-K or 10-KSB.

HOW TO OBTAIN DPAC’S SEC FILINGS

All reports filed by DPAC with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549. DPAC also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.dpactech.com as soon as reasonably practicable after filing such material with the SEC.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DPAC Technologies Corp.

Condensed Consolidated Balance Sheets


	June 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	22,523		$	257,189
Accounts receivable, net		1,253,939			1,645,540
Inventories		1,691,915			1,337,591
Prepaid expenses and other current assets		96,519			66,893

Total current assets		3,064,896			3,307,213

PROPERTY, Net		338,713			356,516

FINANCING COSTS, Net		134,511			31,667
TRADEMARKS		2,583,000			2,583,000
GOODWILL		3,822,503			3,822,503
OTHER INTANGIBLE ASSETS, Net		1,306,714			1,551,724
OTHER ASSETS		18,048			18,048


TOTAL	$	11,268,385		$	11,670,671


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility	$	1,620,000		$	1,982,000
Current portion of long-term debt		125,000			2,237,699
Current portion of capital lease obligations		12,333			11,910
Accounts payable		1,264,479			1,866,052
Accrued restructuring costs — current		186,703			268,988
Put warrant liability		193,500			129,000
Other accrued liabilities		477,774			556,128

Total current liabilities		3,879,789			7,051,777

LONG-TERM LIABILITIES:
Accrued restructuring costs, less current portion		—			51,692
Capital lease obligations, less current portion		15,404			21,619
Ohio Development loan, less current portion		2,079,948			2,119,633
Subordinated debt, less current portion		1,156,150			—

Total long-term liabilities		3,251,502			2,192,944

STOCKHOLDERS’ EQUITY:
Convertible, voting, cumulative, 9% series A preferred stock, $100 par value; 30,000 shares authorized; 21,250 and 0 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		2,014,203			—
Common stock, no par value; 120,000,000 shares authorized; 95,015,142 and 92,890,836 shares outstanding at June 30, 2008 and December 31, 2007, respectively		5,241,379			5,062,528
Preferred stock dividends distributable in common stock, 1,542,339 common shares		47,813			—
Accumulated deficit		(3,166,301	)		(2,636,578	)

Total stockholders’ equity		4,137,094			2,425,950


TOTAL	$	11,268,385		$	11,670,671

See accompanying notes to consolidated financial statements.

DPAC Technologies Corp.

Condensed Consolidated Statements of Operations
(Unaudited)


	For the quarter ended:						For the six months ended:
	June 30,			June 30,			June 30,			June 30,
	2008			2007			2008			2007

NET SALES	$	2,555,130		$	2,891,121		$	5,588,453		$	5,734,767

COST OF GOODS SOLD		1,426,667			1,712,952			3,208,167			3,368,526


GROSS PROFIT		1,128,463			1,178,169			2,380,286			2,366,241

OPERATING EXPENSES
Sales and marketing		312,168			349,196			636,304			772,193
Research and development		297,212			303,394			560,046			611,299
General and administrative		412,555			455,284			898,490			951,693
Amortization of intangible assets		122,505			122,505			245,010			245,010

Total operating expenses		1,144,440			1,230,379			2,339,850			2,580,195



INCOME (LOSS) FROM OPERATIONS		(15,977	)		(52,210	)		40,436			(213,954	)

OTHER (INCOME) EXPENSE:
Interest expense		155,312			381,155			421,503			757,256
Fair value adjustment for put warrant liability		(64,500	)		(54,400	)		64,500			(54,400	)

Total other expenses		90,812			326,755			486,003			702,856


LOSS BEFORE INCOME TAXES		(106,789	)		(378,965	)		(445,567	)		(916,810	)

INCOME TAX PROVISION		4,455			3,000			5,755			4,200


NET LOSS	$	(111,244	)	$	(381,965	)	$	(451,322	)	$	(921,010	)

PREFERRED STOCK DIVIDENDS		47,813			—			78,401			—


NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(159,057	)	$	(381,965	)	$	(529,723	)	$	(921,010	)


NET LOSS PER SHARE:
Net Loss — Basic and diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted		93,599,000			92,844,000			93,245,000			92,832,000

See accompanying notes to consolidated financial statements.

DPAC Technologies Corp.

Condensed Consolidated Statements of Cash Flows
(Unaudited)


	For the six months ended
	June 30,			June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(451,322	)	$	(921,010	)

Adjustments to reconcile net loss from operations to net cash used in operating activities:
Depreciation and amortization		300,065			320,353
Provision for bad debts		—			(810	)
Provision for obsolete inventory		30,000			13,000
Accretion of discount and success fees on debt		42,765			370,320
Amortization of deferred financing costs		21,650			72,706
Adjustment to put warrant liability		64,500			(54,400	)
Non-cash compensation expense		34,463			36,801

Changes in operating assets and liabilities:
Accounts receivable		391,601			(56,246	)
Inventories		(384,324	)		(101,743	)
Prepaid expenses and other assets		(29,626	)		(3,288	)
Accounts payable		(601,573	)		518,368
Accrued restructuring charges		(133,977	)		(186,049	)
Other accrued liabilities		(78,354	)		(59,792	)


Net cash used in operating activities		(794,132	)		(51,790	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(37,252	)		(27,398	)


Net cash used in investing activities:		(37,252	)		(27,398	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowing under revolving credit facility		(362,000	)		421,000
Net borrowing under short term notes		—			38,312
Repayments on bank term loan		(112,699	)		(100,002	)
Repayments on Ohio Development loan		(62,500	)		(41,667	)
Proceeds from Subordinated term debt		1,200,000			—
Repayment of Subordinated Debt		(2,000,000	)		—
Financing costs incurred		(124,494	)		—
Principal payments on capital lease		(5,792	)		(57,421	)
Net proceeds from issuance of preferred stock		2,064,203			—
Proceeds from issuance of common stock		—			4,136


Net cash provided by financing activities		596,718			264,358


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(234,666	)		185,170

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		257,189			37,929


CASH & CASH EQUIVALENTS, END OF PERIOD	$	22,523		$	223,099


SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	305,286		$	304,570

Income taxes paid	$	5,755		$	4,200


NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property under capital leases	$	—		$	13,769

Preferred stock fees and dividends paid in common stock	$	128,401		$	—

See accompanying notes to consolidated financial statements.

DPAC TECHNOLOGIES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 — Summary of Significant Accounting Policies

Nature of Operations

DPAC Technologies Corp., (“DPAC”) through its wholly owned subsidiary, QuaTech Inc., (“QuaTech”) designs, manufactures, and sells device connectivity and device networking solutions for a broad market. QuaTech sells its products through a global network of distributors, system integrators, value added resellers, and original equipment manufacturers (“OEM”). QuaTech designs and manufactures communication and data acquisition products for personal computer based systems. The Company sells to customers in both domestic and foreign markets.

Basis of Presentation

On April 28, 2005, DPAC entered into a merger agreement, as amended, with QuaTech for a transaction to be accounted for as a purchase under accounting principles generally accepted in the United States of America. The merger was approved by both QuaTech and DPAC shareholders on February 23, 2006 and was consummated on February 28, 2006. For accounting purposes, the transaction is considered a “reverse merger” under which QuaTech is considered the acquirer of DPAC. Accordingly, the purchase price was allocated among the fair values of the assets and liabilities of DPAC, while the historical results of QuaTech are reflected in the results of the combined company (the “Company”). The results of operations are those of QuaTech through the merger date, and combined QuaTech and DPAC after the merger date of February 28, 2006. All intercompany transactions and balances have been eliminated in consolidation.

Some historical amounts have been reclassified to be consistent with the current financial presentation.

Interim financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 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 complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

For further information, refer to the audited financial statements and footnotes thereto of DPAC for the year ended December 31, 2007 which was filed on Form 10-KSB on March 31, 2008.

Use of Estimates

In accordance with accounting principles generally accepted in the United States, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectibility of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

New Accounting Pronouncements

In December 2007 the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (FAS 141(R)) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160)”. FAS 141(R) will change how business acquisitions are accounted for and FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. FAS 141(R) and FAS 160 are effective for fiscal years beginning on or after December 15, 2008 (January 1, 2009 for the Company). The adoption of FAS 141(R) and FAS 160 are not expected to have a material impact on the Company’s consolidated financial statements.

SFAS No. 157, “Fair Value Measurements,” was adopted on January 1, 2008. SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosure about fair value measurements. SFAS 157 does not expand or require any new fair value measures, but is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. In February 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” which amends SFAS No. 157 by delaying the adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. The FASB also amended SFAS 157 to exclude SFAS No. 13 and its related interpretive accounting pronouncements that address leasing transactions. Accordingly, the adoption of this Standard in 2008 was limited to financial assets and liabilities, which affects the disclosure of our put warrant liability and our subordinated debt success fee. The adoption of SFAS 157, as amended, did not have a material impact on the Company’s financial condition, results of operations or cash flows.

SFAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:


	Level 1 —		Inputs are quoted prices in active markets for identical assets or liabilities.


	Level 2 —		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.


	Level 3 —		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The following table represents our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2008 and the basis for that measurement:

Fair Value Measurement at June 30, 2008 Using:

Significant

Quoted Prices in

Other

Significant

Total

Active Markets

Observable

Unobservable

Fair Value

for Identical Assets

Inputs

Measurement

(Level 1)

(Level 2)

(Level 3)

Put Warrant Liability

193,500

—

193,500

—

Subordinated Debt Success Fee

14,635

—

14,635

—

The Company valued the put warrant liability by calculating the difference between the Company’s closing stock price at the end of a reporting period and the exercise price per share multiplied by the number of warrants granted. In accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” (“SFAS 150”), the Company has classified the fair value of the warrants as a liability and changes in the fair value of the warrants are recognized in the earnings of the Company. The Company recognized a gain of $64,500 and a charge of $64,500 for the three and six months ended June 30, 2008 and a gain of $54,400 for the three and six months ended June 30, 2007, related to the change in value of the put warrant liability. In addition, the actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price. There was no change in the valuation technique used by the Company since the last reporting period.

The Subordinated Debt Agreement, which funded on January 31, 2008, provides for a formula driven success fee equal to 7.0 times the trailing twelve months EBITDA minus indebtedness plus cash, times 5.5%, to be paid at maturity or a triggering event. The success fee is being accounted for in accordance with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”), as a separate contingent component of the note and will be revalued at each reporting period. The success fee is calculated at the end of each reporting period based on the trailing twelve months EBITDA, with the resultant amount multiplied times the percentage of the loan period remaining at each measurement date. As such, the liability is trued up at each reporting period based on the time elapsed, with the remaining unamortized portion of the success fee accreted monthly as additional interest expense over the remaining term of the loan. The Company recorded a charge to earnings of $8,913 during the quarter ended June 30, 2008 as an increase to the success fee liability. There was no change in the valuation technique used by the Company since the last reporting period.

Note 2 — Liquidity

As of June 30, 2008 we had a cash balance of $23,000 and a deficit in working capital of $815,000. This compares to a cash balance of $257,000 and a deficit in working capital of $3.7 million at the end of 2007. During the quarter ended March 31, 2008, the Company consummated an equity and financing transaction that provided $491,000 in net cash after paying off the then due existing debt. These funds were used for working capital purposes and to bring our payables to a more current position. Going forward, the Company is dependent on financing its operations through the use of its bank line of credit and the contribution from future revenues. A downturn in our revenue levels can severely impact the availability under our line of credit and limit our ability to meet our obligations on a timely basis and finance our operations as needed. At June 30, 2008, we had remaining net availability under our line of credit of $185,000. However, availability may be impacted by the amount of qualifying receivables and there is no assurance that the Company will be able to obtain additional funding if and when it may need it.

NOTE 3 — Inventories

Inventories consist of the following:


	June 30,			December 31,
	2008			2007
Raw materials and sub-assemblies	$	1,048,044		$	850,798
Finished goods		882,239			695,531
Less: reserve for excess and obsolete inventories		(238,738	)		(208,738	)

Total net inventories	$	1,691,915		$	1,337,591

NOTE 4 — Debt

At June 30, 2008 and December 31, 2007, outstanding debt is comprised of the following:


	June 30,			December 31,
	2008			2007
Revolving credit facility	$	1,620,000		$	1,982,000


Long term debt:
Bank term debt	$	—		$	112,699
Less: current portion		—			(112,699	)

Net long-term portion	$	—		$	—


Ohio Development Loan	$	2,204,948		$	2,244,633
Less: current portion		(125,000	)		(125,000	)

Net long-term portion	$	2,079,948		$	2,119,633


Subordinated debt	$	1,200,000		$	1,500,000
Accretion of success fees		14,635			500,000
Less: Unamortized discount for stock warrants		(58,485	)		—

		1,156,150			2,000,000
Less: current portion		—			(2,000,000	)

Net long-term portion	$	1,156,150		$	—


Total Current Portion of Long-term Debt	$	125,000		$	2,237,699

Total Net Long-term Debt	$	3,236,098		$	2,119,633


Put warrant liability	$	193,500		$	129,000

On January 31, 2008, the Company consummated an equity and financing transaction which consisted of an issuance of preferred stock and the funding of a new senior bank line of credit and subordinated term loan. In conjunction with the closing on January 31, 2008, the Company terminated its lending relationships with and paid in full its debt obligations with National City Bank and the Subordinated Loan Agreement with the Hillstreet Fund, notwithstanding the put warrant liability for the Hillstreet Fund.

Revolving Credit Facility

The Company has a revolving line of credit with a bank providing for a maximum $3,000,000 working capital line of credit, with a floating interest rate at the bank’s prime rate (5.0% at June 30, 2008) plus 1.5%. Availability under the line of credit is formula driven based on applicable balances of the Company’s accounts receivable and inventories. Based on the formula, at June 30, 2008 the Company had availability to draw up to a maximum of approximately $1,805,000. The line of credit contains certain financial and other covenants that the Company was in compliance with at June 30, 2008. The Credit Facility is secured by substantially all the assets of the Company and expires on January 31, 2009.

Ohio Development Loan

On January 27, 2006 QuaTech entered into a Loan Agreement with the Director of Development of the State of Ohio pursuant to which QuaTech borrowed $2,267,000 for certain eligible project financing. The State of Ohio debt accrues interest at the rate of 8.0% per year. Payments of interest only were due and payable monthly from March 2006 through February 2007. Thereafter, QuaTech is obligated to make 48 consecutive monthly principal payments of $10,417 plus interest with the balance due on February 1, 2011. On February 1, 2011 QuaTech must also pay the State of Ohio a participation fee equal to the lesser of 10% of the maximum principal amount borrowed or $250,000. The State of Ohio debt is secured by all the assets of QuaTech which security interest is subordinated to the interest of the Bank. The participation fee is being accrued as additional interest each month over the term of the loan.

Subordinated Debt

On January 31, 2008, the Company entered into a Senior Subordinated Note and Warrant Purchase Agreement (“Agreement”) with Canal Mezzanine Partners, L.P. (“Canal”), for $1,200,000. The subordinated note has a stated annual interest rate of 13% and a five year maturity date. Interest only payments are payable monthly during the first five years of the note with all principal due and payable on the fifth anniversary of the note. The Agreement also provides for a formula driven success fee based on a multiple of the trailing twelve months EBITDA, to be paid at maturity or a triggering event, and for issuance of warrants entitling Canal to purchase 3% of the Company’s fully diluted shares at time of exercise at a nominal purchase price.

The warrants have a 10 year life and are exercisable at any time. The subordinated note has been discounted by the fair value of the detachable warrants, with a corresponding contribution to capital. The discount, calculated to be $63,800 at time of issuance, is amortized as additional interest expense and accretes the note to face value at maturity. The Company determined the fair value of the warrant by using the Black-Scholes pricing model and calculating 3% of fully diluted shares at time of issuance, including a potential 50 million common shares for the conversion of the outstanding Series A preferred stock, which equated to approximately 4.9 million shares and using the closing stock price on the date of the transaction of $0.014 per share.

The success fee is defined as equal to 7.0 times the trailing twelve months EBITDA minus indebtedness plus cash, times 5.5%, to be paid at maturity or a triggering event. The success fee is being accounted for in accordance with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” as a separate contingent component of the note and will be revalued at each reporting period. The success fee is calculated at the end of each reporting period based on the trailing twelve months EBITDA, with the resultant amount multiplied times the percentage of the loan period remaining at each measurement date. As such, the liability is trued up at each reporting period based on the time elapsed, with the remaining unamortized portion of the success fee accreted monthly as additional interest expense over the remaining term of the loan.

Put Warrant Liability

In connection with the Subordinated Loan Agreement between the Company and the Hillstreet Fund, entered into on February 28, 2006 and which was paid in full on January 31, 2008, the Company issued 5,443,457, and per certain default provisions is obligated to issue 1,006,000 additional, 10-year warrants (“Put Warrants”) at an exercise price of $0.00001 per share. The warrants expire on February 28, 2016. The Put Warrants continue to remain outstanding and can be “put” to the Company at any time based on criteria set forth in the warrant agreement at a price equal to the greatest of (i) the fair market value as established by a capital transaction or public offering; (ii) six times the Company’s EBITDA for the trailing 12 month period; and (iii) an appraised value. The Company has determined to value the put warrant liability by calculating the difference between the Company’s closing stock price at the end of a reporting period and the exercise price per share multiplied by the number of warrants granted. In accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” (“SFAS 150”), the Company has classified the fair value of the warrants as a liability and changes in the fair value of the warrants are recognized in the earnings of the Company. The Company recognized a gain of $64,500 for the three months ended June 30, 2008 and a net charge to earnings of $64,500 for the six months ended June 30, 2008, and a gain of $54,400 for both the three and six months ended June 30, 2007, related to the change in value of the put warrant liability. In addition, the actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price.

The aggregate amounts of combined long term debt, excluding the put warrant liability, maturing as of June 30th in future years is $125,000 in 2009, $125,000 in 2010, $1,944,000 in 2011, $0 in 2012, and $1,200,000 in 2013.

NOTE 5 — Concentration of Customers

No single customer accounted for more than 10% of net sales for the three or six months ended March 31, 2008 and 2007, respectively. Accounts receivable from one customer accounted for 11% of net accounts receivable at June 30, 2008. The Company has and will have customers ranging from large OEM’s to startup operations. Any inability to collect receivables from any such customers could have a material adverse effect on the Company’s financial position and liquidity.

NOTE 6 — Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities by including other common stock equivalents, such as stock options and warrants, in the weighted-average number of shares outstanding for a period. Common stock equivalents are excluded from the calculation in loss periods, as the effect is anti-dilutive.

The tables below set forth the reconciliation of the denominator of the income (loss) per share calculations:


	Three-months ended
	June 30,
	2008		2007
Shares used in computing basic net income per share		93,599,000		92,884,000
Dilutive effect of stock options and warrants(1)		—		—

Shares used in computing diluted net income per share		93,599,000		92,884,000


	Six-months ended
	June 30,
	2008		2007
Shares used in computing basic net income per share		93,245,000		92,832,000
Dilutive effect of stock options and warrants(2)		—		—

Shares used in computing diluted net income per share		93,245,000		92,832,000


(1)		Potential common shares of 4,448,000 and 5,030,000 have been excluded from diluted weighted average common shares for the three month periods ended June 30, 2008 and 2007, respectively, as the effect would be anti-dilutive.

(2)		Potential common shares of 4,593,000 and 4,871,000 have been excluded from diluted weighted average common shares for the six month periods ended June 30, 2008 and 2007, respectively, as the effect would be anti-dilutive.

The number of shares of common stock, no par value, outstanding at June 30, 2008 was 95,015,142.

At June 30, 2008 the Company had outstanding 21,250 shares of convertible, voting, cumulative, 9% Series A preferred stock. Dividends accrue and are payable quarterly in arrears at the annual rate of 9% of the Original Issue Price of $100 per share, either in cash or common stock, at the decision of the Company. If the Company is not listed for trading on the American Stock Exchange, a NASDAQ Stock Market or the New York Stock Exchange on December 31, 2009, effective beginning January 1, 2010 dividends shall accrue and be paid quarterly in arrears at the annual rate of 15%. For purposes of valuing the common stock payable to holders of Series A Preferred in lieu of cash with respect to such quarterly dividends, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the 10 day period ending the day prior the dividend payment date. To date, the Company has elected to pay such dividends in common stock. At June 30, 2008, accrued dividends of $47,813 equate to 1,542,339 common shares issuable. During the quarter ended June 30, 2008, the Company issued 764,688 common shares in payment of the accrued dividends of $30,588 at March 31, 2008.

Series A preferred stock can, at the option of the holder, be converted into fully paid shares of common stock. The number of shares of common stock into which shares of Series A preferred may be converted shall be obtained by multiplying the number of shares of Series A preferred to be converted by the Original Issue Price of $100 and dividing the result by the product of $0.034 (the “Reference Price”) times 1.25, which equates to 50 million common shares should the total number of outstanding preferred shares be converted. After December 31, 2009, the Company has can redeem the Series A preferred shares at a price per share equal to the Original Issue Price. The holders of preferred stock have preference in the event of liquidation or dissolution of the Company over the holders of common stock.

NOTE 7 — Stock Options

Stock-Based Compensation

The Company follows Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “SFAS 123R”). SFAS 123R requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options and stock issued under our employee stock plans. SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our consolidated statements of operations. We adopted SFAS 123R using the modified prospective transition method, which requires that compensation expense be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards which have not vested as of the date of adoption.

Under the terms of the Company’s 1996 Stock Option Plan, (the “Plan”), qualified and nonqualified options to purchase shares of the Company’s common stock are available for issuance to employees, officers, directors, and consultants. As amended on February 23, 2006, the Plan initially calls for options to purchase 15,000,000 shares with an increase to the total number of options available in the plan by 4% of the number of outstanding shares of common stock each year until the end of the option plan. On February 23, 2006, the termination date for the plan was extended to January 11, 2011. At June 30, 2008, 9,934,000 shares were available for future grants under the Plan.

Options issued under this Plan are granted with exercise prices at fair market value and generally vest immediately for options granted to directors and at a rate of 25% per year for options granted to employees, and expire within 10 years from the date of grant or 90 days after termination of employment.

During the six-month periods ended June, 2008 and 2007, the Company recognized compensation expense for stock options of $34,463 and $36,801 respectively. The expense is included in the consolidated statement of operations as general and administrative expense. Total unamortized compensation expense related to non-vested stock option awards at June 30, 2008 was $246,000, which is expected to be recognized over a weighted-average period of 2.1 years. The Company’s calculations were made using the Black-Scholes option-pricing model, with the following weighted average assumptions:


	For the
	Six Months Ended:
	June 30, 2008			June 30, 2007
Expected life	6.5 Years			3.5 Years
Volatility		195	%		131	%

Interest rate		2.8	%		4.7	%
Dividend yield	None			None

Expected volatilities are based on historical volatility of the Company’s stock. The Company used historical experience with exercise and post employment termination behavior to determine the options’ expected lives. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.

The following table summarizes stock option activity under DPAC’s 1996 Stock Option Plans for the six months ended June 30, 2008:


				Weighted-
				Average		Weighted-Average	Aggregate
	Number of			Exercise		Remaining	Intrinsic
	Shares			Price		Contractual Life	Value
Outstanding — December 31, 2007		10,545,001		$	0.68
Granted (weighted-average fair value of $0.03)		3,250,000		$	0.04
Exercised		—			—
Canceled		(422,435	)	$	1.67

Outstanding — June 30, 2008		13,372,556		$	0.49	6.7 Years	$	14,259

Exercisable — June 30, 2008		8,435,066		$	0.75	5.2 Years	$	14,259

NOTE 8 — 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. The Company’s Chief Executive Officer reviews financial information and makes operational decisions based upon the Company as a whole. Therefore, the Company reports as a single segment.

The Company had export sales of 28% and 25% of net sales for the three and six months ended June 30, 2008 and 20% and 13% of net sales for the three and six months ended June 30, 2007, respectively. Export sales were primarily to Canada, Brazil, and Western European countries. Foreign sales are made in U.S. dollars. All long-lived assets are located in the United States.

NOTE 9 — Income Taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax bases of assets and liabilities. 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. 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. To the extent that recovery is not believed to be more likely than not, a valuation allowance is established. The Company has established a valuation allowance associated with its net deferred tax assets.

The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Evidence evaluated by management included operating results during the most recent three-year period and future projections, with more weight given to historical results than expectations of future profitability, which are inherently uncertain. The Company’s net losses in recent periods represented sufficient negative evidence to require a full valuation allowance against its net deferred tax assets under SFAS No. 109. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of deferred tax assets.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (or “FIN 48”) as of January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. This Interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The implementation of FIN 48 did not have a material impact on the Company’s financial statements. There were no unrecognized tax benefits as of the date of adoption of FIN 48 and therefore, there is no anticipated effect upon the Company’s effective tax rate. Interest, if any, under FIN 48 will be classified in the financial statements as a component of interest expense and statutory penalties, if any, will be classified as a component of general and administrative expense.

NOTE 10 — Commitments and Contingencies

Legal Proceedings

We are subject to various legal proceedings and threatened legal proceedings from time to time as part of our business. We are not currently party to any legal proceedings nor are we aware of any threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe would have a material adverse effect on our business, financial condition and results of operations. However, any potential litigation, regardless of its merits, could result in substantial costs to us and divert management’s attention from our operations. Such diversions could have an adverse impact on our business, results of operations and financial condition.

Other Contingent Contractual Obligations

Over time, the Company has made and continues to make certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include: indemnities to past, present and future directors, officers, employees and other agents pursuant to the Company’s Articles, Bylaws, resolutions, agreements or otherwise; 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; and indemnities pursuant to contracts involving protection of selling security holders against claims by third parties arising from any alleged inaccuracy of information in registration statements filed by the Company with the SEC or involving indemnification of the other parties to contracts from any damages arising from misrepresentations made by the Company. 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 future payments that the Company could potentially be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets.

The Company is party to severance agreements with the current CEO and CFO that provide for compensation equivalent to one year of compensation and six months of compensation, respectively, should either individual be terminated for any reason other than cause.

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

Please refer to the Cautionary Statement Related to Forward-Looking Statements set forth on page 2 of this Report, which is incorporated herein by reference. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed financial statements and notes to those statements included elsewhere in this Report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction/Business Overview

DPAC, through its wholly-owned subsidiary, QuaTech, designs, manufactures, and sells device connectivity and device networking solutions for a broad market. QuaTech sells its products through a global network of distributors, system integrators, value added resellers, and original equipment manufacturers (“OEM”). QuaTech also offers data acquisition products to a limited number of OEM customers and resellers.

QuaTech products can be categorized into two broad product lines:

Our Device Connectivity products include:

•

Multi-port serial boards that add ports to desktop computers to allow for the connection of multiple peripherals with standard interfaces. These products are used in a variety of industries including banking, transportation management, kiosks, satellite communications, and retail point of sale.

•

Mobile products that add ports for laptop and handheld computers. These products include multi-port serial adapters, parallel port adapters, and Bluetooth products.

•

USB to Serial products that add standard serial ports to any computing environment through a USB port. These products address the need to add connectivity through a solution that is external to the computer. These products are used in several markets including retail point of sale and kiosks.

Our Device Networking products include:

•

Serial device server products that connect peripherals to a local area network through a standard TCP/IP interface. This product line was introduced in 2003 and was extended in 2004 through the introduction of product models that connect to the local area network through a wireless 802.11 interface.

•

Industrial rated, embedded wireless modules that enable OEM customers to add standard 802.11 connectivity capabilities to their products. These modules address the needs of a number of industries including transportation, telematics, warehouse and logistic, and point of sale.

This overview of our business reflects DPAC’s acquisition of QuaTech, which was completed by way of a reverse merger (the “Merger”) in which QuaTech became a wholly-owned subsidiary of DPAC. The Merger, as previously reported, was consummated on February 28, 2006.

Risks

Period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as indications of future performance. It is likely that from time to time our operating results will be below the expectations of some investors and not above the expectations of enough investors. In such events, the market price of our common stock would be adversely affected, in some proportion, and perhaps disproportionately. We ourselves have difficulties forecasting, and there are numerous risks and uncertainties concerning the timing of our customers’ initiating their production orders and the amounts of such orders, fluctuating market demand for and declines in the selling prices of similar products, decreases or increases in the costs of the components, uncertain market acceptance, our competitors, delays, or other problems with new products, software, manufacturing, inefficiencies, cost overruns, fixed overhead costs, competition from new wireless products using 802.11 with newer technology, and challenges managing production from overseas suppliers, among other factors, each of which will make it more difficult for us to meet expectations.

Other primary factors that may in the future affect our results of operations include our efforts to reduce our operating expenses and our fixed overhead. Our costs in any particular period could include higher costs associated with stock-based compensation and /or higher costs associated with adjusting the liability for warrants to their fair value through earnings at each reporting period.

These risks should be read in connection with the detailed risks associated with DPAC and QuaTech set forth under the captions “Risk Factors” in Form 10-KSB filed with the SEC on March 31, 2008 and “Risk Factors—Industry and Business Risks Related to DPAC and Its Business” and “Risk Factors—Industry and Business Risks Related to QuaTech and Its Business” in the registration statement of Form S-4/A filed with the SEC on January 9, 2006.

Results of Operations and Financial Condition

Three Months Ended June 30, 2008 and 2007

The following table sets forth certain Condensed Consolidated Statement of Operations data in total dollars, as a percentage of net revenues and as a percentage change from the same period in the prior year. This information should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Form 10-Q.


	For the Three Months Ended:
	June 30, 2008						June 30, 2007						Change
	Results			% of Sales			Results			% of Sales			Dollars			%

NET SALES	$	2,555,130			100	%	$	2,891,121			100	%	$	(335,991	)		-12	%
COST OF GOODS SOLD		1,426,667			56	%		1,712,952			59	%		(286,285	)		-17	%

GROSS PROFIT		1,128,463			44	%		1,178,169			41	%		(49,706	)		-4	%
OPERATING EXPENSES
Sales and marketing		312,168			12	%		349,196			12	%		(37,028	)		-11	%
Research and development		297,212			12	%		303,394			10	%		(6,182	)		-2	%
General and administrative		412,555			16	%		455,284			16	%		(42,729	)		-9	%
Amortization of intangible assets		122,505			5	%		122,505			4	%		—			0	%

Total operating expenses		1,144,440			45	%		1,230,379			43	%		(85,939	)		-7	%

INCOME (LOSS) FROM OPERATIONS		(15,977	)		-1	%		(52,210	)		-2	%		36,233			-69	%
OTHER (INCOME) EXPENSE:
Interest expense		155,312			6	%		381,155			13	%		(225,843	)		-59	%
Fair value adjustment for warrant liability		(64,500	)		-2	%		(54,400	)		-2	%		(10,100	)		19	%

Total other expenses		90,812			4	%		326,755			11	%		(235,943	)		-72	%

LOSS BEFORE INCOME TAXES		(106,789	)		-4	%		(378,965	)		-13	%		272,176			-72	%
INCOME TAX PROVISION		4,455			0	%		3,000			0	%		1,455			49	%

NET LOSS	$	(111,244	)		-4	%	$	(381,965	)		-13	%	$	270,721			-71	%

PREFERRED STOCK DIVIDENDS		47,813			2	%		—			0	%		47,813			—

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(159,057	)		-6	%	$	(381,965	)		-13	%	$	222,908			-58	%

Net Sales. Net sales of $2.6 million for the quarter ended June 30, 2008 decreased by $336,000 or 12% as compared to net sales for the prior year second quarter. Net sales related to the Company’s Device Connectivity products decreased $246,000, or 14% from the quarter ended June 30, 2007, and net sales related to the Company’s Device Networking products, including the Airborne wireless product line, decreased by $90,000, or 8% from the prior year period.

Gross Profit. Gross profit decreased by $50,000 or 4% as a result of the decrease in net sales. Gross profit as a percentage of net sales increased from 41% to 44% due to the change in product mix and the fact that the Company brought in-house some manufacturing that was previously being done at outside contractors, which improved the material margin on the Device Connectivity product line and better absorbed fixed overhead costs.

Sales and Marketing Expenses. Sales and marketing expenses for the quarter ended June 30, 2008 of $312,000 decreased by $37,000 or 11% from the prior year second quarter. The decrease is due primarily to a decrease in personnel costs, including benefits and travel related costs.

Research and Development Expenses. Research and development expenses of $297,000 for the second quarter of 2008 decreased by $6,000 or 2% as compared to the second quarter of 2007. The decrease is due primarily to a decrease in personnel costs, including benefits. The Company will continue to invest in research and development to expand and develop new wireless products. See “Forward-Looking Statements.”

General and Administrative Expenses. General and administrative expenses incurred for the second quarter of 2008 of $413,000 decreased by $43,000 or 9% from the prior year period. The decrease was due primarily to a decrease in non-cash compensation expense for stock options of $20,000, royalty expense of $11,000 and merchant service fees of $11,000.

Amortization of Intangible Assets. Amortization expense is related to the amortization of purchased intangible assets acquired in the Merger on February 28, 2006 being amortized over 5 years.

Interest Expense. The Company incurred interest and financing costs of $155,000 during the second quarter of 2008, as compared to $381,000 incurred in the same period of the prior year. The decrease is due to lower average debt balances and lower effective interest rates. The following non-cash charges are included in interest expense for the second quarter of 2008: accretion of success fees of $3,000, amortization of deferred financing costs of $12,000, and amortization of the discount for warrants of $3,000. The following non-cash charges are included in interest expense for the second quarter of 2007: accretion of success fees of $94,000 amortization of deferred financing costs of $36,000, and amortization of the discount for warrants of $91,000.

Fair Value Adjustment of Put Warrant Liability. The company recorded a $64,500 gain related to the adjustment of the liability for the warrant associated with the Hillstreet subordinated debt. Under SFAS 150, the Company is required to adjust the warrant to its fair value through earnings at the end of each reporting period. At June 30, 2008, based on the Company’s common stock share price of $0.03, the Company calculated the fair value of the warrant to be $193,500. Accordingly, the Company adjusted the liability for the warrant from the previous amount of $258,000 at March 31, 2008 and recorded a gain of $64,500 for the quarter ended June 30, 2008.

Income Taxes. The Company has recorded a full valuation allowance against the Company’s related deferred tax assets. Recent net operating losses represent sufficiently negative evidence to require a continued valuation allowance against the net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of our deferred tax assets.

Preferred Stock Dividends. During the quarter ended March 31, 2008, the Company issued 21,250 shares of convertible, cumulative, 9% series A preferred stock, $100 par value.

Six Months Ended June 30, 2008 and 2007


	For the Six Months Ended:
	June 30, 2008						June 30, 2007						Change
	Results			% of Sales			Results			% of Sales			Dollars			%

NET SALES	$	5,588,453			100	%	$	5,734,767			100	%	$	(146,314	)		-3	%
COST OF GOODS SOLD		3,208,167			57	%		3,368,526			59	%		(160,359	)		-5	%

GROSS PROFIT		2,380,286			43	%		2,366,241			41	%		14,045			1	%
OPERATING EXPENSES
Sales and marketing		636,304			11	%		772,193			13	%		(135,889	)		-18	%
Research and development		560,046			10	%		611,299			11	%		(51,253	)		-8	%
General and administrative		898,490			16	%		951,693			17	%		(53,203	)		-6	%
Amortization of intangible assets		245,010			4	%		245,010			4	%		—			0	%

Total operating expenses		2,339,850			42	%		2,580,195			45	%		(240,345	)		-9	%

INCOME (LOSS) FROM OPERATIONS		40,436			1	%		(213,954	)		-4	%		254,390			-119	%

OTHER (INCOME) EXPENSE:
Interest expense		421,503			8	%		757,256			13	%		(335,753	)		-44	%
Fair value adjustment for warrant liability		64,500			1	%		(54,400	)		-1	%		118,900			-219	%

Total other expenses		486,003			9	%		702,856			12	%		(216,853	)		-31	%

LOSS BEFORE INCOME TAXES		(445,567	)		-8	%		(916,810	)		-16	%		471,243			-51	%
INCOME TAX PROVISION		5,755			0	%		4,200			0	%		1,555			37	%

NET LOSS	$	(451,322	)		-8	%	$	(921,010	)		-16	%	$	469,688			-51	%

PREFERRED STOCK DIVIDENDS		78,401			1	%		—			0	%		78,401			—

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(529,723	)		-9	%	$	(921,010	)		-16	%	$	391,287			-42	%

Net Sales. Net sales of $5.6 million for the six month period ended June 30, 2008 decreased by $146,000 or 3% as compared to net sales for the comparable prior year period. Net sales related to the Company’s Device Connectivity products decreased $647,000, or 17% from the six months ended June 30, 2007, and net sales related to the Company’s Device Networking products, including the Airborne wireless product line, increased by $501,000, or 25% from the prior year period.

Gross Profit. Gross profit increased by $14,000 or 1% despite the decrease in net sales, as a result of the increase in gross profit as a percentage of net sales. Gross profit as a percentage of net sales increased from 41% to 43% due to the change in product mix and the fact that the Company brought in-house some manufacturing that was previously being done at outside contractors, which improved the material margin on the Device Connectivity product line and better absorbed fixed overhead costs.

Sales and Marketing Expenses. Sales and marketing expenses for the six months ended June 30, 2008 of $636,000 decreased by $136,000 or 18% from the prior year period. The decrease is due primarily to a decrease in personnel costs, including benefits and travel related costs. These cost reductions are the result of the Company’s efforts to integrate the sales and marketing departments of DPAC and Quatech during 2007.

Research and Development Expenses. Research and development expenses of $560,000 for the first six months of 2008 decreased by $51,000 or 8% as compared to the comparable period of 2007. The decrease is due primarily to a decrease in personnel costs, including benefits and travel related costs. The Company will continue to invest in research and development to expand and develop new wireless products. See “Forward-Looking Statements.”

General and Administrative Expenses. General and administrative expenses incurred for the six months ended June 30, 2008 of $898,000 decreased by $53,000 or 6% from the prior year period. The decrease was due primarily to decreases in facilities rent and utilities related to the Company’s Southern California facilities partially offset by increased costs for accounting and director fees. Effective April 1, 2007, the Company terminated its lease and relocated out of its Garden Grove, CA facility into office space sized appropriately for the Company’s needs.

Amortization of Intangible Assets. Amortization expense is related to the amortization of purchased intangible assets acquired in the Merger on February 28, 2006 being amortized over 5 years.

Interest Expense. The Company incurred interest and financing costs of $422,000 for the first six months of 2008 as compared to $757,000 incurred in the same period of the prior year. The decrease is due to lower average debt balances and lower effective interest rates. Interest expense in the current year period included the payment and write-off of deferred financing fees in the amount of $50,000 due to the termination of a financing placement agreement. The following non-cash charges are included in interest expense during the first six months of 2008: accretion of success fees of $37,000, amortization of deferred financing costs of $22,000, and amortization of the discount for warrants of $5,000. The following non-cash charges are included in interest expense during the first six months of 2007: accretion of success fees of $189,000, amortization of deferred financing costs of $73,000, and amortization of the discount for warrants of $181,000.

Fair Value Adjustment of Put Warrant Liability. For the six months ended June 30, 2008, the company recorded a $64,500 charge to earnings related to the adjustment of the liability for the warrant associated with the Hillstreet subordinated debt. Under SFAS 150, the Company is required to adjust the warrant to its fair value through earnings at the end of each reporting period. At June 30, 2008, based on the Company’s common stock share price of $0.03, the Company calculated the fair value of the warrant to be $193,500. Accordingly, the Company adjusted the liability for the warrant from the previous amount of $258,000 at March 31, 2008, resulting in a gain of $64,500 for the quarter ended June 30, 2008 and a charge of $64,500 for the six months ended June 30, 2008.

Preferred Stock Dividends. During the quarter ended March 31, 2008, the Company issued 21,250 shares of convertible, cumulative, 9% series A preferred stock, $100 par value.

Liquidity and Capital Resources

As of June 30, 2008 we had a cash balance of $23,000 and a deficit in working capital of $815,000. This compares to a cash balance of $257,000 and a deficit in working capital of $3.7 million at the end of 2007. During the quarter ended March 31, 2008, the Company consummated equity and financing transaction that provided $491,000 in net cash after paying off the then due existing debt. These funds were used for working capital purposes and to bring our payables to a more current position. Going forward, the Company is dependent on financing its operations through the use of its bank line of credit and the contribution from future revenues. A downturn in our revenue levels can severely impact the availability under our line of credit and limit our ability to meet our obligations on a timely basis and finance our operations as needed. At June 30, 2008, we had remaining net availability under our line of credit of $185,000. However, availability may be impacted by the amount of qualifying receivables and there is no assurance that the Company will be able to obtain additional funding if and when it may need it.

The equity and financing transaction consummated during the quarter ended March 31, 2008, comprised of an issuance of convertible preferred stock and the funding of a new senior bank line of credit and subordinated term debt. The preferred stock issuance for $2.1 million consists of 21,250 shares of Series A Preferred shares. The Preferred shares carry an initial annual dividend rate of 9% and contain conversion rights allowing the preferred shares to be converted into Company’s common stock. The senior debt is a $3.0 million working capital line of credit from Fifth Third Bank in Cincinnati, OH, with a floating interest rate of the bank’s prime rate plus 1.5%. Availability under the line of credit is formula-driven based on applicable balances of the Company’s accounts receivable and inventories. At June 30, 2008, based on the formula-driven calculation, the Company had available under the line a maximum of approximately $1.8 million, of which the Company had drawn $1.6 million. The line of credit contains certain financial and other covenants that the Company must comply with. Additionally, on January 31, 2008, the Company entered into a Senior Subordinated Note and Warrant Purchase Agreement (“Agreement”) with Canal Mezzanine Partners, L.P. (“Canal”), providing the Company with approximately $1.1 million in net funding. The note contained in the Agreement has a stated principal balance of $1.2 million with an annual interest rate of 13% and a five-year maturity date. Interest-only payments are payable monthly during the first five years of the note with all principal due and payable on the fifth anniversary of the note. The Agreement also provides for a formula-driven success fee based on a multiple of the trailing twelve months EBITDA to be paid at maturity and for issuance of a warrant entitling Canal to purchase 3% of the Company’s fully diluted shares at time of exercise at a nominal purchase price.

In conjunction with the closing of the foregoing transactions on January 31, 2008, the Company terminated its lending relationship with and paid in full its debt obligations with National City Bank and the Hillstreet Fund, notwithstanding the warrant liability for the Hillstreet Fund.

Although the rate at which cash will be consumed is dependent on the amount of revenues realized during each period and on the amount of costs incurred, management believes that our cash position and borrowings available under our line of credit will be adequate to continue to maintain liquidity to support our operating activities for the near term.

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 many factors, including the amount and timing of the receipt of revenues from operations, any potential acquisitions or divestitures, an increase in manufacturing capabilities, the reduction of liabilities, the timing and extent of the introduction of new products and services and growth in personnel and operations. If needed, there can be no assurance that additional financing will be available 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 “Cautionary Statements.”

Net cash used in operating activities for the six months ended June 30, 2008 was $794,000 as compared to $52,000 used in the first six months of 2007. The net loss of $451,000 incurred in the first six months of 2008 was off-set by non-cash items, including depreciation, amortization, accretion of success fees and warrant liability, totaling $429,000 and the $65,000 adjustment to the put warrant liability. Cash was primarily used to fund an increase in inventory of $384,000 and a pay down in accounts payable of $602,000 and accrued restructuring costs and other accrued liabilities totaling $212,000. A reduction in accounts receivable contributed $392,000 to cash.

Net cash used in investing activities in the six months ended June 30, 2008 consisted of property additions of $37,000.

Net cash provided by financing activities for the six months ended June 30, 2008 was $597,000 as compared to $364,000 provided during the six months of 2007. Cash provided in the current year period consisted of proceeds from the issuance of preferred stock of $2.1 million and proceeds from new subordinated term debt of $1.2 million. These amounts were partially offset by the principal pay-off of the previously existing subordinated term debt of $2.0 million, net repayments under revolving credit facilities of $362,000, pay-off of bank term debt of $113,000, principal payments on the Ohio Development loan of $63,000, and deferred financing costs incurred of $124,000.

As of June 30, 2008, we were in compliance with our bank financial covenants.

The Company operates at leased premises in Hudson, Ohio and leased executive offices in Seal Beach, California, which are adequate for the Company’s needs for the near term.

The Company does not expect to acquire more than $100,000 in capital equipment during the remainder of the fiscal year.

Off Balance Sheet Arrangements

Our off-balance sheet arrangements consist primarily of conventional operating leases, purchase commitments and other commitments arising in the normal course of business, as further discussed below under “Contractual Obligations and Commercial Commitments.” As of June 30, 2008, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations and Commercial Commitments

Purchase Commitments with Contract Manufacturers. We generally issue purchase orders to our contract manufacturers with delivery dates from four to eight weeks from the purchase order date. In addition, we regularly provide such contract manufacturers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. We are committed to accept delivery of materials pursuant to our purchase orders subject to various contract provisions which may in certain limited circumstances allow us to delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations, if any, may or may not result in cancellation costs payable by us. Cancellation without contractual permission to do so would result in additional potential losses, damages and costs. In the past, we have been required to take delivery of materials from our suppliers that were in excess of our actual requirements at the time of delivery, and we have previously recognized charges and expenses related to such excess material. If we are unable to adequately manage our commitments to contract manufacturers and adjust such commitments for changes in demand, we may incur additional costs and expenses, including without limitation inventory expenses related to excess and obsolete inventory. Such costs and expenses could have a material adverse effect on our business, financial condition and results of operations.

Other Purchase Commitments. We also incur various purchase obligations with other vendors and suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. These obligations are generally evidenced by purchase orders with delivery dates from four to six weeks from the purchase order date, and in certain cases, supply agreements that contain the terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to such purchase orders subject to various contract provisions which allow us to delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations may or may not result in cancellation costs payable by us. In the past, we have been required to take delivery of materials from our suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. If we are not able to adequately manage our supply chain and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, financial condition and results of operations.

Severance Agreement Commitments. The Company is party to severance agreements with former employees and is obligated to continue payments under these agreements, with the latest obligation being due in April 2009. The balance due from these arrangements at June 30, 2008 is $187,000 in short-term obligations. The severance liability primarily arose from the accrued restructuring costs assumed at time of the merger and is included in accrued restructuring costs in the financial statements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America and the Company’s discussion and analysis of its financial condition and results of operations requires the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported in its financial statements and accompanying notes. Note 1 of the notes to DPAC’s audited financial statements, filed on Form 10-KSB, describes the significant accounting policies and methods used in the preparation of the Company’s financial statements. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Management believes the Company’s critical accounting policies are those related to revenue recognition, allowance for doubtful accounts, warranty reserves, inventory valuation, valuation of long-lived assets including acquired intangibles, goodwill and trademarks, accounting for costs associated with business combinations, accrual of income tax liability estimates, accounting for our put warrant liability, and accounting for stock-based compensation. Management believes these policies to be critical because they are both important to the portrayal of the Company’s financial condition and results of operations, and they require management to make judgments and estimates about matters that are inherently uncertain.

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable and there are no post–delivery obligations other than warranty. In those instances where customers have right of return, which typically would be for initial stocking orders for distributors, revenue is deferred until confirmation has been received from the customer indicting that the product has shipped and completed the sales cycle. Some distributors have annual stock rotation or return provisions which are typically limited to 5% of the previous twelve months of shipments. In these situations, we reserve the appropriate percentage against shipments throughout the period as deferred revenue. We do not typically have any post delivery obligations other than warranty. The Company also offers marketing incentives to certain customers. These incentives are incurred based on the level of expenses the customers incur and are charged to operations as expenses in the same period. Development revenue is recognized when services are performed and was not material for any of the periods presented.

We establish an allowance for doubtful accounts and a warranty reserve based on historical experience and believe the collection of revenues, net of these reserves, is reasonably assured.

The allowance for doubtful accounts is an estimate for potential non-collection of accounts receivable based on historical experience and known circumstances regarding collectibility of customer accounts. Accounts will be written off as uncollectible if the company determines the amount cannot be collected. The Company has not experienced a non-collection of accounts receivable materially affecting its financial position or results of operations. If the financial condition of the Company’s customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods.

The Company records a warranty reserve as a charge against earnings based on historical warranty claims and estimated costs. If actual returns are not consistent with the historical data used to calculate these estimates, additional warranty reserves could be required.

Inventories consist principally of raw materials, sub-assemblies and finished goods, which are stated at the lower of average cost or market. The Company records an inventory reserve as a charge against earnings for potential slow-moving or obsolete inventory. The reserve is evaluated quarterly utilizing both historical movement over a three year period as compared to quantities on-hand and qualitative factors related to the age of product lines. Significant changes in market conditions, including potential changes in technology, in the future may require additional inventory reserves.

In accordance with SFAS No. 142, goodwill is subject to an impairment assessment at least annually which may result in a charge to operations if the fair value of the reporting unit in which the goodwill is reported declines. The Company tests goodwill and trademarks on at least an annual basis at the end of the fourth quarter, and more often if circumstances should dictate, for impairment. Other intangible assets are amortized over their estimated useful lives. The determination of related estimated useful lives of other intangible assets and whether goodwill and trademarks are impaired involves judgments based upon long-term projections of future performance. The Company operates in a single business segment as a single business unit and annually reviews the recoverability of the carrying value of goodwill using the methodology prescribed in SFAS No. 142. Recoverability of goodwill is determined by comparing the fair value of the entire Company to the accounting value of the underlying net assets. Based on the results of the most recently completed analysis, the Company’s goodwill and trademarks were not impaired as of December 31, 2007. No event has occurred as of or since the period ended December 31, 2007 that would give management an indication that an impairment charge was necessary that would adversely affect the Company’s financial position or results of operations.

In accordance with Statement of Financial Accounting Standard 141 – Business Combinations, direct costs associated with a business combination are capitalized. Upon completion of the business combination, such costs are included in the total acquisition costs associated with the business combination. If completion of the business combination does not occur, all direct costs associated with the business combination are expensed when it is reasonably determinable that the arrangement will not be finalized.

The Company records bonus estimates as a charge against earnings. The bonus is based on meeting budgeted sales and operating results. These estimates are adjusted to actual based on final results of operations achieved during the year.

Deferred tax assets and liabilities are recorded based on SFAS 109. The Company records an estimated income tax liability to recognize the amount of income taxes payable or refundable for the current year and deferred income tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or income tax returns. Judgment is required in estimating the future income tax consequences of events that have been recognized in the Company’s financial statements or the income tax returns. The Company estimates and provides an allowance for deferred tax assets based on estimated realization of the asset utilizing information related to historical taxable income and projected taxable income.

Effective January 1, 2006, the Company adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized on a straight-line basis over the options’ vesting period.

The Company values the put warrant liability by calculating the difference between the Company’s closing stock price at the end of a reporting period and the exercise price per share multiplied by the number of warrants granted. In accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” (“SFAS 150”), the Company has classified the fair value of the put warrants as a liability and changes in the fair value of the warrants are recognized in the earnings of the Company. Changes in our stock price can have a material impact to the put warrant valuation and, therefore, to our financial statements. Additionally, the actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price.

The Company amortizes deferred debt issuance costs using the effective interest method.

Item 4T — Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2008, the end of the period covered by this report, as required by Exchange Act Rule 13a–15(b). The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the Company’s disclosure controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on the foregoing evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1 — Legal Proceedings.

We are or could be subject to various legal proceedings and threatened legal proceedings from time to time as part of the conduct of our business. We believe we are not currently party to any material legal proceedings nor are we aware of any threatened material legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on our business, financial condition and results of operations. However, any potential litigation, regardless of its merits, could result in substantial costs to us and divert management’s attention from our operations. Such costs and diversions could have a material adverse impact on our business, results of operations and financial condition.

Item 6 — Exhibits.


Exhibit No.		Description

	31.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a).

	32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	DPAC TECHNOLOGIES CORP. (Registrant)
August 14, 2008	By:	/s/ STEVEN D. RUNKEL
Date		Steven D. Runkel,
		Chief Executive Officer

August 14, 2008	By:	/s/ STEPHEN J. VUKADINOVICH
Date		Stephen J. Vukadinovich,
		Chief Financial Officer


/s/ STEVEN D. RUNKEL
Steven D. Runkel
Chief Executive Officer
August 14, 2008


/s/ STEPHEN J. VUKADINOVICH
Stephen J. Vukadinovich
Chief Financial Officer
August 14, 2008

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 4T — Controls and Procedures		23

PART II—OTHER INFORMATION

Item 1 — Legal Proceedings		24

Item 6 — Exhibits		24

SIGNATURES		25

EXHIBIT INDEX		26

Exhibit 31.1
Exhibit 32.1


/s/ STEVEN D. RUNKEL
Steven D. Runkel
Chief Executive Officer