UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September~~March 3031, ~~2010~~2011


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

For the transition period from to

Commission file number 0-14843

DPAC TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in Its Charter)


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

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

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

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

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). o Yes o No

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

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

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

~~YES~~The onumber NOof þshares of common stock, no par value, outstanding as of April 28, 2011 was 141,995,826.

The number of shares of common stock, no par value, outstanding as of November 5, 2010 was 109,414,896.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
PART I — FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 4 — Controls and Procedures			2522
PART II—OTHER INFORMATION
PART II — OTHER INFORMATION			23
Item 1 — Legal Proceedings			2623
Item 6 — Exhibits			2623
SIGNATURES			2724
EXHIBIT INDEX			2825
Exhibit 31.1
Exhibit 32.1

CAUTIONARY STATEMENT RELATED TO FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, market conditions, demand and pricing trends, future expense levels, competition in our industry, trends in average selling prices and gross margins, product and infrastructure development, market demand and acceptance, the timing of and demand for next generation products, customer relationships, employee relations, and the level of expected future capital and research and development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to DPAC Technologies Corp.’s (“DPAC” or the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect that DPAC or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The actual results of DPAC may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those discussed under Part I, Item 2, “Management’s Discussion and Analysis 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 and Annual Reports on Form 10-K.

HOW TO OBTAIN DPAC’S SEC FILINGS

All reports filed by DPAC with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549

PART I — FINANCIAL INFORMATION

~~ITEM~~ Item 1. Financial Statements.

DPAC Technologies Corp. ~~Condensed Consolidated Balance Sheets~~

	September 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	28,731		$	17,532
Accounts receivable, net		1,158,666			1,124,598
Inventories		941,177			1,076,739
Prepaid expenses and other current assets		102,076			73,914
Total current assets		2,230,650			2,292,783
PROPERTY, Net		662,413			745,756
FINANCING COSTS, Net		79,979			101,911
GOODWILL AND OTHER NON-AMORTIZING INTANGIBLE ASSETS		6,405,503			6,405,503
OTHER INTANGIBLE ASSETS, Net		250,169			621,684
OTHER ASSETS		16,216			18,817
TOTAL	$	9,644,930		$	10,186,454
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility	$	1,500,000		$	1,425,243
Short term note		8,818			—
Current portion of long-term debt		320,000			230,000
Accounts payable		1,117,453			1,513,568
Put warrant liability		129,000			100,300
Other accrued liabilities		515,517			367,144
Total current liabilities		3,590,788			3,636,255
LONG-TERM LIABILITIES:
Ohio Development loan, less current portion		1,994,668			2,106,724
Subordinated debt, less current portion		1,170,216			1,160,649
Total long-term liabilities		3,164,884			3,267,373
STOCKHOLDERS’ EQUITY:
Convertible, voting, cumulative, 9% series A preferred stock, $100 stated value; 30,000 shares authorized; 30,000 shares issued and outstanding at September 30, 2010 and December 31, 2009		2,499,203			2,499,203
Common stock, no par value; 500,000,000 shares authorized, 109,414,896 shares outstanding at September 30, 2010 and December 31, 2009		5,736,798			5,687,232
Preferred stock dividends distributable in common stock; 26,628,549 and 3,571,429 common shares issuable at September 30, 2010 and December 31, 2009, respectively		352,500			50,000
Accumulated deficit		(5,699,243	)		(4,953,609	)
Total stockholders’ equity		2,889,258			3,282,826
TOTAL	$	9,644,930		$	10,186,454

Condensed Consolidated Balance Sheets


	March 31,			December 31,
	2011			2010
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	56,060		$	47,870
Accounts receivable, net		1,152,661			1,159,122
Inventories		973,168			898,418
Prepaid expenses and other current assets		130,653			37,358

Total current assets		2,312,542			2,142,768

PROPERTY, net		591,650			631,769

DEFERRED FINANCING COSTS, net		60,096			68,291
TRADEMARKS		2,583,000			2,583,000
GOODWILL		3,822,503			3,822,503
AMORTIZABLE INTANGIBLE ASSETS, net		37,000			121,664
OTHER ASSETS		16,133			16,133


TOTAL	$	9,422,924		$	9,386,128


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility	$	1,500,000		$	1,500,000
Short term note		35,088			—
Current portion of long-term debt		320,000			320,000
Accounts payable		1,206,790			1,127,512
Put warrant liability		119,100			110,900
Other accrued liabilities		614,451			512,410

Total current liabilities		3,795,429			3,570,822

LONG-TERM LIABILITIES:
Ohio Development loan, less current portion		1,945,037			1,971,972
Subordinated debt, less current portion		1,176,594			1,191,724

Total long-term liabilities		3,121,631			3,163,696

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 March 31, 2011 and December 31, 2010		2,499,203			2,499,203
Common stock, no par value, 500,000,000 shares authorized; 141,995,826 and 109,414,896 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		6,266,018			5,755,728
Preferred stock dividends distributable in common stock; 2,250,883 and 32,580,930 common shares at March 31, 2011 and December 31, 2010, respectively		112,500			465,000
Accumulated deficit		(6,371,857	)		(6,068,321	)

Total stockholders’ equity		2,505,864			2,651,610


TOTAL	$	9,422,924		$	9,386,128

See accompanying notes to consolidated financial statements.

DPAC Technologies Corp. ~~Condensed Consolidated Statements of Operations (Unaudited)~~

	For the quarter ended:						For the nine months ended:
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
NET SALES	$	1,877,487		$	1,425,770		$	5,630,995		$	5,135,724
COST OF GOODS SOLD		1,119,227			869,320			3,180,780			3,040,134
GROSS PROFIT		758,260			556,450			2,450,215			2,095,590
OPERATING EXPENSES
Sales and marketing		189,819			182,276			554,761			673,686
Research and development		178,729			178,432			560,699			599,036
General and administrative		254,924			260,022			847,034			957,692
Amortization of intangible assets		136,087			132,088			400,261			377,098
Restructuring costs		—			12,097			—			12,097
Total operating expenses		759,559			764,915			2,362,755			2,619,609
INCOME (LOSS) FROM OPERATIONS		(1,299	)		(208,465	)		87,460			(524,019	)
OTHER EXPENSE:
Interest expense		153,495			146,126			466,894			431,933
Fair value adjustment for put warrant liability		64,500			29,000			28,700			29,000
Total other expenses		217,995			175,126			495,594			460,933
LOSS BEFORE INCOME TAXES		(219,294	)		(383,591	)		(408,134	)		(984,952	)
INCOME TAX PROVISION		—			—			—			—
NET LOSS	$	(219,294	)	$	(383,591	)	$	(408,134	)	$	(984,952	)
PREFERRED STOCK DIVIDENDS		112,500			47,813			337,500			143,439
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(331,794	)	$	(431,404	)	$	(745,634	)	$	(1,128,391	)
NET LOSS PER SHARE:
Net Loss — Basic and diluted	$	0.00		$	0.00		$	0.00		$	(0.01	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted		109,415,000			105,856,000			109,415,000			103,167,000

Condensed Consolidated Statements of Operations
(Unaudited)


	For the three months ended:
	March 31,			March 31,
	2011			2010

NET SALES	$	2,012,419		$	1,769,020

COST OF GOODS SOLD		1,173,045			927,027


GROSS PROFIT		839,374			841,993

OPERATING EXPENSES
Sales and marketing		237,107			175,431
Research and development		214,096			187,727
General and administrative		343,525			289,876
Amortization of intangible assets		94,246			132,087

Total operating expenses		888,974			785,121


INCOME (LOSS) FROM OPERATIONS		(49,600	)		56,872

OTHER EXPENSES:
Interest expense		133,236			152,692
Fair value adjustment for put warrant liability		8,200			—

		141,436			152,692

LOSS BEFORE INCOME TAX PROVISION		(191,036	)		(95,820	)

INCOME TAX PROVISION		—			—


NET LOSS	$	(191,036	)	$	(95,820	)

PREFERRED STOCK DIVIDENDS		112,500			112,500


NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(303,536	)	$	(208,320	)


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


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted		120,275,000			109,415,000

See accompanying notes to consolidated financial statements.

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

	For the nine months ended
	September 30,			September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(408,134	)	$	(984,952	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		510,732			442,378
Loss on the sale of assets		—			483
Provision for bad debts		—			1,000
Write off of bad debts		—			(24,673	)
Provision for obsolete inventory		36,000			36,000
Accretion of discount and success fees on debt		22,511			43,789
Amortization of deferred financing costs		34,987			35,609
Adjustment to put warrant liability		28,700			29,000
Non-cash compensation expense		49,566			100,306
Changes in operating assets and liabilities:
Accounts receivable		(34,068	)		202,868
Inventories		99,562			25,454
Prepaid expenses and other assets		(25,561	)		(45,580	)
Accounts payable		(396,115	)		235,854
Accrued restructuring charges		—			(42,366	)
Other accrued liabilities		130,873			(96,114	)
Net cash provided by (used in) operating activities		49,053			(40,944	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(55,874	)		(61,430	)
Net cash from sale of assets		—			150,000
Net cash provided by (used in) investing activities:		(55,874	)		88,570
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under revolving credit facility		74,757			40,243
Net borrowing under short term notes		8,818			15,011
Repayments on Ohio Development loan		—			(93,751	)
Repayment of Subordinated Debt		(35,000	)		—
Financing costs incurred		(13,055	)		(9,900	)
Principal payments on capital lease obligations		—			(3,252	)
Preferred stock dividends paid in cash		(17,500	)		—
Net cash provided by (used in) financing activities		18,020			(51,649	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		11,199			(4,023	)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		17,532			9,157
CASH & CASH EQUIVALENTS, END OF PERIOD	$	28,731		$	5,134
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	371,321		$	358,634
NON-CASH INVESTING AND FINANCING ACTIVITIES
Preferred stock dividends paid in common stock	$	302,500		$	143,439
Issuance of preferred stock for acquisition of SocketSerial assets	$	—		$	450,000

Condensed Consolidated Statements of Cash Flows
(Unaudited)


	For the three months ended
	March 31,			March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(191,036	)	$	(95,820	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		128,783			170,681
Provision for obsolete inventory		12,000			12,000
Accretion of discount and success fees on debt		(10,815	)		7,504
Amortization of deferred financing costs		8,195			9,151
Fair value adjustment for put warrant liability		8,200			—
Non-cash compensation expense		45,290			19,677

Changes in operating assets and liabilities:
Accounts receivable		6,461			(41,441	)
Inventories		(86,750	)		115,294
Prepaid expenses and other assets		(93,295	)		(53,757	)
Accounts payable		79,278			(392,612	)
Other accrued liabilities		102,041			271,853


Net cash provided by operating activities		8,352			22,530


CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(4,000	)		(19,230	)


Net cash used in investing activities:		(4,000	)		(19,230	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility		—			74,757
Net borrowing under short term notes		35,088			35,060
Repayments on Ohio Development loan		(31,250	)		—
Repayments on Subordinated Debt		—			(25,000	)
Dividends paid		—			(17,500	)


Net cash provided by financing activities		3,838			67,317


NET INCREASE IN CASH AND CASH EQUIVALENTS		8,190			70,617

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		47,870			17,532


CASH & CASH EQUIVALENTS, END OF PERIOD	$	56,060		$	88,149


SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	126,212		$	96,246

Accrued preferred stock dividends distributable in common stock	$	112,500		$	95,000

Common stock issued in payment of preferred stock dividends	$	465,000		$	—

See accompanying notes to consolidated financial statements.

DPAC TECHNOLOGIES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 — Summary of Significant Accounting Policies

Nature of Operations

DPAC Technologies Corp., (“DPAC”) through its wholly owned subsidiary, Quatech Inc., (“Quatech”) designs 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 communication and data acquisition products for personal computer based systems. The Company sells to customers in both domestic and foreign markets.

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 recent operating losses, ~~declines~~deficit in working capital balances and the ~~inherent~~ inherent risk in extending or refinancing our bank line of credit, which matures on ~~December~~May 1531, ~~2010~~ 2011. Our ability to continue as a going concern is dependent upon our ability to maintain positive ~~cash~~ cash flows from operations and to raise additional financing. Management believes that it has taken ~~the~~ the necessary steps to achieve and maintain positive cash flows from operations, including the acquisition of a product line and reduction and management of the Company’s operating costs. 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 ~~September~~March 3031, ~~2010~~2011, the Company had a cash balance of $2956,000 and a deficit in working capital of of $1,~~360~~483,000. ~~This~~At ~~compares~~December 31, to2010, the Company had a cash balance of $1848,000 and a deficit in working capital of $1,~~343~~428,000 ~~at December 31, 2009~~. Although the Company has reported net losses in recent periods, a significant portion of our operating expenses are non-cash. During the first ~~nine~~three months of ~~2010~~2011, the Company reported a net loss of $~~408~~191,000, which included the following non-cash operating expenses: depreciation and amortization of $~~511~~129,000, non-cash compensation expense for stock options of $5045,000, and ~~non-cash~~a ~~interest~~charge ~~expense~~ of $578,~~000.~~200 ~~For~~for the ~~year~~put ~~ended~~warrant ~~December 31,~~adjustment. ~~2009~~For 2010, the ~~Company~~ Company reported a net loss of $1665,~~133,~~000, which included the following non-cash operating expenses: depreciation and amortization of $~~595~~684,000, provision for excess inventory of $166,000, non-cash compensation expense for stock options of $~~119~~68,000, and non-cash interest expense of $~~108~~95,000.

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 ~~(see Note 11 for more information)~~. This ~~transaction~~ 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~~ 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 ~~(see Note 2 for more information)~~. Margins generated from revenues of this product line have helped enable the Company to achieve a cash flow break even from operations. ~~During the third quarter of 2010~~In March 2011, the Company entered into a ~~Third~~Fourth Amendment to Credit Agreement extending the maturity date of its Bank revolving credit facility to ~~December~~May 1531, ~~2010~~2011.

Going forward, the Company is dependent on financing its operations ~~through~~from the contributions generated from future revenues and the use of its bank line of credit ~~and the contribution from future revenues~~. 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~~over shipments during the first ~~nine~~ three months of ~~2010~~2011, resulting in a 3081% ~~and 10%~~ increase in ~~net sales for, respectively,~~ the ~~three and nine months ended September 30, 2010, when compared to the comparable prior year periods, and a 122% increase in the~~ size of its backlog of firm orders from $~~540~~664,000 at December 31, ~~2009~~2010 to $1~~.2 million~~,200,000 at the beginning of the ~~fourth~~second quarter of ~~2010~~ 2011. 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 its current lender to extend the maturity date and also to a number of other potential lenders with the intent of replacing the bank line of credit, which matures on May 31, 2011 (as previously reported on the Company’s Current Report on Form 8-K, filed March 31, 2011).The Company was fully drawn on its line of credit at ~~September~~March 3031, ~~2010~~ 2011. 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.

Interim financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included. Operating results for the three ~~and nine~~ months ended ~~September~~ March 3031, ~~2010~~2011 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2010~~2011.

All intercompany transactions and balances have been eliminated in consolidation.

~~Some~~For ~~historical~~further ~~amounts~~information, ~~have~~refer ~~been~~to ~~reclassified~~the toaudited befinancial ~~consistent~~statements ~~with~~and footnotes thereto of DPAC for the ~~current~~year ~~financial~~ended December 31, 2010 ~~presentation~~which were filed on Form 10-K on April 15, 2011.

For further information, refer to the audited financial statements and footnotes thereto of DPAC for the year ended December 31, 2009 which were filed on Form 10-K on April 15, 2010.

Use of Estimates

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

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.

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 September 30, 2010 Using:
			Fair Value Measurement 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	$	~~129,000~~		—	$	~~129,000~~		—
March 31, 2011	$	119,100		—	$	119,100		—
December 31, 2010	$	110,900		—	$	110,900		—
Success Fee
March 31, 2011	$	—		—	$	—		—
December 31, 2010	$	18,319		—	$	18,319		—

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 $64,500 and $28,700 for the three and nine month periods ended September 30, 2010, respectively, and a loss of $29,000 for both the comparable periods in 2009, 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~~Company ~~Debt~~values ~~Agreement,~~the ~~which~~put ~~funded~~warrant onliability ~~January 31,~~at ~~2008,~~the ~~provides~~end ~~for~~of aeach ~~formula~~reporting ~~driven~~period by calculating the ~~success~~difference ~~fee~~between ~~equal~~the toput ~~7.0~~price ~~times~~per ~~the~~share ~~trailing~~as ~~twelve~~defined ~~months~~in ~~EBITDA~~the ~~minus~~Warrant ~~indebtedness~~Agreement ~~plus~~and ~~cash,~~the exercise ~~times~~price ~~5.5%,~~per toshare bemultiplied ~~paid~~by atthe ~~maturity~~number orof awarrants ~~triggering event~~granted. The ~~success~~Company ~~fee~~has isclassified ~~being~~the ~~accounted for as~~fair avalue ~~separate contingent component~~ of the ~~note~~warrants ~~and~~as ~~will~~a beliability ~~revalued~~and atchanges ~~each~~in ~~reporting~~the ~~period.~~fair ~~The success~~value ~~fee~~of isthe ~~calculated~~warrants atare recognized in the ~~end~~earnings of ~~each~~the ~~reporting~~Company. ~~period~~The ~~based~~Company onrecognized ~~the~~a ~~trailing~~loss ~~twelve~~of ~~months EBITDA~~$8,200 ~~with~~for the ~~resultant~~three ~~amount~~months ~~multiplied~~ended March 31, ~~times~~2011 ~~the~~and ~~percentage~~no ofgain or loss for the ~~loan~~comparable period ~~remaining~~in ~~at each~~2010, ~~measurement~~related ~~date.~~to Asthe ~~such,~~change in value of the ~~liability~~put iswarrant ~~trued~~liability. upIn atthe ~~each~~current ~~reporting~~year period, ~~based~~the onCompany calculated the put ~~time~~price ~~elapsed,~~per ~~with~~share by using the ~~remaining~~Company’s ~~unamortized~~stock ~~portion~~book ofvalue ~~the~~as ~~success~~defined ~~fee~~in ~~accreted~~the ~~monthly~~Warrant asAgreement, ~~additional~~resulting ~~interest~~in ~~expense~~a ~~over~~per ~~the~~share ~~remaining~~value ~~term~~ of ~~the loan~~$0.019. ~~Based~~In onprior periods, the ~~results~~Company ofhas used the ~~above~~closing stock ~~calculation,~~price ~~the~~to ~~Company~~value ~~recorded~~the noput warrant liability ~~for~~as ~~the~~it ~~success~~has ~~fee~~approximated asthe ofper ~~September 30,~~share ~~2010~~book value. ~~There~~In ~~was~~addition, nothe ~~change~~actual insettlement ~~the~~amount ~~valuation~~of ~~technique~~the ~~used~~put bywarrant ~~the~~liability ~~Company~~could ~~since~~differ materially from the ~~last~~value ~~reporting period~~determined.

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 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. Based on the results of the above calculation, the Company recorded no liability for the success fee as of March 31, 2011, resulting in a gain of $18,319 for the three months ended March 31, 2011. There was no change in the valuation technique used by the Company since the last reporting period.

New Accounting Pronouncements

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~~provision iswas ~~currently~~adopted ~~evaluating~~and ~~the~~did ~~impact~~not ofhave ~~adopting~~a ~~this~~material ~~guidance~~effect on ~~its~~the financial position, results of ~~statements~~operations or cash flows of the Company.

In ~~July~~April 2010, the FASB issued anAccounting ~~amendment~~Standards toUpdate ~~Disclosures~~2010-13 ~~about~~(ASU ~~the~~2010-13), “Compensation—Stock ~~Credit~~Compensation ~~Quality~~(Topic of718).” ~~Financing Receivables~~ASU ~~and~~2010-13 ~~the~~provides ~~Allowance~~amendments ~~for~~to ~~Credit~~ASC ~~Losses.~~Topic ~~This~~718 ~~Update~~to clarify ~~requires~~that an ~~entity~~employee toshare-based ~~provide~~payment ~~a greater~~award ~~level~~with ofan ~~disaggregated~~exercise ~~information~~price ~~about~~denominated in the currency ~~credit quality~~ of ~~its~~a ~~financing~~market ~~receivables and~~in ~~its~~which ~~allowance~~a ~~for~~substantial ~~credit~~portion ~~losses,~~of ~~excluding~~the ~~short-term~~entity’s ~~trade~~equity ~~accounts~~securities ~~receivable.~~trades ~~In addition,~~should ~~the~~not ~~amendments~~be inconsidered ~~this~~to ~~Update~~contain ~~require~~a ancondition ~~entity~~that tois ~~disclose~~not ~~credit~~a ~~quality indicators~~market, ~~past due information~~performance, ~~and~~or ~~modifications~~service ~~of its financing receivables~~condition. Therefore, ~~These~~an ~~improvements~~entity ~~will~~would ~~help~~not ~~financial statement~~classify ~~users~~such ~~assess~~ an ~~entity’s~~award ~~credit~~as ~~risk~~a ~~exposures~~liability ~~and~~if ~~its~~it ~~allowance~~otherwise ~~for~~qualifies ~~credit losses~~as equity. The ~~amendment~~ isamendments in ASU 2010-13 are effective for ~~interim~~fiscal years, and ~~annual~~interim periods ~~ending~~within those fiscal years, beginning on or after December 15, 2010. The ~~Company~~ ~~does~~adoption ~~not~~of ~~expect~~the ~~adoption~~provisions of ~~this~~ASU 2010-13 ~~guidance~~did tonot have a ~~significant~~material effect on ~~current~~the orfinancial ~~future earnings~~position, or results of operations or cash flows of the Company.

~~NOTE~~In 2December 2010, the FASB issued an Accounting Standards Update 2010-28(“ASU 2010-28”), “Intangibles—Goodwill ~~Product~~and ~~Line~~Other ~~Acquisition~~(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 adoption of the provisions of ASU 2010-28 did not have a material effect on the financial position, results of operations or cash flows of the Company.

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~~NOTE ~~Assets~~2 ~~were~~— ~~acquired for a purchase price of $500,000, of which $450,000 was payable at~~Inventories closing, and a contingent $50,000 payment would be 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. The Company has not achieved $250,000 in SocketSerial revenue in any quarter through September 30, 2010. The purchase price was allocated as follows:

Equipment	$	10,000
Developed software		390,000
Customer list		50,000
Total	$	450,000

The acquired Assets were placed into service effective December 31, 2009 and began being depreciated in January 2010 under their respective lives, estimated to be 5 years, on a straight line basis.

NOTE 3 — Inventories

Inventories consist of the following:

	September 30,			December 31,
	March 31,			December 31,
	2010			2009
	2011			2010
Raw materials and sub-assemblies	$	659,599		$	547,816
Finished goods	$	710,447		$	613,009
Finished goods		580,763			811,600
Raw materials and sub-assemblies		262,721			285,409
Less: reserve for excess and obsolete inventories		(299,185	)		(282,677	)
	$	973,168		$	898,418
Total net inventories	$	941,177		$	1,076,739

Purchases of finished assemblies and components from ~~two~~three major vendors represented 3540%, ~~and~~29% 33and 22% of the total inventory purchased in the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011, and ~~two~~four vendors accounted for 4536, 24%, 12% and 2112% for the ~~nine~~three month period ended ~~September~~March 3031, ~~2009~~2010. The Company has arrangements with these vendors to purchase product based on purchase orders periodically issued by the Company.

NOTE 43 — Property

Property consists of the following:

	September 30,			December 31,
	March 31,			December 31,
	2010			2009
	2011			2010
Leasehold improvements	$	103,714		$	103,714
Machinery and equipment		~~371~~384,~~123~~773			~~328~~380,~~197~~773
Computer software and equipment		~~624~~628,~~410~~683			~~611~~628,~~462~~683
Office funiture and equipment		79,602			79,602
Internally developed software		191,657			191,657
Developed embedded software		390,000			390,000
		1,760,506			1,704,632
		1,778,429			1,774,429
Less: accumulated depreciation and amortization		(1,~~098~~186,~~093~~779	)		(~~958~~1,~~876~~142,660	)
Net property	$	~~662~~591,~~413~~650		$	~~745~~631,~~756~~769

NOTE 54 — Debt

At ~~September~~March 3031, ~~2010~~2011 and December 31, ~~2009~~2010, outstanding debt is comprised of the following:

	September 30,			December 31,
	March 31,			December 31,
	2010			2009
	2011			2010
Revolving credit facility	$	1,500,000		$	1,~~425~~500,~~243~~000
Long term debt:
Ohio Development Loan:
Principal balance	$	1,~~933~~875,~~278~~018		$	1,~~933~~906,~~279~~268
Accrued participation fee		~~186~~195,~~390~~019			~~173~~190,~~445~~704
		2,119,668			2,106,724
		2,070,037			2,096,972
Less: current portion		(125,000	)		—(125,000	)
Net long-term portion		1,~~994~~945,~~668~~037			21,~~106~~971,~~724~~972
Subordinated debt:
Principal balance	$	1,395,000		$	1,~~430~~395,000
Accrued success fee		—			—18,319
Less: Unamortized discount for stock warrants		(2923,~~784~~406	)		(3926,~~351~~595	)
		1,365,216			1,390,649
		1,371,594			1,386,724
Less: current portion		(195,000	)		(~~230~~195,000	)
Net long-term portion	$	1,~~170~~176,~~216~~594		$	1,~~160~~191,~~649~~724
Total Current Portion of Long-term Debt	$	320,000		$	~~230~~320,000
Total Net Long-term Debt	$	3,~~164~~121,~~884~~631		$	3,~~267~~163,~~373~~696

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 ~~September~~March 3031, ~~2010~~2011, the facility had a floating interest rate at the ~~Bank’s~~ ~~Revolver~~30 day LIBOR ~~Rate~~ (0.2524%) at March 31, 2011) plus 8.5%. Interest is payable monthly on the last day of each month, until maturity. OnThe ~~September 20,~~Company ~~2010,~~is ~~the~~obligated ~~Company~~to ~~entered~~pay ~~into~~to the aBank ~~Third~~an ~~Amendment~~extension tofee ~~Credit Agreement~~of $17,500 ~~effective~~per asthe terms of ~~July 30,~~the ~~2010~~Fourth Amendment, ~~extending~~which extended the ~~maturity~~line from ~~date to~~ December 15, 2010 ~~and under~~to ~~which~~May 31, ~~the~~2011, ~~Company~~with $7,500 paid towith the ~~Bank~~signing ~~half~~ of the ~~previously~~agreement ~~agreed~~in ~~upon~~March 2011, ~~extension~~and ~~fee of~~ $2510,000 ~~with the balance~~ due at maturity. ~~Additionally, the Company paid to the Bank $5,000 in fees. The Bank waived certain events of default occurring under the Credit Agreement, including covenant non-compliance.~~ 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 ~~September~~ March 3031, ~~2010~~ 2011 the Company had availability to draw up to the maximum ~~of the~~ line amount of $1,500,000~~, on which the Company was fully drawn~~. ~~As previously reported, previous covenant defaults were waived by the Bank~~ ~~in an agreement dated March 30, 2010.~~ The Credit Facility is secured by substantially all of the assets of the Company and expires on May 31, 2011.

~~Short~~As ~~Term~~of ~~Note~~March 31, 2011, 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.

The short term note is with a financial institution and was funded for $39,700 to finance insurance premiums. The note bears interest at 10.85% per annum and calls for 9 monthly payments of $4,609, beginning in April 2010.

Short Term Note

The short term note is with a financial institution and was funded for $39,474 to finance insurance premiums. The note bears interest at 7.0% per annum and calls for 9 monthly payments of $4,514, beginning in March 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. InDuring ~~November 2009~~the second quarter of 2010, the ~~Company~~repayments ~~and~~terms of the note ~~Director~~were ofmodified ~~Development~~by means of an Allonge to the ~~State~~original ofinstrument ~~Ohio~~and ~~came~~provided toa annew ~~agreement~~debt amortization totable. ~~modify~~The ~~the~~modification ~~repayment~~deferred ~~schedule~~all monthly principal payments for a period of 11 months from October 2009 through September 2010 and ~~extend~~extended the maturity date of the note. Per the modified ~~new~~ 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 ~~31,~~ 2013. ~~In October 2010, the~~ The Company ~~began~~is ~~making~~current ~~both~~on ~~interest~~all ~~and principal~~ payments ~~per~~through ~~the amended~~March 31, ~~agreement~~2011. At maturity, Quatech ~~must~~is ~~also~~obligated ~~pay~~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. Effective March 1, 2011, the interest rate was increased to 16%. 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 March 31, 2011, the Company was in compliance with the financial covenants of the agreement.

In October 2008, the Company entered into an Amendment to the Agreement ~~securing~~providing ~~additional~~for ~~Senior~~a second tranche of Senior Subordinated Debt financing from Canal of $250,000, which was ~~originally~~ due and payable on February 15, 2009. In March 2010, the Company ~~agreed~~and toCanal ~~make~~came ~~monthly~~to ~~principal payments of $20~~agreement,~~000 plus~~ ~~interest~~effective ~~through March~~November ~~31, 2010 and beginning April~~ 1, ~~2010~~ 2009, ~~monthly~~that ~~principal~~established ~~payments~~a ~~of $25,000~~modified ~~plus~~payment ~~interest~~schedule ~~until~~and increased the ~~additional~~interest ~~financing~~rate ~~loan~~from is13% ~~paid~~to in16% per ~~full~~annum. The Company, ~~because~~repaid ~~of cash constraints~~$55,000 ~~has not been able to meet the terms~~ of the ~~repayment~~principal ~~agreement~~balance. ~~and~~In isApril 2011, ~~currently in~~ the ~~process~~Company ~~of renegotiating the terms with~~ and Canal. ~~The~~came to agreement ~~also~~extending ~~increases~~ the ~~interest~~maturity ~~on the~~date ~~additional financing from 13%~~ to ~~16%~~July 31, ~~per annum~~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~~ The Company determined the fair value of the warrant by using the Black-Scholes pricing model and calculating 3% of fully diluted shares at time of issuance, including a potential 50 million common shares for the conversion of the outstanding Series A preferred stock, which equated to approximately 4.9 million shares and using the closing stock price on the date of the transaction of $0.014 per share.

The success fee is defined as equal to 7.0 times the trailing twelve months EBITDA minus indebtedness plus cash, times 56.50%, 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. ~~In connection~~Based ~~with~~ on the ~~Amendment~~formula ~~for additional financing~~calculation, ~~Canal~~there iswas ~~entitled~~no tosuccess ~~increase~~fee ~~the multiplier~~accrued inat ~~the success fee~~March 31, as2011 ~~described~~and ~~above~~$18,319 ~~from~~was ~~5.5%~~accrued at toDecember 31, 62010.~~0%.~~

Put Warrant Liability

In connection with the Subordinated Loan Agreement between the Company and the HillStreet Fund, entered into on February 28, 2006 and which was paid in full on January 31, 2008, the Company issued 5,443,457, and per certain default provisions is obligated to issue 1,006,000 additional, 10-year warrants (“Put Warrants”) at an exercise price of $0.00001 per share. The warrants expire on February 28, 2016. The Put Warrants continue to remain outstanding and can be “put” to the Company at any time based on criteria set forth in the warrant agreement at a price equal to the greatest of (i) the fair market value as established by a capital transaction or public offering; (ii) six times the Company’s EBITDA for the trailing 12 month period; and (iii) an appraised value. The Company has determined to value the put warrant liability by calculating the difference between the Company’s closing stock price at the end of a reporting period and the exercise price per share multiplied by the number of warrants granted. 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 $64,500 and $28,700 for the three and nine month periods ended September 30, 2010, respectively, and a loss of $29,000 for both the comparable periods in 2009, related to the change in value of the put warrant liability. The actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price.

~~The~~Put ~~aggregate~~Warrant ~~amounts of combined long term debt, exclusive of the put warrant liability and the~~Liability ~~unamortized discount for stock warrants, maturing as of September 30th in future years is $320,000 in 2011, $125,000 in 2012, and $3,039,884 in 2013.~~

~~NOTE~~In 6connection —with ~~Concentration~~the Subordinated Loan Agreement between the Company and the HillStreet Fund, entered into on February 28, 2006 and which was paid in full on January 31, 2008, the Company issued 5,443,457, and per certain default provisions could be obligated to issue 1,006,000 additional, 10-year warrants (“Put Warrants”) at an exercise price of ~~Customers~~$0.00001 per share. The warrants expire on February 28, 2016. The Put Warrants continue to remain outstanding and can be “put” to the Company at any time based on criteria set forth in the warrant agreement at a price equal to the greatest of (i) the fair market value as established by a capital transaction or public offering; (ii) six times the Company’s EBITDA for the trailing 12 month period; and (iii) an appraised value. The Company has determined to value the put warrant liability by calculating the difference between the put price as defined in the Warrant Agreement 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 recorded a loss of $8,200 for the three months ended March 31, 2011, and no gain or loss was recorded for the period ended March 31, 2010, for changes in the fair value of the put warrant liability. The actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s determination.

~~One~~The ~~customer~~aggregate ~~accounted~~amounts ~~for~~of ~~12%~~combined ~~and~~long noterm ~~single~~debt, ~~customer~~exclusive ~~accounted for more than 10%~~ of ~~net sales for~~ the ~~three~~put ~~and~~warrant ~~nine~~liability ~~months ended September 30, 2010,~~ and ~~two customers accounted for 15% and 10% of~~the ~~net~~unamortized ~~sales~~discount for ~~the~~stock ~~three months ended September 30~~warrants, ~~2009,~~maturing ~~respectively.~~as ~~No single customer accounted for more than 10%~~ of ~~accounts receivable at September~~March ~~30,~~31st ~~2010,~~in ~~and~~future ~~accounts~~years ~~receivable~~is ~~from~~$320,000 ~~one~~in ~~customer~~2012 ~~accounted~~and ~~for 16% of net accounts receivable at September 30~~$3,121,631 ~~2009.~~in ~~The Company has and will have customers ranging from large OEM’s to startup operations~~2013. ~~Any inability to collect~~ ~~receivables from any such customers could have a material adverse effect on the Company’s financial position and liquidity.~~

NOTE 75 — ~~Net~~Concentration ~~Income~~of ~~(Loss) Per Share~~Customers

Two customers accounted for 12% and 11% and no single customer accounted for more than 10% of net sales for the three months ended March 31, 2011 and 2010, respectively. Two customers accounted for 12% and 11% of accounts receivable at March 31, 2011 and no single customer accounted for more than 10% of net accounts receivable at March 31, 2010. The Company has and will have customers ranging from large OEM’s to startup operations. Any inability to collect receivables from any such customers could have a material adverse effect on the Company’s financial position and liquidity.

NOTE 6 — Net Income (Loss) Per Share

The Company computes net income (loss) per share by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities by including other common stock equivalents, such as stock options and warrants, in the weighted-average number of shares outstanding for a period. Common stock equivalents are excluded from the calculation in loss periods, as the effect is anti-dilutive.

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

	Three-months ended
	September 30,
	March 31,
	2010		2009
	2011		2010
Shares used in computing basic net income per share		~~109~~120,~~415~~275,000		~~105~~109,~~856~~415,000
Dilutive effect of stock options and warrants(1)(3)		—		—
Dilutive effect of stock options and warrants(1)(2)		—		—
Shares used in computing diluted net income per share		~~109~~120,~~415~~275,000		~~108~~109,~~856~~415,000

	Nine-months ended
(1)	Potential common shares of 13,545,000 and 8,522,000 for the exercise of stock options and warrants have been excluded from diluted weighted average common shares for the three month periods ended March 31, 2011 and 2010, respectively, as the effect would be anti-dilutive.
	September 30,
(2)	Also excluded from both the March 31, 2011 and 2010 computations are the potential of approximately 71 million common shares that would be issued upon the conversion of the total number of shares of Preferred Stock outstanding, at the option of the preferred shareholders. Also excluded are 2,251,000 and 7,170,000 common shares distributable in payment of preferred stock dividends at March 31, 2011 and 2010, respectively.
	2010		2009
Shares used in computing basic net income per share		109,415,000		103,167,000
Dilutive effect of stock options and warrants(2)(3)		—		—
Shares used in computing diluted net income per share		109,415,000		103,167,000

(1)		Potential common shares of 8,503,000 and 8,076,000 for the exercise of stock options and warrants have been excluded from diluted weighted average common shares for the three month periods ended September 30, 2010 and 2009, respectively, as the effect would be anti-dilutive.
(2)		Potential common shares of 8,502,000 and 8,089,000 for the exercise of stock options and warrants have been excluded from diluted weighted average common shares for the nine month periods ended September 30, 2010 and 2009, respectively, as the effect would be anti-dilutive.
(3)		Also excluded from both the September 30, 2010 and 2009 computations are the potential of approximately 71 million common shares that would be issued upon the conversion of the total number of shares of Preferred Stock outstanding, at the option of the preferred shareholders. Additionally excluded from both the September 30, 2010 and 2009 computations are 26.6 million and 2.2 million, respectively, common shares issuable in payment of accrued stock dividends on Preferred Stock.

The number of shares of common stock, no par value, outstanding at April 28, 2011 was 141,995,826.

~~The~~At ~~number~~March 31, of2011 the Company had outstanding 30,000 shares of ~~common~~convertible, voting, cumulative, Series A preferred stock. Through December 31, no2009, ~~par~~dividends ~~value~~accrued and were payable quarterly in arrears at the annual rate of 9% of the Original Issue Price of $100 per share, ~~outstanding~~either in cash or common stock, at ~~November~~the decision of the Company. Effective January 51, 2010, ~~was~~dividends accrue and ~~109~~are payable quarterly in arrears at the annual rate of 15% given that the Company is not listed for trading on the American Stock Exchange,~~414~~ a NASDAQ Stock Market or the New York Stock Exchange. For purposes of valuing the common stock payable to holders of Series A Preferred in lieu of cash with respect to such quarterly dividends,~~896~~ 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. At March 31, 2011, the Company has accrued dividends distributable in common stock of $112,500, which equates to approximately 2,251,000 common shares issuable, and $17,500 of accrued dividends payable in cash. In March 2011, the Company issued 32,580,930 shares of common stock in payment of accrued preferred stock dividends payable in common stock of $465,000.

At September 30, 2010 the Company had outstanding 30,000 shares of convertible, voting, cumulative, Series A preferred stock. Through December 31, 2009, dividends accrued and were 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. Effective January 1, 2010, dividends accrue and are payable quarterly in arrears at the annual rate of 15% given that the Company is not listed for trading on the American Stock Exchange, a NASDAQ Stock Market or the New York Stock Exchange. 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. At September 30, 2010, the Company has accrued dividends distributable in common stock of $352,500, which equates to approximately 26,629,000 common shares issuable, and $17,500 of accrued dividends payable 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.

NOTE 87 — Stock Options

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.

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 authorized 15,000,000 option shares with an annual increase to the total number of option shares available in the plan equal to 4% of the total number of common shares outstanding 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 ~~September~~March 3031, ~~2010~~2011, ~~approximately~~no ~~17,944,000~~additional shares ~~were~~are ~~available~~authorized ~~for~~to ~~future~~be ~~grants under~~granted since the ~~Plan~~plan has terminated.

Options issued under this Plan are granted with exercise prices equal to the closing stock price on the date of grant 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~~In ~~the nine-month periods ended September~~January 302011, ~~2010 and 2009,~~ the Company ~~recognized compensation~~granted ~~expense for~~ stock options ofunder ~~$49,566 and $100,306 respectively. The expense is included in~~ the ~~consolidated~~standard ~~statement~~plan provisions of ~~operations as general and administrative expense. Total~~1,000,000 ~~unamortized~~shares ~~compensation expense related~~ to ~~non-vested~~directors ~~stock~~and ~~option awards at September 30~~8, ~~2010 was $65~~100,000, ~~which~~shares ~~is expected~~ to beemployees ~~recognized~~for ~~over~~ a ~~weighted-average~~total ~~period~~ of ~~0.85 years. The Company’s calculations were made using the Black-Scholes option-pricing model~~9,100,000 ~~with~~shares ~~the following~~granted. ~~weighted average assumptions:~~

	For the Nine
	Months Ended September 30,
	2010 (1)		2009
Expected life		N/A		6.5 Years
Volatility		N/A		297	%
Interest rate		N/A		2.0	%
Dividend yield		N/A		None

During the three-month periods ended March 31, 2011 and 2010, the Company recognized compensation expense for stock options of $45,290 and $19,677 respectively. The expense is included in the consolidated statement of operations as general and administrative expense. Total unamortized compensation expense related to non-vested stock option awards at March 31, 2011 was $160,000, which is expected to be recognized over a weighted-average period of 1.9 years. The Company’s calculations were made using the Black-Scholes option-pricing model, with the following weighted average assumptions:

(1) No options were granted during the nine months ended September 30, 2010.


	For the Three Months
	Ended March 31,
	2011			2010 (1)
Expected life		6.5 Years			N/A
Volatility		369	%		N/A
Interest rate		2.5	%		N/A
Dividend yield		None			N/A


(1)		No options were granted during the three months ended March 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.

The following table summarizes stock option activity under DPAC’s 1996 Stock Option Plans for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011:

				Weighted-
				Average		Weighted-Average		Aggregate
	Number of			Exercise		Remaining		Intrinsic
	Shares			Price		Contractual Life		Value
Outstanding — December 31, 2009		14,550,936		$	0.42
Outstanding — December 31, 2010		12,784,699		$	0.21
Granted		—9,100,000		$	—0.02
Exercised		—			—
Canceled		(1,~~430~~066,~~833~~256	)	$	20.3036
Outstanding —September 30, 2010		13,120,103		$	0.22		5.4 Years	$	1,500
Outstanding — March 31, 2011		20,818,443		$	0.12		7.3 Years	$	451,400
Exercisable — September 30, 2010		11,082,603		$	0.25		5.0 Years	$	1,500
Exercisable — March 31, 2011		10,755,943		$	0.21		6.0 Years	$	131,500

NOTE 98 — Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer reviews financial information and makes operational decisions based upon the Company as a whole. Therefore, the Company reports as a single segment.

The Company had export sales of 3221% and 29% of net sales for the three ~~and nine~~ months ended ~~September~~ March 3031, ~~2010~~ 2011 and ~~22% and 20% of net sales for the three and nine months ended September 30~~2010, ~~2009,~~ respectively. Export sales were primarily to Canada, Brazil, Singapore, and Western ~~European~~ European countries. Foreign sales are made in U.S. dollars. All long-lived assets are located in the United States.

NOTE 109 — Income Taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax bases of assets and liabilities. The Company exercises significant judgment relating to the projection of future taxable income to determine the recoverability of any tax assets recorded on the balance sheet. DPAC regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. To the extent that recovery is not believed to be more likely than not, a valuation allowance is established. The Company has established a valuation allowance associated with its net deferred tax assets.

As of March 31, 2011, 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.

The valuation allowance was calculated by 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.

NOTE 1110 — ~~Sale~~Commitments ofand ~~Manufacturing Capability~~Contingencies

The Company entered into an Equipment Purchase Agreement (the “Agreement”) that was consummated in the first quarter of 2009 with one of its contract manufacturers (“Manufacturer”) and sold certain of its manufacturing capability (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 from Quatech as required. 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.

NOTE 12 — Commitments and Contingencies

Legal Proceedings

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

Other Contingent Contractual Obligations

Over time, the Company has made and continues to make certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include: indemnities to past, present and future directors, officers, employees and other agents pursuant to the Company’s Articles, Bylaws, resolutions, agreements or otherwise; indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; and indemnities pursuant to contracts involving protection of selling security holders against claims by third parties arising from any alleged inaccuracy of information in registration statements filed by the Company with the SEC or involving indemnification of the other parties to contracts from any damages arising from misrepresentations made by the Company. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees may not provide for any limitation of the future payments that the Company could potentially be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets.

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

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

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

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

Introduction/Business Overview

DPAC, through its wholly owned subsidiary, Quatech, designs 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”).

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.

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.

Risks

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

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

These risks should be read in connection with the detailed risks associated with DPAC and Quatech set forth under the caption “Risk Factors” contained in the Registrant’s Annual Report on Form 10-K filed with the SEC on April 15, ~~2010~~2011.

Results of Operations and Financial Condition

Three Months Ended ~~September~~March 3031, ~~2010~~2011 and ~~2009~~2010

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

	For the Three Months Ended:
	September 30, 2010						September 30, 2009						Change
	March 31, 2011						March 31, 2010						Change
	Results			% of Sales			Results			% of Sales			Dollars			%
NET SALES	$	12,~~877~~012,~~487~~419			100	%	$	1,~~425~~769,~~770~~020			100	%	$	~~451~~243,~~717~~399			3214	%
COST OF GOODS SOLD		1,~~119~~173,~~227~~045			6058	%		~~869~~927,~~320~~027			6152	%		~~249~~246,~~907~~018			2927	%
GROSS PROFIT		~~758~~839,~~260~~374			4042	%		~~556~~841,~~450~~993			3948	%		~~201~~(2,~~810~~619	)		360	%
OPERATING EXPENSES
Sales and marketing		~~189~~237,~~819~~107			1012	%		~~182~~175,~~276~~431			1310	%		761,~~543~~676			435	%
Research and development		~~178~~214,~~729~~096			1011	%		~~178~~187,~~432~~727			1311	%		~~297~~26,369			—14	%
General and administrative		~~254~~343,~~924~~525			1417	%		~~260~~289,~~022~~876			1816	%		(553,~~098~~649	)		(219	)%
Amortization of intangible assets		~~136~~94,~~087~~246			75	%		132,~~088~~087			97	%		3(37,~~999~~841	)		3-29	%
Restructuring costs		—			—			12,097			1			(12,097	)		(100	)
Total operating expenses		888,974			44	%		785,121			44	%		103,853			13	%
Total operating expenses		759,559			41			764,915			54			(5,356	)		(1	)
INCOME (LOSS) FROM OPERATIONS		(49,600	)		-2	%		56,872			3	%		(106,472	)		-187	%
LOSS FROM OPERATIONS		(1,299	)		(1	)		(208,465	)		(15	)		207,166			(99	)
INTEREST EXPENSE		133,236			7	%		152,692			9	%		(19,456	)		-13	%
OTHER EXPENSE:
FAIR VALUE ADJUSTMENT FOR PUT WARRANT LIABILITY		8,200			0	%		—			0	%		8,200
Interest expense		153,495			8			146,126			10			7,369			5
LOSS BEFORE INCOME TAX PROVISION		(191,036	)		-9	%		(95,820	)		-5	%		(95,216	)		99	%
Fair value adjustment for warrant liability		64,500			3			29,000			2			35,500			122
INCOME TAX PROVISION		—			0	%		—			0	%		—			0	%
Total other expenses		217,995			11			175,126			12			42,869			24
NET LOSS	$	(191,036	)		-9	%	$	(95,820	)		-5	%	$	(95,216	)		99	%
LOSS BEFORE INCOME TAXES		(219,294	)		(12	)		(383,591	)		(27	)		164,297			(43	)
PREFERRED STOCK DIVIDENDS		112,500			6	%		112,500			6	%		—			0	%
INCOME TAX PROVISION		—			—			—			—			—			—
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(303,536	)		-15	%	$	(208,320	)		-12	%	$	(95,216	)		46	%
NET LOSS	$	(219,294	)		(12	)%	$	(383,591	)		(27	)%	$	164,297			(43	)%
PREFERRED STOCK DIVIDENDS		112,500			6			47,813			3			64,687			135
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(331,794	)		(18	)%	$	(431,404	)		(30	)%	$	99,610			(23	)%

Net Sales. Net sales of $12.90 million for the quarter ended ~~September~~March 3031, ~~2010~~2011 increased by $~~452~~243,000 or 3214% as compared to the prior year ~~comparable~~first ~~period net sales~~quarter. Net sales related to the Company’s Device Connectivity products increased by $~~238~~42,000, or 304%, and net sales related to the Company’s Device Networking products, including the Airborne wireless product line, increased by $~~214~~201,000, or 31 271% from the prior year period.

Gross Profit. Gross profit in absolute dollars ~~increased~~decreased by $~~202~~3,000. orGross ~~36%~~profit as a percentage ~~result~~ of ~~the~~ ~~increase in~~ net sales. ~~Gross~~decreased ~~profit~~from 48% to 42%, due primarily to higher variable costs, with direct material costs as a percentage of net sales ~~increased~~increasing tofrom 4046% ~~from~~to 3950%, due ~~primarily~~ to ~~lower~~the ~~variable~~change in product mix. Additionally, fixed overhead costs ~~(direct~~increased by $53,000 in the current year quarter due to increased indirect material) ascosts aof ~~percentage~~$27,000, salaries and benefits of ~~net~~$13,000 ~~sales~~and freight and other cost of $13,000.

Sales and Marketing Expenses. Sales and marketing expenses for the quarter ended ~~September 30~~March 31, 2011 ~~2010~~ of $~~190~~237,000 increased by $862,000 or 435% from the prior year ~~third~~first quarter, due to an ~~increase~~ increase in salary and ~~benefits~~commissions ~~costs~~of 28,000, advertising of $27,000 and travel related expenses of $7,000.

Research and Development Expenses. Research and development expenses of $214,000 for the first quarter of 2011 increased by 26,000, or 14%, from the prior year period. The increase was due to higher salaries and outside consulting expenses. The Company will continue to invest in research and development to expand and develop new wireless products. See “Forward-Looking Statements.”

~~Research~~General and ~~Development~~Administrative Expenses. ~~Research~~General and ~~development~~administrative expenses of $~~179~~344,000 incurred for the ~~third~~ first quarter of ~~2010~~2011 ~~was~~increased ~~flat~~by ~~compared~~$54,000 toor ~~the~~19% ~~third~~from ~~quarter~~the ofprior ~~2009~~year period. The increase ~~Company~~was ~~will~~due ~~continue~~primarily to ~~invest~~ inhigher ~~research~~salary ~~and~~expense ~~development~~of to$28,000 ~~expand~~ and ~~develop~~non-cash ~~new~~compensation ~~wireless~~expense related ~~products.~~to ~~See “Forward-Looking~~stock ~~Statements~~options of $25,000.”

~~General~~Amortization ~~and~~of ~~Administrative~~Intangible ~~Expenses~~Assets. ~~General~~Amortization ~~and~~expense ~~administrative~~decreased ~~expenses~~by of $~~255~~38,000, or 29%, due ~~incurred~~to ~~for~~the technology acquired in the ~~third~~DPAC ~~quarter~~/ ofQuatech ~~2010~~merger ~~decreased~~being byfully amortized as of February 28, 2011. $582,000 orof 2%the ~~from~~current year period amortization expense is for the ~~prior~~amortization of purchased technology acquired in the merger, and the balance of $12,000 in the current year period is the amortization of capitalized developed software and customer lists being amortized over 5 years.

~~Amortization~~Interest ofExpense. ~~Intangible~~The ~~Assets.~~Company incurred interest and financing costs of $~~122~~133,000 during the first quarter of ~~amortization~~2011, ~~expense~~as compared to $153,000 for the same period in the prior year. The decrease is ~~related~~due to the ~~amortization~~ write down of ~~purchased~~$18,000 ~~intangible~~of ~~assets~~accrued ~~acquired~~success fees for the Subordinated Debt in the current ~~Merger~~year onperiod. ~~February 28~~The following non-cash items are included in interest expense for the first quarter of 2011: a gain for the adjustment of accrued success fees of $14,000, ~~2006~~amortization ~~being~~of ~~amortized~~deferred ~~over~~financing ~~5 years~~costs of $8,000, and amortization of the ~~balance~~discount for warrants of $143,000. inThe following ~~the~~non-cash ~~current~~charges ~~year~~are ~~period~~included in interest expense for the ~~amortization~~first quarter of 2010: accretion of ~~capitalized~~success ~~developed~~fees ~~software~~of $4,000, amortization of deferred financing costs of $9,000, and amortization ~~customer~~of ~~lists~~the ~~being~~discount ~~amortized~~for ~~over~~warrants ~~5 years~~of $3,000.

~~Interest~~Fair ~~Expense.~~Value ~~The~~Adjustment ~~Company~~of ~~incurred~~Put ~~interest~~Warrant ~~and~~Liability. ~~financing~~The ~~costs~~Company ofadjusts ~~$153,000~~the ~~during~~liability for the ~~third~~HillStreet ~~quarter~~Fund ofput ~~2010,~~warrant asto ~~compared~~its tofair ~~$146~~value,~~000~~ ~~for~~through ~~the~~earnings, ~~same~~at ~~period in~~ the ~~prior~~end ~~year.~~of ~~The~~each ~~increase~~reporting ~~is due to higher average effective interest rates~~period. ~~The~~During ~~following non-cash charges are included in interest expense for~~ the ~~third~~first quarter of ~~2010:~~2011, ~~accretion~~the ofcompany ~~success~~recorded ~~fees~~a ofloss ~~$4,000, amortization~~ of ~~deferred financing costs of~~ $128,~~000,~~200 ~~and~~compared ~~amortization~~to ofno ~~the discount for warrants of $3,000.~~gain ~~The~~or ~~following~~loss ~~non-cash charges are included in interest expense~~ for the ~~third~~first quarter of ~~2009: accretion of success fees of $11,000, amortization of deferred financing costs of $14,000, and amortization of the discount for warrants of $3,000~~2010.

Fair Value Adjustment of Put Warrant Liability. The Company adjusts the liability for the HillStreet Fund put warrant to its fair value, through earnings, at the end of each reporting period. During the third quarter of 2010, the company recorded a loss of $65,000 compared to a loss of $29,000 for the third quarter of 2009.

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

Preferred Stock Dividends. The Company has outstanding 30,000 shares of convertible, cumulative, 915% Series A preferred stock, $100 stated value. ~~Effective January 1, 2010, the~~ ~~dividend rate increased to 15% per annum.~~

Liquidity and Capital Resources

At March 31, 2011, the Company had a cash balance of $56,000 and a deficit in working capital of $1,483,000. At December 31, 2010, the Company had a cash balance of $48,000 and a deficit in working capital of $1,428,000. Although the Company has reported net losses in recent periods, a significant portion of our operating expenses are non-cash. During the first three months of 2011, the Company reported a net loss of $191,000, which included the following non-cash operating expenses: depreciation and amortization of $129,000, non-cash compensation expense for stock options of $45,000, and a charge of $8,200 for the put warrant adjustment. 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 expense for stock options of $68,000, and non-cash interest expense of $95,000.

The Company has taken the following actions to reduce expenses and increase capital: 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 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 over shipments during the first three months of 2011, resulting in a 81% increase in the size of its backlog of firm orders from $664,000 at December 31, 2010 to $1,200,000 at the beginning of the second quarter of 2011. However, a downturn in our revenue levels can severely impact the availability under our line of credit and limit our ability to meet our obligations on a timely basis and finance our operations as needed. 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 was fully drawn on its line of credit at March 31, 2011. 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.

~~Nine~~The ~~Months~~Company ~~Ended~~has ~~September~~a revolving line of credit with a Bank providing for a maximum $1,500,000 working capital line of credit. The facility bears a floating interest rate at the Bank’s Revolver LIBOR Rate (.24% at March 3031, ~~2010~~2011) plus 8.5%. Availability under the line of credit is formula driven based on applicable balances of the Company’s accounts receivable and ~~2009~~inventories. Based on the formula calculation, the Company had availability to draw up to the maximum line amount of $1,500,000, of which the Company was fully drawn at March 31, 2011. The Credit Facility is secured by substantially all the assets of the Company and is scheduled to mature on May 31, 2011.

	For the Nine Months Ended:
	September 30, 2010						September 30, 2009						Change
	Results			% of Sales			Results			% of Sales			Dollars			%
NET SALES	$	5,630,995			100	%	$	5,135,724			100	%	$	495,271			10	%
COST OF GOODS SOLD		3,180,780			56			3,040,134			59			140,646			5
GROSS PROFIT		2,450,215			44			2,095,590			41			354,625			17
OPERATING EXPENSES
Sales and marketing		554,761			10			673,686			13			(118,925	)		(18	)
Research and development		560,699			10			599,036			12			(38,337	)		(6	)
General and administrative		847,034			15			957,692			19			(110,658	)		(12	)
Amortization of intangible assets		400,261			7			377,098			7			23,163			6
Restructuring costs		—			—			12,097			—			(12,097	)		(100	)
Total operating expenses		2,362,755			42			2,619,609			51			(256,854	)		(10	)
INCOME (LOSS) FROM OPERATIONS		87,460			2			(524,019	)		(10	)		611,479			(117	)
OTHER EXPENSE:
Interest expense		466,894			8			431,933			8			34,961			8
Fair value adjustment for warrant liability		28,700			1			29,000			1			(300	)		(1	)
Total other expenses		495,594			9			460,933			9			34,661			8
LOSS BEFORE INCOME TAXES		(408,134	)		(7	)		(984,952	)		(19	)		576,818			(59	)
INCOME TAX PROVISION		—			—			—			—			—			—
NET LOSS	$	(408,134	)		(7	)%	$	(984,952	)		(19	)%	$	576,818			(59	)%
PREFERRED STOCK DIVIDENDS		337,500			6			143,439			3			194,061			135
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(745,634	)		(13	)%	$	(1,128,391	)		(22	)%	$	382,757			(34	)%

Net Sales. Net sales of $5.6 million for the nine months ended September 30, 2010 increased by $495,000 or 10% as compared to net sales for the comparable prior year period. Net sales related to the Company’s Device Connectivity products decreased $126,000, or 4% from the nine months ended September 30, 2009, and net sales related to the Company’s Device Networking products, including the Airborne wireless product line, increased by $621,000, or 31% from the prior year period.

Gross Profit. Gross profit increased by $355,000, or 17%, for the nine month period as a result of the increase in revenues. Gross profit as a percentage of net sales increased to 44% from 41% due primarily to lower variable costs (direct material) as a percentage of net sales and lower fixed costs. During the first quarter of 2009, the Company sold certain of its manufacturing capability to one of its contract manufacturing vendors and ceased internal manufacturing its products. The Company purchases completed assemblies from contract manufacturers.

Sales and Marketing Expenses. Sales and marketing expenses for the nine months ended September 30, 2010 of $555,000 decreased by $119,000 or 18% from the prior year period. The decrease is due to a decrease in salary and related expenses.

Research and Development Expenses. Research and development expenses of $561,000 for the first nine months of 2010 decreased by $38,000 or 6% as compared to the same period of 2009 primarily due to lower salary and consulting costs of $76,000, higher R&D expenses of $7,000, partially offset by $29,000 of incurred expenses in 2009 being capitalized for developed software. The Company will continue to invest in research and development to expand and develop new wireless products. See “Forward-Looking Statements.”

General and Administrative Expenses. General and administrative expenses incurred for the nine months ended September 30, 2010 of $847,000 decreased by $111,000 or 12% from the prior year period. The decrease was due primarily to lower salary costs and lower non-cash compensation expense related to stock options.

Amortization of Intangible Assets. $368,000 of amortization expense is related to the amortization of purchased intangible assets acquired in the Merger on February 28, 2006 being amortized over 5 years, with the balance of $32,000 in the current year period related to the amortization of capitalized developed software and customer lists, being amortized over 5 years.

Interest Expense. The Company incurred interest and financing costs of $467,000 during the first nine months of 2010 as compared to $432,000 incurred in the prior year period. The increase is due to higher effective interest rates. The following non-cash charges are included in interest expense during the first nine months of 2010: accretion of success fees of $13,000, amortization of deferred financing costs of $35,000, and amortization of the discount for warrants of $10,000. The following non-cash charges are included in interest expense during the first nine months of 2009: accretion of success fees of $34,000, amortization of deferred financing costs of $36,000, and amortization of the discount for warrants of $10,000.

Fair Value Adjustment of Put Warrant Liability. For the nine months ended September 30, 2010 and 2009, the company recorded a loss of $29,000 related to the adjustment of the put warrant. The Company adjusts the warrant to its fair value through earnings at the end of each reporting period.

Preferred Stock Dividends. The Company has outstanding 30,000 shares of convertible, cumulative, 9% Series A preferred stock, $100 stated value. Effective January 1, 2010, the dividend rate increased to 15% per annum. On September 30, 2009, the Company issued 8,750 shares of Series A preferred stock in conjunction with the SocketSerial asset purchase.

Liquidity and Capital Resources

At September 30, 2010, the Company had a cash balance of $29,000 and a deficit in working capital of $1,360,000. 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. During the first nine months of 2010, the Company reported a net loss of $408,000, which included the following non-cash operating expenses: depreciation and amortization of $511,000, non-cash compensation for stock options of $50,000, and non-cash interest expense of $57,000. 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, 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 took actions to reduce 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 (see Note 11 for more information). 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 (see Note 2 for more information). Margins generated from revenues of this product line have helped enable the Company to achieve a cash flow break even from operations.

Going forward, the Company is dependent on financing its operations through the use of its bank line of credit and the contribution from future revenues. 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 the first nine months of 2010, resulting in a 30% and 10% increase in net sales for, respectively, the three and nine months ended September 30, 2010, when compared to the comparable prior year periods, and a 122% increase in the size of its backlog of firm orders from $540,000 at December 31, 2009 to $1.2 million at the beginning of the fourth quarter of 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 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.

The Company has a revolving line of credit with a Bank providing for a maximum $1,500,000 working capital line of credit. The facility bears a floating interest rate at the Bank’s Revolver LIBOR Rate (.25% at September 30, 2010) plus 8.5%. Availability under the line of credit is formula driven based on applicable balances of the Company’s accounts receivable and inventories. Based on the formula calculation, the Company had availability to draw up to the maximum line amount of $1,500,000, of which the Company was fully drawn at September 30, 2010. The Credit Facility is secured by substantially all the assets of the Company and is scheduled to mature on December 15, 2010.

The actual amount and timing of working capital and capital expenditures that we may incur in future periods may vary significantly and will depend upon many factors, including the amount and timing of the receipt of revenues from operations, any potential acquisitions or divestitures, an increase in manufacturing capabilities, the reduction of liabilities, the timing and extent of the introduction of new products and services and growth in personnel and operations. If needed, there can be no assurance that additional financing will be available on terms favorable to the Company, if at all. If internally generated funds are inadequate, we may scale back expenditures or seek other financing, which might include sales of equity securities that could dilute existing shareholders. See “Cautionary Statements.”

Net cash provided by operating activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011 was $498,000 as as compared to ~~net cash used of~~ $4123,000 in the first ~~nine~~three months of ~~2009~~2010. The net loss of $~~408~~191,000 incurred in the first ~~nine~~three months of ~~2010~~2011 was offset by non-cash items, including depreciation and amortization, non-cash compensation expense, accretion of success fees and amortization of deferred ~~financing~~ financing costs, totaling $~~682~~192,000. Cash was used to ~~pay~~increase ~~down~~prepaids ~~accounts~~and ~~payable~~other assets by $~~396~~93,000, and ~~fund~~ fund increases in ~~accounts~~inventories ~~receivable~~ of $3487,000. AAn ~~decrease~~increase in ~~inventories~~other accrued liabilities of $~~100~~102,000 and anin ~~increase~~accounts inpayable ~~other accrued liabilities~~ of $~~131~~79,000 contributed to cash.

Net cash used in investing activities for ~~the nine months ended September 30, 2010 consisted of~~ property additions ofwas $564,000 asand ~~compared to~~ $8919,000 ~~provided~~for in the ~~nine~~ three months ended ~~September 30~~March 31, ~~2009,~~2011 ~~which~~and ~~consisted of net cash received from the sale of assets of $150~~2010,~~000,~~ ~~partially offset by property additions of $61,000~~respectively.

Net cash provided by financing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011 was $184,000 as as compared to $5267,000 ~~used~~for ~~during~~ the ~~first~~same ~~nine~~period ~~months~~ of ~~2009~~2010. Cash provided in the current year period consisted of net borrowing of $7535,000 ~~under the bank line of credit and $9,000 net borrowing~~ in short term notes to finance insurance premiums, partially offset by $3531,000 in ~~repayments~~ ofprincipal ~~subordinated~~payments ~~debt,~~on ~~dividends~~the ofOhio ~~$18,000~~Development ~~and financing costs incurred of $13,000~~loan.

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 to acquire more than $50,000 in capital equipment during the remainder of the fiscal year.

Off Balance Sheet Arrangements

Our off-balance sheet arrangements consist primarily of conventional operating leases, purchase commitments and other commitments arising in the normal course of business, as further discussed below under “Contractual Obligations and Commercial Commitments.” As of ~~September~~March 3031,~~2010~~ 2011, we did ~~not~~ not have any relationships with unconsolidated entities or financial partners, such as entities ~~often~~ often referred to as structured finance or special purpose entities, which would have been ~~established~~ established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations and Commercial Commitments

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

2220

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. Because of macro conditions impacting the entire electronics industry, lead times for certain components of the Company’s products have extended to beyond twenty weeks. 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.

Critical Accounting Policies

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

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

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

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

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

2321

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

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

We capitalize certain internally developed software costs 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. As of ~~September~~March 3031, ~~2010~~2011, $191,657 of software development costs were capitalized with accumulated amortization of $4767,~~914~~080. The assets are being amortized on a straight line basis over their estimated life of 5 years.

Goodwill isand trademarks are subject to an impairment assessment atannually ~~least~~on ~~annually~~December 31st of each year and more often if conditions should dictate, which may result in a charge to operations if the fair value of the reporting unit in which the goodwill is reported declines. ~~The Company tests goodwill and trademarks on at least an annual basis at the end of the fourth quarter, and more often if circumstances should dictate, for impairment.~~ Other intangible assets are amortized over their estimated useful lives. The determination of related estimated useful lives of other intangible assets and whether goodwill and trademarks are impaired involves judgments based upon long-term projections of future performance. The Company operates in a single business segment as a single business unit and annually reviews the recoverability of the carrying value of goodwill using the methodology prescribed in FASB guidance. Recoverability of goodwill is determined by comparing the fair value of the entire Company to the accounting value of the underlying net assets. Based on the results of the most recently completed analysis, the Company’s goodwill and trademarks were not impaired as of December 31, ~~2009~~2010. No event has occurred as of or since the period ended December 31, ~~2009~~2010 that would give management an indication that an impairment charge was necessary that would adversely affect the Company’s financial position or results of operations.

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

The Company values the put warrant liability at the end of a reporting period by calculating the difference between the ~~Company’s closing~~put ~~stock~~ price atper ~~the~~share ~~end~~as ofdefined ain ~~reporting~~the ~~period~~Warrant Agreement and the exercise price per share multiplied by the number of warrants granted. In accordance with FASB guidance, the Company has classified the fair value of the put warrants as a liability and changes in the fair value of the warrants are recognized in the earnings of the Company. Changes in ~~our~~the ~~stock~~put price price can have a material impact to the put warrant valuation and, therefore, to our financial statements. Additionally, the actual settlement amount of the put warrant liability could differ materially from the value determined ~~based on the Company’s stock price~~.

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


Item 4 — Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of ~~September~~March 3031, ~~2010~~2011, the end of the period covered by this report, as required by Exchange Act Rule 13a-—15(b). The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the Company’s disclosure controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on the foregoing evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

2522

PART II—OTHER INFORMATION


Item 1 — Legal Proceedings.

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


Item 6 — Exhibits.

Exhibit No.		Description
	10.1	Third Amendment to Credit Agreement, by and among DPAC Technologies Corp., QuaTech, Inc. and Fifth Third Bank, dated as of July 30, 2010 (incorporated herein by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed September 22, 2010).
	31.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a).
	32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

2623

SIGNATURES

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

	DPAC TECHNOLOGIES CORP. (Registrant)
Date: November 15, 2010	By:	/s/ STEVEN D. RUNKEL
Date: May 13, 2011	By:	/s/ STEVEN D. RUNKEL
		Steven D. Runkel,
		Chief Executive Officer
Date: November 15, 2010	By:	/s/ STEPHEN J. VUKADINOVICH
Date: May 13, 2011	By:	/s/ STEPHEN J. VUKADINOVICH
		Stephen J. Vukadinovich,
		Chief Financial Officer

2724

EXHIBIT INDEX


Exhibit No.		Description

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

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

2825

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Filing Compare · DT Sale Corp.