UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-K

(Mark One)


þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2010


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		(I.R.S. Employer Identification No.)
of incorporation or organization)


5675 HUDSON INDUSTRIAL PARK, HUDSON, OHIO		44236
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (800) 553-1170

Securities registered pursuant to Section 12(b) of the Exchange Act:
None

Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 the filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. 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 issuer’s revenues for the year ended December 31, 2010 were $7,847,465.

The aggregate market value of the registrant’s Common Stock, no par value, held by non-affiliates of the registrant on March 18, 2011 based on a closing price of $0.045 for the Common Stock of the Company was $1,540,000.

The number of shares of registrant’s Common Stock outstanding at March 29, 2011 was 141,995,826 shares.

Documents Incorporated By Reference

None.

DPAC TECHNOLOGIES CORP.
FORM 10-K
for the year ended December 31, 2009
I N D E X


	PAGE

PART I

Item 1. Business		3

Item 1A. Risk Factors		7

Item 1B. Unresolved Staff Comments		13

Item 2. Properties		13

Item 3. Legal Proceedings		13

Item 4. Submission of Matters to a Vote of Security Holders		13

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		14

Item 6. Selected Financial Data		14

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 7A. Quantitative and Qualitative Disclosures About Market Risk		22

Item 8. Financial Statements and Supplementary Data		22

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		22

Item 9A. Controls and Procedures		22

Item 9B. Other Information		23

PART III

Item 10. Directors, Executive Officers and Corporate Governance		23

Item 11. Executive Compensation		26

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		28

Item 13. Certain Relationships and Related Transactions, and Director Independence		29

Item 14. Principal Accountant Fees and Services		29

PART IV

Item 15. Exhibits		30

Signatures		33

Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K 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 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 Form 10-QSB and Annual Reports on Form 10-K or Form 10-KSB.

HOW TO OBTAIN DPAC TECHNOLOGIES SEC FILINGS

All reports filed by DPAC Technologies 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, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. 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


ITEM 1:		BUSINESS

DPAC Technologies Corp., a California corporation (“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”). The Company sells to customers in both domestic and foreign markets.

Merger

On April 28, 2005, DPAC entered into a merger agreement, as subsequently 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 was considered a “reverse merger” under which Quatech was 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. Except where otherwise noted, the financial information contained herein represents the results of operations of Quatech through the merger date, and combined Quatech and DPAC after the merger date of February 28, 2006.

General Description of Business

Quatech is an industry leader in device networking and connectivity solutions. Through design, manufacturing and support, Quatech maintains high standards of reliability and performance. Customers include OEM’s, value added resellers (VAR’s) and System Integrators, as well as end-users in many industries, including banking, retail/POS, access control, building automation and security, and energy management.

DPAC was incorporated in California in September 1983, originally under the name Dense-Pac Microsystems, Inc., and changed its name to DPAC Technologies Corp. in August 2001.

Quatech was incorporated in Ohio in 2000 as W.R. Acquisition, Inc. In July 2000, W.R. Acquisition acquired the assets and business of Quatech’s predecessor, Qua Tech, Inc., an Ohio corporation, and the company changed its name to Quatech, Inc. The Company has its worldwide headquarters in Hudson, OH.

At the time of the acquisition in July 2000, Qua Tech, Inc. developed and marketed a data acquisition product line as well as a device connectivity product line. The data acquisition product line consisted of analog-to-digital converters, digital I/O hardware, signal conditioning hardware, and related software. The analog to digital converters as well as the digital I/O products were available for a number of computer bus architectures including ISA, PCI, and PC Card. The device connectivity product line included a number of multi-port serial adapters supporting asynchronous and synchronous transmissions. The products were also available on multiple computer bus architectures including ISA, PCI and PC Card. In addition, Qua Tech, Inc. had just completed the release of the initial USB to Serial product line.

Subsequent to the acquisition, Quatech evaluated the market opportunities in both the data acquisition and device connectivity markets and made the determination to focus product development, along with sales and marketing activities, on the device connectivity product lines. All product development activities related to the data acquisition products were suspended. Sales and marketing activities in support of the data acquisition products were restricted to the support of a limited number of existing original equipment manufacturers and resellers.

Quatech has continued to enhance the device connectivity product line through the development and release of additional products. These products have been developed as a reaction to both general market and specific customer demand. Significant new products released in this timeframe include a full line of universal PCI multi-port serial cards that support both 5V and 3.3V PCI slots, 8 and 16 port versions of the USB to Serial products, ruggedized multi-port, serial PC Card products, and multi-port serial Compact Flash products.

In 2001, Quatech initiated the development of its serial device server product line that would allow devices with traditional serial ports to be connected to a Local Area Network (LAN) through a TCP/IP connection. This product line was released for commercial availability in late 2003. Quatech has continued the development of this product line through the release of new product models, including products capable of connecting to the network through a wireless 802.11 interface.

In October 2009, Quatech acquired the SocketSerial product line from Socket Mobile. The products in the SocketSerial product line consist of a CompactFlash serial card, a PC serial card, a PC dual serial card, and a PC quad serial card, all with fixed and removable cable models. Also included are a USB to Serial Adapter, USB to Ethernet Adapter and a license to sell the Cordless Serial Adapter. In addition, Quatech has added several of the North American and International distribution partners that had historically sold the SocketSerial products to its list of distribution partners for both its device and networking connectivity product lines.

Products

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.

Multi-port serial boards consists primarily of ISA bus and PCI bus products with 1, 2, 4, or 8 asynchronous serial ports as well as single port synchronous serial ports.

Mobile products consists primarily of PC Card and Compact Flash products with 1, 2, or 4 asynchronous serial ports, PC Cards with a single synchronous serial port and a PC Card with a single parallel port.

In March 2005, Quatech announced the introduction of new four and eight port multiple electrical interface (MEI) products to the device server product line. These products were released for general availability in May 2005.

In March 2005, Quatech announced the introduction of six new wireless products to the device server product line. These products were released for general availability in March 2005.

In June 2004, Quatech announced its intention of developing a line of RFID reader products. A prototype was developed and demonstrated at the RFID World conference in April 2004. No further work has been done in the development of this product line since the development of the initial prototype. Quatech is continuing to monitor this market prior to committing the resources necessary to complete the development of this product line.

Airborne TM wireless product line — the Airborne wireless product line was acquired with the merger of DPAC and Quatech and was originally announced by DPAC in September 2003 to address needs in the industrial wireless marketplace with a product known as the Airborne™ Wireless LAN Node module. The wireless product utilizes the 802.11 standard communications protocol (also known as “WiFi”) and targets the identified growth opportunities in embedded and plug-and-play applications, where we believe OEM customers as well as end-user customers have a need for an integrated local area network wireless connectivity solution. The wireless module includes a radio, base-band processor, an application processor and software for a “drop-in” web-enabled WiFi solution for connecting equipment, instrumentation and other devices to a local area network. An additional plug-and-play version of the product was developed and named AirborneDirect™. This product provides a web-enabled wireless connectivity solution for industrial equipment already in field use. Since, for the customer, there is no need to develop the software, or develop the radio frequency and communications expertise in-house, customers can realize reduced product development costs and a quick time-to-market. The AirborneDirect™ modules provide instant local area network and Internet connectivity, and connect through standard serial or Ethernet interfaces to a wide variety of applications.

The Airborne modules are designed to provide wireless local area network and Internet connectivity in transportation, logistics, point of sale devices, medical equipment, and other industrial products and applications. The product was designed to address the needs of small to medium volume applications where time to market, industrial temperature compatibility and ease of implementation are key factors in the decision to implement a wireless connectivity solution. Equipment with an Airborne™ module, either embedded or attached, can be monitored and controlled by a handheld device, by a personal computer in a central location or over the Internet. This eliminates cabling, allows the equipment to be portable and provides an effective mode of supplying the non-PC device to a local area network and the Internet. For example, the module can be a solution for communicating remote sensing and data collection activities through the Internet to a user’s PC or network database software.

Distribution, Marketing and Customers

Quatech sells its products through a global network of distributors, system integrators, value added resellers, and original equipment manufacturers. Internationally, Quatech sells and markets its products through over 50 distributors and resellers in more than 30 countries. Quatech customers operate in a broad array of markets including retail point of sale, industrial automation, financial services and banking, telecommunications, transportation management, access control and security, gaming, data acquisition, and homeland security. All customers are supported from Quatech’s headquarters in Hudson, OH or from sales and technical support personnel located in Southern California. No single customer accounted for more than 10% of net sales in 2009.

International Sales

The Company had export sales that accounted for 26% and 23% of total net sales in 2010 and 2009, respectively. Export sales were primarily to Canada and Western European and South American countries. Foreign sales are made in U.S dollars. Specific demand shifts by customers could result in significant changes in our export sales from year to year.

All of Quatech’s assets are located in the United States. The Company does not own or operate any manufacturing operations or sales offices in foreign countries.

Operations

Quatech procures all parts and certain services involved in the production of its products, and subcontracts its product manufacturing to outside partners who specialize in such services. Quatech believes that this approach is optimal as it reduces fixed costs, extends manufacturing capacity and increases production flexibility.

Quatech’s products are manufactured using both standard and semi-custom components. Most of these components are available from multiple sources in the domestic electronics distribution market. There are, however, several components that are provided only by single-source providers.

The manufacturing for the wireless product is being done offshore. We are reliant on the offshore manufacturer to provide a quality product and meet our production requirements. We currently have a ten to fifteen week lead-time on various products and schedule the manufacturing requirements based on our sales forecasts. Changes to the sales forecast could affect the inventory level of the wireless product. There is currently no second source for the production of the wireless module, but Quatech does have the right to transfer production to another manufacturer if there are problems with the manufacturer. If Quatech were required to change its primary offshore manufacturer, it would require significant time. This may lead to not having sufficient inventory to meet pending sales requirements. We believe that the offshore manufacturer is of sufficient size and resources to meet any production requirements that we may have, including any foreseeable increased volume needs for the wireless products.

Our reliance on certain single-source and limited-source components exposes us to quality control issues if these suppliers experience a failure in their production process or otherwise fail to meet our quality requirements. A failure in single-source or limited-source components or products could force us to repair or replace a product utilizing replacement components. If we cannot obtain comparable replacements or effectively retune or redesign our products, we could lose customer orders or incur additional costs, which could have a material adverse effect on our gross margins and results of operations.

Research and Development

Our future success will depend in major part on our ability to develop new products or product enhancements to keep up with technological advances and to meet customer needs. Our research and development efforts for 2011 will focus on developing new wireless and related products and expanding our product offerings.

Quatech’s engineering, research and development expenses were $733,000 in 2010 and $775,000 in 2009. Additionally, the Company capitalized $0 and $29,000 of software development costs incurred in 2010 and 2009, respectively. Quatech does not rely upon patent protection to protect its competitive position. The nature of the market Quatech competes in places a heavy emphasis on the ability of Quatech to service and support the customer along with the reliability of the product’s design and manufacturing. Engineering activities consist of the design and development of new products and the redesign of existing products to keep current with changes in the industry and products offered by the Company’s competitors. The Company also designs and develops new products for specific customers and such activities are often conducted in partnership with our customers.

We are currently involved in research and development for new software and hardware approaches for utilization in our wireless product line, as well as the development of package level products that may incorporate our wireless products as part of the overall system design. Our product development activities are solution driven, and our goal is to create technological advancements by working with each customer to develop advanced cost-effective products that solve each customer’s specific requirements. However, we, for the most part, develop products within the 802.11 standard and infrequently might develop patentable inventions. The 802.11 standards on which our products are based are defined by IEEE and designed to ensure interoperability of all products purporting to meet the standard.

Service and Warranty

We offer warranties of various lengths, which differ by customer and product type and typically cover defects in materials and workmanship. We perform warranty and other maintenance services for our products in Ohio and at our contract manufacturer overseas.

Competitive Conditions

Quatech competes in the device connectivity and device networking markets. Both of these markets are characterized by a broad number of competitors, both domestic and foreign, of varying size. Quatech competes on the basis of providing reliable products, marketed at a mid-level price compared to other competitive offerings. Quatech emphasizes customer service and support as a key differentiator. Quatech’s ability to meet rapid delivery requirements is a key element of our ability to service the customer. This requires us to carry significant amounts of inventory to meet our customer’s forecasted needs.

As the markets for multi-port serial adapters in both the PC Card form factor and PCI form factor mature, Quatech has placed emphasis on the development and marketing of products that address the growth markets of multi-port USB to serial adapters and device servers that connect devices to Ethernet Local Area Networks. Quatech believes that these emerging product lines are significant to its future growth.

We have competition from other wireless products using 802.11 technologies. There are also other companies that offer similar products with the same or other configurations and radio communication protocols, including cellular, Bluetooth and proprietary radio solutions that will compete with our Airborne wireless module. The primary competitors in providing embedded 802.11 wireless solutions to OEM customers are Lantronix Inc. and Digi International Inc. Other competitors may provide alternative radio protocols such as cellular or other proprietary technologies for sale to OEM’s. These competitors include Wavecom SA, Maxstream, and Skybility. Other companies such as Symbol Technologies Inc. and Cisco Systems Inc. make wireless solutions that are not primarily aimed at OEM customers, but may be used in those applications and have been in certain circumstances. Many of these companies in the wireless market have greater financial, manufacturing and marketing capabilities than we have.

Backlog

As of December 31, 2010 Quatech had backlog orders which management believed to be firm commitments of approximately $664,000. As of December 31, 2009 Quatech had backlog orders which management believed to be firm commitments of approximately $540,000. All of these orders pending as of December 31, 2010 are expected to ship in calendar year 2011. Backlog as of any particular date is not necessarily indicative of Quatech’s future sales trends.

Product orders in our backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. While we regularly review our backlog of orders to ensure that it adequately reflects product orders expected to ship within the one year period, we cannot make any guarantee that such orders will actually be shipped or that such orders will not be delayed or cancelled in the future. We make regular adjustments to our backlog as customer delivery schedules change and in response to changes in our production schedule. Accordingly, we stress that backlog as of any particular date should not be considered a reliable indicator of sales for any future period and our revenues in any given period may depend substantially on orders placed in that period.

Personnel

As of December 31, 2010, Quatech employed 22 full time employees, 19 of which are located at Quatech’s facility in Hudson, Ohio, 3 of which are located in Southern California. Of the 22 full-time employees, 4 were in general and administration, 7 were in sales, marketing and customer support, 6 were in engineering, research and development, and 5 were in operations and manufacturing. The Company occasionally hires part-time employees. The Company believes that it has a good relationship with its employees and no employees are represented by a union.


ITEM 1A:		RISK FACTORS

Cautionary Statements

Investors should carefully consider the risks described below and all other information in the Form 10-K. The risk and uncertainties described below are not the only one facing the Company. Additional risks and uncertainties not presently known to the Company may also impair the Company’s business and operations.

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.

Potential Future Insufficiency of Capital and Financial Resources

Our financial statements have been prepared on a going concern basis. The report of our Independent Registered Public Accounting Firm on our financial statements for the year ended December 31, 2010 contains an explanatory paragraph noting that certain conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to establish profitable operations and to raise additional financing. We have been taking steps intended to achieve positive cash flows, including the acquisition of a product line and reduction and management of our operating costs. Our current senior credit facility will mature and become payable in May of 2011, and we will be required to refinance this credit facility. We may require additional financing to meet our ongoing obligations through the end of the year ending December 31, 2011. Our continued ability to obtain financing may be unavailable if and when needed. If we obtain additional financing, the terms and conditions of the financing could have material adverse effects on the market price of the common stock. Problems that we could encounter because of insufficient capital include but are not limited to additional costs and expenses, including higher interest rates and the acceleration of maturity dates on other debt financing. Some additional costs might be associated with complying with or defending legal actions by or for creditors, or paying fees, charges or costs of creditors. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of assets and liabilities that may result from the outcome of this uncertainty.

Product Development and Technological Change

The wireless connectivity industry is characterized by rapid technological change and is highly competitive with respect to timely product innovation. Our wireless products are subject to obsolescence or price erosion because competitors are continuously introducing technologies with the same or greater capacity as our technology. As a result, wireless products may have a product life of not more than one to three years.

Our future success depends on our ability to develop new wireless 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, firmware or software development, or introduction of wireless technologies could have a material adverse effect on our financial condition and results of operations. Additionally, the Company could incur additional 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 recent product introductions for the wireless marketplace, could require the expenditure of an unknown amount of funds for research and development, tooling, software development, 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 out-source production to third parties or enter into licensing arrangements and be successful in the management of sub-contractors overseas. 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 electronics and components 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 and contractors for wireless and semiconductor devices used in our products, and we have no long-term supply contracts with any of them.

Due to the cyclical nature of these industries and competitive conditions, we, or our sub-contractors, 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.

Credit Risks and Dependence on Major Customers

We grant credit to customers in 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. Our inability to collect receivables from any larger customer could have a material adverse effect on our business, financial condition, and results of operations.

Intellectual Property Rights

Our ability to compete effectively is dependent on our proprietary know-how and our ability to develop and apply technology. We do not have patents for our products in the wireless area. The wireless 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, and 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 companies that offer or are in the process of developing similar types of wireless products, including Lantronix, Digi-International and others. We could also experience competition from established and emerging network 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 whom 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

Gross profit as a percentage of sales was 40% for the year ended December 31, 2010 as compared to 41% for the year ended December 31, 2009. In the first quarter of 2009, we sold our manufacturing capability to one of our contract manufacturers. This resulted in lower fixed costs but may negatively impact future gross margins due to higher variable costs. Any change in the gross margins can typically be attributed to the mix of products, average selling prices, revenue levels, the use of outside contract manufacturers, and increases to our fixed cost structure. As we market our products, the product mix may change over time and result in changes in the gross margin.

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. Declines in the selling prices of our products could have a material adverse effect on our net sales and could have a material adverse effect on our business, financial condition and results of operations. 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 any 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 we sell a material portion of our products in Europe (due to their vacation cycles) and to the extent, our exposure to the personal computer market remains significant.

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 wireless, 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 wireless, computer, telecommunications, networking or other industries utilizing our products.

Our suppliers, contract manufacturers or customers could become competitors

Many of our customers internally design and/or manufacture their own wireless communications network products. These customers also continuously evaluate whether to manufacture their own wireless communications network products or utilize contract manufacturers to produce their own internal designs. Certain of our customers and prospective customers regularly produce or design wireless communications network products in an attempt to replace products manufactured by us. We believe that this practice will continue. In the event that our customers manufacture or design their own wireless communications network products, such customers could reduce or eliminate their purchases of our products, which would result in reduced revenues and would adversely impact our results of operations and liquidity. Wireless infrastructure equipment manufacturers with internal manufacturing capabilities, including many of our customers, could also sell wireless communications network products externally to other manufacturers, thereby competing directly with us. In addition, our suppliers or contract manufacturers may decide to produce competing products directly for our customers and, effectively, compete against us. If, for any reason, our customers produce their wireless communications network products internally, increase the percentage of their internal production, require us to participate in joint venture manufacturing with them, engage our suppliers or contract manufacturers to manufacture competing products, or otherwise compete directly against us, our revenues would decrease, which would adversely impact our results of operations.

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, our competitors may have the ability to manufacture competitive products in Asia or otherwise at lower cost than we would incur to have them manufactured.

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 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 customers’ 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 Business Combinations or Acquisitions

We may pursue a strategy of acquiring additional companies or businesses. We may pursue selective acquisitions to complement our internal growth. We have limited experience in acquiring other businesses, product lines and technologies. In addition, the attention of our management team may be diverted from our core business if we undertake an acquisition. Potential acquisitions also involve numerous risks, including, among others:

	•		Problems assimilating the purchased operations, technologies or products;

	•		Costs associated with the acquisition;

	•		Adverse effects on existing business relationships with suppliers and customers;

	•		Sudden market changes;

	•		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.

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 Wireless and Electronics Industries

The wireless and the electronics industries are highly cyclical and are 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 the producing 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 these industries 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.

Our reliance on contract manufacturers exposes us to risks of excess inventory or inventory carrying costs

If our contract manufacturers are unable to respond promptly and timely to changes in customer demand, we may be unable to produce enough products to respond to sudden increases in demand resulting in lost revenues, or alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our contract manufacturers. We regularly provide rolling forecasts of our requirements to our contract manufacturers for planning purposes, pursuant to our agreements, a portion of which is binding upon us. Additionally, we are committed to accept delivery on the forecasted terms for a portion of the rolling forecast. Cancellations of orders or changes to the forecasts provided to any of our contract manufacturers may result in cancellation costs payable by us.

By using contract manufacturers, our ability to directly control the use of all inventory is reduced because we do not have full operating control over their operations. If we are unable to accurately forecast demand for our contract manufacturers and manage the costs associated with our contract manufacturers, we may be required to pay inventory carrying costs or purchase excess inventory. If we or our contract manufacturers are unable to utilize such excess inventory in a timely manner, and are unable to sell excess components or products due to their customized nature, our operating results and liquidity would be negatively impacted.

Product Returns and Order Cancellation

To the extent we have products manufactured in anticipation of future demand and 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, and have typically not done so in the past, 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 that are not 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 May Impair Value of Investment

We may need to raise additional capital. Our potential means to raise capital potentially include public or private equity offerings or debt financings. Our future capital requirements depend on many factors including our research, development, sales and marketing activities, acquisitions, and other costs. We do not know whether additional financing will be available when needed, or will be available on terms favorable to us. 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. To the extent we raise additional capital by issuing debt, our shareholders would incur additional interest expenses that would reduce earnings and cash flow of the Company. Also, plans to borrow and repay the debt are subject to numerous risks. In the event the debt is not repaid as and when due, additional costs and debt would be incurred to satisfy and refinance the obligation, and the debt therefore could grow. If a company’s debt coverage costs are excessive, its equity can lose value for reasons including a decline in creditworthiness.

Geographic Concentration of Operation

Our wireless product line is manufactured overseas in Taiwan, with some contract manufacturing conducted locally. Due to the geographic concentration, a disruption of their 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 using or limit our sub-contractors’ operations and consequently harm our business, financial condition and results of operations.

Compliance with Environmental Laws and Regulations

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

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 our results of operations could be materially and adversely affected.

Stock Price Volatility and Market Overhang

Existing shareholders may suffer with each adverse change in the market price of our common stock. The market price of our common stock will be affected by a variety of factors in the future. Most obviously, our shares may suffer adversely if and when our future operating results are below the expectations of investors. The stock market in general, and the market for shares of technology companies in particular, experiences extreme price fluctuations. Our common stock market price is made more volatile because of the relatively low volume of trading in our common stock. When trading is sporadic, significant price movement can be caused by a relatively small number of shares.

Another factor that may affect our common stock price will be the number of our outstanding shares and, at times, the number and prices of warrants that could be exercised. At December 31, 2010, we have accrued dividends on our Preferred Stock payable in common shares equating to 32,580,930 common shares and which were issued on March 28, 2011. At December 31, 2010, we have reserved a total of 14,118,000 shares for issuance upon exercise of outstanding warrants. Holders of our warrants hold registration rights that are intended to make the warrant shares immediately available for public sale upon exercise, and warrants may be exercised at any time until their expiration. It is foreseeable that when a warrant has an intrinsic value, which is usually called being “in-the-money,” the holder may desire to exercise the warrant and immediately sell the stock. If our common stock trades at prices higher than a warrant’s exercise price, the shares can be sold at a profit. At such times, sales of large numbers of shares received upon exercises of warrants might materially and adversely affect the market price of our common stock.

Other Contingent Contractual Obligations

The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets. However, 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 indemnities to all directors and officers pertaining to claims on account of acting as a director or officer. In the event that the Company has, or is claimed to have, any indemnification obligation related to current or former directors or officers, the costs and expenses could be material to the Company and the amount of cost and expense of such an obligation would not necessarily be limited whatsoever. Other indemnities are made to various lessors in connection with facility leases for certain claims arising from such facility or lease; other indemnities are made to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; and other indemnities involve the accuracy of representations and warranties in certain contracts and are made in favor of the other contractual party. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. 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, which would customarily be for a limited amount. Product warranty costs are not significant.


ITEM 1B:		UNRESOLVED STAFF COMMENTS

Not applicable.


ITEM 2:		PROPERTIES

Quatech’s principal place of business is located at 5675 Hudson Industrial Parkway, Hudson, Ohio 44236 where the company leases approximately 17,100 square feet of combined office, warehousing and product assembly space. Quatech has leased the space through April 2014. Quatech has sublet 4,911 square feet of manufacturing space in this facility to one of its contract manufacturers. The sublease is on an open end basis.


ITEM 3:		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, 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 or for which damages would exceed 10% of the current assets of the Company. 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.


ITEM 4:		(REMOVED AND RESERVED)

PART II


ITEM 5:		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock trades on the OTC Markets Group, Inc. quotation and trading system under the symbol “OTCQB:DPAC.” Some financial Web sites may report DPAC Technologies Corp. under the symbol DPAC.PK The following table sets forth the high and low closing sale prices on the Nasdaq Small Cap Market as reported by The Nasdaq Stock Market.


	High		Low

Fiscal Year ended December 31, 2009:
Quarter Ended
March 31, 2009	$	0.03	$	0.01
June 30, 2009	$	0.04	$	0.01
September 30, 2009	$	0.03	$	0.01
December 31, 2009	$	0.04	$	0.01

Fiscal Year ended December 31, 2010:
Quarter Ended
March 31, 2010	$	0.02	$	0.01
June 30, 2010	$	0.02	$	0.01
September 30, 2010	$	0.02	$	0.01
December 31, 2010	$	0.04	$	0.02

Holders

There were approximately 196 shareholders of record as of March 22, 2011. Development Capital Ventures, LP, holds approximately 59% of the common shares outstanding at March 22, 2011.

Dividends

We have not paid dividends on our common stock in either of the past two fiscal years. We do not expect to pay any dividends on our common stock in the foreseeable future. There are currently contractual arrangements in our loan agreements and other restrictions that preclude our ability to pay dividends.


ITEM 6:		SELECTED FINANCIAL DATA

Not applicable


ITEM 7:		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included elsewhere in this Report. This discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed here. The cautionary statements made in this Report should be read as being applicable to all forward-looking statements wherever they appear. Numerous important factors, risks and uncertainties affect our operations and could cause actual results to differ materially from those expressed or implied by these or any other forward-looking statements made by us or on our behalf. Factors that could cause or contribute to such differences include those discussed in “Risk Factors,” as well as those discussed elsewhere herein. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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.

Successful implementation of the Airborne wireless products and new product lines will require, among other things, best-in-class designs, exceptional customer service and patience. Also timing of revenue may be affected by the length of time it may take our customers in designing our Airborne product into their product lines and introducing their products. In addition, our revenues are ultimately limited by the success of our customers’ products in relation to their competition.

Fluctuations in Operating Results

The primary factors that may in the future create material fluctuations in our results of operations include the following: timing and amount of shipments, changes in the mix of products sold, any inability to procure required components, whether new customer orders are for immediate or deferred delivery, the sizes and timing of investments in new technologies or product lines, a partial or complete loss of any principal customer, any addition of a significant new customer, a reduction in orders or delays in orders from a customer, excess product inventory accumulation by a customer, and other factors.

The need for continued significant operating expenditures for research and development, software and firmware enhancements, ongoing customer service and support, and administration, among other factors, will make it difficult for us to reduce our operating expenses in any particular period, even if our expectations for net sales for that period are not met. Therefore, our fixed overhead may negatively impact our operating results.

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe to be reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. In order to aid you in fully understanding and evaluating our reported financial results, the significant accounting policies which we believe to be the most subjective and critical include the following:

Revenue Recognition

The majority of our revenue is derived from the sales of products. 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. Revenue is recognized from the sale of products at the point of passage of title, which is at the time of shipment to customers, including OEMs, distributors and other strategic end user customers. Revenue recognition is deferred in all instances when the earnings process is incomplete, such as sales to certain customers that may have certain rights of return and price protection provisions. Revenue on sales to distributors where a right of return exists is recognized upon “sell-through,” when products are shipped from the distributor to the distributor’s customer. Revenue related to those products in our distribution channel at the end of each reporting period which has not sold-through is deferred. Quatech 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.

Accounts Receivable

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The amount of our reserves is based on historical experience and our analysis of the accounts receivable balances outstanding. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would result in an additional general and administrative expense in the period such determination was made. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past, which could adversely affect our operating results.

Inventories

We value our inventory at the lower of the actual cost to purchase and/or manufacture or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. We additionally consider additional facts and circumstances in order to determine whether any condition exists that would confirm or deny the need for recording a write-down. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale of the related inventory. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

Property, Plant and Equipment

The Company periodically reviews the recoverability of its long-lived assets. The Company also reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted future net cash flows from the operations to which the assets relate, based on management’s best estimates using appropriate assumptions and projections at the time, to the carrying amount of the assets. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the asset.

Capitalized Developed Software

Certain software development costs are capitalized after a product becomes technologically feasible and before its general release to customers. Significant judgment is required in determining when a product becomes “technologically feasible.” Capitalized development costs are then amortized over the product’s estimated life beginning upon general release of the product. Periodically, we compare a product’s unamortized capitalized cost to the product’s net realizable value. To the extent unamortized capitalized cost exceeds net realizable value based on the product’s estimated future gross revenues (reduced by the estimated future costs of completing and selling the product) the excess is written off. This analysis requires us to estimate future gross revenues associated with certain products and the future costs of completing and selling certain products. Changes in these estimates could result in write-offs of capitalized software costs.

Goodwill and Indefinite Lived Intangibles

We review the recoverability of the carrying value of goodwill and intangibles on an annual basis at December 31^st or more frequently when an event occurs or circumstances change to indicate that an impairment of goodwill or intangibles has possibly occurred. Since we operate in a single business segment as a single business unit, the determination of whether any potential impairment of goodwill exists is based on a comparison of the fair value of the entire Company to its carrying value. In estimating the fair value of the entire Company, the Market Approach and Income Approach are the methodologies deemed the most reliable and are the primary methods used for our impairment analysis, with the income approach weighted 60% and the market approached weighted 40%. The valuation analysis is dependent upon a number of various factors including estimates of forecasted revenues and costs, appropriate discount rates and other variables. The first step of the goodwill impairment test consists of comparing the carrying value of the reporting unit to its fair value. If the fair value of the entire Company is determined to be less than the carrying value of the Company, we would be required to take the second step of the goodwill impairment test to measure the amount of impairment loss, if any, and to record such impairment loss for our goodwill. Based on our impairment testing as of December 31, 2010, the fair value of our single reporting unit exceeded its carrying value by approximately $995,000, which management believes to be substantial and not indicative of potential impairment. As the total of the company’s fair value exceeded the carrying value of net assets, it passed the first step of the impairment test and, accordingly, the second step was not required to be performed. Recording an impairment charge for goodwill could have a material adverse impact on our operating results for the period in which such charge was recorded.

Deferred Taxes

Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be realized. During the years ended December 31, 2010 and 2009, the Company recorded a full valuation allowance associated with its net deferred tax assets.

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 our 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.

Included in total deferred tax assets, the Company has an income tax carryforward for federal net operating losses. The cumulative federal net operating loss carryforward of approximately $12,308,000 expires through 2030; however, as a result of the merger between Quatech, Inc. and DPAC Technologies Corp, a substantial portion of DPAC’s federal net operating loss carryforward is subject to the provisions of Sec. 382 of the Internal Revenue Code (IRC), and therefore, is not available for immediate benefit to the company. The realization of the Company’s deferred tax assets, including this federal net operating loss, and the related valuation allowance are significant estimates requiring assumptions regarding the sufficiency of future taxable income to realize the future tax deduction from the reversal of deferred tax assets and the net operating loss prior to their expiration. The valuation allowance has been provided based upon the Company’s assessment of future realizability of certain deferred tax assets, as it is more likely than not that sufficient taxable income will not be generated to realize these temporary differences. The net increase in the valuation allowance was $252,201 for 2010 and $419,790 for 2009. The amount of the corresponding valuation allowance could change significantly in the near term if estimates of future taxable income are changed.

The Company adheres to the provisions of ASC 740, “Income Taxes”. ASC 740 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements, and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition issues. It is the Company’s practice to recognize penalties and/or interest related to income tax matters in interest and penalties expense.

Recently Issued Accounting Standards

In January 2009, the Securities and Exchange Commission (“SEC”) issued Release No. 33-9002, “Interactive Data to Improve Financial Reporting.” The final rule requires companies to provide their financial statements and financial statement schedules to the SEC and on their corporate websites in interactive data format using the eXtensible Business Reporting Language (“XBRL”). The rule was adopted by the SEC to improve the ability of financial statement users to access and analyze financial data. The SEC adopted a phase-in schedule indicating when registrants must furnish interactive data. Under this schedule, the Company will be required to submit filings with financial statement information using XBRL commencing with its June 30, 2011 quarterly report on Form 10-Q. The Company is currently evaluating the impact of XBRL reporting on its financial reporting process.

In October 2009, the FASB amended revenue recognition guidance for arrangements with multiple deliverables. The guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (“VSOE”), vendor objective evidence (“VOE”) or third-party evidence (“TPE”) is unavailable. This guidance should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. Full retrospective application of the guidance is optional. The Company does not expect the impact of adopting this guidance to have a material effect on its financial statements.

In April 2010, the FASB issued Accounting Standards Update 2010-13 (ASU 2010-13), “Compensation—Stock Compensation (Topic 718).” ASU 2010-13 provides amendments to ASC Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The provisions of ASU 2010-13 are not expected to have a material effect on the financial position, results of operations or cash flows of the Company.

In December 2010, the FASB issued an Accounting Standards Update 2010-28(“ASU 2010-28”), “Intangibles—Goodwill and Other (Topic 350)”. ASU 2010-28 amends ASC Topic 350. ASU 2010-28 clarifies the requirement to test for impairment of goodwill. ASC Topic 350 requires that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is not permitted. The provisions of ASU 2010-28 are not expected to have a material effect on the financial position, results of operations or cash flows of the Company.

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 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 802.11b 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.

Results of Operations

The following table summarizes DPAC’s results of operations as a percentage of net sales for the two years ended December 31, 2010 and 2009:


	2010						2009
				% of						% of			Change
	Amount			Sales			Amount			Sales			Amount			%
Net sales	$	7,847,465			100	%	$	6,807,418			100	%	$	1,040,047			15	%
Cost of goods sold		4,694,840			60	%		4,008,510			59	%		686,330			17	%
Gross profit		3,152,625			40	%		2,798,908			41	%		353,717			13	%
Operating expenses:
Sales and marketing		782,965			10	%		824,659			12	%		(41,694	)		-5	%
Research and development		733,065			9	%		775,106			11	%		(42,041	)		-5	%
General and administrative		1,111,266			14	%		1,247,519			18	%		(136,253	)		-11	%
Amortization of intangible assets		538,348			7	%		509,185			7	%		29,163			6	%
Restructuring charges		—			0	%		12,097			0	%		(12,097	)		-100	%
Total operating expenses		3,165,644			40	%		3,368,566			49	%		(202,922	)		-6	%
Loss from operations		(13,019	)		0	%		(569,658	)		-8	%		556,639			-98	%
Interest expense		641,093			8	%		579,553			9	%		61,540			11	%
Fair value adjustment for put warrant liability		10,600			0	%		(15,800	)		0	%		26,400			-167	%
Total other expenses		651,693			8	%		563,753			8	%		87,940			16	%
LOSS BEFORE INCOME TAX PROVISION		(664,712	)		-8	%		(1,133,411	)		-17	%		468,699			-41	%
INCOME TAX PROVISION		—			0	%		—			0	%		—
NET LOSS		(664,712	)		-8	%		(1,133,411	)		-17	%		468,699			-41	%

Preferred stock dividends		450,000			6	%		210,939			3	%		239,061			113	%
Net loss attributrible to common shareholders	$	(1,114,712	)		-14	%	$	(1,344,350	)		-20	%	$	229,638			-17	%

Net Sales

Net sales for the year ended December 31, 2010 of $7,847,000 increased by $1,040,000 or 15% compared to net sales for the year ended December 31, 2009. Net sales related to the Company’s Device Connectivity products increased $19,000 or 1%, and net sales related to the Company’s Device Networking products, including the Airborne wireless product line, increased by $1,021,000, or 36% from the prior year. The increase in revenues for the Device Networking product line is the result of improved product shipments to end customers by our OEM customers and increased penetration into new applications for our products.

Gross Profit

Gross profit increased by $354,000 or 13% to $3,153,000 in 2010 from $2,799,000 in 2009 due to the increase in net sales. Gross profit as a percentage of sales decreased to 40% for 2010 from 41% in 2009. The decrease in gross profit percentage is due to the write-down of inventory of $166,000 in the current year partially offset by fixed operating expenses being spread over a higher revenue base resulting in fixed expenses representing a smaller percentage of cost of goods sold.

Sales and Marketing

Sales and marketing expenses of $783,000 decreased by $42,000 or by 5% as compared to 2009. The decrease is due primarily to a decrease in salaries and related expenses of $71,000, offset by an increase in representative commissions of $19,000 and advertising Internet search engine costs of $10,000.

Research and Development

Research and development expenses of $733,000 for 2010 decreased by $42,000, or 5%, as compared to 2009. The decrease is due to a decrease in personnel and consulting costs incurred, including benefits and travel related costs, of $73,000. These reductions were partially offset by software developments costs incurred of $29,000 being capitalized in 2009 and no costs being capitalized in 2010. The Company will continue to invest in research and development to expand and develop new wireless products. See “Forward-Looking Statements.”

General and Administrative Expense

General and administrative expenses incurred for 2010 of $1,111,000 decreased by $136,000 or 11% from the prior year. The decrease was due primarily to decreases in salaries and benefits of $39,000, non-cash compensation expense related to stock options of $51,000, business and Directors and Officers insurance premiums of $35,000 and depreciation expense of $18,000. These reductions were partly off-set by small increases in other expense items.

Amortization Expense

Amortization expense of $538,000 for 2010 is comprised of the amortization of purchased intangible assets acquired in the Merger on February 28, 2006 being amortized over 5 years of $490,000, amortization of internally developed software being capitalized over 5 years of $38,000, and amortization of the customer list acquired in the SocketSerial acquisition of $10,000.

Interest Expense

The Company incurred interest and financing costs of $641,000 in 2010 as compared to $580,000 incurred in 2009. The following non-cash charges are included in interest expense during 2010: accretion of participation and success fees of $35,000, amortization of deferred financing costs of $47,000, and amortization of the discount for warrants of $13,000. The following non-cash charges are included in interest expense during 2009: accretion of participation fees of $46,000, amortization of deferred financing costs of $50,000, and amortization of the discount for warrants of $13,000.

Fair Value Adjustment of Put Warrant Liability.

For 2010, the Company recorded a net charge to earnings of $10,600 related to the adjustment of the liability for the put warrant compared to a net gain of $15,800 for 2009. The Company is required to adjust the put warrant liability to its fair value through earnings at the end of each reporting period. At December 31, 2010, based on the Company’s common stock average share price of $0.017, the Company calculated the fair value of the put warrants to be $110,900. The actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price.

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. A full valuation allowance was recorded against the Company’s related deferred tax assets for 2010 and 2009. The Company recorded no income tax provision for 2010 or 2009.

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. 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.

LIQUIDITY AND CAPITAL RESOURCES

The Company incurred a net loss of $665,000 for 2010 and ended the year with a cash balance of $48,000 and a deficit in working capital of $1.4 million. The Company incurred a net loss of $1.1 Million for 2009 and ended the year with a cash balance of $18,000 and a deficit in working capital of $1.3 million.

Although the Company has reported net losses in recent periods, a significant portion of our operating expenses are non-cash. For the year ended December 31, 2010, non-cash operating expenses included depreciation and amortization of $684,000, write-down of inventory of $166,000, non-cash compensation for stock options of $68,000, and non-cash interest expense of $95,000. During 2009, non-cash operating expenses included depreciation and amortization of $595,000, write-down of inventory of $48,000, non-cash compensation for stock options of $119,000, and non-cash interest expense of $108,000.

In the third quarter of 2008, the Company took actions to reduce its cash operating expenses to align its cost structure with the then current economic conditions and a downturn in the Company’s revenue levels. These reductions resulted in annualized operating cost savings of approximately $600,000. Additionally, during the first quarter of 2009, the Company consummated an agreement with one of its contract manufacturers and sold certain equipment and inventory, sublet a portion of its facility to the manufacturer, and will further engage the manufacturer to produce more of the Company’s products. This transaction provided $150,000 in cash.

In the third quarter of 2009, the Company implemented additional cost reduction measures by reducing headcount by 3 individuals and implementing a salary reduction program for all employees of 10%. These measures are expected to result in annual operating costs reductions of approximately $400,000.

On September 30, 2009, the Company acquired the SocketSerial product line in a non-cash transaction for the Company. Management believes that margins generated from future revenues of this product line will help enable the Company to achieve a cash flow break even from operations.

Net cash provided by operating activities for 2010 was $122,000 as compared to net cash used of $4,000 for 2009. The net loss of $665,000 incurred in 2010 was offset by non-cash items, including depreciation and amortization, provision for excess inventory, non-cash compensation expense, accretion of success fees and amortization of deferred financing costs, totaling $1.0 million. Cash was used to pay down accounts payable by $386,000, and fund increases in accounts receivable of $31,000. A decrease in inventories of $13,000 and in prepaid expenses of $39,000, and an increase in other accrued liabilities of $132,000 contributed to cash.

Net cash used in investing activities in 2010 of $70,000 was for the property acquisitions. Net cash provided by investing activities of $124,000 for 2009 consisted of cash received from the sale of assets of $190,000 and partially offset by property additions of $37,000 and capitalized developed software of $29,000.

Net cash used in financing activities for 2010 was $22,000 as compared to $112,000 used during 2009. Cash used in the current year consisted of principal repayments on the Ohio Development loan of $31,000, principal repayments on subordinated debt of $35,000, payment of preferred stock dividends of $18,000 and financing costs incurred of $13,000, partially offset by net borrowings under our revolving credit facility of $75,000. Cash used in 2009 consisted of principal repayments on the Ohio Development loan of $104,000, principal repayments on subordinated debt of $20,000, and financing costs incurred of $20,000, partially offset by proceeds from the issuance of preferred stock of $35,000.

The Company operates at leased premises in Hudson, Ohio which are adequate for the Company’s needs for the near term.

The Company does not expect acquiring more than $100,000 in capital equipment during fiscal year 2011.

As discussed in the financial footnotes to the Financial Statements and Supplementary Data, the Company has in place a senior revolving credit facility with Fifth Third Bank, a Loan Agreement with the State of Ohio and a subordinated note with Canal Mezzanine Partners (each of the State of Ohio loan and the subordinated note with Canal are subordinated to the interests of Fifth Third Bank). In March of 2011, the Company entered into a Fourth Amendment to Credit Agreement extending the maturity date of its Bank revolving credit facility to May 31, 2011.

As of December 31, 2010, we were not in compliance with certain of our bank financial covenants, which included purchasing assets in excess of $100,000.00 from Socket Mobile, Inc. through the assistance of Development Capital Venture, L.P. without the express written consent of the bank. These defaults were waived by Fifth Third Bank by agreement (entered into in March, 2011), but any other events of default were not waived. Each of the loan agreements with Canal Mezzanine Partners and the State of Ohio provide for cross-default of such loans in the event the Company defaults on a material agreement (such as the Bank credit facility) under certain terms. Further, each of the loan agreements provide for restrictive covenants, including the incurrence of additional indebtedness and certain equity financings, which restrict the Company’s ability to access other sources of liquidity, absent refinancing all of the existing indebtedness. The Company is currently talking to a number of other potential lenders with the intent of replacing the bank line of credit with a new facility; however, we have not at this time received a commitment from another source that could replace the Bank line in its entirety. The Bank line currently is set to mature in May, 2011. Additionally, the Canal Mezzanine and State of Ohio loan agreements contain provisions that accelerate the maturity and repayment of outstanding borrowings upon the acceleration of the Bank debt.

At December 31, 2010, the Company was not in compliance with certain financial covenants associated with the Canal Mezzanine debt; however, subsequent to year end, the covenant was modified such allowing the Company to be in compliance. The Company expects to be able to remain in compliance with the modified covenant at least through the remainder of 2011.

The report of the independent registered public accounting firm included an explanatory paragraph regarding certain conditions that raise substantial doubt about our ability to continue as a going concern. These conditions include the inherent uncertainty in refinancing our bank line of credit, which matures on May 31, 2011 as well as continuing operating losses and deficits in our working capital balances. Our ability to continue as a going concern is dependent upon our ability to maintain positive cash flows from operations and to refinance or extend our line of credit. We believe that the steps we have taken, including the acquisition of a product line and the reduction of our operating expenses as described above will enable us to achieve positive cash flows from operations. Additionally, the Company experienced an increase in the rate of new orders during 2010, resulting in a 15% increase in net sales for 2010 compared to 2009, and a 23% increase in the size of its backlog of firm orders from $540,000 at December 31, 2009 to $664,000 at December 31, 2010. There can be no assurance that we will be successful in achieving any of these steps, and there can be no assurance that additional financing will be available on acceptable terms, if at all, and any such terms may be dilutive to existing stockholders. Our inability to secure and maintain the necessary liquidity will have a material adverse effect on our financial condition and results of operations. If we are unable to secure the necessary capital for our business, we may need to suspend some or all of our current operations. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of assets and liabilities that may result from the outcome of this uncertainty. If we continue to achieve revenue growth and maintain positive cash flows from operations, we anticipate requirements for cash will include funding of higher receivable and inventory balances.

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 December 31, 2010, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance, special purpose entities or variable interest 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

We incur various contractual obligations and commercial commitments in our normal course of business. Such obligations and commitments consist primarily of the following:

Debt Payment Obligations

The Company has a significant amount of borrowings and has the following amounts of aggregate long term debt repayments maturing as of December 31st in future years of $320,000 in 2011, $125,000 in 2012, and $3,039,000 in 2013.

Operating Lease Obligations

As of December 31, 2010, we have operating leases for our facilities with future minimum payments of $520,000 extending through March 31, 2014.

Purchase Commitments with Contract Manufacturers

We generally issue purchase orders to our contract manufacturers with delivery dates from four to sixteen 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 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 unable to adequately manage our contract manufacturers 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.

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.

Inflation

Management believes that inflation has not had a significant impact on the price of our products, the cost of our materials, or our operating results for either of the two years ended December 31, 2010.


ITEM 7A:		QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 8:		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements of the Company with related Notes and Report of Independent Registered Public Accounting Firm are attached hereto commencing at page F-l.


ITEM 9:		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.


ITEM 9A:		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal year ending December 31, 2010 covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, respectively, to allow timely decisions regarding required disclosures. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010 under the criteria set forth in the Internal Control—Integrated Framework.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within DPAC have been detected.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the permanent deferral by the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2010, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


ITEM 9B:		OTHER INFORMATION

None.

PART III


ITEM 10:		DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The following table sets forth certain information regarding our directors as of December 31, 2010:


Name	Since	Age	Positions
Samuel W. Tishler	2000	73	Chairman of the Board of Directors
Steven D. Runkel	2006	49	President, Chief Executive Officer, and Director
Dennis R. Leibel	2006	66	Director
William Roberts	2006	56	Director
Mark Chapman	2006	49	Director
James Bole	2006	48	Director

Position with Company (in addition to Director) and Principal Occupations during the Past Five Years

Samuel W. Tishler, Chairman of our Board of Directors, is an independent consultant, retired in 2003 as vice president for Corporate Development for Acterna Corporation, a manufacturer of telecommunications test equipment, and is an experienced strategic planning and venture investment professional. He was a vice president of Arthur D. Little Enterprises, Inc. from 1977 to 1986 and a founder of Arthur D. Little Ventures. He also was a vice president of Raytheon Ventures from 1987 to 1994, and in that capacity was responsible for its venture capital portfolio. Mr. Tishler has also served on many of the Boards of venture-backed companies, including Viewlogic Systems and Kloss Video Corporation.

Mr. Tishler’s broad strategic planning background includes the early development of technology concepts from planning to development and execution. This strategic background and experience with smaller companies allow him to provide significant leadership to the Board of Directors and the Company, as a smaller reporting company.

Steven D. Runkel is our Chief Executive Officer (CEO) and President, and has served in that role since February, 2006. From July, 2000 until February, 2006 he was Quatech, Inc.’s CEO and President. Quatech, Inc. and DPAC merged in February of 2006. From May of 1999 until July 2000, he was a Sr. Practice Director for Oracle Corporation with a focus on Customer Relationship Management (CRM) system implementations. From April 1995 to April 1999 he served in a number of executive management positions for Innovative Systems Inc., a CRM software and services company. These positions included President and Chief Operating Officer from June 1997 to April 1999. Prior to joining Innovative Systems, Mr. Runkel held leadership positions at Formtek, Inc. and Harris Corporation. Mr. Runkel has a BS from Pennsylvania State University.

The company believes that Mr. Runkel’s background in customer relationship management is critical to DPAC’s core business strategy of service and support to its customers.

Dennis R. Leibel has served as a Director of the Company since February 2006 and chairs the Audit Committee. Mr. Leibel is a private investor and a retired financial and legal executive. Mr. Leibel also serves on the Board of Directors of Microsemi Corporation, where he is Chairman, and was formerly a member of the Board of Directors of Commerce Energy Group, Inc. until 2008. Mr. Leibel holds a B.S. degree in accounting, a Juris Doctor degree and an L.L.M. degree.

Mr. Leibel’s experience both in financial matters and as a practicing attorney are significant benefits to DPAC as a smaller reporting company.

William Roberts’ is a 30 year veteran in retailing. He currently is Chairman, Belk Northern Division, a division of Belk Inc. Belk is a $4 billion private retail chain based out of Charlotte, NC. Prior to Belk, Mr. Roberts held various merchandising positions with May Department Stores and Macy’s.

Mr. Roberts experience in the retailing and merchandising fields benefit the company insofar as its core business (as described above) primarily relates to establishing strong relationships with its customers.

Mark Chapman is CEO of EDX wireless LLC, a privately held developer of wireless network planning software. Previously, he was Senior Vice President and General Manager at Comarco Inc (NASDAQ: CMRO), and President of Ascom Inc, a division of Ascom (ASCN.SW), a Swiss provider of wireless network test equipment which acquired Comarco’s WTS division in Jan 2009. Prior roles included acting Vice President of Business Development for WiSpry, a venture funded fabless semiconductor company targeting broadband and wireless communications, as well as various consulting assignments. From 2001 to 2003, Mr. Chapman served as President and CEO of Ditrans Corp, a developer of Digital Transceiver products. Mr. Chapman’s prior experience also includes various management, sales and marketing positions at Rockwell Semiconductor (now Conexant) where he had responsibility for various modem products and later wireless data products. Mr. Chapman received a BSEE with first class honors from Robert Gordon’s University, Aberdeen, Scotland.

Mr. Chapman’s technical background and wide ranging experience in industries similar to DPAC’s represent knowledge, skills and experience that are highly beneficial to the company.

James Bole is President and CEO of Almaden Systems LLC, a private information technology consultancy. Prior to founding Almaden Systems, Jim served as Vice President of Products and Services at RNA Networks, and previous to that Vice President of SOA Solutions at Software AG, a German global enterprise software company. Mr. Bole has more than 25 years of entrepreneurial software development and technical management experience in both startups and Fortune 100 companies. From 2001 to September 2006, Mr. Bole was Vice President of Products and Professional Services at Infravio, a venture capital-backed software startup acquired by Software AG/webMethods. Prior to joining Infravio, Mr. Bole held executive positions at Lockheed Martin (NYSE: LMT), Formtek (acquired by Lockheed Martin), and WorkExchange Technologies. Mr. Bole holds a BS in Applied Mathematics/Computer Science from Carnegie Mellon University.

Mr. Bole’s technical background and management experience, both with large enterprises and smaller companies, are highly valuable to the company as a smaller reporting company.

Executive Officers

The following information is provided with respect to DPAC’s current executive officers. Information for Mr. Steven D. Runkel is provided under the heading “Directors” above.

DPAC’s executive officers and their ages as of December 31, 2009 are as follows:


Name	Age	Positions

Stephen J. Vukadinovich	62	Mr. Vukadinovich has served as Chief Financial Officer of DPAC since 2004, having previously served as Controller to DPAC since May of 2000.

Board of Director Meetings and Committees

During the year ended December 31, 2010, the board of Directors held 4 meetings. All members of the Board of directors hold office until the next Annual Meeting of Stockholders or the election and qualification of their successors. Executive officers serve at the discretion of the Board of Directors.

During the year ended December 31, 2010, each Board of Directors member attended at least 75% of the meetings of the board of Directors and at least 75% of the meetings of the committees on which he served.

We currently have two committees of our Board of Directors: the Audit Committee and the Compensation Committee.

The Audit Committee meets periodically with the company’s management and independent registered public accounting firm to, among other things, review the results of the annual audit and quarterly reviews and discuss the financial statements. The audit committee also hires the independent registered public accounting firm, and receives and considers the accountant’s comments as to controls, adequacy of staff and management performance and procedures. As of the end of 2010 the Audit Committee was composed of Mr. Leibel, Mr. Tishler and Mr. Chapman, all of whom are independent directors. Mr. Leibel is the Chairman of the Audit Committee, and also serves as our “audit committee financial expert”, as defined in Item 407(d)(5)(ii) of Regulation S-K. The Audit Committee operates under a formal charter that governs its duties and conduct.

The compensation committee determines the salaries and incentive compensation of our officers and provides recommendations for the salaries and incentive compensation of our other employees. There are currently two members of the Compensation Committee, Mr. Roberts and Mr. Bole. The compensation committee does not operate under a charter.

The Board of Directors does not maintain a standing nominating committee. The board believes that given its small relative size and familiarity with the company, the costs associated with maintaining such an additional committee are outweighed and that the board and the company would not benefit materially by expending board time and resources with such a formal process. The Board does not have a specific policy as to diversity of the Board. However, with respect to diversity in its deliberations, the Board considers the extent to which potential candidates possess sufficiently beneficial skill sets and characteristics that would contribute to the Board’s overall effectiveness.

Board Leadership Structure. Mr. Tishler serves as our Chairman of the Board of Directors. Mr. Runkel has served as our CEO since the acquisition of Quatech by the company in 2006. The Board believes that the company benefits from having a non-employee chairperson, which affords management greater time resources with which to focus on the core business of the company. The Board does not currently have a designated lead independent director. The Board believes that the appointment of a designated lead independent director is not necessary at this time because of the Company’s small size and because the independent directors play an active role in Board matters.

Board Role in Risk Oversight. The Board administers its risk oversight function directly and through the Audit Committee. The Board and the Audit Committee regularly discuss with management the Company’s major risk exposures, their potential financial impact on the Company, and the steps taken to monitor and control those risks.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors and those persons who beneficially own more than 10% of our outstanding shares of common stock to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% beneficial owners are also required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.

Based solely upon a review of the copies of such forms furnished to us, we believe that during 2010 all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.

Code of Ethics for Financial Professionals

Our code of ethics, which we adopted in 2004, will be provided free of charge to anyone upon written request. Request can be made by mail or fax to:

DPAC Technologies Corp.
5675 Hudson Industrial Park
Hudson, Ohio 44236
Fax: 330-655-9020


ITEM 11:		EXECUTIVE COMPENSATION

The following table sets forth compensation for services rendered in all capacities to the Company for each person who served as an executive officer during the year ended December 31, 2010 (the “Named Executive Officers”). No other executive officer of the Company received salary and bonus, which exceeded $100,000 in the aggregate during the year ended December 31, 2010:

Summary Compensation Table


													Change in
													Pension
													Value and
											Non-Equity		Nonqualified
											Incentive		Deferred
Name and							Stock		Option		Plan		Compensation		All Other
Principal			Salary		Bonus		Awards		Awards		Compensation		Earnings		Compensation		Total
Position	Year		($)		($)		($)		($)		($)		($)		($)		($)
Steven D. Runkel		2010		182,308		8,750		0		0		0		0		9,000		200,058
Chief Executive Officer (1)		2009		190,700		0		0		0		0		0		9,000		199,700

Stephen J. Vukadinovich		2010		137,647		0		0		0		0		0		6,000		143,647
Chief Financial Officer (2)		2009		140,000		0		0		0		0		0		6,000		146,000


(1)		Mr. Runkel’s base salary was voluntarily reduced in July 2009 from $200,000 to $180,000. Mr. Runkel’s other compensation for 2010 consisted of payment of a bonus accrued in 2009 and a vehicle allowance. Additionally, Mr. Runkel, who serves as a director of the Company, does not receive compensation for such service as a director.

(2)		Mr. Vukadinovich’s base salary was reduced in July 2009 from $145,000 to $131,000 due to the Company’s cash flow constraints. Mr. Vukadinovich’s other compensation consisted of a vehicle allowance.

Option Grants

During 2010 the Company issued no stock options.

The following tables contain information concerning the stock option grants to the Company’s Named Executive Officers for the year ended December 31, 2010.

Option Grants in Last Fiscal Year

% of Total

Securities

Options

Underlying

Granted to

Options

Employees in

Base Price

Expiration

Name

Granted (#)

Fiscal Year

($/Share)

Date

Steven D. Runkel
Chief Executive Officer

—

N/A

Stephen J. Vukadinovich
Chief Financial Officer

—

N/A

Outstanding Equity Awards at Year End

Option Awards

Stock Awards

Equity

Incentive

Equity

Plan

Market

Incentive

Awards:

Value

Plan

Market or

Option Awards

Awards:

Payout

Equity Incentive

Number of

Shares

Number of

Value of

Plan Awards:

Shares or

Unearned

Number of

Units of

Shares,

Securities

Stock

Units or

Underlying

That

Other

Unexercised

Option

Have

Right

Rights

Options

Unearned

Exercise

Option

Not

That Have

(#)

Options

Price

Expiration

Vested

Not Vested

Name

Exercisable

Unexercisable

(#)

($)

Date

(#)

($)

(#)

($)

Steven D. Runkel

697,874

0.02

02/28/2011

697,874

0.03

02/28/2012

697,874

0.06

02/28/2014

750,000

250,000

0.10

04/11/2017

500,000

0.04

04/01/2018

Stephen J. Vukadinovich

8,000

1.50

03/22/2011

12,000

1.78

06/01/2011

4,000

1.97

10/22/2011

5,000

2.12

12/03/2011

12,000

1.71

07/25/2012

35,000

0.94

04/10/2013

100,000

0.38

11/04/2014

120,000

0.16

02/28/2016

168,750

56,250

0.10

04/11/2017

112,500

0.04

04/01/2018

Employment Agreements

Effective January 1, 2011, the Company has a written employment agreement with Mr. Runkel that specified a base salary of $225,000 per year, an auto allowance of $750 per month and eligibility to participate in any incentive compensation program of the Company and all other benefit programs generally applicable to the Company’s senior executives. If DPAC terminates Mr. Runkel’s employment for any reason other than for “cause” or if Mr. Runkel terminates his employment for “good reason”, as those terms are defined in the agreement, Mr. Runkel will be entitled to a severance equal to the continuation of his base salary and auto allowance for twelve months from the termination of his employment. In addition, upon such an event, all unvested stock options to purchase Company common stock held by Mr. Runkel, if any, shall become fully vested and may be exercised by him for two years from the date of his termination. The employment agreement terminates on January 30, 2012.

Effective January 1, 2011, the Company has a written employment agreement with Mr. Vukadinovich that specified a base salary of $155,000 per year, an auto allowance of $500 per month and eligibility to participate in any incentive compensation program of the Company and all other benefit programs generally applicable to the Company’s senior executives. If DPAC terminates Mr. Vukadinovich’s employment for any reason other than for “cause” or if Mr. Vukadinovich terminates his employment for “good reason”, as those terms are defined in the agreement, Mr. Vukadinovich will be entitled to a severance equal to the continuation of his base salary and auto allowance for six months from the termination of his employment. In addition, upon such an event, all unvested stock options to purchase Company common stock held by Mr. Vukadinovich, if any, shall become fully vested and may be exercised by him for two years from the date of his termination. The employment agreement terminates on January 30, 2012.

Compensation of Directors

The following table sets forth the compensation of the Board for the 2010 fiscal year:


									Change in
									Pension
									Value and
	Fees								Nonqualified
	Earned or						Non-Equity		Deferred
	Paid in		Stock		Option		Incentive Plan		Compensation		All Other
Name	Cash		Awards		Awards		Compensation		Earnings		Compensation		Total
(1)	($)		($)		($)		($)		($)		($)		($)(2)
(a)	(b)		(c)		(d)		(e)		(f)		(g)		(h)

Samuel W. Tishler		0		0		0		0		0		0		0
Steven D. Runkel		0		0		0		0		0		0		0
Dennis R. Leibel		0		0		0		0		0		0		0
William Roberts		0		0		0		0		0		0		0
Mark Chapman		0		0		0		0		0		0		0
James Bole		0		0		0		0		0		0		0


(1)		Mr. Runkel’s compensation is included in the Executive Compensation summary table. Mr. Runkel does not receive any compensation related to being a director of the Company.

(2)		The Company recognized no expense in its consolidated financial statements related to compensation for directors.

Prior to 2009, the Company paid its non-employee directors a cash retainer of $2,000 per quarter. The Chair of the Audit Committee and the Chair of the Compensation Committee were each paid an additional $1,000 and $500 per quarter, respectively. In addition to such retainers, non-employee directors received fees of $1,500 for each Board meeting attended. In addition, non-employee directors received fees of $500 for each Audit Committee or Compensation Committee meeting attended. The Board members are reimbursed their out-of-pocket expenses for attending Board and committee meetings. For 2009 and 2010, the Directors agreed to forgo all cash payments. The Compensation Committee is currently taking under consideration future Director compensation.

Each non-employee director is entitled to be granted annually an option to purchase up to 50,000 shares of the Company’s Common Stock at the fair market value of such shares at the time of such grant. Such option grants have a 10 year life and are immediately exercisable and fully vested at the time of grant. No stock option grants were issued to directors during the 2010 year. On January 10, 2011, the Company issued to its non-employee directors option grants to purchase 200,000 common shares. This included the annual 50,000 share grants plus additional shares in lieu of cash compensation. All options granted had an exercise price of $0.018 per share, the closing stock price on the day of the grant.


ITEM 12:		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following tables sets forth certain information as of January 31, 2011, with respect to ownership of the Company’s Common Stock by each person who is known by the Company to own beneficially 5% or more of the Common Stock, each Named Officer, each director of the Company, each nominee for director, and all executive officers and directors of the Company as a group.


	Amount and
	Nature of
	Beneficial			Percentage of
Name of Beneficial Owner (and Address of Each 5% Beneficial Owner)	Ownership			Class (1)

Development Capital Ventures, LP 7500 Iron Bar Lane, Suite 209 Fort Mill, SC 29708-6908		163,570,923	(2)		78.0	%

Current directors, director nominees, and executive officers:
Steven Runkel		4,227,764	(3)		2.9	%
William Roberts		11,723,127	(4)		8.1	%
James Bole		2,813,036	(5)		2.0	%
Mark Chapman		666,667	(6)		*
Dennis Leibel		800,000	(6)		*
Samuel Tishler		867,667	(6)		*
Stephen Vukadinovich		569,250	(6)		*

All executive officers and directors as a group (seven)		21,667,511			14.3	%


(1)		Shares of Common Stock, which were not outstanding but which could be acquired upon exercise of a warrant or option within 60 days from the date of this filing, are considered outstanding for the purpose of computing the percentage of outstanding shares beneficially owned. However, such shares are not considered to be outstanding for any other purpose.

(2)		Includes 31,035,258 common shares for the issuance of accrued dividends and the equivalent of 67,647,059 common shares for the potential conversion of 28,750 shares of Class A Preferred Shares.


(3)		Includes 2,645,748 shares subject to options that are exercisable within 60 days.

(4)		Includes 927,404 common shares for the issuance of accrued stock dividends, 666,667 shares subject to options that are exercisable within 60 days and 1,764,706 shares for the potential conversion of 750 shares of Class A Preferred Shares.

(5)		Includes 618,268 common shares for the issuance of accrued stock dividends, 666,667 shares subject to options that are exercisable within 60 days and 1,176,471 shares for the potential conversion of 500 shares of Class A Preferred Shares.

(6)		Consists only of shares subject to options that are exercisable within 60 days.

*		Represents less than 1% of the outstanding shares.

Equity Compensation Plan Information

No. of Shares of

Common Stock

Remaining

Number of

Available

Shares of

for future Issuance

Common Stock

under the Equity

to be

Compensation

Issued upon

Plans

Exercise of

Weighted-Average

(excluding shares

Outstanding

Exercise Price of

reflected in

Options

Outstanding Options

column 1)

Equity Compensation Plans Approved by Shareholders

12,784,699

0.21

22,655,000

Equity Compensation Plans not Approved by Shareholders

—

Total

12,784,699

0.21

22,655,000


ITEM 13:		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

As previously reported in the company’s current report on Form 8-K (filed with the SEC on October 6, 2009) in connection with the acquisition of the SocketSerial assets reported therein, our majority stockholder Development Capital Ventures, LP (“DCV”) facilitated the purchase of such assets through the purchase of shares of our Series A Preferred Stock for an approximate dollar value of $500,000. Mr. Don Murfin, a former director of DPAC, is also a shareholder, director and officer of DCV’s sole general partner.


ITEM 14:		PRINCIPAL ACCOUNTANT FEES AND SERVICES

Maloney + Novotny LLC (“Maloney + Novotny”) served as the company’s independent auditor for the years ended December 31, 2010 and 2009. The following is a summary of the fees billed to the Company by Maloney + Novotny for professional services rendered during the years ended December 31, 2010 and 2009:


Fee Catgegory	2010		2009
Audit Fees	$	98,320	$	92,300
Audit-Related Fees		—		—
Tax Fees		—		—
All Other Fees		890		4,055


Total Fees	$	99,210	$	96,355

Audit fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided in connection with statutory and regulatory filings or engagements.

Our audit committee pre-approves all fees for services to be performed by our principal accountant in accordance with our audit committee charter.


ITEM 15:		EXHIBITS

The following documents are filed as part of this Form 10-K:


	2.1			Agreement dated March 7, 2005 between the Registrant and Quatech, Inc., which is incorporated by reference to Exhibit 2.3 to the Registrant ‘s Form 8-K as filed March 8, 2005.

	2.2			Agreement and Plan of Reorganization dated April 26, 2005 among the Registrant, DPAC Acquisition Sub, Inc. and Quatech, Inc., is incorporated by reference to the to 2.4 to Form 8-K/A as filed by the Registrant on April 27, 2005.

	3.1			Articles of Incorporation, as amended, which are incorporated by reference to the Registrant’s Current Report on Form 8-K, Date of Event July 11, 1988.

	3.2			By-laws, as amended, which are incorporated by reference to Registrant’s Current Report on Form 8-K, Date of Event July 11, 1988.

	3.3			Certificate of Determination dated January 3, 2008, which is incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K as filed February 5, 2008.

	3.4			Certificate of Amendment to the Articles of Incorporation, as amended, of DPAC Technologies Corp., filed July 6, 2010, which is incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K as filed August 4, 2010

	4.1			Common Stock Purchase Warrant dated January 31, 2008 between the Registrant and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.1			Lease for Premises at 7321 Lincoln Way, Garden Grove, California, dated June 19, 1997, incorporated by reference to Registrant’s Annual Report on Form l0-KSB for the year ended February 29, 1996.

	10.2			Renewal of Garden Grove lease, incorporated by reference to Exhibit 10.2.1 to the Registrant’s Form 10-K filed June 1, 2004 for the year ended February 29, 2004.

	10.3			1996 Stock Option Plan as incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form l0-KSB for the year ended February 29, 1996.*

	10.4			1985 Stock Option Plan, as amended and incorporated by reference to Registrant’s Annual Report on Form l0-KSB for the year ended February 28, 1994.*

	10.5			Form of Indemnification Agreement with officers and directors as incorporated by reference to Registrant’s Annual Report on Form l0-KSB for the year ended February 28, 1994.*

	10.6			Description of CEO Severance Agreement dated March 18, 2004, incorporated by reference to Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q filed January 14, 2005.

	10.7			Description of Supplemental Severance Policy, incorporated by reference to Exhibit 10.15 to the Registrant’s Current Report on Form 8-K filed February 23, 2005.*

	10.8			Loan Agreement, between Quatech, Inc., as Borrower, and the Director of Development of the State of Ohio, as Lender, dated as of January 27, 2006 incorporated by reference to Exhibit 10.12 to the Registrant’s Current Report on Form 8-K, as filed March 6, 2006.

	10.9			Description of Director Compensation adopted March 14, 2006, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed March 20, 2006.


	10.10			Credit Agreement dated January 30, 2008 between the Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.11			Revolving Credit Promissory Note dated January 30, 2008 between the Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.12			Security Agreement dated January 30, 2008 between the Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.13			Subordination Agreement dated January 30, 2008 between the Registrant, Quatech, Inc., Canal Mezzanine Partners, L.P. and Fifth Third Bank, between the Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.14			Acknowledgement Agreement dated January 30, 2008 between Fifth Third Bank and Development Capital Ventures, L.P., which is incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.15			Senior Subordinated Note and Warrant Purchase Agreement dated January 31, 2008 between the Registrant, Quatech, Inc. and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.16			Senior Subordinated Note dated January 31, 2008 between the Registrant, Quatech, Inc. and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit 10.7 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.17			Security Agreement dated January 31, 2008 between the Registrant, Quatech, Inc. and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit 10.8 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.18			Co-Sale Agreement dated January 31, 2008 between the Registrant, Development Capital Ventures, LP, William Roberts, Steven D. Runkel, and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit 10.9 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.19			Registration Rights Agreement dated January 31, 2008 between the Registrant and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit 10.10 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.20			Acknowledgement Agreement dated January 31, 2008 between Canal Mezzanine Partners, L.P. and Development Capital Ventures, LP, which is incorporated by reference to Exhibit 10.11 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.21			Subscription Agreement dated December 17, 2007 between the Registrant and Development Capital Ventures, LP, which is incorporated by reference to Exhibit 10.12 to the Registrant’s Form 8-K as filed February 5, 2008.

	10.22			Equipment Purchase Agreement dated as of December 30, 2008 between the Registrant and Tetrad Electronics, Inc., which is incorporated by reference to Exhibit 10.34 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008.

	10.23			Asset Purchase Agreement By and Among Socket Mobile, Inc., Development Capital Ventures, L.P. and Quatech Inc., made as of the close of business on September 30, 2009, which is incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed October 6, 2009.

	10.24			Supply and Licensing Agreement between Quatech, Inc. and Socket Mobile, Inc., effective as of September 30, 2009, which is incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K as filed October 6, 2009.

	10.25			First Amendment to Credit Agreement dated January 31, 2009 among the Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.35 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008.


	10.26			Revolving Credit Promissory Note dated January 31, 2009 among the Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.35 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2008.

	10.27			Second Amendment to Credit Agreement, by and among DPAC Technologies Corp., Quatech, Inc. and Fifth Third Bank, dated as of March 30, 2010, which is incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed April 5, 2010.

	10.28			Amended and Restated Revolving Note made by DPAC Technologies Corp. and Quatech, Inc. in favor of Fifth Third Bank, dated as of March 30, 2010, which is incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K as filed April 5, 2010.

	10.29			Letter Agreement among DPAC Technologies Corp. and Development Capital Ventures, LP dated September 30, 2009, which is incorporated by reference to Exhibit 7 to Development Capital Ventures, LP’s Schedule 13D, Amendment No. 2 with respect to the Registrant.

	10.30			Third Amendment to Credit Agreement, by and among DPAC Technologies Corp., QuaTech, Inc. and Fifth Third Bank, dated as of July 30, 2010, which is incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed September 22, 2010.

	10.31			Fourth Amendment to Credit Agreement, by and among DPAC Technologies Corp., QuaTech, Inc. and Fifth Third Bank, dated as of February 25, 2011, which is incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed March 31, 2011.

	10.32			Employment Agreement, effective as of January 1, 2011, between DPAC Technologies Corp. and Steven D. Runkel, which is incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed January 12, 2011.

	10.33			Employment Agreement, effective as of January 1, 2011, between DPAC Technologies Corp. and Stephen Vukadinovich, which is incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K as filed January 12, 2011.

	14.1			Code of Business Conduct and Ethics, incorporated by reference to Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K filed on June 1, 2004 for the fiscal year ended February 29, 2004.

	21.1			List of Subsidiaries.

	23.1			Consent of Maloney + Novotny, LLC, a Registered Independent Public Accounting Firm.

	24.1			Power of Attorney (contained on the signature page to this report).

	31.1			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Management compensatory plan or arrangement

(c)		Financial Statement Schedules Excluded from Annual Report: None

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


Date: April 15, 2011	DPAC TECHNOLOGIES CORP.
	By:	/s/ Steven D. Runkel
		Steven D. Runkel
		Chief Executive Officer Director

	By:	/s/ Stephen J. Vukadinovich
		Stephen J. Vukadinovich
		Chief Financial Officer & Secretary (Principal Financial and Accounting Officer)

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints Steven D. Runkel and Stephen J. Vukadinovich, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, to sign the report on Form 10-K and any or all amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof in any and all capacities.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


/s/ Samuel W. Tishler Samuel W. Tishler Chairman of the Board		April 15, 2011

/s/ Steven D. Runkel Steven D. Runkel Chief Executive Officer, Director (Principal Executive Officer)		April 15, 2011

/s/ William Roberts William Roberts, Director		April 15, 2011

/s/ Mark Chapman Mark Chapman, Director		April 15, 2011

/s/ Dennis R. Leibel Dennis R. Leibel, Director		April 15, 2011

/s/ Jim Bole Jim Bole, Director		April 15, 2011

/s/ Stephen J. Vukadinovich Stephen J. Vukadinovich Chief Financial Officer & Secretary (Principal Financial and Accounting Officer)		April 15, 2011

DPAC TECHNOLOGIES CORP.

TABLE OF CONTENTS


	Page No.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets		F-3

Consolidated Statements of Operations		F-4

Consolidated Statements of Stockholders’ Equity		F-5

Consolidated Statements of Cash Flows		F-6

Notes to Consolidated Financial Statements		F-7 – F-21

F-1

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
DPAC Technologies Corp.
Hudson, Ohio

We have audited the accompanying consolidated balance sheets of DPAC Technologies Corp. and subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DPAC Technologies Corp. and subsidiary as of December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, certain conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.


MALONEY + NOVOTNY LLC

Cleveland, Ohio
April 15, 2010

F-2

DPAC Technologies Corp.

Consolidated Balance Sheets
December 31, 2010 and 2009


	2010			2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	47,870		$	17,532
Accounts receivable, net		1,159,122			1,124,598
Inventories		898,418			1,076,739
Prepaid expenses and other current assets		37,358			73,914

Total current assets		2,142,768			2,292,783

PROPERTY, net		631,769			745,756

FINANCING COSTS, net		68,291			101,911
TRADEMARKS		2,583,000			2,583,000
GOODWILL		3,822,503			3,822,503
AMORTIZABLE INTANGIBLE ASSETS, net		121,664			621,684
OTHER ASSETS		16,133			18,817


TOTAL	$	9,386,128		$	10,186,454


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility	$	1,500,000		$	1,425,243
Current portion of long-term debt		320,000			230,000
Accounts payable		1,127,512			1,513,568
Put warrant liability		110,900			100,300
Other accrued liabilities		512,410			367,144

Total current liabilities		3,570,822			3,636,255

LONG-TERM LIABILITIES:

Ohio Development loan, less current portion		1,971,972			2,106,724
Subordinated debt, less current portion		1,191,724			1,160,649

Total long-term liabilities		3,163,696			3,267,373

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Convertible, voting, cumulative, 15% series A preferred stock, $100 par value; 30,000 shares authorized; 30,000 shares issued and outstanding at December 31, 2010 and 2009, respectively		2,499,203			2,499,203
Common stock, no par value - 500,000,000 shares authorized; 109,414,896 shares issued and outstanding at December 31, 2010 and 2009		5,755,728			5,687,232
Preferred stock dividends distributable in common stock; 32,580,930 and 3,571,429 common shares at December 31, 2010 and 2009, respectively		465,000			50,000
Accumulated deficit		(6,068,321	)		(4,953,609	)

Total stockholders’ equity		2,651,610			3,282,826


TOTAL	$	9,386,128		$	10,186,454

See accompanying notes to consolidated financial statements.

F-3

DPAC Technologies Corp.

Consolidated Statements of Operations

For the Years Ended December 31, 2010 and 2009


	2010			2009

NET SALES	$	7,847,465		$	6,807,418

COST OF GOODS SOLD		4,694,840			4,008,510


GROSS PROFIT		3,152,625			2,798,908

OPERATING EXPENSES
Sales and marketing		782,965			824,659
Research and development		733,065			775,106
General and administrative		1,111,266			1,247,519
Amortization of intangible assets		538,348			509,185
Restructuring charges		—			12,097

Total operating expenses		3,165,644			3,368,566


LOSS FROM OPERATIONS		(13,019	)		(569,658	)

OTHER (INCOME) EXPENSES:
Interest expense		641,093			579,553
Fair value adjustment for put warrant liability		10,600			(15,800	)

Total other expenses		651,693			563,753


LOSS BEFORE INCOME TAX PROVISION		(664,712	)		(1,133,411	)

INCOME TAX PROVISION		—			—


NET LOSS		(664,712	)		(1,133,411	)

PREFERRED STOCK DIVIDENDS		450,000			210,939


NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(1,114,712	)	$	(1,344,350	)


NET LOSS PER SHARE:
Basic and diluted	$	(0.01	)	$	(0.01	)


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted		109,415,000			104,367,000

See accompanying notes to consolidated financial statements.

F-4

DPAC Technologies Corp.

Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2010 and 2009


									Preferred stock
									dividends
	Preferred Stock				Common Stock				distributable in		Accumulated
	Shares		Amount		Shares		Amount		Common Stock		Deficit			Total

BALANCE AT DECEMBER 31, 2008		21,250		2,014,203		98,006,343		5,376,609		47,813		(3,609,259	)		3,829,366

ISSUANCE OF PREFERRED STOCK		8,750		485,000											485,000

PREFERRED STOCK DIVIDENDS PAID OR DISTRIBUTABLE IN COMMON STOCK						11,408,553		191,252		2,187		(210,939	)		(17,500	)

COMPENSATION EXPENSE ASSOCIATED WITH STOCK OPTIONS								119,371							119,371

NET LOSS												(1,133,411	)		(1,133,411	)


BALANCE AT DECEMBER 31, 2009		30,000	$	2,499,203		109,414,896	$	5,687,232	$	50,000	$	(4,953,609	)	$	3,282,826

PREFERRED STOCK DIVIDENDS DISTRIBUTABLE IN COMMON STOCK										415,000		(450,000	)		(35,000	)

COMPENSATION EXPENSE ASSOCIATED WITH STOCK OPTIONS								68,496							68,496

NET LOSS												(664,712	)		(664,712	)


BALANCE AT DECEMBER 31, 2010		30,000	$	2,499,203		109,414,896	$	5,755,728	$	465,000	$	(6,068,321	)	$	2,651,610

See accompanying notes to consolidated financial statements.

F-5

DPAC Technologies Corp.

Consolidated Statements of Cash Flows
For the Years Ended December 31, 2010 and 2009


	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(664,712	)	$	(1,133,411	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		683,804			594,997
Provision for bad debts		(3,195	)		(23,773	)
Provision for excess inventory		165,550			48,000
Accretion of discount and success fees on debt		48,334			58,385
Amortization of deferred financing costs		46,675			50,068
Fair value adjustment for put warrant liability		10,600			(15,800	)
Non-cash compensation expense		68,496			119,371

Changes in operating assets and liabilities:
Accounts receivable		(31,329	)		(214,336	)
Inventories		12,771			41,208
Prepaid expenses and other assets		39,240			(33,079	)
Accounts payable		(386,056	)		616,464
Accrued restructuring charges		—			(42,366	)
Other accrued liabilities		132,005			(69,756	)

Net cash provided by (used in) operating activities		122,183			(4,028	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash from sales of assets		—			190,901
Property additions		(69,797	)		(37,140	)
Developed software		—			(29,282	)

Net cash provided by (used in) investing activities:		(69,797	)		124,479


CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under revolving credit facility		74,757			243
Repayments on Ohio Development loan		(31,250	)		(104,167	)
Repayments of Subordinated Debt		(35,000	)		(20,000	)
Financing costs incurred		(13,055	)		(19,900	)
Principal payments on capital lease obligations		—			(3,252	)
Preferred stock dividends paid in cash		(17,500	)		—
Net proceeds from issuance of preferred stock		—			35,000

Net cash used in financing activities		(22,048	)		(112,076	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		30,338			8,375

CASH and CASH EQUIVALENTS, BEGINNING OF PERIOD		17,532			9,157


CASH and CASH EQUIVALENTS, END OF PERIOD	$	47,870		$	17,532


SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	494,467		$	463,397


SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock fees and dividends paid in common stock	$	415,000		$	143,149

Issuance of preferred stock for acquisition of SocketSerial assets	$	—		$	450,000

See accompanying notes to consolidated financial statements.

F-6

DPAC Technologies Corp.

Notes to Consolidated Financial Statements

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.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany transactions and balances have been eliminated in consolidation.

Going Concern

The Company’s financial statements have been prepared on a going concern basis. Certain conditions exist that raise substantial doubt about the Company’s ability to continue as a going concern. These conditions include continued operating losses, deficit working capital balances and the inherent risk in extending or refinancing our bank line of credit, which matures on May 31, 2011. Our ability to continue as a going concern is dependent upon our ability to maintain positive cash flows from operations and to raise additional financing. Management believes that it has taken the necessary steps to achieve positive cash flows from operations, including the acquisition of a product line and reduction and management of the Company’s operating costs. The Company’s continued ability to obtain financing may be unavailable when needed. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As such, they do not include adjustments relating to the recoverability of recorded asset amounts and classification of recorded assets and liabilities that might result from the outcome of this uncertainty.

Liquidity

At December 31, 2010, the Company had a cash balance of $48,000 and a deficit in working capital of $1,428,000. This compares to a cash balance of $18,000 and a deficit in working capital of $1,343,000 at December 31, 2009. Although the Company has reported net losses in recent periods, a significant portion of our operating expenses are non-cash. For 2010, the Company reported a net loss of $665,000, which included the following non-cash operating expenses: depreciation and amortization of $684,000, provision for excess inventory of $166,000, non-cash compensation for stock options of $68,000, and non-cash interest expense of $95,000. For the year ended December 31, 2009, the Company reported a net loss of $1,133,000, which included the following non-cash operating expenses: depreciation and amortization of $595,000, provision for excess inventory of $48,000, non-cash compensation expense for stock options of $119,000, and non-cash interest expense of $108,000.

The Company has taken the following actions to reduce expenses and increase capital: In the third quarter of 2008, the Company reduced its cash operating expenses to align its cost structure with then current economic conditions and a downturn in the Company’s revenue levels, resulting in annualized operating cost savings of approximately $600,000. During the first quarter of 2009, the Company entered into an agreement with one of its contract manufacturers to sell certain equipment and inventory, lease a portion of its facility to the manufacturer, and further engage the manufacturer to produce more of the Company’s products. This transaction provided $150,000 in cash and has improved the operating efficiency of the Company. In the third quarter of 2009, the Company implemented additional cost reduction measures by reducing headcount and implementing a salary reduction program for all employees resulting in annual operating costs reductions of approximately $400,000. On September 30, 2009, the Company acquired the SocketSerial product line in a non cash transaction for the Company. Margins generated from revenues of this product line have helped enable the Company to achieve a cash flow break even from operations. In March of 2011, the Company entered into a Fourth Amendment to Credit Agreement extending the maturity date of its Bank revolving credit facility to May 31, 2011.

Going forward, the Company is dependent on financing its operations from through the contribution generated from future revenues and the use of its bank line of credit. Management believes that the actions it has taken will help enable the Company to generate positive cash flows from operations. Additionally, the Company experienced an increase in the rate of new orders during 2010, resulting in a 15% increase in net sales for 2010 compared to 2009, and a 23% increase in the size of its backlog of firm orders from $540,000 at December 31, 2009 to $664,000 at December 31, 2010. However, a further 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. The Company is currently talking to a number of other potential lenders with the intent of replacing the bank line of credit, which matures on May 31, 2011, with a new facility; however, we have not at this time received a commitment from another source that could replace the Bank line in its entirety. The Company may find it necessary to raise additional capital to fund its operations; however, there can be no assurance that additional capital will be available on acceptable terms, if at all, if and when it may be needed.

F-7

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.

The Company calculates its reserve for excess and obsolete inventory based on the best estimate available as to the value of the items, and capitalizes labor and overhead to inventory based on estimates of applicable expenses. The Company estimates an allowance for doubtful accounts of its accounts receivable based upon a review of delinquent accounts and an assessment of the Company’s historical evidence of collections. Additionally, the Company calculated its warranty reserve on the best available measure of claims. Because of the inherent uncertainties in estimating the above, it is at least reasonably possible that the estimates used could change within the near term.

Cash and Cash Equivalents

The Company considers all short-term debt securities purchased with an initial maturity of three months or less to be cash equivalents.

Accounts Receivable

The Company extends unsecured credit to customers under normal trade agreements, which generally require payment within 30 days. Accounts greater than 90 days past due are considered delinquent. The Company does not charge interest on delinquent trade accounts receivable. Unless specified by the customer, payments are applied to the oldest unpaid invoice. Accounts receivable are presented at the amounts billed.

Management estimates an allowance for doubtful accounts, which was $23,479, and $26,674 as of December 31, 2010 and 2009, respectively. The estimate is based upon management’s review of delinquent accounts and an assessment of the Company’s historical evidence of collections. The Company incurred $0 and $1,000 of bad debt expense for the years ended December 31, 2010 and 2009, respectively. Specific accounts are charged directly to the reserve when management obtains evidence of a customer’s insolvency or otherwise determines that the account is uncollectible. Charge-offs of specific accounts for the years ended December 31, 2010 and 2009 totaled $3,195 and $23,773, respectively.

Inventories

Inventories, consisting principally of raw materials, sub-assemblies and finished goods, are stated at the lower of average cost or market. The Company regularly monitors inventories for excess or obsolete items and records a provision to write-down excess or obsolete items as required. At the end of each reporting period, the Company compares its inventory on hand to its forecasted requirements for the next twelve month period and the Company writes-off the cost of any inventory that is surplus, less any amounts that the Company believes it can recover from the disposal of such inventory. The Company’s sales forecasts are based upon historical trends, customer communications, and data regarding market trends and dynamics. Changes in the amounts recorded for surplus or obsolete inventory are included in cost of goods sold.

Property

Property is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally ranging from 3 to 11 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful lives of the improvements or the term of the related lease.

Capitalized Developed Software

F-8

Financing Costs

Financing costs incurred are amortized over the life of the associated financing arrangements using the effective interest method. Amortization expense totaled approximately $46,675 and $50,068 for the years ended December 31, 2010 and 2009, respectively.

Long-lived Assets

The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the assets’ carrying value exceeds its fair value, and is recorded as a reduction in the carrying value of the related asset and a charge to operations.

Goodwill and Intangible Assets

Goodwill and indefinite lived intangible assets are tested for impairment annually at December 31^st or more frequently when events or circumstances indicate that the carrying value of the Company’s single reporting unit more likely than not exceeds its fair value. The Company utilizes the two step test as required to assess goodwill for impairment. The first step of the goodwill impairment test consists of comparing the carrying value of the reporting unit to its fair value. Management estimates the fair value of the Company using an average of two methods and compares the fair value to the carrying amount (net book value) to ascertain if potential goodwill impairment exists. The Company utilizes methods that focus on its ability to produce income (“Income Approach”) and the estimated consideration it would receive if there were a sale of the Company (“Market Approach”). Key assumptions utilized in the determination of fair value in step one of the test included the following: the Company’s market capitalization; market multiples of comparable companies within its industry; revenue and expense forecasts used in the evaluation are based on trends of historical performance and management’s estimate of future performance; cash flows utilized in the discounted cash flow analysis are estimated using a weighted average cost of capital determined to be appropriate for the Company. Based on the Company’s analysis for impairment at December 31, 2010, the estimated fair value of the Company significantly exceeded its carrying value; therefore there was no impairment of goodwill and other indefinite lived intangibles. Consequently, the second step of the impairment test was not necessary.

Amortizable Intangible Assets

At December 31, 2010, amortizable intangible assets consisted of the following:


			Accumulated
	Gross Assets		Amortization			Net
Developed technology	$	2,450,094	$	(2,368,430	)	$	81,664
Customer list		50,000		(10,000	)		40,000

	$	2,500,094	$	(2,378,430	)	$	121,664

At December 31, 2009 amortizable intangible assets consisted of the following:


			Accumulated
	Gross Assets		Amortization			Net
Developed technology	$	2,450,094	$	(1,878,410	)	$	571,684
Customer list		50,000		—			50,000

	$	2,500,094	$	(1,878,410	)	$	621,684

The developed technology was acquired in the DPAC — Quatech merger on February 28, 2006. The fair value was determined to be $2,450,094 at the acquisition date and is being amortized over its estimated life of 5 years. The fair value for the customer list acquired with the SocketSerial product line acquisition on September 30, 2009 of $50,000 is being amortized over its expected life of 5 years.

Total amortization expense related to the above assets was $500,020 and $490,020 for the years ended December 31, 2010 and 2009, respectively.

F-9

Revenue Recognition

Revenue on sales to customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, and there are no remaining significant obligations. Revenue on sales to distributors where a right of return exists is recognized upon “sell-through,” when products are shipped from the distributor to the distributor’s customer. Revenue related to those products in our distribution channel at the end of each reporting period which has not sold-through is deferred. The amount of deferred revenue included in other accrued liabilities on the Company’s balance sheet was $68,587 and $9,991 at December 31, 2010 and 2009, respectively.

A reserve for defective products is recorded for customers based on historical experience or specific identification of an event necessitating a reserve. Development revenue is recognized when services are performed and was not significant for any of the periods presented.

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.

Advertising Costs

The cost of advertising is charged to expense as incurred. Advertising expense for the years ended December 31, 2010 and 2009 totaled approximately $77,000 and $64,000, respectively.

Shipping and Handling Costs

The costs of shipping and handling billed to customers in sale transactions are recorded as revenue. Costs incurred for shipping and handling to customers are reported in cost of good sold. Total shipping and handling costs incurred to ship goods to customers were approximately $82,000 and $68,000 for the years ended December 31, 2010 and 2009, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable, which are derived primarily from distributors, original equipment manufacturers, and end customers.

The Company maintains its cash balances primarily in one financial institution which is insured under the Federal Deposit Insurance Corporation.

Stock-Based Compensation

The Company recognizes 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. The Company estimates the fair value of share-based payment awards on the date of grant using a Black-Scholes 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.

Income Taxes

As of December 31, 2010, the Company’s prior three income tax years remain subject to examination by the Internal Revenue Service, as well as various state and local taxing authorities.

Net Income (Loss) per Share

Basic earnings per share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution of securities by including other common stock equivalents, including stock options, in the weighted-average number of common shares outstanding for a period, if dilutive.

F-10

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


	2010		2009

Shares used in computing basic net income (loss) per share		109,415,000		104,367,000
Dilutive effect of stock options and warrants⁽¹⁾⁽²⁾		—		—

Shares used in computing diluted net income (loss) per share		109,415,000		104,367,000


(1)		For the 2010 and 2009 periods presented, the diluted net loss per share is equivalent to the basic net loss per share because the Company experienced losses in these years and thus no potential common shares underlying stock options, warrants, or convertible preferred stock have been included in the net loss per share calculation. Options and warrants to purchase 8,513,000 and 8,181,000 shares of Common Stock in 2010 and 2009, respectively, have been omitted from the loss per share calculation as their effect is anti-dilutive.

(2)		Also excluded from both the 2010 and 2009 period computations are approximately 32 million common shares issuable for payment of accrued preferred stock dividends payable at December 31, 2010, and the potential of approximately 71 million common shares that would have been issued upon the conversion of the total number of shares of Preferred Stock outstanding at each date at the option of the preferred shareholders.

The number of shares of common stock, no par value, outstanding at both December 31, 2010 and 2009 was 109,414,896. Additionally, there were unissued accrued dividend shares of 32,580,930 and 3,571,429 issuable at December 31, 2010 and 2009, respectively. The Company issued the 32,580,930 shares on March 28, 2011.

Preferred Stock

At December 31, 2010 the Company had outstanding 30,000 shares of convertible, voting, cumulative, 15% 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. Since the Company was not listed for trading on the American Stock Exchange, a NASDAQ Stock Market or the New York Stock Exchange as of December 31, 2009, effective beginning January 1, 2010, dividends accrue and are to 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 to the dividend payment date. During the year ended December 31, 2009, the Company issued 11,408,553 common shares in payment of dividends of $191,252. At December 31, 2010, the Company had accrued dividends of $482,500, of which $465,000 is distributable in common stock, equating to 32,580,930 common shares issuable, and $17,500 of which is accrued to be paid in cash. The Company did not issue any common shares during the year ended December 31, 2010. At December 31, 2009, The Company had accrued dividends of $67,500, of which $50,000 was distributable in common stock, equating to 3,571,429 common shares issuable, and $17,500 of which was accrued to be paid in cash.

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 approximately 71 million common shares should the total number of outstanding preferred shares be converted. After December 31, 2009, the Company 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.

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, and debt approximate fair value due to the relatively short period of time to maturity.

Fair Value Measurements

In September 2006, the FASB issued ASC No. 820, Fair Value Measurements (“ASC 820,” and previously referred to as Statement No. 157). The accounting pronouncement establishes a three-level hierarchy which prioritizes the inputs used in measuring fair value. In general, fair value determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations in which there is little, if any, market activity for the asset or liability.

F-11

The following table represents our financial assets and liabilities measured at fair value on a recurring basis and the basis for that measurement:


			Fair Value Measurement at December 31, 2010 Using:
					Significant
			Quoted Prices in		Other		Significant
	Total		Active Markets		Observable		Unobservable
	Fair Value		for Identical Assets		Inputs		Inputs
	Measurement		(Level 1)		(Level 2)		(Level 3)
Put Warrant Liability:
December 31, 2010	$	110,900		—	$	110,900		—

December 31, 2009	$	100,300		—	$	100,300		—


Success Fee:
December 31, 2010	$	18,319		—	$	18,319		—

December 31, 2009		—		—		—		—

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. 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 loss of $10,600 and a gain of $15,800 for the years ended December 31, 2010 and 2009, respectively, 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 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 by 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. Based on the results of the above calculation, the Company recorded a liability of $18,319 and $0 for the success fee as of December 31, 2010 and 2009, respectively. There was no change in the valuation technique used by the Company since the last reporting period.

Comprehensive Income

The Company had no items of other comprehensive income for 2010 and 2009.

Recently Issued Accounting Standards

In October 2009, the FASB amended revenue recognition guidance for arrangements with multiple deliverables. The guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (“VSOE”), vendor objective evidence (“VOE”) or third-party evidence (“TPE”) is unavailable. This guidance should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. Full retrospective application of the guidance is optional. The Company is currently evaluating the impact of adopting this guidance on its financial statements.

F-12

In April 2010, the FASB issued Accounting Standards Update 2010-13 (ASU 2010-13), “Compensation—Stock Compensation (Topic 718).” ASU 2010-13 provides amendments to ASC Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The provision of ASU 2010-13 are not expected to have a material effect on the financial position, results of operations or cash flows of the Company.

NOTE 2 — PRODUCT LINE ACQUISITION

On September 30, 2009, in a non-cash transaction for the Company, the Company acquired from Socket Mobile, Inc. (“Socket”) the SocketSerial product line and all assets of Socket which pertain to Socket’s serial card business (the “Business”), including the tangible personal property and assets of Socket related to the Business; rights to any contract, purchase order, license or other agreement to the ownership, manufacture and distribution of the assets; certain rights to the intellectual property and proprietary rights related to or useful in connection with the Business and customer lists; the SocketSerial brand name and the SocketSerial website. The products in the SocketSerial product line consist of a CompactFlash serial card, a PC serial card, a PC dual serial card, and a PC quad serial card, all with fixed and removable cable models. Also included are a USB to Serial Adapter, USB to Ethernet Adapter and a license to sell the Cordless Serial Adapter. Quatech intends to continue to manufacture and distribute the SocketSerial product line and assumed existing customer support responsibilities. The transaction was completed with the assistance of Development Capital Ventures, LP (“DCV”), the Company’s majority shareholder. DCV initially purchased the Assets from Socket and immediately transferred the Assets to the Company in exchange for 8,750 shares of the Company’s Series A Preferred Stock.

The Assets were acquired for a purchase price of $500,000, of which $450,000 was payable at closing, and a contingent $50,000 payment would have become payable upon the attainment by Quatech of $250,000 in quarterly sales revenue from the sale of SocketSerial products in any quarter through the quarter ending December 31, 2010. No sales of the SocketSerial products attained the $250,000 threshold in any quarterly period through December 31, 2010; therefore the contingent $50,000 is not payable. The purchase price was allocated as follows:


Equipment	$	10,000
Developed embedded software		390,000
Customer list		50,000

Total	$	450,000

The acquired Assets were not placed fully into service until December 31, 2009 and will begin being depreciated in January 2010 under their respective lives, estimated to be 5 years, on a straight line basis.

F-13

NOTE 3 — INVENTORIES

Inventory components at year-end are shown in the following table:


	2010		2009
Finished goods	$	613,009	$	761,600
Raw materials and sub-assemblies		285,409		315,139

	$	898,418	$	1,076,739

Purchases of finished assemblies from three major vendors represented 37%, 30% and 11% of the total inventory purchased in 2010 and purchases from two major vendors represented 43% and 23% of inventory purchased in 2009. The Company has arrangements with these vendors to purchase product based on purchase orders periodically issued by the Company.

NOTE 4 — PROPERTY

At December 31, 2010 and 2009, property consisted of the following:


	2010			2009
Leasehold improvements	$	103,714		$	103,714
Machinery and equipment		380,773			328,197
Computer software and equipment		628,683			611,462
Office furniture and equipment		79,602			79,602
Internally developed software		191,657			191,657
Developed embedded software		390,000			390,000

		1,774,429			1,704,632
Less: Accumulated depreciation		(1,142,660	)		(958,876	)

Net property	$	631,769		$	745,756

Depreciation expense totaled approximately $184,000 and $86,000 for the years ended December 31, 2010 and 2009, respectively.

F-14

NOTE 5 — INCOME TAXES

The income tax benefit consists of the following for the years ended December 31, 2010 and 2009:


	2010			2009
Current:
Federal	$	—		$	—
State		—			—

Total current		—			—


Deferred:
Federal		(225,654	)		(375,602	)
State		(26,547	)		(44,188	)

Total deferred		(252,201	)		(419,790	)
Change in valuation allowance		252,201			419,790

Deferred income tax provision — net		—			—


Total income tax provision	$	—		$	—

At December 31, 2010 and 2009, net deferred tax balances consisted of the following:


	2010			2009
Deferred tax assets related to:
Accounts receivable	$	8,922		$	10,136
Accrued expenses		43,338			40,911
Inventory		169,489			115,853
Intangibles		740,246			646,507
General business credits		135,562			135,562
Nonqualified stock options		88,635			62,606
Stock warrants		42,142			38,114
Net operating loss caryforward		4,676,969			4,507,300

		5,905,303			5,556,989
Valuation allowance		(4,712,578	)		(4,460,376	)

Deferred tax assets, net		1,192,725			1,096,613

Deferred tax liabilities related to:
Property, plant and equipment		(75,144	)		(33,743	)
Intangibles		(1,117,581	)		(1,062,870	)

Deferred tax liabilities, net		(1,192,725	)		(1,096,613	)


Deferred taxes, net	$	—		$	—


Amounts included in balance sheets:
Current deferred tax assets	$	—		$	—
Long-germ deferred tax liability		—			—

Deferred taxes, net	$	—		$	—

Included in the total deferred tax assets, the Company has an income tax carryforward for federal net operating losses. The cumulative federal net operating loss carryforward of approximately $12,308,000 expires through 2030; however, as a result of the merger between Quatech, Inc. and DPAC Technologies Corp, a substantial portion of DPAC’s federal net operating loss carryforward is subject to the provisions of Sec. 382 of the Internal Revenue Code (IRC), and therefore, is not available for immediate benefit to the company. Management has not yet determined the final impact of the IRC Sec. 382 limitation on the federal net operating loss carryforward. The realization of the Company’s deferred tax assets, including this federal net operating loss, and the related valuation allowance are significant estimates requiring assumptions regarding the sufficiency of future taxable income to realize the future tax deduction from the reversal of deferred tax assets and the net operating loss prior to their expiration. The valuation allowance has been provided based upon the Company’s assessment of future realizability of certain deferred tax assets, as it is more likely than not that sufficient taxable income will not be generated to realize these temporary differences. The net increase in the valuation allowance was $252,201 for 2010 and $419,790 for 2009. The amount of the corresponding valuation allowance could change significantly in the near term if estimates of future taxable income are changed.

F-15

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 2010 and 2009 valuation allowances were calculated using 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. 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.

A reconciliation of the Company’s effective tax rate compared to the federal statutory rate is as follows:


	2010			2009
Federal statutory rate		(34	)%		(34	)%
State taxes		0			0
Valuation allowance		34			34
Other		0			0

		0	%		0	%

NOTE 6 — DEBT

At December 31, 2010 and 2009, outstanding debt consisted of the following:


	2010			2009

Revolving credit facility	$	1,500,000		$	1,425,243


Long term debt:
Ohio Development Loan:
Principal balance	$	1,906,268		$	1,933,279
Accrued participation fee		190,704			173,445

		2,096,972			2,106,724
Less: current portion		(125,000	)		—

Net long-term portion		1,971,972			2,106,724


Subordinated debt:
Principal balance	$	1,395,000		$	1,430,000
Accrued success fee		18,319			—
Less: Unamortized discount for stock warrants		(26,595	)		(39,351	)

		1,386,724			1,390,649
Less: current portion		(195,000	)		(230,000	)

Net long-term portion	$	1,191,724		$	1,160,649


Total Current Portion of Long-term Debt	$	320,000		$	230,000

Total Net Long-term Debt	$	3,163,696		$	3,267,373

F-16

Revolving Credit Facility

The Company has a revolving line of credit with a Bank providing for a maximum facility of $1,500,000 working capital line of credit through May 31, 2011. At December 31, 2010, the facility had a floating interest rate at the 30 day LIBOR (.26% at December 31, 2010) plus 8.5%. Per the terms of the Third Amendment to Credit Facility, the line expired on December 15, 2010. In March 2011, the Company entered into a Fourth Amendment (“Amendment”) to Credit Agreement, effective as of December 15, 2010, extending the maturity date to May 31, 2011, and maintaining the interest rate at the LIBOR Rate, plus 8.5%. Interest is payable monthly on the last day of each month, until maturity. The Company is obligated to pay to the Bank an extension fee of $17,500 per the terms of the Fourth Amendment, with $7,500 due with the signing of the agreement and $10,000 due at maturity. All other terms and conditions of the Credit Agreement remain unchanged by the Amendment. 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 December 31, 2010 the Company had availability to draw up to the maximum line amount of $1,500,000. For 2010, the average debt balance on the line of credit was $1,500,000 and the weighted average interest rate was 8.75%. The Credit Facility is secured by substantially all of the assets of the Company and expires on May 31, 2011.

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 9.0% per year. Payments of interest only were due and payable monthly from March 2006 through February 2007. Thereafter, Quatech was obligated to make 48 consecutive monthly principal payments of $10,417 plus interest with the then balance due on February 1, 2011. During the second quarter of 2010, the repayments terms of the note were modified by means of an Allonge to the original instrument and provided a new debt amortization table. The modification deferred all monthly principal payments for a period of 11 months from October 2009 through September 2010 and extended the maturity date of the note. Per the modified agreement, the Company was obligated to make only monthly interest payments from November 2009 through September 2010. Thereafter, Quatech is obligated to make monthly principal payments of $10,417 plus interest through January 2013, with the remaining balance due in January 2013. The Company is current on all payments through December 31, 2010. At maturity, Quatech is obligated to 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. At December 31, 2010, the Company was not in compliance with the Funded Debt to EBITDA covenant. Subsequent to year end and effective December 31, 2010, the covenant was modified to read equal to or less than 5.0, with which the Company is in compliance, and expects to be able to remain in compliance with. In conjunction with the covenant modification and effective March 1, 2011, the interest rate was increased from 13% to 16% per annum.

In October 2008, the Company entered into an Amendment to the Agreement providing for a second tranche of Senior Subordinated Debt financing from Canal of $250,000, which was due and payable on February 15, 2009. In March 2010, the Company and Canal came to agreement, effective November 1, 2009, that established a modified payment schedule and increased the interest rate from 13% to 16% per annum. The Company repaid $55,000 of the principal balance. In April 2011, the Company and Canal came to agreement modifying the maturity date to July 31, 2011.

The warrants associated with the Canal debt 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 being 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.

F-17

The success fee is defined as equal to 7.0 times the trailing twelve months EBITDA minus indebtedness plus cash, times 6.0%, to be paid at maturity or a triggering event. The success fee is being accounted for 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. $18,319 was accrued for the success fee was accrued at December 31, 2010 based on the formula calculation and no success fees were accrued as of December 31, 2009.

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 a 10-year warrant (“Put Warrant”) for 5,443,457 common shares at an exercise price of $0.00001 per share. The warrant expires on February 28, 2016. The Put Warrant continues 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 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. The Company has classified the fair value of the warrant as a liability and changes in the fair value of the warrant are recognized in the earnings of the Company. The Company recognized a loss of $10,600 and a gain of $15,800 for the years ended December 31, 2010 and 2009, respectively, 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 December 31st in future years is $320,000 in 2011, $125,000 in 2012, and $3,039,000 in 2013.

Interest expense incurred of $641,000 for the year ended December 31, 2010 included the following non-cash charges: accretion of participation and success fees of $35,000, amortization of deferred financing costs of $47,000, and amortization of the discount for warrants of $13,000.

Interest expense incurred of $580,000 for the year ended December 31, 2009 included the following non-cash charges: accretion of participation fees of $46,000, amortization of deferred financing costs of $50,000, and amortization of the discount for warrants of $13,000.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office and operation facilities in Hudson, Ohio under an operating lease arrangement that expires on March 31, 2014. The minimum annual rentals under this lease are being charged to expense on a straight line basis over the lease term. Deferred rents were $8,775 as of December 31, 2010 and $13,500 as of December 31, 2009. The facility lease requires additional payments for property taxes, insurance and maintenance costs. Additionally, the Company leases certain equipment under operating leases. The Company had no capital leases as of December 31, 2010. The following table summarizes the future minimum payments under the Company’s operating leases at December 31, 2010:


Fiscal Year Ending	Operating

2011	$	160,000
2012		160,000
2013		160,000
2014		40,000

Total minimum lease payments	$	520,000

Rent expense under operating leases was approximately $109,000 and $122,000 for the years ended December 31, 2010 and 2009, respectively. The amounts for both 2010 and 2009 are net of rental receipts of $59,000 as the Company has sublet a portion of its facility in Hudson, OH to one of its contract manufacturers.

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.

F-18

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 has written 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.

NOTE 8 — STOCK OPTION PLANS

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 called for options to purchase 15,000,000 shares with an increase to the total number of options available in the plan of 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 December 31, 2010, 22,655,000 shares were available for future grants under the Plan. Subsequent to year end and prior to the termination date of the plan, the Company issued 9,100,000 options shares.

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 years ended December 31, 2010 and 2009, the Company recognized compensation expense for stock options of $68,496 and $119,371. 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 December 31, 2010 was $46,000, which is expected to be recognized over a weighted-average period of 0.7 years. The Company’s calculations were made using the Black-Scholes option-pricing model, with the following weighted average assumptions:


	2010⁽¹⁾		2009

Expected life		N/A	6.5 years
Volatility		N/A		297	%
Interest rate		N/A		2.0	%
Dividends		N/A	None


(1)		No options were granted during the year ended December 31, 2010.

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.

F-19

The following table summarizes stock option activity under DPAC’s 1996 Stock Option Plans for the years ended December 31, 2010 and 2009:


						Weighted-
				Weighted-		Average
				Average		Remaining	Aggregrate
	Number of			Exercise		Contractural	Intrinsic
	Shares			Price		Life	Value
Outstanding — December 31, 2008		12,882,125		$	0.86
Granted (weighted-average fair value of $0.03)		2,050,001		$	0.03
Exercised		—		$	0.00
Canceled		(381,190	)	$	1.04

Outstanding — December 31, 2009		14,550,936		$	0.42
Granted		—		$	0.00
Exercised		—		$	0.00
Canceled		(1,766,237	)	$	1.93

Outstanding — December 31, 2010		12,784,699		$	0.21	5.1 Years	$	—

Exercisable — December 31, 2010		10,822,199		$	0.24	4.8 Years	$	—

No options were exercised in 2010 or 2009.

The outstanding and exercisable options at December 31, 2010 presented by price range are as follows:


				Options Outstanding						Options Exercisable
						Weighted-		Wgt. Avg.				Weighted-
						Average		Remaining				Average
Range of				Number		Exerciese		Contractual		Number		Exercise
Exercise Prices				Outstanding		Price		Life		Exercisable		Price
$	0.01	$	0.03		3,645,333	$	0.03		4.5		3,645,333	$	0.03
$	0.04	$	0.10		6,717,566	$	0.07		6.1		4,755,066	$	0.07
$	0.11	$	0.25		960,000	$	0.16		5.2		960,000	$	0.16
$	0.26	$	7.56		1,461,800	$	1.38		1.8		1,461,800	$	1.38

					12,784,699	$	0.21		5.1		10,822,199	$	0.24

NOTE 9 — CONCENTRATION OF CUSTOMERS

No single customer accounted for more than 10% of net sales for 2010 and one customer accounted for 11% of net sales in 2009. No single customer accounted for more than 10% and one customer accounted for 13% of accounts receivable at December 31, 2010 and 2009, respectively.

NOTE 10 — 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 taken as a whole. Therefore, the Company reports as a single segment.

The Company had export sales that accounted for 26% and 23% of total net sales in 2010 and 2009, respectively. Export sales were primarily to Western European countries, Canada, Brazil, and Singapore. Foreign sales are made in U.S dollars. All long-lived assets are located in the United States.

F-20

NOTE 11 — EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan covering substantially all employees. The Company matches 25% of employee deferral contributions up to 6% of eligible wages, as defined. The Company contributed matching contributions of approximately $11,000 and $15,000 in the years ended December 31, 2010 and 2009, respectively.

NOTE 12 — SALE OF MANUFACTURING CAPABILITY

The Company entered into an Equipment Purchase Agreement (the “Agreement”) that was consummated in January 2009 with one of its contract manufacturers (“Manufacturer”) and sold certain of its manufacturing equipment (consisting of manufacturing equipment, fixtures, tools, shelving and tables) for a sale price of $74,000. The Manufacturer also assumed the obligations of Quatech under a certain capital lease with a remaining balance of approximately $21,000 at December 31, 2008. Also pursuant to the Agreement, Quatech sold certain inventory valued at a sum of $150,000. Quatech and Manufacturer have agreed that Manufacturer will purchase additional active inventory thereafter from Quatech under terms and conditions to be determined. Also pursuant to the Agreement, the Company sublet to Manufacturer 4,911 square feet of space at the Company’s manufacturing facility located in Hudson, OH. Additionally, the Company has agreed to utilize Manufacturer as its manufacturer of all products and parts for existing products of the Company (other than under the Company’s Airborne wireless product line) for a period of 24 months under terms and conditions to be determined by the parties. A negligible loss was recorded with regard to the transaction as the assets were sold at the Company’s approximate net carrying value of the assets.

F-21

DPAC TECHNOLOGIES CORP 10-K