Edgar Filing: DIGITAL POWER CORP

dpc_10q-063012.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2012

¨	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 1-12711

DIGITAL POWER CORPORATION

( Exact name of registrant as specified in its charter )

California	94-1721931
(State or other jurisdiction of	(I.R.S. Employer Identification Number)
incorporation or organization)

41324 Christy Street

Fremont, CA 94538-3158

(Address of principal executive offices)

(510) 657-2635

(Registrant’s telephone number)

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ 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	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ¨ No þ

At August 14, 2012, the registrant had outstanding 6,863,150 shares of common stock.

DIGITAL POWER CORPORATION

TABLE OF CONTENTS

					Page

PART I – FINANCIAL INFORMATION

	Item 1.	Financial Statements	3

		Consolidated Balance Sheets as of June 30, 2011 and December 31, 2011	3

		Consolidated Statements of Operations for the three and six months ended June 30, 2012 and June 30, 2011	4

		Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and June 30, 2011	5

		Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2012	6

		Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and June 30, 2011	7

		Notes to Interim Consolidated Financial Statements	8-13

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
	Item 4.	Controls and Procedures	17

PART II – OTHER INFORMATION			17

	Item 1.	Legal Proceedings	17
	Item 1A.	Risk Factors	17
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 3.	Defaults Upon Senior Securities	24
	Item 4.	Reserved	24
	Item 5.	Other Information	24
	Item 6.	Exhibits	24

SIGNATURES			25

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share data

	June 30,			December 31,
	2012			2011
	Unaudited
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1, 922		$	1,777
Trade receivables (net of allowance for doubtful accounts of $ 146 and $ 148 at June 30, 2012 and December 31, 2011, respectively)		2,326			1,845
Prepaid expenses and other receivables		146			108
Inventories (Note 3)		1,886			2,332
Total current assets		6,280			6,062

PROPERTY AND EQUIPMENT, NET		472			448
INTANGIBLE ASSET, NET		306			350
AVAILABLE FOR SALE SECURITIES OF TELKOOR		607			483
LONG-TERM DEPOSITS		6			6

Total assets	$	7,671		$	7,349

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	942		$	1,032
Related parties - trade payables		363			369
Advances from customers and deferred revenues		16			286
Other current liabilities		472			529
Total current liabilities		1,793			2,216

SHAREHOLDERS' EQUITY:
Share capital -
Series A Redeemable, Convertible Preferred shares, no par value - 500,000 shares authorized at June 30, 2012 and December 31, 2011; No shares are issued and outstanding.		-			-
Preferred shares, no par value - 1,500,000 shares authorized at June 30, 2012 and December 31, 2011; No shares are issued and outstanding.		-			-
Common shares, no par value - 30,000,000 shares authorized at June 30, 2012 and December 31, 2011; 6,863,150 shares and 6,849,654 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		-			-
Additional paid-in capital		14,410			14,358
Accumulated deficit		(7,768	)		(8,321	)
Accumulated other comprehensive loss		(764	)		(904	)
Total shareholders' equity		5,878			5,133
Total liabilities and shareholders' equity	$	7,671		$	7,349

The accompanying notes are an integral part of the interim consolidated financial statements.

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands, except per share data

	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012		2011
	Unaudited

Revenues	$	5,182		$	6,150		$	2,942	$	3,172
Cost of revenues		2,979			3,751			1,666		1,879

Gross profit		2,203			2,399			1,276		1,293

Operating expenses:
Engineering and product development		322			388			160		202
Selling and marketing		490			514			252		239
General and administrative		804			882			393		433

Total operating expenses		1,616			1,784			805		874

Operating income		587			615			471		419
Financial income (expense), net		(22	)		(27	)		7		(2	)

Income before income taxes		565			588			478		417

Income taxes		12			10			-		9

Net income	$	553		$	578		$	478	$	408

Basic net income per share	$	0.081		$	0.086		$	0.070	$	0.061

Diluted net income per share	$	0.079		$	0.083		$	0.069	$	0.058

The accompanying notes are an integral part of the interim consolidated financial statements.

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

U.S. dollars in thousands

	Six months ended June 30,					Three months ended June 30,
	2012		2011			2012			2011
	Unaudited

Net Income	$	553	$	578		$	478		$	408
Other Comprehensive income, net of tax:
Change in net unrealized gain on available-for-sale marketable securities		130		(181	)		93			(181	)
Change in net foreign currency translation adjustment		10		84			(72	)		(4	)
Other comprehensive income		140		(97	)		21			(185	)
Total comprehensive income:		693		481			499			223

The accompanying notes are an integral part of the interim consolidated financial statements.

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. dollars in thousands, except share data

								Other
	Common		Additional					accumulated			Total		Total
	shares		paid-in		Accumulated			comprehensive			comprehensive		shareholders'
	Number		capital		deficit			loss			Income		equity

Balance as of January 1, 2012		6,849,654	$	14,358	$	(8,321	)	$	(904	)	-		$	5,133


Stock based compensation related to options granted to Telkoor's employees and other non- employee consultants		-		(9)		-			-		-			(9)
Stock based compensation related to options granted to employees		-		61		-			-		-			61
Exercise of options granted to employees		13,496				-			-		-			-
Comprehensive income:
Net Income		-		-		553			-			553		553
Unrealized loss from available-for-sale securities		-		-		-			130			130		130
Foreign currency translation adjustments		-		-		-			10			10		10

Total comprehensive income											$	693
Balance as of June 30, 2012 (unaudited)		6,863,150	$	14,410	$	(7,768	)	$	(764	)			$	5,878

The accompanying notes are an integral part of the interim consolidated financial statements.

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Six months ended June 30,
	2012			2011
	Unaudited
Cash flows from operating activities :

Net income	$	553		$	578
Adjustments required to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		50			31
Amortization of intangible asset		49			50
Stock based compensation related to options granted to employees		61			68
Stock based compensation related to options granted to Telkoor's employees		(9)			14
Decrease (increase) in trade receivables, net		(484)			345
(Increase) decrease in prepaid expenses and other accounts receivable		(37)			28
Decrease in inventories		462			49
Decrease in accounts payable and related parties- trade payables		(100	)		(247	)
Decrease in deferred revenues and other current liabilities		(335	)		(579	)

Net cash provided by operating activities		210			337

Cash flows from investing activities :

Purchase of available for sale securities of Telkoor		-			(1,007	)
Purchase of property and equipment		(71	)		(27	)

Net cash used in investing activities		(71	)		(1,034	)

Cash flows from financing activities :

Exercise of employees stock options		-			26

Net cash provided by financing activities		-			26

Effect of exchange rate changes on cash and cash equivalents		6			47

Increase/ (decrease) in cash and cash equivalents		145			(624	)
Cash and cash equivalents at the beginning of the period		1,777			2,115

Cash and cash equivalents at the end of the period	$	1,922		$	1,491

The accompanying notes are an integral part of the interim consolidated financial statements.

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 1:- GENERAL

Digital Power Corporation (the "Company" or "DPC") was incorporated in 1969, under the General Corporation Law of the State of California. The Company and Digital Power Limited ("DPL"), a wholly owned subsidiary located in the United Kingdom, are currently engaged in the design, manufacture and sale of switching power supplies and converters. The Company has two reportable geographic segments - North America (sales through DPC) and Europe (sales through DPL).

The Company depends on Telkoor Telecom Ltd. ("Telkoor"), a major shareholder of the Company and one of DPC's third party subcontractors, for design and manufacturing capabilities of some of the products which the Company sells. The Company also relies on third party contract manufacturer’s (CMs) to manufacture its products. If Telkoor and these manufacturers are unable or unwilling to continue manufacturing the Company's products in required volumes on a timely basis, that could lead to loss of sales, and adversely affect the Company's operating results and cash position. The Company also depends on Telkoor's intellectual property and its willingness and ability to transfer production to third party manufacturers allowing the Company to use these production rights. Failure to obtain new products in a timely manner or delay in delivery of product to customers would have an adverse effect on the Company's ability to meet its customers' expectations.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements as of June 30, 2012 and for the six months ended June 30, 2012 and 2011 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of the financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2012.

The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2011 are applied consistently in these financial statements. In addition, the following accounting policy is applied:

	b.	Marketable securities: The Company classifies its investment in Telkoor's shares as available-for-sale securities in accordance with ASC 320 (originally issued as SFAS 115), "Investment in Debt and Equity Securities". The investment is stated at market value. Unrealized gains and losses are comprised of the difference between market value and the investment fair value at the acquisition date and are reflected as "accumulated other comprehensive loss" in equity.
	c.	Accounting for stock-based compensation: The Company has several stock-based employee compensation plans, which are described more fully in Note 4. The Company accounts for stock-based compensation in accordance with Accounting Standards Codification Statement ("ASC") 718 (formerly SFAS No. 123 (revised 2004)) "Stock compensation" ("ASC 718"). The Company and its subsidiary apply ASC 718 and ASC 505-50 (formerly EITF 96-18) "Equity-Based Payments to Non-Employees" ("ASC 505-50") to options issued to non-employees. ASC 718 requires use of an option valuation model to measure the fair value of the options at the grant date.

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:- INVENTORIES

	June 30,		December 31,
	2012		2011
	Unaudited

Raw materials, parts and supplies	$	324	$	239
Work in progress		334		486
Finished products		1,228		1,607

	$	1,886	$	2,332

NOTE 4:- ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock option plans:

Under the Company's stock option plans, options may be granted to employees, officers, consultants, service providers and directors of the Company or its subsidiary.

As of June 30, 2012, the Company has authorized, by way of three Incentive Share Option Plans, the grant of options to officers, management, other key employees and others of up to 513,000, 240,000 and 1,519,000 shares, respectively, of the Company's common stock. As of June 30, 2012, options to purchase up to an aggregate of 410,145 shares of the Company's common stock are still available for future grant.

The options granted generally become fully exercisable after four years and expire no later than 10 years from the date of the option grant. Any options that are forfeited or cancelled before expiration become available for future grants.

	Six months ended June 30, 2012
	Amount of options		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value (*)
Outstanding at the beginning of the period		792,763	$	1.33		6.88	$	411

Outstanding at the end of the period		792,763	$	1.33		6.38	$	67

Exercisable options at the end of the period		476,013	$	1.21		4.97	$	56

(*)

Calculation of aggregate intrinsic value is based on the share price of the Company's common stock as of June 30, 2012 ($ 1.20 per share).

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 4:- ACCOUNTING FOR STOCK-BASED COMPENSATION (Cont.)

Stock option plans (cont.):

Under the provisions of ASC 718, the fair value of each option is estimated on the date of grant using a Black-Sholes option valuation model that uses the assumptions such as stock price on the date of the grant, exercise price, risk-free interest rate, expected volatility, expected life and expected dividend yield of the option. Expected volatility is based exclusively on historical volatility of the entity's stock as allowed by ASC 718. The Company uses historical information with respect to the employee options exercised to estimate the expected term of options granted, representing the period of time that options granted are expected to be outstanding. The risk-free interest rate of period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

No options were granted during the first six month of 2012. The fair value for options granted in the three months ended June 30, 2011 is amortized over their vesting period using a straight-line recognition method and estimated at the date of grant with the following assumptions:

		Three months ended June 30, 2011
		Unaudited

Dividend yield		0%
Expected volatility		84%
Risk-free interest rate		2.23%
Expected forfeiture		5%
Expected life (years)		6.25

The total employee's equity-based compensation expense related to all of the Company's equity-based awards, recognized for the six months and three months ended June 30, 2012 is comprised as follows:

	Six months ended				Three months ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
	Unaudited		Unaudited		Unaudited		Unaudited

Sales and marketing expenses		3		8		1		4
General and administrative		58		60		30		28
Total employees equity-based compensation expense		61		68		31		32

The weighted-average grant-date fair value of options granted during the first six months of 2011 was $1.19. As of June 30, 2012, there was $ 337 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a period of the next 40 months.

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 4:- ACCOUNTING FOR STOCK-BASED COMPENSATION (Cont.)

b. Employee Stock Ownership Plan:

The Company has an Employee Stock Ownership Plan ("ESOP") covering eligible employees. The ESOP provides for the Employee Stock Ownership Trust ("ESOT") to distribute shares of the Company's Common shares as retirement benefits to the participants. The Company has not distributed shares since 1998. As of June 30, 2012, the ESOT held 167,504 shares of common stock.

NOTE 5:- ACQUISITION OF SHARES OF TELKOOR

On June 16, 2011 the Company has acquired 1,136,666 shares of Telkoor, a major shareholder of the Company and an Israeli company listed in the Tel Aviv stock exchange, for $0.88 (NIS 3) per share, which represents 8.8% of the outstanding shares of Telkoor. As a result of this transaction, an existing manufacturing agreement between Digital Power and Telkoor will be updated and extended. The investment is accounted for as available-for-sale security.

NOTE 6:- NET INCOME PER SHARE

The following table sets forth the computation of the basic and diluted net earnings per share:

1. Numerator:

	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
	Unaudited

Net income available to Common shareholders	$	553	$	578	$	478	$	408

2. Denominator:

	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
	Unaudited

Denominator for basic net income per share of weighted average number of common shares		6,851,614		6,705,046		6,853,594		6,711,056
Effect of dilutive securities:
Employee stock options		154,501		268,080		85,753		259,884

Denominator for diluted net income per common share		7,006,115		6,973,126		6,939,347		6,970,940

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 7:- SEGMENTS

The Company has two reportable geographic segments (see Note 1 for a brief description of the Company's business).

The following data presents the revenues, expenditures and other operating data of the Company's geographic operating segments in accordance with ASC 218 (formerly SFAS No. 131) "Segment Reporting".

	Six months ended June 30, 2012 (unaudited)
	DPC		DPL		Eliminations			Total

Revenues	$	2,853	$	2,329	$	-		$	5,182
Intersegment revenues		290		3		(293	)		-
Total revenues	$	3,143	$	2,332	$	(293	)	$	5,182

Depreciation and amortization	$	23	$	76	$	-		$	99
Operating income	$	244	$	343	$	-		$	587
Financial expense, net								$	(22	)
Tax expense								$	(12	)
Net income	$	232	$	321	$	-		$	553
Expenditures for segment assets	$	57	$	14	$	-		$	71
Identifiable assets	$	4,367	$	3,304	$	-		$	7,671

	Six months ended June 30, 2011 (unaudited)
	DPC		DPL		Eliminations			Total

Revenues	$	3,324	$	2,826	$	-		$	6,150
Intersegment revenues		237		5		(242	)		-
Total revenues	$	3,561	$	2,831	$	(242	)	$	6,150

Depreciation and amortization	$	9	$	22	$	-		$	31
Operating income	$	320	$	295	$	-		$	615
Financial expense, net								$	(27	)
Tax expense								$	(10	)
Net income	$	310	$	268	$	-		$	578
Expenditures for segment assets	$	4	$	23	$	-		$	27
Identifiable assets	$	3,514	$	3,482	$	-		$	6,996

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 7:- SEGMENTS (Cont.)

	Three months ended June 30, 2012 (unaudited)
	DPC		DPL		Eliminations			Total

Revenues	$	1,442	$	1,500	$	-		$	2,942
Intersegment revenues		162		1		(163	)		-
Total revenues	$	1,604	$	1,501	$	(163	)	$	2,942

Depreciation expense	$	11	$	39	$	-		$	50
Operating income	$	132	$	339	$	-		$	471
Financial expenses, net								$	7
Tax expense								$	-
Net income	$	124	$	354	$	-		$	478
Expenditures for segment assets	$	43	$	8	$	-		$	51
Identifiable assets	$	3,514	$	3,304	$	-		$	6,996

	Three months ended June 30, 2011 (unaudited)
	DPC		DPL		Eliminations			Total

Revenues	$	1,719	$	1,453	$	-		$	3,172
Intersegment revenues		161		4		(165	)		-
Total revenues	$	1,880	$	1,457	$	(165	)	$	3,172
Depreciation expense	$	4	$	12	$	-		$	16
Operating income	$	211	$	208	$	-		$	419
Financial expenses, net								$	(2	)
Tax expense								$	(9	)
Net income	$	202	$	206	$	-		$	408
Expenditures for segment assets	$	1	$	15	$	-		$	16
Identifiable assets	$	3,514	$	3,482	$	-		$	6,996

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on our expectations, beliefs, forecasts, intentions and future strategies and are signified by the words "expects," "anticipates," "intends," "believes" or similar language. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II, Item 1A. Risk Factors” and elsewhere in this report. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. All forward-looking statements included in this quarterly report are based on information available to us on the date of this report and speak only as of the date hereof. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

In this quarterly report, the “Company,” “Digital Power,” “we,” “us” and “our” refer to Digital Power Corporation, a California corporation, and our wholly-owned subsidiary, Digital Power Limited.

GENERAL

Digital Power Corporation is a solution-driven organization that designs, develops, manufactures and sells high-grade customized and flexible power system solutions for the most demanding applications in the medical, military, telecom and industrial markets. We are highly focused on high-grade and custom product designs for the commercial, medical and military/defense markets, where customers demand high density, high efficiency and ruggedized products to meet the harshest and/or military mission critical operating conditions. We are a California corporation originally formed in 1969, and our common stock trades on the NYSE Amex under the symbol “DPW”. Our corporate headquarters are located in the heart of the Silicon Valley.

We also have a wholly-owned subsidiary, Digital Power Limited ("DPL"), which operates under the brand name of “Gresham Power Electronics” (“Gresham”). DPL is located in Salisbury, England, and it designs, manufactures and sells power products and system solutions mainly for the European marketplace, including power conversion, power distribution equipment, DC/AC (Direct Current/Active Current) inverters and UPS (Uninterruptible Power Supply) products. DPL’s defense business specializes in power conversion and distribution equipment for Naval applications.

We believe that we are one of the first companies in the power solutions industry to introduce a product strategy based on the premise that products developed with an extremely flexible architecture enable rapid modifications to meet unique customer requirements for non-standard output voltages. The development and implementation of this strategy has resulted in broad acceptance in the telecom/industrial, and increasingly in the medical market, segments for our new line of high density and high efficiency power products. These products set an industry standard for providing high-power output in package sizes that are among the smallest available for such commercial products.

We market and sell our products to many diverse market segments, including the telecom, industrial, medical and military/defense industries. Our products serve a global market, with an emphasis on North America, Europe and the Far East. We offer a broad product variety, including a full custom product design and production, unique high-speed switching power front-end, modified-standard and value added products of Open-Frame, Compact PCI, Micro TCA, ATCA Front-End, PoE (Power over Ethernet), Inverter, UPS, and complete custom power product solutions for commercial and military marketplaces, providing power output from 50 watts to 72,000 watts.

In an effort to provide short lead-times, high quality products and competitive pricing to support our markets, we have entered into production agreements with several contract manufacturers located in Asia, primarily China. These agreements allow us to better control production costs and ensure high quality products deliverable in a timely manner to meet market demand. However, we use domestic manufacturers to manufacture prototypes, “short production run” and our military products.

We intend to remain an innovative leader in the development of cutting-edge custom power solutions and rich features products to meet any customer needs and requirements, rugged power systems to meet harsh and extreme operation environmental requirements, and high performance, high efficiency, high-density and modular power systems. We are focusing today on developing even more high-grade custom power system solutions for numerous customers in a broadly diversified range of markets and challenging environments. Each product development is based on best of class performance criteria, including unique, advanced feature sets and a special layout to meet our customers’ unique operating conditions where efficiency, size and time to market are key to their success. We are taking initiatives to develop and sell high efficiency “green power” solutions.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2012, COMPARED TO JUNE 30, 2011

Revenues

Our revenues decreased by 7.3% to $2.9 million for the three months ended June 30, 2012, from $3.2 million for the three months ended June 30, 2011. The decrease in revenues was mainly due to decrease in shipment of our custom products to the commercial markets.

Revenues from our U.S. operations decreased by 16.1% to $1.4 million for the three months ended June 30, 2012, from $1.7 million for the three months ended June 30, 2011. Revenues from our European operations were relatively unchanged and were $1.5 million for the three months ended June 30, 2012 and the same period of 2011. The decrease in revenues in our U.S. operations was attributable to decreased sales of custom products to the commercial market.

For the six months ended June 30, 2012, our revenues decreased by 15.7% to $5.2 million from $6.2 for the six months ended June 30, 2011. The decrease in the revenues was attributable to end of life of certain military products of our European operations and lower demand due in the domestic operations.

For the six months ended June 30, 2012, revenues from our U.S. operations decreased by 14.2% to $2.9 million from $3.3 for the six months ended June 30, 2011. Revenues from our European operations of DPL decreased by 17.6% to $2.3 for the six months ended June 30, 2012, from $2.8 million for the six months ended June 30, 2011.

Gross Margins

Gross margins increased to 43.4% for the three months ended June 30, 2012, compared to 40.8% for the three months ended June 30, 2011. Gross margins for the six months ended June 30, 2012 increased to 42.5% compared to the gross margins of 39.0% for the six months ended June 30, 2011. The increase in gross margins for the six months ended June 30, 2012 was mainly due to lower pricing offered by suppliers and improved product mix.

Engineering and Product Development

Engineering and product development expenses were $160,000, or 5.4% of revenues, for the three months ended June 30, 2012, compared to $202,000, or 6.4% of revenues, for the three months ended June 30, 2011. Engineering and product development expenses were $322,000 or 6.2% of revenues, for the six months ended June 30, 2012 as compared to $388,000, or 6.3% of revenues, for the six months ended June 30, 2011. The overall decrease in our engineering and product development expenses was mainly due to a decreased spending on consulting costs related to new products.

Selling and Marketing

Selling and marketing expenses were $252,000 or 8.6% of revenues, for the three months ended June 30, 2012 as compared to $239,000, or 7.5% of revenues, for the three months ended June 30, 2011. Selling and marketing expenses were $490,000 or 9.4% of revenues, for the six months ended June 30, 2012 as compared to $514,000, or 8.4% of revenues, for the six months ended June 30, 2011. The decrease in the absolute dollars of selling and marketing expenses was primarily due to lower expense in selling and marketing headcount.

General and Administrative

General and administrative expenses were $393,000 or 13.4% of revenues, for the three months ended June 30, 2012 as compared to $433,000, or 13.6% of revenues, for the three months ended June 30, 2011. General and administrative expenses were $804,000 or 15.3% of revenues, for the six months ended June 30, 2012 as compared to $882,000, or 14.3% of revenues, for the six months ended June 30, 2011. The decrease in general and administrative expenses during the three and six months ended June 30, 2012 was mainly due change in personnel related cost.

Financial Income (Expense)

Financial income was $7,000 for the three months ended June 30, 2012 compared to financial expenses of $2,000 for the three months ended June 30, 2011. Financial expense was $22,000 for the six months ended June 30, 2012 compared to financial expense of $27,000 for the six months ended June 30, 2011. The change in financial results was due to foreign currency fluctuations during the respective periods.

LIQUIDITY AND CAPITAL RESOURCES

On June 30, 2012, we had cash and cash equivalents of $1.9 million and working capital of $4.5 million. This compared with cash and cash equivalents of $1.8 million and working capital of $3.8 million at December 31, 2011. The increase in cash and cash equivalents and working capital was due mainly to the net income for six months ended June 30, 2012 and decrease in inventory partially offset by an increase in trade receivables and decrease accounts payable and deferred revenue and other current liabilities.

Net cash provided by operating activities totaled $210,000 for six months ended June 30, 2012 compared to $337,000 for the six months ended June 30, 2011.

Net cash used in investing activities was $71,000 for the six months ended June 30, 2012 compared to $1,034,000 for the six months ended June 30, 2011. The net usage of cash for investing activities in 2011 was due mainly to a purchase of available for sale securities of Telkoor.

Net cash provided by financing activities was $26,000 for the six months ended June 30, 2011 due to a employees’ options exercised. There were no cash flows from financing activities for the six months ended June 30, 2012.

We believe we have adequate resources at this time to continue our operational and promotional efforts to increase sales and support our current operation. However, if we do not increase our sales, we may have to raise money through debt or equity, which may dilute shareholders’ equity.

CRITICAL ACCOUNTING POLICIES

In our Annual Report on Form 10-K for the year ended December 31, 2011, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. The basis for developing the estimates and assumptions within our critical accounting policies is based on historical information and known current trends and factors. The estimates and assumptions are evaluated on an ongoing basis and actual results have been within our expectations. We have not changed these policies from those previously disclosed in our Annual Report.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for a smaller reporting company.

ITEM 4T.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial officer, with the assistance of other members of the Company's management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

During the period covered by this quarterly report, there were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See our disclosures under “Legal Proceedings” in our Annual Report on Form 10-K, filed April 3, 2012. There have been no material developments in those proceedings since that filing.

ITEM 1A.

RISK FACTORS

The risk factors listed in this section provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Readers should be aware that the occurrence of any of the events described in these risk factors could have a material adverse effect on our business, results of operations and financial condition. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Although we generated operating income and a net income during the six months ended June 30, 2012, we experienced an operating loss and a net loss during the six months ended June 31, 2010, we have historically experienced net losses and we may experience net losses in the future.

For the six months ended June 30, 2012, we had an operating income of $587,000 and a net income of $553,000 compared to an operating loss of $52,000 and a net loss of $29,000 for the six months ended June 30, 2010. Although we have actively taken steps to increase our revenue and reduce manufacturing and operating costs, we may incur operating and net losses in the future unless we continue to increase revenues by selling current and custom design products, and continue seeking manufacturing cost reductions through offshore strategic agreements with contract manufacturers.

We depend on Telkoor to design and manufacture some of our products.

We depend on Telkoor, our largest shareholder and one of our third party subcontractors, for design and manufacturing capabilities for some of the products that we sell. If Telkoor is unable or unwilling to continue designing or manufacturing our products in required volumes and with a certain level of quality on a timely basis, that could lead to loss of sales and adversely affect our operating results and cash position. We also depend on Telkoor's intellectual property and ability to transfer production to third party manufacturers. Failure to obtain new products in a timely manner or delay in delivery of products to customers will have an adverse effect on our ability to meet our customers’ expectations. In addition, we operate in highly competitive markets where our ability to sell Telkoor’s products could be adversely affected by Telkoor’s agreements with other companies, long lead-times and the high cost of Telkoor’s products. For example, in April 2008 Telkoor signed a “private label” agreement with Murata Power Solutions ("MPS") in Canada to manufacture and sell Telkoor’s products under the Murata brand name, an agreement which positioned Murata as a direct competitor to us with respect to selling Telkoor’s products in North America.

Also, in 2010, Telkoor’s manufacturing lead-times increased, which has hindered our ability to respond to our customers’ needs. Telkoor’s principal offices, research and development and manufacturing facilities are located in Israel. Political, economic, and military conditions in Israel directly affect Telkoor’s operations. We are also dependent upon Telkoor’s terms and conditions with its contract manufacturers for some of our products, which terms and conditions may not always be in our best interest. In 2010, the Company purchased a certain IP from Telkoor in order to reduce its dependency on Telkoor with respect to a certain line of products.

Beginning in 2010, Telkoor made the decision to not offer Digital Power manufacturing rights on their newer technology, which prevents us from cost-reducing these products. This requires us to buy finished goods directly from Telkoor which, in turn, affects our ability to sell these products at competitive prices.

We are dependent upon our ability, and our contract manufacturers’ ability, to timely procure electronic components.

Affected by the 2009 global recession and the recent tsunami and nuclear crises in Japan, many of our raw material vendors have reduced capacities, closed production lines and, in some cases, even discontinued their operations. As a result, there is a global shortage of certain electronic components, which has extended our production lead-time and our production costs. For example, in some cases, finished goods that used to be available in 12 weeks for a production purchase order are now available only after 22 weeks. Also, some materials are no longer available to support some of our products, thereby requiring us to search for cross materials or, even worse, redesign some of our products to support currently-available materials. Such redesign efforts may require certain regulatory and safety agency re-submittals, which may cause further production delays. While we have initiated actions that we believe will limit our exposure to such problems, the dynamic business conditions in many of our markets may challenge the solutions that have been put in place, and issues may recur in the future.

In addition, some of our products are manufactured, assembled and tested by third party subcontractors and contract manufacturers located in Asia. While we have had relationships with many of these third parties in the past, we cannot predict how or whether these relationships will continue in the future. In addition, changes in management, financial viability, manufacturing demand or capacity, or other factors, at these third parties could hurt our ability to have our products manufactured.

Our strategic focus on our custom power supply solution competencies and concurrent cost reduction plans may be ineffective or may limit our ability to compete.

As a result of our strategic focus on custom power supply solutions, we will continue to devote significant resources to developing and manufacturing custom power supply solutions for a large number of customers, where each product represents a uniquely tailored solution for a specific customer’s requirements. A failure to meet these customer product requirements or a failure to meet production schedules and/or product quality standards may put us at risk with one or more of these customers. The loss of one or more of our significant custom power supply solution customers could have a material adverse impact on our revenues, business or financial condition.

We have also implemented a series of initiatives designed to increase efficiency and reduce costs. While we believe that these actions will reduce costs, they may not be sufficient to achieve the required operational efficiencies that will enable us to respond more quickly to changes in the market or result in the improvements in our business that we anticipate. In such event, we may be forced to take additional cost-reducing initiatives, which may negatively impact quarterly earnings and profitability as we account for severance and other related costs. In addition, there is the risk that such measures could have long-term adverse effects on our business by reducing our pool of talent, decreasing or slowing improvements in our products or services, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for our solutions increases and limiting our ability to hire and retain key personnel. These circumstances could cause our earnings to be lower than they otherwise might be.

If our new custom products development efforts fail to result in products that meet our customers’ needs, or if our customers fail to accept our new products, our revenues will be adversely affected.

We develop multiple custom product designs. The commercial success of this new technology will depend on a number of factors, including the successful development of the custom products, our ability to meet customer requirements, our ability to meet all product criteria, successful transition from development stage to production stage, our ability to meet product cost targets generating acceptable margins, timely remediation of product performance issues, if any, identified during testing, product performance at customer locations, differentiation of our product from our competitors’ products, and management of customer expectations concerning product capabilities and life cycles. If we fail to accomplish all of the above, our business could be materially and adversely affected.

We are dependent upon our ability to attract, retain and motivate our key personnel.

Our success depends on our ability to attract, retain and motivate our key management personnel, including, but not limited to, our CEO, CFO, marketing & sales, and key engineers, necessary to implement our business plan and to grow our business. Despite the adverse economic conditions at this time, and those occurring over the past several years, competition for certain specific technical and management skill sets is intense. If we are unable to identify and hire the personnel that we need to succeed, or if one or more of our present key employees were to cease to be associated with us, our future results could be adversely affected. Our CEO, Amos Kohn, also currently serves as our CFO on an interim basis until the Company appoints a new CFO. Mr. Kohn will continue to serve in his role as our CEO.

We depend upon a few major customers for a majority of our revenues, and the loss of any of these customers, or the substantial reduction in the quantity of products that they purchase from us, would significantly reduce our revenues and net income.

We currently depend upon a few major original equipment manufacturers ("OEM") and other customers for a significant portion of our revenues. Because of the global economic downturn, we have already experienced a reduction of orders by OEMs and a reduction or cancellation of orders, scaling back of certain activities and workforce layoffs by other customers. The loss of any of these customers, or a substantial reduction in the quantity of products that they purchase from us, would significantly reduce our revenues and net income. Furthermore, diversions in the capital spending of certain of these customers to new network elements have and could continue to lead to their reduced demand for our products, which could, in turn, have a material adverse effect on our business and results of operations. If the financial condition of one or more of our major customers should deteriorate, or if they have difficulty acquiring investment capital due to any of these or other factors, a substantial decrease in our revenues would likely result.

We are dependent on the electronic equipment industry, and accordingly will be affected by the impact on that industry by the current economic downturn.

Substantially all of our existing customers are in the electronic equipment industry, and they manufacture products that are subject to rapid technological change, obsolescence, and large fluctuations in demand. This industry is further characterized by intense competition and volatility. The OEMs serving this industry are pressured for increased product performance and lower product prices, and their misjudgments of order quantities negatively affects our business by reducing or canceling orders by OEMs. OEMs, in turn, make similar demands on their suppliers, such as us, for increased product performance and lower prices. Recently, certain segments of the electronic industry have experienced a significant softening in product demand. Such lower demand may affect our customers, in which case the demand for our products may decline and our growth could be adversely affected.

Our reliance on subcontract manufacturers to manufacture certain aspects of our products involves risks, including delays in product shipments and reduced control over product quality.

Since we do not own significant manufacturing facilities, we must rely on, and will continue to rely on, a limited number of subcontract manufacturers to manufacture our power supply products. Our reliance upon such subcontract manufacturers involves several risks, including reduced control over manufacturing costs, delivery times, reliability and quality of components, unfavorable currency exchange fluctuations, and continued inflationary pressures on many of the raw materials used in the manufacturing of our power supply products. If we were to encounter a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, inability of our subcontract manufacturers to procure raw materials, the loss of key assembly subcontractors, difficulties associated with the transition to our new subcontract manufacturers or other factors, we could experience lost revenues, increased costs, and delays in, or cancellations or rescheduling of, orders or shipments, any of which would materially harm our business.

We outsource, and are dependent upon developer partners for, the development of some of our custom design products.

We made an operational decision to outsource some of our custom design products to numerous developer partners. This business structure will remain in place until the custom design volume justifies expanding our in house capabilities. Incomplete product designs that do not fully comply with the customer specifications and requirements might affect our ability to transition to a volume production stage of the custom designed product where the revenue goals are dependent on the high volume of custom product production. Furthermore, we rely on the design partners’ ability to provide high quality prototypes of the designed product for our customer approval as a critical stage to approve production.

We face intense industry competition, price erosion and product obsolescence, which, in turn, could reduce our profitability .

We operate in an industry that is generally characterized by intense competition. We believe that the principal bases of competition in our markets are breadth of product line, quality of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are therefore common in our industry as competitors strive to retain or expand market share. Product obsolescence can lead to increases in un-saleable inventory that may need to be written off and, therefore, could reduce our profitability. Similarly, price erosion can reduce our profitability by decreasing our revenues and our gross margins. In fact, we have seen price erosion over the last several years on most of the products we sell, and we expect additional price erosion in the future.

Our future results are dependent on our ability to establish, maintain and expand our manufacturers' representative OEM relationships and our other distributors.

We market and sell our products through domestic and international OEM relationships and other distribution channels, such as manufacturers' representatives and distributors. Our future results are dependent on our ability to establish, maintain and expand our relationships with OEMs as well as with manufacturers' representatives and distributors to sell our products. If, however, the third parties with whom we have entered into such OEM and other arrangements should fail to meet their contractual obligations, cease doing, or reduce the amount of their, business with us or otherwise fail to meet their own performance objectives, customer demand for our products could be adversely affected, which would have an adverse effect on our revenues.

We may not be able to procure necessary key components for our products, or we may purchase too much inventory or the wrong inventory.

The power supply industry, and the electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for our products, we may not have adequate supplies of inventory on hand to satisfy our customers' needs. Furthermore, during these periods of growth, our suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that we require to build products so that we can meet our customers' needs. Our inability to secure sufficient components to build products for our customers could negatively impact our sales and operating results. We may choose to mitigate this risk by increasing the levels of inventory for certain key components. Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are negative factors impacting our customers’ end markets. If we purchase too much inventory or the wrong inventory, we may have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect on our gross margins and on our results of operations.

We depend on sales of our legacy products for a meaningful portion of our revenues, but these products are mature and their sales will continue to decline.

A relatively large portion of our sales have historically been attributable to our legacy products. We expect that these products may continue to account for a meaningful percentage of our revenues for the foreseeable future. However, these sales are declining. Although we are unable to predict future prices for our legacy products, we expect that prices for these products will continue to be subject to significant downward pressure in certain markets for the reasons described above. Accordingly, our ability to maintain or increase revenues will be dependent on our ability to expand our customer base, to increase unit sales volumes of these products and to successfully, develop, introduce and sell new products such as custom design and value added products. We cannot assure you that we will be able to expand our customer base, increase unit sales volumes of existing products or develop, introduce and/or sell new products.

Our operating results may vary from quarter to quarter.

Our operating results have in the past been subject to quarter-to-quarter fluctuations, and we expect that these fluctuations will continue, and may increase in magnitude, in future periods. Demand for our products is driven by many factors, including the availability of funding for our products in customers’ capital budgets. There is a trend for some of our customers to place large orders near the end of a quarter or fiscal year, in part to spend remaining available capital budget funds. Seasonal fluctuations in customer demand for our products driven by budgetary and other concerns can create corresponding fluctuations in period-to-period revenues, and we therefore cannot assure you that our results in one period are necessarily indicative of our revenues in any future period. In addition, the number and timing of large individual sales and the ability to obtain acceptances of those sales, where applicable, have been difficult for us to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one or more significant sales in a quarter could harm our operating results. It is possible that, in some quarters, our operating results will be below the expectations of public market analysts or investors. In such events, or in the event adverse conditions prevail, the market price of our common stock may decline significantly.

Failure of our information technology infrastructure to operate effectively could adversely affect our business.

We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

We are subject to certain governmental regulatory restrictions relating to our international sales.

Some of our products are subject to International Traffic in Arms Regulation ("ITAR") rules, which are interpreted, enforced and administered by the U.S. Department of State. These regulations implement the provisions of the Arms Export Control Act, the goal of which is to safeguard U.S. national security and further U.S. foreign policy objectives. ITAR controls not only the export, import and trade of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services as well as foreign production. Any delays in obtaining the required export, import or trade licenses for products subject to ITAR rules could have a materially adverse effect on our business, financial condition, and/or operating results. In addition, changes in United States export and import laws that require us to obtain additional export and import licenses or delays in obtaining export or import licenses currently being sought could cause significant shipment delays and, if such delays are too great, could result in the cancellation of orders. Any future restrictions or charges imposed by the United States or any other country on our international sales or foreign subsidiary could have a materially adverse effect on our business, financial condition, and/or operating results. In addition, from time to time, we have entered into contracts with the Israeli Ministry of Defense which were funded with monies subject to, and we therefore were required to comply with the regulations governing, the U.S. Foreign Military Financing program. Any such future sales would be subject to such regulations.

We depend on international operations for a substantial majority of our components and products.

We purchase a substantial majority of our components from foreign manufacturers and have a substantial majority of our commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business, financial condition, and/or operating results.

We depend on international sales for a portion of our revenues.

Sales to customers outside of North America accounted for 44.9% of net revenues during the six months ended June 30, 2012, and we expect that international sales will continue to represent a material portion of our total revenues. International sales are subject to the risks of international business operations as described above, as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions.

If our accounting controls and procedures are circumvented or otherwise fail to achieve their intended purposes, our business could be seriously harmed.

We evaluate our disclosure controls and procedures as of the end of each fiscal quarter, and are annually reviewing and evaluating our internal control over financial reporting in order to comply with Securities and Exchange Commission (“SEC”) rules relating to internal control over financial reporting adopted pursuant to the Sarbanes-Oxley Act of 2002. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain effective internal control over financial reporting or our management does not timely assess the adequacy of such internal control, we may be subject to regulatory sanctions, and our reputation may decline.

The sale of our products is dependent upon our ability to satisfy the proprietary requirements of our customers.

We depend upon a relatively narrow range of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance by our customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to satisfy such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed.

The sale of our products is dependent on our ability to respond to rapid technological change, including evolving industry-wide standards, and may be adversely affected by the development, and acceptance by our customers, of new technologies which may compete with, or reduce the demand for, our products.

Rapid technological change, including evolving industry standards, could render our products obsolete. To the extent our customers adopt such new technology in place of our products, the sales of our products may be adversely affected. Such competition may also increase pricing pressure for our products and adversely affect the revenues from such products.

Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property rights of others, resulting in claims against us, the results of which could be costly.

Many of our products consist entirely or partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights, trade secret laws and contractual obligations, these protections may not be sufficient to prevent the wrongful appropriation of our intellectual property, nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. In order to defend our proprietary rights in the technology utilized in our products from third party infringement, we may be required to institute legal proceedings, which would be costly and would divert our resources from the development of our business. If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results could be adversely affected.

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require us to reengineer or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad.

If we are unable to satisfy our customers’ specific product quality, certification or network requirements, our business could be disrupted and our financial condition could be harmed.

Our customers demand that our products meet stringent quality, performance and reliability standards. We have, from time to time, experienced problems in satisfying such standards. Defects or failures have occurred in the past, and may in the future occur, relating to our product quality, performance and reliability. From time to time, our customers also require us to implement specific changes to our products to allow these products to operate within their specific network configurations. If we are unable to remedy these failures or defects or if we cannot effect such required product modifications, we could experience lost revenues, increased costs, including inventory write-offs, warranty expense and costs associated with customer support, delays in, or cancellations or rescheduling of, orders or shipments and product returns or discounts, any of which would harm our business.

If we ship products that contain defects, the market acceptance of our products and our reputation will be harmed and our customers could seek to recover their damages from us.

Our products are complex, and despite extensive testing, may contain defects or undetected errors or failures that may become apparent only after our products have been shipped to our customers and installed in their network or after product features or new versions are released. Any such defect, error or failure could result in failure of market acceptance of our products or damage to our reputation or relations with our customers, resulting in substantial costs for us and for our customers as well as the cancellation of orders, warranty costs and product returns. In addition, any defects, errors, misuse of our products or other potential problems within or out of our control that may arise from the use of our products could result in financial or other damages to our customers. Our customers could seek to have us pay for these losses. Although we maintain product liability insurance, it may not be adequate.

If Telkoor's share market value will continue to decrease it may have a material adverse effect on our results of operations.

During the second quarter of 2011, we invested in our major shareholder – Telkoor Telecom Ltd. ( a publicly traded company in Israel) through our wholly own subsidiary, DPL. This strategic investment was classified as an available-for-sale security and was recorded in our financial statements at the market value. Under United States generally accepted accounting principles ("U.S. GAAP"), unrealized losses are reflected as "accumulated other comprehensive loss" in the equity, unless there is deemed to be a permanent decrease in market value. Subsequent to June 30, 2011 the share price of Telkoor has dropped significantly and if their share price remains at this low level, and we do not have an independent valuation or other evidence to prove otherwise, we may conclude that this decrease in the market value is permanent and the loss should be classified from equity to the statement of operations.

Our common stock price is volatile .

Our common stock is listed on the NYSE Amex and is thinly traded. In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with our operations or business prospects. The exercise of outstanding options and warrants may adversely affect our stock price and a shareholder’s percentage of ownership. As of June 30, 2012, we had outstanding exercisable options to purchase an aggregate of 476,013 shares of common stock, with a weighted average exercise price of $1.21 per share.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

RESERVED

ITEM 5.

OTHER INFORMATION

On August 14, 2012, the Company issued a press release announcing its financial results for the second quarter ended June 30, 2012. A copy of the press release is furnished as Exhibit 99.1 hereto.

On July 31, 2012, we received a letter from the SEC in relation to our Form 10-K for the year ended December 31, 2011 file on April 3, 2012 and our Form 10-Q Amendment No. 1 for the quarter ended March 31, 2012 filed on May 25, 2012. We are in the process of responding to the letter and resolving the comments of SEC.

ITEM 6.

EXHIBITS

Exhibits

3.1	Amended and Restated Articles of Incorporation of Digital Power Corporation (1)

3.2	Amendment to Articles of Incorporation (1)

3.3	Bylaws of Digital Power Corporation (1)

10.1	1996 Digital Power Stock Option Plan (1)
10.2	1998 Digital Power Stock Option Plan (2)
10.3	2002 Digital Power Stock Option Plan (3)
10.4	Lease, dated as of August 21, 2007, between the Company and SDC Fremont Business Center, Inc. (4)
10.5	Employment Agreement with Amos Kohn (5)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley of 2002

32	Certification 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
99.1	Press Release, dated August 14, 2012, issued by Digital Power Corporation

(1)	Previously filed with the Commission on October 16, 1996 as an exhibit to the Company’s Registration Statement on Form SB-2.
(2)	Previously filed with the Commission as Exhibit 10.7 to the Company’s Form 10-KSB for the year ended December 31, 1998.
(3)	Previously filed with the Commission as Exhibit A to the Company’s Proxy Statement filed on September 5, 2002.
(4)	Previously filed with the Commission as Exhibit 10.1 to the Company’s Form 8-K filed on October 22, 2007.
(5)	Previously filed with the Commission as Exhibit 10.1 to the Company’s Form 8-K filed on July 10, 2008.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 14, 2012

Digital Power Corporation

By:	/s/ Amos Kohn
	Amos Kohn
	President, Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)