AS FILED WITH THE COMMISSION ON OCTOBER 16, 1996        FILE NO. 333-
                U.S. SECURITIES AND EXCHANGE COMMISSION
                        WASHINGTON, D.C. 20549
                              ___________
                               FORM SB-2
                        REGISTRATION STATEMENT
                                 UNDER
                      THE SECURITIES ACT OF 1933

                       DIGITAL POWER CORPORATION
            (Name of small business issuer in its charter)


            CALIFORNIA                       3679            94-1721931
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization)   Classification Code)        Identification No.)

  41920 Christy Street, Fremont, California 94538-3158; 510-657-2635
     (Address and telephone number of principal executive offices)

         41920 Christy Street, Fremont, California 94538-3158
(Address of principal place of business or intended principal place of
business)

               Robert O. Smith, Chief Executive Officer
                       Digital Power Corporation
                         41920 Christy Street
                    Fremont, California 94538-3158
                             510-657-2635
       (Name, address and telephone number of agent for service)

                              Copies to:

        Daniel B. Eng, Esq.                     Charles B. Pearlman, Esq.
    Bartel Eng Linn & Schroder                   Joel D. Mayersohn, Esq.
   300 Capitol Mall, Suite 1100           Atlas, Pearlman, Trop & Borkson, P.A.
   Sacramento, California 95814               New River Center, Suite 1900
     Telephone:  916-442-0400                  200 East Las Olas Boulevard
                                           Fort Lauderdale, Florida 33302-4610
                                                Telephone:  954-763-1200

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:  As soon as practicable after
the Registration Statement becomes effective.

If any of the  securities  being registered on this form are to be offered on a
delayed or continuous basis  pursuant  to  Rule  415  under the Securities Act,
check the following box.  [ X ]

If  this  Form  is  filed  to register additional securities  for  an  offering
pursuant to Rule 462(b) under  the  Securities  Act, please check the following
blocks and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [  ]

If this Form is a post-effective amendment filed  pursuant to Rule 462(c) under
the  Securities  Act,  check  the  following box and list  the  Securities  Act
registration statement number of the  earlier  effective registration statement
for the same offering.  [  ]

If delivery of the prospectus is expected to be  made  pursuant  to  Rule  434,
please check the following box.  [  ]




                        CALCULATION OF REGISTRATION FEE



Proposed Title of each Proposed maximum class of maximum aggregate Amount of securities to be Amount to be offering price(1) offering registration registered registered price fee Common Stock 1,150,000 $4.00 $4,600,000 $1,393.94 Common Stock Purchase Warrants 775,000 $.125 $96,875 29.36 Common Stock Underlying Warrants 775,000 $5.00 $3,875,000 $1,174.24 Total $2,597.54
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457 of the Securities Act of 1933. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. DIGITAL POWER CORPORATION CROSS-REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-B Registration Statement ITEM NUMBER AND CAPTION PROSPECTUS CAPTION 1. Front of Registration Statement and Outside Front Cover Page of Outside Front Cover Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover Pages 3. Summary Information and Risk Prospectus Summary; Risk Factors Factors 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Underwriting 6. Dilution Dilution 7. Selling Security Holders Principal and Selling Stockholders and Warrantholders 8. Plan of Distribution The Offering; Underwriting; Terms of Offering 9. Legal Proceedings Legal Proceedings 10. Directors, Executive Officers, Promoters and Control Persons Management; Principal and Selling Shareholders 11. Security Ownership of Certain Beneficial Owners and Principal and Selling Stockholders Management and Warrantholders 12. Description of Securities Description of Securities 13. Interest of Named Experts and Experts; Legal Matters Counsel 14. Disclosure of Commission Position on Indemnification for Underwriting Securities Act Liabilities 15. Organization Within Last Five Summary; Business Years 16. Description of Business Summary; Business 17. Management's Discussion and Analysis or Plan of Operation Management's Discussion and Analysis 18. Description of Property Business 19. Certain Relationships and Related Transactions Certain Transactions 20. Market for Common Equity and Related Stockholder Matters Summary 21. Executive Compensation Management 22. Financial Statements Consolidated Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Change in Accountants Prospectus Subject to Completion October 16, 1996 DIGITAL POWER CORPORATION 1,000,000 SHARES OF COMMON STOCK NO PAR VALUE 700,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS _________________ Of the 1,000,000 shares of common stock, no par value ("Common Stock") offered, 750,000 shares are being sold by Digital Power Corporation ("Digital Power" or the "Company") and 250,000 shares are being sold by certain selling stockholders of the Company (the "Selling Stockholders"). In addition, the Company is selling 500,000 redeemable common stock purchase warrants ("Warrants"), and certain warrantholders may sell up to 200,000 Warrants, entitling the holders thereof to purchase, during a three-year period from the date of this Prospectus ("Exercise Period"), one share of Common Stock at an exercise price of $5.00 per share, subject to adjustment. See "Principal and Selling Stockholders and Warrantholders." The Company will not receive any proceeds from the sale of shares by the Selling Stockholders or from the sale of Warrants by certain warrantholders. Under certain conditions, the Company shall have the right upon 30 days notice to call each Warrant for redemption at $.125 per Warrant. See "Description of Securities." Further, the Company is registering 700,000 shares of Common Stock that will be issued upon the exercise of the Warrants. See "Management," "Certain Transactions," and "Description Of Securities." Prior to this offering, there has been no public market for the Common Stock or Warrants of the Company. It is currently estimated that the initial public offering price per share of Common Stock will be $4.00, and that the initial public offering price per Warrant will be $.125. See "Underwriting" for the factors to be considered in determining the initial public offering price. SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK AND WARRANTS. Application has been made for the listing of the Company's Common Stock under the symbol "DPWR" and Warrants under the symbol "DPWRW" on the NASDAQ SmallCap Market. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Public Underwriting Discounts Proceeds to Proceeds to Selling and Commissions(1) Company(2) Stockholders(3) Per Share $4.00 $0.40 $3.60 $3.60 Per Warrant. . . . . $0.125 $0.0125 $0.1125 $0.1125 Total{(4)} $4,087,500 $408,750 $2,756,250 $922,500
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting estimated expenses of $230,000 payable by the Company, and additional compensation to be received by the Underwriters in the form of a non-accountable expense allowance equal to three percent (3%) of the proceeds from the offering of the Common Stock and Warrants, or a total of $122,625 ($140,906 if the Underwriters' over-allotment is exercised in full). (3) Before expenses related to the Offering attributed to the Selling Stockholder on a prorata basis. (4) The Company has granted the Underwriters an option for 45 days to purchase up to an additional 150,000 shares at the initial public offering price per share, and up to additional 75,000 Warrants at $.125 per Warrant solely to cover over-allotments, if any. If such option is exercised in full, the total initial public offering price, underwriting discount, and proceeds to Company will be $4,696,875, $469,688, and $3,304,687, respectively. The shares and Warrants offered hereby are offered by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares of Common Stock and Warrants will be ready for delivery in Boca Raton, Florida on or about ______________, 1996, against payment therefor immediately available funds. WERBEL-ROTH SECURITIES, INC. The date of this Prospectus is ___________, 1996. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Company intends to furnish its stockholders annual reports containing consolidated financial statements audited by its independent auditors and quarterly reports containing unaudited consolidated financial information for the first three quarters of each fiscal year. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such State. [Pictures of Power Supplies] PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION, REPRESENTATIVES' WARRANTS, AND OUTSTANDING OPTIONS AND WARRANTS WILL NOT BE EXERCISED. SEE "DESCRIPTION OF SECURITIES" AND "UNDERWRITING." THE COMPANY Digital Power Corporation designs, develops, manufactures, and markets switching power supplies for sale to manufacturers of computers and other electronic equipment. Switching power supplies are critical components of all computers and other electronic equipment. The electronic circuitry in computers and other electronic equipment requires a steady and isolated supply of direct current (DC) electrical power. In addition, the various components and subassemblies within computers and other electronic equipment often require different voltage levels of electrical power. The power supply products of the Company satisfy these two requirements by converting the alternating current (AC) electricity from a primary source, such as a wall outlet, into the direct current required for the proper functioning of electronic circuits, and by dividing the single electrical current into as many as four discrete output voltages. The Company's power supply products also monitor and regulate the DC output voltages being delivered to protect the electronic equipment from harmful surges and drops in voltage levels. Because the Company's products have a high "power- density" (measured in watts per cubic inch), the power supply products of the Company are generally smaller than those of competitors. Furthermore, the Company's power supply products are extremely "flexible" in design. This "flexibility" approach allows the Company to modify quickly and inexpensively its base-design products to satisfy an OEM's specific power supply needs, thereby enabling the Company to keep to a minimum its expenses for non-recurring engineering ("NRE") of its base-design products. As a result of the Company's "flexibility" approach, it has provided samples of modified power supplies to OEM customers in as quickly as a few days, an important capability given the increasing emphasis placed by OEMs on "time-to-market". Digital Power's strategic objective is to exploit this combination of power density, flexibility, and short time-to-market to win an increasing share of the growing power supply market. Unless the context otherwise indicates, the reference to "Digital Power" or the "Company" herein shall mean Digital Power Corporation and its wholly owned subsidiary Poder Digital, S.A. de C.V. Micro-Tech Consultants of Santa Rosa, California reports that the worldwide market for power supplies was about $15 billion in 1995, with average projected sales growth of approximately 8.5% over the next five years. This market is highly fragmented among power supply manufacturers. The Company believes that there are over 400 different manufacturers competing in the various market segments. The major segments of the switching power supply market are typically characterized as either the "captive market" or the "merchant market". The captive market represents those original equipment manufacturers (OEMs) who design and manufacture their own power supplies for use as a component in their own electronic products, whereas the merchant market represents those OEMs who purchase their power supplies from third-party manufacturers who specialize in the development and production of power supplies. The Company believes the merchant market is growing faster than any other segment of the entire power supply market as OEMs increasingly buy their power supplies from companies such as Digital Power rather than manufacturing their own power supplies "in-house". For the years ended December 31, 1994 and 1995, the Company had revenues and income before income taxes of $6,249,333 and $144,976, and $10,037,502 and $826,484, respectively. For the six months ended June 30, 1996, the Company had revenues and income before income taxes of $6,553,376 and $637,208. RISK FACTORS For a discussion of considerations relevant to an investment in the Common Stock and Warrants, see "Risk Factors." THE OFFERING Common Stock Offered: Offering(1)..............................................750,000 shares Selling Stockholders.....................................250,000 shares Total..................................................1,000,000 shares Common Stock to be outstanding after the Offering......2,353,275 shares Warrants(1) . . . . . Exercisable until December , 1999, with each Warrant exercisable for one share of Common Stock at a price of $5.00, subject to adjustment. See "Description of Securities." Use of Proceeds . . . Repayment of approximately $1 million of indebtedness and general corporate purposes, including product development, advertising, and working capital. See "Use of Proceeds." Proposed NASDAQ SmallCap Market Symbol - Common Stock..............DPWR Proposed NASDAQ SmallCap Market Symbol - Warrants ................DPWRW (1) Assumes that the Underwriters have not exercised an over-allotment option to purchase up to an additional 150,000 shares and up to 75,000 Warrants. SUMMARY CONSOLIDATED FINANCIAL DATA The unaudited summary consolidated financial data presented below should be read in conjunction with the more detailed financial statements of the Company and notes thereto along with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Years Ended Six Months Ended DECEMBER 31 JUNE 30 1994 1995 1995 1996 Statement of Operations Data: Revenues $6,249,333 $10,037,502 $4,947,952 $6,553,376 Income from operations 257,935 1,027,772 332,928 689,612 Income before Income Taxes 144,976 826,484 270,511 637,208 Provision (Benefit) for 23,253 (277,400) 28,000 294,000 Income Taxes 121,723 1,103,884 242,511 343,208 Net Income 0.02 0.80 0.16 0.24 Net Income per share $ 0.02 $ 0.66 $ 0.15 $ 0.20 Primary Fully Diluted 1,226,208 1,258,858 1,242,395 1,276,778 Shares used in per share calculation
As at JUNE 30, 1996 ACTUAL AS ADJUSTED(1) Balance Sheet Data: Working Capital $2,426,022 $4,003,494 Total Assets 5,443,277 6,877,652 Long-term debt 1,471,361 614,458 Stockholders' equity $1,533,759 $3,968,134 (1) Adjusted to give effect to the estimated net proceeds of this offering to be received by the Company based upon an assumed public offering price of $4.00 per share and $.125 per Warrant. THE COMPANY Digital Power provides switching power supplies to original equipment manufacturers (OEMs). The Company designs, develops, manufactures, and markets 50 watt to 750 watt power supplies. Power supplies are complex subassemblies or modules integral to virtually every electronic product. They can have numerous different features, but the most important functions of a power supply are to receive alternating current (AC) electricity from a primary source, such as a wall electrical outlet, convert that AC current into direct current (DC), reduce the voltage of an output to the desired level, and regulate and filter the DC output voltages required for the operation of the various electronic circuits. The Company believes that its power supply products are superior to those of its competitors because the Company's products combine high power- density (measured in watts per cubic inch) with a high degree of design flexibility, allowing the Company to modify its power supplies in order to satisfy the specific and unique needs of its OEM customers. The Company has increased its revenues and income before income taxes from $6,249,333 and $144,976 in fiscal year 1994, to $10,037,502 and $826,484 in fiscal year 1995. For the six months ended June 30, 1996, revenues and net income before income taxes were $6,553,376 and $637,208. According to independent market surveys conducted by Micro- Tech, the total world market for electronic power supplies is in excess of $15 billion, with approximately 50% of this market being the "captive market" and the balance being the "merchant market". Growing at an average annual rate of 13%, the merchant market is the fastest growing segment of the power supply market, as OEMs continue to outsource their power supply requirements. This merchant market is highly fragmented according to the power level, technology, packaging, and application of a particular power supply. One segment of the merchant market involves industrial and office automation, industrial and portable computing, and networking applications. This is the market targeted and served by Digital Power. The Company believes that its focus on high-efficiency, high-density, design-flexible power supplies is ideally suited to the rapid growth opportunities existing in this market segment. Digital Power's products are sold domestically and in Canada through a network of 13 manufacturers' representatives. Digital Power also has 28 stocking distributors in the United States and Europe. In addition, the Company has formed strategic relationships with three of its customers to private label its products. Digital Power's customers can generally be grouped into three broad industries, consisting of the computer, telecommunication, and instrument industries. The Company has a current base of over 150 active customers, including companies such as Ascend Communications, AT&T, Westinghouse, Telex, Storage Dimensions, Motorola, Retix, Stanford Telecommunications, 3Com, and Centillion Business Unit, a wholly-owned subsidiary of Bay Networks. See "Business-Breakdown of Product Market". The Company's strategy is to continue the trend of its sales and profit growth by making increased sales to existing customers, while simultaneously targeting sales to new customers. The Company believes that its "flexibility" concept allows customers a unique choice between its products and products offered by other power supply competitors. OEMs have typically had to settle for a standard power supply product with output voltages and other features predetermined by the manufacturer. Alternatively, if the OEM's product required a different set of power supply parameters, the OEM was forced to design this modification in-house, or pay a power supply manufacturer for a custom product. Since custom- designed power supplies are development-intensive and require a great deal of time to design, develop, and manufacture, only OEMs with significant volume requirements can economically justify the expense and delay associated with their production. Furthermore, since virtually every power conversion product intended for use in commercial application requires certain independent safety agency testing, (e.g. by Underwriters Laboratories) at considerable expense, an additional barrier is presented to the smaller OEM. By offering the OEM customer a new choice with the Digital Power "flexibility" series, the Company believes it has gained a competitive advantage. The Company's "flexibility" series is designed around a standardized power platform, but allows the customer to specify output voltages tailored to its exact requirements within specific parameters. Furthermore, OEMs are seeking power supplies with greater power density (measured in watts per cubic inch). Digital Power's strategy in responding to this demand has been to offer increasingly smaller power supply units or packages. For example, the Company believes that its US100 series of products, mounted on a 3" x 5" printed circuit board, is the industry's smallest 100 watt off-line (A/C input) power supply. In addition to the line of proprietary products offered, and in response to requests from OEMs, the Company has recently begun providing "value-added services" along with its products. The term "value-added services" refers to the Company's incorporation of an OEM's selected electronic components, enclosures, and cable assemblies with the Company's power supply products to produce a power subassembly that is compatible with the OEM's own equipment and is specifically tailored to meet the OEM's needs. The Company purchases the parts and components that the OEM itself would otherwise attach to or integrate with the Company's power supply, and the Company provides the OEM with that integration and installation service thus saving the OEM time and money. The Company believes that this value-added service is well-suited to those OEMs who wish to reduce their vendor base and minimize their investment in fixed costs since the OEMs are not required to manufacture their own power subassemblies and thus are not required to purchase individual parts from many vendors or build assembly facilities. Currently, almost all of the Company's manufacturing, including its value-added services, is done at a 16,000 square foot facility operated by the Company's wholly-owned subsidiary, Poder Digital, S.A. de C.V., located in Guadalajara, Mexico. However, the Company has recently entered into an agreement with a manufacturer in China to manufacture the Company's products. In its initial phase, the Company believes that the facility in China will complement its manufacturing facility in Guadalajara, Mexico since the facility in China will allow the Company to produce power supplies with sufficient lead time at lower costs, while the Guadalajara facility will continue to manufacture power supplies that need a quick turnaround or modification. Through its predecessor, Digital Power was originally formed in 1969. The Company's executive offices are located at 41920 Christy Street, Fremont, California 94538-3158, and the Company's telephone number is 510-657-2635. RISK FACTORS In addition to the other information presented in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the Common Stock and Warrants offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. CUSTOMER CONCENTRATION For the six months ended June 30, 1996, one OEM accounted for 26.4% of the Company's total revenues, and for the fiscal year ended December 31, 1995, three OEMs accounted for 18% in the aggregate of total revenues. The one OEM account which accounted for 26.4% of the Company's total revenues for the six months ended June 30, 1996 substantially contributed to the Company's increase in revenues for such period. Recently, due to a decrease in market demand for its products, this OEM has decreased the number of power supplies it has purchased from the Company. In light of such decrease in demand, it is unlikely that this OEM will continue to purchase power supplies from the Company at the same rate that it had done during the first six months of 1996. In addition during 1995, two distributors accounted for 37% of revenues, and during 1994, one distributor accounted for 16% of revenues. See "Risk Factors - Dependence on Computer and Other Electronic Equipment Industries; Customers' Product Obsolescence." The loss of any one of these OEM customers would have an adverse effect on the Company's revenues. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON COMPUTER AND OTHER ELECTRONIC EQUIPMENT INDUSTRIES; CUSTOMERS' PRODUCT OBSOLESCENCE Substantially all of the Company's existing customers are in the computer and other electronic equipment industries and produce products which are subject to rapid technological change, obsolescence, and large fluctuations in product demand. These industries are characterized by intense competition and a demand on OEMs serving these markets for increased product performance and lower product prices. Given this industry environment in which they operate, OEMs make similar demands on their suppliers, such as the Company, for increased product performance and lower product prices. Thus, in order to be successful, the Company must properly assess developments in the computer and other electronic equipment industries and identify product groups and customers with the potential for continued and future growth. Factors affecting the computer and other electronic equipment industries, in general, or any of the Company's major customers or their products, in particular, could have a material adverse effect on the Company's results of operations. In addition, the computer industry is inherently volatile. Recently, certain segments of the computer and other electronic industries have experienced a softening in demand for their products. Although this has not materially affected the Company's customers, in the event that it affects all segments of the computer and other electronic industries, the growth of the Company could be adversely affected. COMPETITION The design, manufacture, and sale of power supplies is a highly competitive industry. The Company's competition includes approximately 400 companies located throughout the world, some of whom have advantages over the Company in terms of labor and component costs, and some of whom may offer products comparable in quality to those of the Company. Certain of the Company's competitors, including Computer Products, Inc., ASTEC America, Zytec Corporation and Lambda Electronics, have substantially greater fiscal and marketing resources and geographic presence than does the Company. In addition, in light of the Company's limited revenues in comparison to the total power supply market, many competitors may be unaware or indifferent to the Company and its products. If the Company continues to be successful in increasing its revenues, other competitors may notice and increase competition for the Company's customers. The Company also faces competition from current and prospective customers who may decide to design and manufacture internally the power supplies needed for their products. To remain competitive, management believes that the Company must continue to compete favorably on the basis of value by providing advanced manufacturing technology, offering superior customer service and design engineering services, continuously improving quality and reliability levels, and offering flexible and reliable delivery schedules. There can be no assurance that the Company will continue to compete successfully in this market. DILUTION The initial public offering price is greater than the book value per outstanding share of Common Stock. Accordingly, purchasers in the offering will suffer an immediate and substantial dilution of $2.31 in the net tangible book value per share of the Common Stock from the initial public offering price. Additional dilution will occur upon exercise of outstanding options granted by the Company. See "Dilution." DEPENDENCE ON GUADALAJARA, MEXICO FACILITY; FOREIGN CURRENCY FLUCTUATIONS The Company produces substantially all of its products at its facility located in Guadalajara, Mexico. The products are then delivered to Fremont, California for testing and distribution. The Company believes that it has a good working relationship with its employees in Guadalajara, Mexico and has recently signed a five-year contract with the union representing the employees. Recently, the Company has entered into a "turnkey" manufacturing contract with a manufacturer located in China to produce its products in an attempt to reduce its dependence on its Mexican facility. At this time the purchase of products from the manufacturer located in China is minimal and requires advance scheduling which affects the Company's ability to produce products quickly. However, if the Company's revenues grow as anticipated, the Company intends to manufacture more of its products utilizing the Chinese manufacturer. In the event that there is an unforeseen disruption at the Guadalajara production plant or with the Chinese manufacturer, such disruption may have an adverse effect on the Company's ability to deliver its products and may adversely affect the Company's financial operations. Further, the Guadalajara, Mexico, facility conducts its financial operations using the Mexican peso. Therefore, due to financial conditions beyond the control of the Company, the Company is subject to monetary fluctuations between the U.S. dollar and Mexican peso. During fiscal 1995, the Mexican peso was devalued against the U.S. dollar resulting in an approximate $85,000 loss to the Company. See "Management's Discussion and Analysis and Results of Operations." SECURITY INTEREST IN THE COMPANY'S ASSETS The Company has entered into a $1.5 million revolving credit facility. As of June 30, 1996, the amount outstanding under the credit facility and other loans was $1,614,458. Although the Company intends to use part of the proceeds raised hereby to reduce the credit facility, the credit facility is secured by substantially all of the Company's assets. Therefore, in the event the Company is unable to repay the credit facility, the bank will hold a first- priority security interest in the Company's assets upon default. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." NECESSITY TO MAINTAIN CURRENT PROSPECTUS; STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS The shares of Common Stock issuable on exercise of the Warrants (except the Warrants issuable upon exercise of the Representatives' Warrants) have been registered with the Commission. The Company will be required, from time to time, to file post-effective amendments to its registration statement in order to maintain a current prospectus covering the issuance of such shares upon exercise of the Warrants. The Company has undertaken to make such filings and use its best efforts to cause such post-effective amendments to become effective. If for any reason a required post- effective amendment is not filed, it does not become effective or is not maintained, the holders of the Warrants may be prevented from exercising their Warrants. Holders of the Warrants have the right to exercise the Warrants only if the underlying Shares of Common Stock are qualified, registered or exempt from registration under applicable securities laws of the state in which the various holders of the Warrants reside. The Company cannot issue shares of Common Stock to holders of the Warrants in states where such shares are not qualified, registered or exempt. See "Description of Securities." DEPENDENCE UPON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL The Company's performance is substantially dependent on the performance of its executive officers and key personnel, and on its ability to retain and motivate such personnel. The loss of any of the Company's key personnel, particularly Robert O. Smith or Claude Adkins, could have a material adverse effect on the Company's business, financial condition, and operating results. The Company has "key person" life insurance policies on Mr. Smith in the aggregate amount of $2 million. The Company also has an employment agreement with Mr. Smith. The Company's future success also depends on its continuing ability to identify, hire, train, and retain other highly-qualified creative, technical, and managerial personnel. Competition for highly qualified personnel is intense. There can be no assurance that the Company will be successful in attracting, assimilating, and retaining such personnel, and the failure to do so could have a material adverse effect on the Company's business, financial condition, and operating results. Moreover, in the event of the loss of any such personnel, there can be no assurance that the Company would be able to prevent the unauthorized disclosure or use of its proprietary technology, practices, procedures, or customer lists. CONCENTRATION OF STOCK OWNERSHIP Upon the completion of the offering, the present directors, executive officers, and stockholders owning more than 5% of the outstanding Common Stock and their respective affiliates will beneficially own approximately 28.49% of the outstanding Common Stock of the Company (27.02% of the outstanding Common Stock if the Underwriters' over-allotment option is exercised in full). As a result of their ownership, the directors, executive officers, and more than 5% stockholders and their respective affiliates collectively will have substantial control of all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Under California law, however, shareholders are entitled to cumulative voting. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. See "Principal Stockholders" and "Description of Securities." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES Prior to the offering, there has been no public market for the Company's Common Stock or Warrants, and there can be no assurance that an active public market for the Company's Common Stock or Warrants will develop or be sustained after the offering. The initial offering price will be determined by negotiations between the Company and the representative of the Underwriters based upon several factors. The trading price of the Company's Common Stock or Warrants could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, changes in financial estimates by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to the Company, and other events or factors. Moreover, in some future quarter the Company's operating results may fall below the expectations of securities analysts and investors. In such event, the market price of the Company's Common Stock or Warrants would likely be materially and adversely affected. In addition, the stock market in general, and the market prices for high-tech related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the trading price of the Company's Common Stock or Warrants, regardless of the Company's operating performance. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALES; NO PRIOR TRADING MARKET; REGISTRATION RIGHTS Sales of a substantial number of shares of the Company's Common Stock in the public market could have the effect of depressing the prevailing market price of its Common Stock. Upon the completion of the offering, the Company will have outstanding 2,353,275 shares of Common Stock (assuming no exercise of outstanding options and Warrants of 1,459,900). Of these shares, the 1,000,000 shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless purchased by "affiliates" of the Company as that term is defined in Rule 144 of the Securities Act ("Affiliates"), which shares will be subject to the resale limitations of Rule 144 adopted under the Securities Act. The remaining 1,353,275 shares will be "restricted securities" as that term is defined under Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 promulgated under the Securities Act, which rule is summarized below. As a result of the contractual restrictions described below and the provisions of Rule 144, additional shares will be available for sale in the public market as follows: (i) 1,272,458 currently outstanding shares will be eligible for sale upon expiration of lock-up agreements 12 months after the date of this Prospectus; (ii) 1,459,900 additional shares will be issuable upon the exercise of stock options and Warrants, to the extent exercisable as of such date; and (iii) 80,817 currently outstanding shares will be eligible for sale from time to time thereafter pursuant to Rule 144. See "Shares Eligible for Future Sale." Certain stockholders of the Company have entered into lock-up agreements with Werbel-Roth Securities, Inc. providing that, with certain limited exceptions, such stockholders will not offer, sell, contract to sell, grant an option to purchase, make a short sale, or otherwise dispose of or engage in any hedging or other transaction that is designed or reasonably expected to lead to a disposition of any shares of Common Stock for a period of 12 months after the date of this Prospectus without the prior written consent of the Underwriters. Other than the (i) 1,000,000 shares being offered hereby, (ii) 1,459,900 shares subject to options and Warrants, and (iii) 80,817 shares subject to Rule 144, as of the date of this Prospectus, no shares of Common Stock of the Company will be eligible for immediate sale in the public market until the expiration of the 12 month lock-up agreements with the representative of the Underwriters. The Underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. Prior to the offerings, there has been no public market for the Common Stock of the Company, and no predictions can be made as to the effect, if any, that the sale or availability for sale of shares of additional Common Stock will have on the trading price of the Common Stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could adversely affect the trading price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. See "Description of Securities." DEPENDENCE ON SUPPLIERS In order to reduce dependence on any one supplier, the Company attempts to obtain two suppliers for each component of its products. However, for two line transformers in three of its products, the Company is dependent on single suppliers. Currently, these products account for approximately 10% of the Company's total sales. Although the Company will seek to find other manufacturers of transformers for these three products, unanticipated shortages or delays in these parts may have an adverse effect on the Company's results of operations. NO PATENTS The Company's products are not subject to any U.S. or foreign patents. The Company believes that because its products are being continually updated and revised, obtaining patents would not be beneficial. Therefore, there can be no assurance that other competitors or former employees will not obtain the Company's proprietary information and develop it. POSSIBLE DILUTION FROM WARRANTS AND OPTIONS On completion of this Offering, options and Warrants to purchase an aggregate of 1,459,900 shares of common stock will be outstanding, including 700,000 shares underlying the Warrants, 150,000 shares underlying the Representatives' Warrants and 609,900 shares underlying the options issued to employees of the Company. Holders of such options and Warrants will be able to purchase shares of Common Stock at a price less than the offering price of the Common Stock with a resulting dilution of the interests to the other stockholders. Because of this potential dilutive effect, the options and Warrants may have a detrimental impact on the terms under which the Company may obtain financing through a sale of its Common Stock in the future. For these reasons, any evaluation of the favorability of market conditions for a subsequent stock offering by the Company must take into account any outstanding options or Warrants. See "Dilution," "Management-Stock Plans" and "Description of Securities." REDEEMABLE WARRANTS AND IMPACT ON INVESTORS Provided that the closing bid price of the Common Stock has been at least $6.00 per share for thirty (30) consecutive trading days, the Warrants are subject to redemption by the Company. The Company's exercise of this right would force the holder of the Warrants to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holder to do so, to sell the Warrants at the then current market price when the holder might otherwise wish to hold the Warrants for possible additional appreciation, or to accept the redemption price. Holders who do not exercise their Warrants prior to redemption by the Company will forfeit their right to purchase the Shares of Common Stock underlying the Warrants. See "Description of Securities." NO DIVIDENDS The Company has not paid cash dividends on its Common Stock since its inception and does not anticipate any cash dividends on the Common Stock in the foreseeable future. For the foreseeable future, the Company intends to reinvest earnings of the Company, if any, on the development and expansion of its business. See "Dividend Policy." AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS The Board of Directors is authorized to issue shares of preferred stock and to determine the dividend, liquidation, conversion, redemption and other rights, preferences, and limitation of such shares without further vote or action of the stockholders. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, or other rights which could adversely effect the voting power or the rights of the holders of the Common Stock. In the event of such issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging and delaying or preventing a change in control of the Company. The Company has no present intention to issue any shares of its preferred stock, although there can be no assurance that the Company will not do so in the future. See "Description of Securities." SUBSTANTIAL FLEXIBILITY IN USE OF PROCEEDS The Company has not designated any specific use for the net proceeds from the sale by the Company of the Common Stock offered hereby, except for the application of approximately $1.0 million of such net proceeds for the repayment of the Company's line of credit. Rather, the Company intends to use the remaining net proceeds primarily for general corporate purposes, including product development, advertising and working capital. Accordingly, management will have significant flexibility in applying the net proceeds of the offering. See "Use of Proceeds." PENNY STOCK REGULATION The Commission has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. While the shares of Common Stock offered hereunder will not initially be subject to penny stock regulation rules by virtue of the fact that such registered securities will be quoted on the NASDAQ SmallCap Market, there can be no assurance that the Company will be able to continuously meet the NASDAQ SmallCap Market maintenance criteria. See "Risk Factor-Maintenance Criteria for NASDAQ Securities." MAINTENANCE CRITERIA FOR NASDAQ SECURITIES The National Association of Securities Dealers, Inc. (the "NASD"), which administers the NASDAQ SmallCap Market, maintains criteria for continued eligibility on the NASDAQ SmallCap Market. In order to be included in the NASDAQ SmallCap Market, a company must maintain $2,000,000 in total assets, a $200,000 market value of the public float and $1,000,000 in total capital and surplus. In addition, continued inclusion requires two market-makers and a minimum bid price of $1.00 per share, provided however, that if a company falls below such minimum bid price, it will remain eligible for continued inclusion on the NASDAQ SmallCap Market if the market value of the public float is at least $1,000,000 and the company has $2,000,000 in capital and surplus. The failure to meet these maintenance criteria in the future may result in the discontinuance of the inclusion of the Company's securities on the NASDAQ SmallCap Market. In such event, the Company's securities will be subject to being delisted, and trading, if any, in the Common Stock of the Company would thereafter be conducted in the over-the-counter market in the so-called "pink sheets," or the NASD's OTC Bulletin Board. Consequently, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's securities. If the Company's securities were subject to the regulations on penny stocks, the market liquidity for the Company's securities could be severely and adversely affected by limiting the ability of broker-dealers to sell the Company's securities and the ability of purchasers in this offering to sell their securities in the secondary market at a time and price acceptable to them. USE OF PROCEEDS The net proceeds to the Company from the sale of the 750,000 shares of Common Stock and 500,000 Warrants offered by the Company hereby are estimated to be approximately $2,434,375 ($2,983,469 if the Underwriters' over-allotment option is exercised in full) at an assumed initial public offering price of $4.00 per share and $.125 per Warrant and after deducting the estimated underwriting discount and offering expenses. The Company intends to use approximately $1 million of such net proceeds for the repayment of the Company's revolving credit facility with San Jose National Bank, which bears interest at prime plus 1% and is due in October, 1997. Proceeds from the revolving credit facility were used for working capital. In addition, the Company will use the net proceeds for general corporate purposes including product development, product advertising, and working capital. The amounts and timing of the Company's actual expenditures will depend upon numerous factors, including the status of the Company's product development efforts, competition, and marketing and sales activities. Pending use of the net proceeds of the sale of the shares of Common Stock and Warrants offered hereby, the Company intends to invest such funds in short term, interest bearing, investment grade obligations. Any additional proceeds received upon the exercise of the Warrants, the Underwriters' over- allotment option or the Representatives' Warrants, as well as income from investments, if any, will be added to working capital. As a forward looking statement based on its current operations, the Company believes that the proceeds raised hereby will be sufficient to meet the Company's financial needs for at least twelve months following the date of the offering, and that no additional financing will be required in the near future. The Company will not receive any proceeds from the sale of shares by the Selling Shareholders or the Warrants by certain Warrantholders. DIVIDEND POLICY The Company has not declared or paid any cash dividends since its inception. The Company currently intends to retain future earnings for use in the operation and expansion of the business. The Company does not intend to pay any cash dividends in the foreseeable future. The declaration of dividends in the future will be at the discretion of the Board of Directors and will depend upon the earnings, capital requirements, and financial position of the Company. On May 31, 1996, the Company issued a stock dividend in the form of Common Stock valued at $1.80 per share on the cumulative accrued but unpaid dividends on the Series A Preferred Stock. Since such stock dividend, all of the Series A Preferred Stock has been converted into Common Stock. CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996, as adjusted to give effect to the sale of 750,000 shares of Common Stock and 500,000 Warrants offered by the Company hereby assuming an initial public offering price per share of $4.00 and per Warrant price of $.125 and net proceeds of approximately $2,434,375, and the application of the net proceeds therefrom. June 30, 1996 ACTUAL AS ADJUSTED Current portion of long-term debt $ 143,097 $ -0- Long-term debt, less current portion 1,471,361 614,458 Stockholders' Equity Series A Preferred stock, no par value; 500,000 shares authorized; no shares issued and outstanding ---- ---- Common stock, no par value 5,000,000 shares authorized; 1,603,275 shares issued and outstanding; 2,353,275 shares issued and outstanding as adjusted(1) $5,539,115 $7,973,490 Accumulated deficit (3,505,356) (3,505,356) Unearned ESOP plan shares (500,000) (500,000) Total stockholders' equity 1,533,759 3,968,134 Total capitalization $3,148,217 $4,582,592 __________________________________________ (1) The above calculations do not include 609,900 shares of Common Stock issuable upon the exercise of stock options. Of such 609,900 options, (i) 96,900 are immediately exercisable at an exercise price of $0.50, (ii) 178,125 are immediately exercisable at an exercise price of $1.80, (iii) 59,375 are exercisable in May 1997 at an exercise price of $1.80, and (iv) 275,500 are exercisable in May 1998 at an exercise price of $1.80. DILUTION At June 30, 1996, the net tangible book value of the Company was $1,533,759, or $0.96 per share. Net tangible book value per share is determined by dividing the net tangible book value (tangible assets less liabilities) of the Company at June 30, 1996, by the number of shares of Common Stock outstanding. Without taking into account any changes in net tangible book value after June 30, 1996, other than to give effect to the sale of the Company of 750,000 shares of Common Stock offered hereby at an assumed initial public offering price of $4.00 per share and 500,000 Warrants at an assumed initial public offering price of $0.125 per Warrant, and after deducting underwriting discounts and commissions and estimated offering expenses payable to the Company, the pro forma net tangible book value at June 30, 1996 would have been approximately $3,968,134, or $1.69 per share. This amount represents an immediate dilution to new investors of $2.31 per share and an immediate increase in net tangible book value per share to existing stockholders of $0.73 per share. The following table illustrates this dilution per share: Assumed public offering price per share $4.00 Net tangible book value per share at June 30, 1996 $0.96 Increase per share attributable to new investors .73 Pro forma net tangible book value per share after the offering 1.69 Net tangible book value dilution per share to new investors $2.31 The foregoing information assumes no exercise of outstanding stock options. At June 30, 1996, there were outstanding options to purchase 96,900 shares of Common Stock at an exercise price of $.50 per share, and outstanding options to purchase 513,000 shares of Common Stock at an exercise price of $1.80 per share (of which options 178,125 are immediately exercisable and 334,875 are subject to vesting). To the extent outstanding options are exercised, there will be further dilution to new investors. The following table sets forth, as of the date of this Prospectus, the number of shares of Common Stock purchased, the percentage of shares of Common Stock purchased, the total gross consideration paid, the percentage of total consideration paid, and the average price per share paid by the existing shareholders and by the investors purchasing shares of Common Stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION Average Price NUMBER PERCENT NUMBER PERCENT PER SHARE Existing 1,603,275 68.13% $5,539,115 64.87% $ 3.45 shareholders New investors 750,000 31.87% $3,000,000 35.13% $ 4.00 Total 2,353,275 100.00% $8,539,115 100.00% $ 3.63
SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of operations data presented below for the years ended December 31, 1995 and 1994, are derived from and should be read in conjunction with the more detailed financial statements of the Company and the notes thereto, which have been audited by Hein + Associates LLP, independent auditors, whose report is included elsewhere in this Prospectus. The selected consolidated statements of operations data for the six months ended June 30, 1996 and 1995 and consolidated balance sheet data as of June 30, 1996 are derived from the unaudited consolidated financial statements of the Company. In the opinion of the Company, such unaudited consolidated financial statements include all necessary adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of results for such periods. The selected consolidated financial data presented below should be read along with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" which follows this section.
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 1994 1995 1995 1996 Statement of Operations Data: Revenues: $6,249,333 $10,037,502 $4,947,952 $6,553,376 Cost and expenses: Cost of sales 4,663,124 7,494,427 3,885,875 4,975,557 Engineering and product development 408,966 481,475 243,048 314,659 Sales and marketing 500,338 452,654 234,066 240,621 General and administrative 418,970 581,174 252,035 332,927 Total operating expenses 1,328,274 1,515,303 729,149 888,207 Income from operations 257,935 1,027,772 332,928 689,612 Interest expense, net 102,509 116,030 55,566 52,198 Translation loss (10,450) (85,258) (6,851) (206) Income before income taxes 144,976 826,484 270,511 637,208 Provision (Benefit) for income taxes 23,253 (277,400) 28,000 294,000 Net income 121,723 1,103,884 242,511 343,208 Net income per share: Primary 0.02 0.80 0.16 0.24 Fully diluted $0.02 $0.66 $0.15 $0.20 Shares used in per share calculations 1,226,208 1,258,858 1,242,395 1,276,778
Balance Sheet Data: Working capital $2,426,022 Total assets 5,443,277 Long-term debt 1,471,361 Stockholders' equity $1,533,759 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATION The following discussion and analysis should be read in connection with the Company's Consolidated Financial Statements and the notes thereto and other financial information included elsewhere in the Prospectus. OVERVIEW The Company designs, develops, manufactures, and markets electronic power supplies for use in converting electric power into a form suitable for the operation of electronic circuitry. Revenues are generated from the sale of the Company's power supplies to OEMs in the computer and other electronic equipment industries. RESULTS OF OPERATIONS The table below sets forth certain statements of operations data as a percentage of revenues for the six months ended June 30, 1996 and 1995 and the years ended December 31, 1995 and 1994.
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 1994 1995 1995 1996 Revenues 100% 100% 100% 100% Cost of goods sold 74.62 74.66 78.54 75.92 Gross margin 25.38 25.34 21.46 24.08 Selling, general and administrative 14.71 10.30 9.82 8.75 Engineering and product development 6.54 4.8 4.91 4.8 Total operating expense 21.25 15.1 14.73 13.55 Operating income 4.13 10.24 6.73 10.53 Net interest expense 1.64 1.16 1.12 .8 Translation loss .17 .85 .14 .0 Income before income taxes 2.32 8.23 5.47 9.73 Provision (Benefit) for .37 (2.76) .57 4.49 Income taxes Net Income 1.95% 10.99% 4.9% 5.24%
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1995. REVENUES Revenues for the six months ended June 30, 1996 increased by $1,605,424, or 32.45% over the six months ended June 30, 1995. This increase in revenues was due primarily to substantially increased sales to a single OEM and, to a lesser extent, to increased sales to the Company's 28 stocking distributors. Due to market conditions, sales of the OEM's products have slowed which in turn has affected the sales of the Company's power supplies to the OEM. In light of such decrease in purchases, it will be unlikely that the OEM will purchase the same number of power supplies it purchased during the first six months of the year. See "Risk Factors - Customer Concentration." GROSS MARGINS Gross margins were 24.08% for the six months ended June 30, 1996 compared to 21.46% for the six months ended June 30, 1995. The improvement in gross margins can primarily be attributed to greater capacity utilization as fixed overhead costs declined on a per unit basis. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by $87,447, from $486,101 for the six months ended June 30, 1995, to $573,548 for the six months ended June 30, 1996. The increase primarily related to one-time bonuses to certain employees which increased employee compensation expense. As a percentage of revenues, however, selling, general and administrative expenses decreased from 9.82% for the six months ended June 30, 1995 to 8.75% for the six months ended June 30, 1996 since the increase in revenues during this period was greater than the increase in selling, general and administrative expenses. ENGINEERING AND PRODUCT DEVELOPMENT Engineering and product development expenses were 4.80% of revenues for the six months ended June 30, 1996, and 4.91% of revenues for the six months ended June 30, 1995. This slight decrease as a percentage of revenues was due to a greater increase in revenues than the increase in engineering and product development expenses. INTEREST EXPENSE Interest expense was 0.8% of revenues for the six months ended June 30, 1996 and 1.12% of revenues for the six months ended June 30, 1995. This decrease was primarily due to a one percentage point reduction in interest rate of the line of credit loan which took place in September 1995. TRANSLATION LOSS The primary currency of the Company's subsidiary, Poder Digital, is the Mexican peso. During 1995, the Mexican peso was devalued against the United States dollar. As a result of such devaluation, the Company experienced a translation loss of $6,851 for the six months ended June 30, 1995 related to Poder Digital's operations using Mexican pesos. The Company did not experience a similar loss for the six months ended June 30, 1996. INCOME BEFORE INCOME TAXES Income before income taxes for the six months ended June 30, 1996 was $637,208 compared to $270,511 for the same period during 1995. This increase of $366,697 was primarily due to the substantial increase in revenues over expenses during the six months ended June 30, 1996. INCOME TAX The Company's income tax expense was 4.49% of revenues for the six months ended June 30, 1996 and 0.57% of revenues for the six months ended June 30, 1995. Through December 31, 1995, the Company had net operating loss tax carry-forwards (NOLs) which resulted in minimal federal tax liability for the Company in 1995. Through June 30, 1996, the Company began providing for year-end tax liability at an estimated average annual rate of approximately 40%. NET INCOME Net income was $343,208 for the six months ended June 30, 1996 and $242,511 for the six months ended June 30, 1995. The increase in net income was due to increased revenues and a decreased cost of goods sold as a percentage of sales. As previously discussed, during the fourth quarter of 1995, the Company recognized a one-time tax benefit of $277,400 due to its prior net operating losses. Because of the tax benefit recognized during the fourth quarter of 1995, it is unlikely that the Company's net income for 1996 will exceed the Company's 1995 net income. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 REVENUES Revenues in 1995 increased by $3,788,169, or 60.62%. The majority of this increase, $1,957,293 (51.67%) was due to increased sales through the Company's stocking distributors who resell the Company's products to OEMs. Direct sales by the Company to OEMs accounted for $1,294,886 (34.18%) of the increase in sales and the balance of $535,990 (14.15%) was generated by the Company's three private label customers. GROSS MARGINS Gross margins were 25.34% of revenues during 1995 and 25.38% of revenues during 1994. This slight decrease in gross margins was due to increased costs to the Company. These increased costs primarily resulted from increased sheet metal costs and increased costs associated with certain Japanese-sourced materials, such as capacitors. Japanese-sourced materials became more expensive because of the weakening of the Japanese yen against the dollar. In addition, the Company's administrative costs of its Mexican facility increased due to the appointment of a new plant manager and several other key management personnel to strengthen the operations of that facility. These increases in costs were offset by an approximate 5% increase in selling prices instituted during 1995. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were 10.30% of revenues in 1995 and 14.71% of revenues in 1994. Selling, general and administrative expenses declined during 1995 primarily due to the Company's decision to terminate its relationship with its manufacturer's representative in the Northern California territory and to manage sales directly, resulting in a decrease in commissions to 1.42% of revenues in 1995 from 3.87% of revenues in 1994. ENGINEERING AND PRODUCT DEVELOPMENT Engineering and product development expenses were 4.80% of revenues in 1995, and 6.54% of revenues in 1994. During 1994, the Company had entered into several custom product development contracts which were engineering-intensive but did not result in the expected revenues. In 1995, the Company directed its engineering resources to a greater degree on the development of modifiable standard products with a resulting decline in engineering expenses as a percentage of revenues. INTEREST EXPENSE Interest expense was 1.16% of revenues during 1995 and 1.64% of revenues during 1994. Interest expense relates primarily to a line of credit and two equipment term loans with San Jose National Bank. The two term loans in the aggregate principal amount of $170,000, and the line of credit, are secured by the Company's accounts receivables and the Company's assets. Proceeds from the two term loans were used to acquire equipment, and proceeds from the line of credit were used for working capital. Because the Company's borrowings did not increase in 1995, interest expense, as a percentage of revenues, decreased in 1995. In addition, the interest rate on the line of credit loan decreased by one percentage point in September 1995. TRANSLATION LOSS The primary currency of the Company's subsidiary, Poder Digital, is the Mexican peso. During the fiscal year ended 1995, the Mexican peso was devalued against the United States dollar. As a result of the devaluation, the Company incurred a $85,258 translation loss related to Poder Digital's operations. During 1994, the Company experienced a translation loss of $10,450. INCOME BEFORE INCOME TAXES Income before income taxes increased by $681,508 from $144,976 during 1994 to $826,484 in 1995. This substantial increase was primarily due to the increase in revenues from the sale of the Company's power supplies. INCOME TAX During the fourth quarter of 1995, the Company recognized an income tax benefit of $277,400 as compared to a tax provision of $23,253 during 1994. The recognition of the tax benefit during 1995 is due to the Company's utilization of its prior net operating loss carryforward. NET INCOME Net income was $1,103,884 in 1995 and $121,723 in 1994, an increase of $982,161, or 807%. The increase in net income was due to a substantial increase in sales without a corresponding increase in expenses related to such sales, and due to a $277,400 tax benefit. The Company does not believe that its business is seasonal. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1996 and December 31, 1995, the Company's working capital was $2,426,022 and $2,211,358, respectively. For the past two fiscal years and the six months ended June 30, 1996, the Company has relied on cash flows from operations supplemented by bank borrowings to finance working capital and capital improvements. The Company's bank borrowings consist of a $120,000 promissory note bearing interest at 10% per annum and due December 8, 1998, a $50,000 promissory note bearing interest at 10.5% per annum and due May, 1999, and a $1.5 million line of credit bearing interest at prime plus 1% and due October 15, 1997. Proceeds from the promissory notes were used to acquire equipment, and the line of credit is used to supplement the Company's working capital. The promissory notes and line of credit are secured by substantially all of the Company's assets. The Company does not anticipate any material capital expenditures during 1997. As of June 30, 1996 and December 31, 1995, the Company's bank borrowings totalled $1,614,458 and $1,054,145, respectively. See Note 6 of Notes to Consolidated Financial Statements. Part of the proceeds raised hereby will be used to reduce the Company's borrowings by approximately $1 million. In addition, the Company is a guarantor of a $500,000 term loan granted to the Company's employee stock ownership plan ("ESOP"). The $500,000 term loan is included in the total amount of the Company's bank borrowings as of June 30, 1996 stated in the preceding paragraph. The $500,000 is due in June 2001 and bears interest at 10.5% per annum. Proceeds from the loan were used to acquire the Company's Common Stock by the ESOP. Principal and interest on the loan will be paid by the ESOP through contributions made by the Company to the ESOP in the amount of approximately $10,750 per month. This amount will be a monthly deduction against revenues through June 2001. NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS The requirements of the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets," issued in March 1995 ("FAS 121") and the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," issued in October 1995 ("FAS 123"), are effective for financial statements for years that begin after December 15, 1995. The Company adopted FAS 121 effective January 1, 1996. The adoption had no effect on the Company's financial position. FAS 123 encourages, but does not require, companies to recognize compensation expense based on fair value for grants of stock, stock options, and other equity instruments granted to employees. Companies that do not adopt the fair value accounting rules must disclose the impact of adopting the new method in the notes to the financial statements. The Company currently does not intend to adopt the fair value accounting prescribed by FAS 123 and will be subject only to the disclosure requirements prescribed by FAS 123. BUSINESS OVERVIEW Digital Power Corporation designs, develops, manufactures, and markets switching power supplies for sale to manufacturers of computers and other electronic equipment. Switching power supplies are critical components of all computers and other electronic equipment. The electronic circuitry in computers and other electronic equipment requires a steady and isolated supply of direct current (DC) electrical power. In addition, the various components and subassemblies within computers and other electronic equipment often require different voltage levels of electrical power. The power supply products of the Company satisfy these two requirements by converting the alternating current (AC) electricity from a primary source, such as a wall outlet, into the direct current required for the proper functioning of electronic circuits, and by dividing the single electrical current into as many as four discrete output voltages. The Company's power supply products also monitor and regulate the DC output voltages being delivered to protect the electronic equipment from harmful surges and drops in voltage levels. Because the Company's products have a high "power-density" (measured in watts per cubic inch), the power supply products of the Company are generally smaller than those of competitors. For example, the Company believes that its US100 series of power supplies, on a 3"x 5" printed circuit board, is the smallest 100 watt off-line (AC input) power supply available in the industry. Furthermore, the Company's power supply products are extremely "flexible" in design. This "flexibility" approach allows the Company to modify quickly and inexpensively its base-design products to satisfy an OEM's specific power supply needs, thereby enabling the Company to keep to a minimum its expenses for non-recurring engineering ("NRE") of its base-design products. Because of this reduced NRE expense related to the "flexibility" line of switching power supplies, the Company does not charge its customers for its NRE expenses incurred in tailoring a power supply to a customer's specific requirements. However, many competitors of the Company do charge their customers for NRE expenses. As a result of the Company's "flexibility" approach, it has provided samples of modified power supplies to OEM customers in as quickly as a few days, an important capability given the increasing emphasis placed by OEMs on "time-to-market". Digital Power's strategic objective is to exploit this combination of power density, flexibility, and short time-to-market to win an increasing share of the growing power supply market. THE INDUSTRY The market for power supplies is large, as all electronic systems require a steady supply of low voltage electrical power. Almost all of these systems require direct current (DC) voltages, not the alternating current (AC) voltages provided by utility companies. Furthermore, the voltage levels produced by standard power sources must be significantly lowered in order to allow proper functioning of an electronic component. For example, internal computer microprocessors, as well as memory and logic circuitry in telecommunications systems, generally operate on a voltage level of 5 volts DC or less. However, most electrical outlets produce at least 115 volts AC. Therefore, the incoming voltage of 115 volts AC must be both converted to DC and reduced to 5 volts. This is the function performed by a typical power supply. Those products which accept and convert alternating current from a primary power source into the direct current required by electronic systems are generally referred to as "power supplies". Those products which convert one level of DC voltage into a higher or lower level of DC voltage as required by a particular electronic device are generally referred to as "DC/DC converters". Electronic systems are sensitive to variations in voltage, and therefore require protection from the surges and drops in the AC voltage which commonly occur over electrical lines. Power supplies perform this essential function by regulating or maintaining the output voltages within a narrow range of values. Finally, power supplies divide a charge of electricity into multiple lower voltage outputs. Most electronic systems have a number of subsystems, each of which may require a different incoming operating voltage. Power supplies can provide multiple outputs of different voltage levels. Certain voltage levels are common in the electronics field. Increasingly, Digital Power has received requests from OEMs for "non-standard" voltage outputs. Digital Power believes that its "flexibility" series of power supplies are ideally suited for these non-standard voltage applications. THE MARKET According to Micro-Tech, the worldwide market for electronic power supplies was estimated to be $15 billion in 1995. The power supply manufacturing industry is highly fragmented and Digital Power believes there are approximately 400 power supply competitors in the world. The electronic power supply market is typically split into captive and merchant segments. The captive segment of the market, that portion represented by OEMs who design and manufacture power supplies for use in their own products, is estimated to account for 50% of the total market according to Micro-Tech. The balance of the power supply market is served by merchant power supply manufacturers such as Digital Power that design and manufacture power supplies for sale to OEMs. Micro-Tech forecasts that the merchant segment of the market will experience the greatest rate of growth, increasing from 52.5% of the total market in 1996 to 62.8% of the total market in 2000. The Company believes that the increase is due, in part, to the fact that power supplies are becoming an increasingly complex component to the OEMs, with constantly changing requirements such as power factor correction (PFC) and filtering specifications to minimize electromagnetic interference (EMI). POWER FACTOR CORRECTION. The alternating current electricity delivered by utility companies over power lines is delivered in smooth waves, known as harmonic waves, or sine waves. This smooth harmonic wave form of AC electricity that reaches a power supply is known as "apparent power", and it is measured in watts (watts equal volts multiplied by amperes). Although the electricity reaches a switching power supply in a smooth harmonic wave form, the switching power supply does not draw on the electricity in a smooth harmonic fashion. Rather, in the process of "rectifying" the alternating current into direct current form, a switching power supply will draw current off the AC harmonic wave form in short bursts, each of which is shorter in duration than the wave frequency. The amount of power drawn off the line by the switching power supply in these short bursts is known as the "real input power". The real input power cannot be greater than the apparent power, and in fact is almost always less than the apparent power. Therefore, a percentage, or factor, can be arithmetically determined by dividing the real input power by the apparent power, giving a coefficient known as the "power factor" of the power supply. Ideally, a switching power supply would have a power factor of one, where all the apparent power is drawn off by the power supply, resulting in the real input power equaling the apparent power. In practice, however, this is not possible. In fact, most switching power supplies without the special feature known as "power factor correction" have an approximate power factor of only .60. The reason why power factor of less than one can be a significant problem relates to the power that is not drawn off the power line, or the differential amount between one and the power factor (1 - .60 = .40 in the example given above). This differential of missing power is reflected back onto the power line in a harmonically distorted fashion, since the originally smooth harmonic wave form has now been disrupted by the power that has been drawn off by the power supply and exhibits a kind of "ripple" in the wave form. The harmonically distorted wave form circulates as wasted heat energy in the power line, as well as in wall sockets, electrical wiring in the building, and in distribution transformers along the power line. This problem of harmonic distortion and wasted heat energy grows as additional switching power supplies are connected to and draw power from a power line. A large enough number of switching power supplies drawing power from a line without power factor correction will result in: (i) a significant uncompensated loss of electrical power (in the form of heat) to the electrical utility company; (ii) potential damage to power lines and transformers caused by excessive heat; and (iii) "dirty" electrical power for "downstream" consumers of electricity. A low power factor is generally not a problem for the piece of electronic equipment itself served by the switching power supply. In response to these problems, manufacturers of power supplies have developed certain circuitry within power supplies known as "power factor correction", or PFC. With PFC, most power supplies can be improved to perform at a power factor of approximately .99. Historically, PFC has only been installed in high wattage switching power supplies because of the comparatively greater amount of harmonic distortion reflected back onto the line by these power supplies. However, PFC is rapidly becoming critical at all power levels, not only because it allows equipment designers to power more circuits from a standard outlet, but also because of regulatory requirements established in the European Union, such as European Normatives EN61000-3-2 and EN61000-3-3. These two normative standards, known more fully as "Limits For Harmonic Current Emissions," and "Limitation Of Voltage Fluctuations And Flicker On Low Voltage Supply Systems For Equipment With Rated Current <16A [less than 16 amperes]," respectively, upgrade the former generic standard IEC555.2 and place pressure on manufacturers of power supplies to develop products with PFC at lower and lower power levels. ELECTROMAGNETIC INTERFERENCE (EMI). EMI is universally undesirable because it potentially interferes with the operation of other electronic equipment. In the United States, the Federal Communications Commission ("FCC") has mandated certain EMI limits which cannot be exceeded by OEM equipment. The European Union (EU) has issued an electromagnetic compatibility (EMC) directive that applies certain requirements to products sold in Europe beginning January 1, 1996. The EU created these directives to insure conformity with safety and quality standards and to assess product compliance throughout its jurisdiction. One of these requirements involves Conformity European ("CE") marking. OEMs may add the "CE" mark to their equipment if it meets the requirements for radiated and conducted noise emissions and for noise susceptibility. The power supply, if part of an OEM system, does not itself need CE certification. However, since it is one of the major noise generators within an OEM system, there is a growing demand for the power supply to have the CE mark. A pre-approved power supply provides added assurance that the OEM will meet the applicable standards with little trouble. Digital Power plans to address the market demands discussed above for PFC and EMI features by developing and introducing a line of power supply products which incorporate PFC and provide filtering from EMI which meets or exceeds the requirements for "CE" marking. The power supply market can be further segmented between custom and standard power supplies. Power supplies designed and manufactured by an OEM for use in its own equipment are an example of a custom design, as the product is not intended for resale. However, custom power supplies are also common in the merchant market, as certain OEMs contract with power supply manufacturers to design a product that meets the form, fit, and function requirements of their specific application. Standard, "off-the-shelf" power supplies are intended for sale to many customers whose electronic equipment can operate from "standard" output voltages, such as 5 volts, 12 volts or 24 volts DC. A subset of the standard segment of the market has evolved, commonly known as "modified", comprising power supply products which have the performance characteristics of a standard power supply, but need certain, usually minor, modifications. These modifications may include slight mechanical changes to the sheet metal chassis, but more typically involve an adjustment to the output voltages from one of the "standard" output voltages (e.g. 5 volts to 7 volts, or 15 volts to 18.5 volts). Digital Power primarily serves the North American power electronics market with AC/DC power supplies and DC/DC converters ranging from 50 watts to 750 watts of total output power. AC/DC power supplies represent the largest part of the merchant power electronics market with sales in North America alone expected to grow from about $4.9 billion in 1996 to $6.7 billion in 2000. During the same period, DC/DC converter sales in North America are forecasted to grow from $1.5 billion in 1996 to $2.1 billion in 2000. STRATEGY Digital Power's strategy is to be the supplier of choice to OEMs requiring a high quality power solution where size, rapid modification, and time-to-market are critical to their business success. Target market segments would include telecommunications, networking, switching, mass storage, and industrial and office automation products. While many of these segments would be characterized as computer-related, the Company does not participate in the personal computer (PC) power supply market. The power supply market for PCs is very competitive with standard power supplies producing low margins. PRODUCT STRATEGY Digital Power has eight series of base designs from which thousands of individual models can be produced. Each series has its own printed circuit board (PCB) layout that is common to all models within the series regardless of the number of output voltages (typically one to four) or the rating of the individual output voltages. A broad range of output ratings, from 3.3 volts to 48 volts, can be produced by simply changing the power transformer construction and a small number of output components. Designers of electronic systems can determine their total power requirements only after they have designed the system's electronic circuitry and selected the components to be used in the system. Since the designer has a finite amount of space for the system and may be under competitive pressure to further reduce its size, a burden is placed on the power supply manufacturer to maximize the power density of the power supply. A typical power supply consists of a PCB, electronic components, a power transformer and other electromagnetic components, and a sheet metal chassis. The larger components are typically installed on the PCB by means of pin-through-hole assembly where the components are inserted into pre-drilled holes and soldered to electrical circuits on the PCB. Other components can be attached to the PCB by surface mount interconnection technology (SMT) which allows for a reduction in board size since the holes are eliminated and components can be placed on both sides of the board. The Company's US100 series is an example of a product using this manufacturing technology. PRODUCTS Digital Power's "flexibility" concept applies to all of the Company's US, UP/SP, and DP product series. A common printed circuit board is shared by each model in a particular family, resulting in a reduction in parts inventory while allowing for rapid modifiability into thousands of output combinations. The following is a description of the Company's products. US50/DP50 SERIES The US50 series of power supplies are compact, economical, high efficiency, open frame switchers that deliver up to 50 watts of continuous or 60 watts of peak power from one to four outputs. The 90-264 VAC universal input allows them to be used worldwide without jumper selection. Flexibility options include chassis and cover, power good signal, an isolated V4 output, and UL544 (medical) safety approval. All US50 series units are also available in 12VDC, 24VDC, or 48VDC inputs. This optional DC input unit (DP50 series) maintains the same pin-out, size, and mounting as the US50 series. US70/DP70 SERIES The US70 series of power supplies is similar to the US50 series, a compact, economical, highly efficient, open frame switcher that delivers up to 65 watts with a 70 watt peak. This unit is offered with one to four outputs, a universal input rated from 90 to 264 VAC, and is only slightly larger than the US50 series. The US70 series is differentiated from competitive offerings by virtue of its smaller size, providing up to four outputs while competitors typically are limited to three outputs. Flexibility options include cover, power good signal, an isolated V4 output, and UL544 (medical) safety approval. The DP70 is the same as the US70 except the input is 48 volts DC. The Company also offers 12 & 24 VDC DC input on this series where the model series changes to DN&DM. This type of product is ideal for low profile systems with the power supply measuring 3.2" x 5" x 1.5". US100/DP100 SERIES The US100/DP100 is the industry's smallest 100 watt switcher. Measuring only 5" x 3.3" x 1.5", this series delivers up to 100 watts of continuous or 120 watt peak power from one to four outputs. The 90-264VAC universal input allows them to be used worldwide. This product is ideal in applications where OEMs have upgraded their systems, requiring an additional 30-40 watts of output power but being unable to accommodate a larger unit. The US100 fits in the same form factor and does not require any tooling or mechanical changes by the OEM. Flexibility options include a cover and adjustable post regulators on V3 and/or V4 outputs. Fully custom models are also available. All US100 series units are also available with 12VDC, 24VDC, or 48 VDC inputs. This optional DC input unit (DP100) maintains the same pin-out, size, and mounting as the US100 series. UP300 SERIES The UP300 series are economical, high efficiency, open frame switchers that deliver up to 300 watts of continuous, 325 watt, peak power from one to two outputs. The 115/230VAC auto-selectable input allows them to be used worldwide. On-board EMI filtering is a standard feature. Flexibility options include a cover, power fail/power good signal, and an isolated 2nd output. The UP300 is also available as the SP300 series, which is jumper selectable between 115 and 230VAC and provides the OEM an even more economical solution. This product can be used in network switching systems or other electronic systems where a lot of single output current, such as 5, 12, 24, 48 volt current might be required. US250/DP250 SERIES The US250 series are economical, high efficiency, open frame switchers that deliver up to 250 watts of continuous or 300 watts of peak power from one to four outputs. The 115/230VAC auto-selectable input allows them to be used worldwide. Flexibility options include cover, power fail/power good signal, enable/inhibit, and an isolated V3 output. All US250 series units are also available with 12VDC, 24VDC, or 48VDC inputs. This optional DC input unit (DP250) maintains the same pin-out, size, and mounting as the US250 series. US350 SERIES The US350 series is a fully-featured unit that has active power factor correction and was designed to be field-configurable by the Company's international and domestic sales channels. This feature allows the stocking distributor to lower its inventory costs but still maintain the required stock to rapidly provide power supplies with the unique combination of output voltages required by an OEM. This unit delivers 350 watts from one to four outputs modules and meets the total harmonic distortion spec IEC 555.2. The US350 has an on-board EMI filter and operates from 90-264 VAC input. This unit measures 9" x 5" x 2.5" and can operate without any minimum loads and has an optional internal fan and power fail/power good signal. US750 SERIES The newest product under development by the Company is the US750 series. The US750 is a fully modular power supply measuring 3" x 10.25" x 5" and delivers 750 watts from one to four power outputs. This product can be configured to meet many different applications. It comes with optional N+1 parallelability, hot swapability, frequency synching, power good/power fail, and remote on/off. The Company anticipates that this product will be available for sale during the first quarter of 1997. The Company also produces two products designated as the KD series in a 150 watt and 200 watt product. These designs were acquired in 1987 under a licensing agreement with KDK Electronics. They are still offered for sale but are expected to continue to decline as a percentage of Digital's revenues. The licensing agreement with KDK Electronics, as amended, provides that in the event total historical sales of KD products reaches $20 million, then KDK Electronics will be granted a stock option to purchase 100,000 shares of Digital's Common Stock for $3.50 per share with Digital paying the exercise price. Due to changing market conditions, the KD series is expected to be phased out prior to reaching the $20 million sales level. Therefore, no common stock is anticipated to be granted to KDK Electronics under the licensing agreement. In addition, KDK Electronics will be paid a royalty equal to 5% on the first $20 million total sales of the KD series products with the royalty decreasing on sales over that amount. KD products accounted for 23%, 14%, and 9% of revenues in 1994, 1995, and for the six months ended June 30, 1996, respectively. Total cumulative sales of KD products were $14,211,423 as of June 30, 1996. VALUE-ADDED SERVICE Digital Power offers its customers various types of value-added services, which may include the following additions to its standard product offerings. Electrical (power): Paralleled power supplies for (N+1) redundancy, hot swapability, output OR'ing diodes, AC input receptacle with fuse, external EMI filter, on/off switch, cabling and connectors, and battery backup with charger. Electrical (control and monitoring): AC power fail detect signal, DC output(s) OK signal, inhibit, output voltage margining, and digital control interface. Mechanical: Custom hot-plug chassis for (N+1) redundant operation, locking handle, cover, and fan. These services incorporate one of the Company's base products along with additional enclosures, cable assemblies, and other electronic components to arrive at a power subassembly. This strategy matches perfectly with those OEMS wishing to reduce their vendor base, as the turnkey sub-assembly allows customers to eliminate other vendors. QUALITY MANAGEMENT METHODS Digital Power's emphasis on quality begins with the initial design stage and continues through the production processes to the end product. To execute this strategy, the Company utilizes sophisticated design techniques including computer modeling and computer aided design combined with advanced management methods such as just-in-time (JIT) manufacturing, statistical process control (SPC), and total quality commitment (TQC). The Company believes that these techniques lower production costs while simultaneously improving production efficiencies and the quality of the end- product. SAFETY AND REGULATORY AGENCIES All of the Company's power supplies meet or exceed established international safety standards including Underwriters Laboratory Incorporated (UL) in the United States; Canadian Standards Associations (CSA) in Canada, or the UL equivalent (cUL); and Technischer Uberwachungs-Verein (TUV) or Verband Deutscher Electrotechniker (VDE) in Germany. In addition the Company has been site-approved by the British Approval Board for Telecommunications (BABT) in the United Kingdom. The Company plans to achieve ISO 9001 certification, a European model for quality assurance, by the second quarter of 1997. SUPPLIERS Other than certain fabricated parts such as printed circuit boards and sheet metal chassis which are readily available from many suppliers, the Company uses no custom components. Typically, two suppliers are qualified for every component, with the exception being two line transformers, one manufactured by Tamura and the second one manufactured by Spitznagel. These transformers are designed into three of the Company's products, which products accounted for approximately 10% of the Company's sales in 1995. MANUFACTURING STRATEGY Consistent with its product flexibility strategy, the Company aims to maintain a high degree of flexibility in its manufacturing processes in order to respond to rapidly changing market conditions. With few exceptions, the competitive nature of the power supply industry has placed continual downward pressure on selling prices. In order to achieve low cost manufacturing with a labor-intensive product, manufacturers have the option of automating much of the labor out of their product, or producing their product in a low labor cost environment. Given the high fixed costs of automation and the resistance this places on making major product changes, Digital Power believes that its flexible manufacturing strategy is best achieved through a highly variable cost of operation. In 1986, the Company established a wholly-owned subsidiary in Guadalajara, Mexico to assemble its products. This manufacturing facility performs materials management, sub-assembly, final assembly, and test functions for the majority of the Company's power supply products. In addition, Digital has entered into an agreement with Fortron/Source Corp. to manufacture Digital's products at a facility located in China on a turnkey basis. Purchases from Fortron/Source will be made pursuant to purchase orders and the agreement may be terminated upon 120 days notice. Although the Company has just recently begun to manufacture its products through Fortron/Source, the Company believes that it will be able to produce high volume power supplies through Fortron/Source at a cost lower than at its Guadalajara, Mexico, facility. SALES, MARKETING AND CUSTOMERS Digital Power markets its products domestically through a network of 13 independent manufacturers representatives. Each representative organization is responsible for managing sales in a particular geographic territory. Generally, the representative has exclusive access to all potential customers in the assigned territory and is compensated by commissions at 5% of net sales after the product is shipped, received, and paid for by the customer. Typically, either the Company or the representative organization may terminate the agreement with 30 days written notice. In certain territories, the Company has entered into agreements with 28 stocking distributors who buy and resell the Company's products. For the six months ended June 30, 1996, and for the years ended December 31, 1995 and 1994, distributor sales accounted for 38.9%, 39.7%, and 32.4%, respectively, of the Company's total sales. Over this same period, one distributor accounted for 23.1%, 27%, and 16%, respectively, of total sales. In addition, international sales through stocking distributors accounted for less than 5% of the Company's sales. In general, the agreements with stocking distributors are subject to annual renewal and may be terminated upon 90 day's written notice. Although these agreements may be terminated by either party in the event a stocking distributor decides to terminate its agreement with the Company, the Company believes that it would be able to continue the sale of its products through direct sales to the customers of the stocking distributor. Further, and in general, stocking distributors are eligible to return 25% of their previous six-month's sales for stock rotation. For the past three years, stock rotations have not exceeded one percent of total sales. The Company has also entered into agreements with three private label customers who buy and resell the Company's products. Under these agreements, the Company sells its products to the private label company who then resells the products with its label to its customers. The Company believes that these private label agreements expand its market by offering the customer a second source for the Company's products. The private label agreements may be terminated by either party. Further, the private label agreement requires that any product subject to a private label be available for 5 years. For the six months ended June 30, 1996, and for the years ended December 31, 1995 and 1994, private label sales accounted for 8.4%, 10.2%, and 7.8%, respectively, of total sales. The Company's promotional efforts to date have included product data sheets, feature articles in trade periodicals, and trade shows. Part of the proceeds raised hereby will be used for future promotional activities, including space advertising in industry-specific publications, a full line product catalog, application notes, and direct mail to an industry-specific mail list. The Company's products are warranted to be free of defects for a period ranging from one to two years from date of shipment. No significant warranty returns have been experienced. As of June 30, 1996, the Company's warranty reserve was $149,125. BREAKDOWN OF PRODUCT MARKET The table below sets forth the percentage of Digital Power's revenues generated by particular market segments served by Digital Power's customers, and indicates representative customers within those market segments.
PRODUCT OR MARKET SERVED BY CUSTOMER PERCENTAGE OF REVENUES REPRESENTATIVE CUSTOMERS Communications 28% Westinghouse STM Wireless Stanford Telecommunications Multipoint Networks ADC AT&T Network Switches, Routers, Hubs 24% Bay Networks Ascend Communications Digital Link Whitetree 3COM Computer Peripheral/Mass Storage 12% Storage Dimensions Motorola Photography/Visual Equipment 9% N View Photometrics Optivision Semiconductor Mfg. Equipment 7% Applied Materials Asyst Technologies Enclosures 6% Elma Sigma/Trimm Broadcast Equipment 5% Leitch Video Office Automation 4% Quartet Ovonics Patapsco Medical Equipment 3% OEC Diasonics Test Equipment 2% Analogic Orion Instruments
BACKLOG Digital Power typically does not build finished goods for stock. Upon receipt of a purchase order from a customer, a work order is issued to the Company's production department to build a specified quantity of a model to be delivered on a specified shipment date. Backlog consists of purchase orders on-hand generally having a scheduled delivery date within the next six months. The Company's backlog was $5,810,098 at June 30, 1996, and $3,276,498 at December 31, 1995. Variations in the magnitude and duration of purchase orders received by the Company and customer delivery requirements may result in substantial fluctuations in backlog from period to period. Although the Company may have a binding purchase order, customers may cancel or reschedule deliveries and backlog may not be a meaningful indicator of future financial results. COMPETITION The merchant power supply manufacturing industry is highly fragmented and serviced by approximately 400 competitors worldwide. Many of the Company's competitors are located in low cost environments where they may have advantages in terms of labor and component costs. In addition, they may offer products comparable in quality to those of Digital Power and have significantly greater financial and marketing resources. Representative examples of the Company's competitors are Computer Products, Inc., ASTEC America, Zytec Corporation, and Lambda Electronics. The Company believes it has a competitive position with its targeted customers who need a high-quality, compact product which can be readily modified to meet the customer's unique requirements. To remain competitive, the Company must continue to offer innovative products at competitive prices while demonstrating flexibility in meeting the customer's requirements for rapid time-to-market. RESEARCH AND DEVELOPMENT The Company's research and development efforts are primarily directed toward the development of new standard power supply platforms which may be readily modified to provide a broad array of individual models. Improvements are constantly sought in power density, modifiability, and efficiency, while the Company attempts to anticipate changing market demands for increased functionality, such as PFC and improved EMI filtering. Internal research is supplemented through the utilization of consultants who specialize in various areas, including component and materials engineering, and electromagnetic design enhancements to improve efficiency, while reducing the cost and size of the Company's products. Product development is performed at Digital Power's headquarters in California by three engineers who are supported and assisted by five technicians. The Company's total expenditures for research and development were $408,966, $481,475, and $314,659 for the years ended December 31, 1994, 1995, and the six month period ended June 30, 1996, respectively, and represented 6.54%, 4.8%, and 4.8% of the Company's total revenues for the corresponding periods. EMPLOYEES As of June 30, 1996, the Company had approximately 345 full- time employees with 300 of these employed at its wholly-owned subsidiary Poder Digital located in Guadalajara, Mexico. The employees of Digital Power's Mexican operation are members of a national labor union, as are most employees of Mexican companies. The Company has not experienced any work stoppages at either of its facilities and believes its employee relations are good. FACILITIES The Company's headquarters are located in approximately 9,500 square feet of leased office, research and development space in Fremont, California. The Company pays $5,890 per month, subject to adjustment, and the lease expires on January 31, 2001. The Company's manufacturing facility is located in 16,000 square feet of leased space in Guadalajara, Mexico. The Company pays approximately $3,500 per month, subject to adjustment, and the lease expires in February, 2001. The Company believes that its existing facilities are adequate for the foreseeable future and has no plans to expand them. LEGAL PROCEEDINGS The Company knows of no material litigation or claims pending, threatened, or contemplated to which the Company is or may become a party. MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The names and ages of the Executive Officers and Directors of the Company as of September 30, 1996, and certain information about such persons, are set forth below. The Company's Bylaws provide for a Board of Directors of not less than five nor more than nine members, with the actual number to be set by resolution of the Board. Each of the Company's Directors is elected at the annual meeting of shareholders of the Company and serves until the next annual meeting until such person's successor is elected and qualified, or until such person's earlier death, resignation, or removal. As part of the Underwriting Agreement, the Underwriters shall have the option to designate a member to the Board of Directors, or, at the Underwriters' option, designate an individual to attend the Board's meetings for a period of five years. At this time, the Underwriters have not indicated whether they intend to exercise such right. See "Underwriting." Executive Officers are appointed by, and serve at the discretion of, the Board of Directors. Except as discussed below, the Company has no employment agreements with any of its Executive Officers or Directors. The Company has not paid any fees or other remuneration to the Directors for their services as Directors. The Directors do, however, receive stock options and Warrants from the Company for their services. In August of 1996, each Director received Warrants to purchase 20,000 shares of Common Stock at $5.00 per share for services as a Director. See "Principal and Selling Stockholders and Warrantholders." The Company has agreed to register the Common Stock underlying such options and Warrants. No family relationship exists between any of the Officers or Directors. Name Age Position Edward L. Lammerding 66 Chairman of the Board Philip M. Lee 72 Director Thomas W. O'Neil, Jr. 67 Director Robert O. Smith 52 Director, Chief Executive Officer, and President Claude Adkins 54 Director, Executive Vice President, and Vice President-Engineering Philip G. Swany 46 Chief Financial Officer and Vice President-Finance BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS. EDWARD L. LAMMERDING. Mr. Lammerding is Chairman of the Board of the Company and has been a Director since 1989. Since November, 1995, Mr. Lammerding has also served as Chairman of the Board of 3Net Systems, and since 1983 he has served as Chairman of the Board of Sierra Resources Corporation, a venture capital investment firm. Currently, Mr. Lammerding is serving as a director or trustee of three other organizations, including Public Affairs Information, Inc., a legislative bill reporting service, Unicube U.S.A., Inc., a hospital curtain manufacturer, and Fulton Water Co., a domestic water supply company. Mr. Lammerding also serves on the board of the California State Lottery Commission, St. Mary's College, and the Marine Corps Historical Foundation. Mr. Lammerding received an A.B. in Economics from St. Mary's College. PHILIP M. LEE. Mr. Lee has served as a Director of the Company since 1991. He has over 40 years experience in supermarket management and is a general partner of J & P Properties, a real estate management and investment company. Mr. Lee is also a director of Sierra Resources Corporation. He received a certificate in management from American River College. THOMAS W. O'NEIL, JR. Mr. O'Neil has served as a Director of the Company since 1991. He is a certified public accountant and has been a partner of Schultze, Wallace and O'Neil, CPAs, since 1991. Mr. O'Neil is a retired partner of KPMG Peat Marwick. Mr. O'Neil is also a director of the California Exposition and State Fair, Chairman of the Board of the Regional Credit Association, and a director of 3Net Systems, Inc. ROBERT O. SMITH. Mr. Smith joined the Company in November 1989 as its Chief Executive Officer and as a Director, and in May 1996 he was also made President of the Company. From 1980 through 1989, Mr. Smith held various executive positions with Computer Products, Inc., a manufacturer of power conversion products and industrial automation systems (including positions as Vice President/Group Controller of the Power Conversion Group, General Manager of the Compower Division, and President of the Boschert subsidiary). From 1978 to 1980, Mr. Smith was Cost Accounting Manager at Harris Computer Systems. Mr. Smith received a B.S. in Business Administration from the Ohio University and completed numerous courses in the M.B.A. program at Kent State University. CLAUDE ADKINS. Mr. Adkins was the Company's President from September 1987 to May 1996, and Executive Vice President and Vice President of Engineering from May 1996 to the present. Mr. Adkins has been responsible for marketing power supplies and for new product development for the Company since the inception of the power supply line of products. From August 1975 to January 1978, Mr. Adkins was a technical sales representative for Richards Associates, a manufacturer's representative organization in San Jose, California. He received an A.A. degree from El Camino Junior College, and a B.S. degree in Industrial Technology and Electronics from California State University at Long Beach. PHILIP G. SWANY. Mr. Swany joined the Company as its Controller in 1981. In February 1992, he left the Company to serve as the Controller for Crystal Graphics, Inc., a 3-D graphics software development company. In September 1995, Mr. Swany returned to the Company where he was made Vice President-Finance. In May 1996, he was named Chief Financial Officer and Secretary of the Company. Mr. Swany received a B.S. degree in Business Administration - Accounting from Menlo College, and attended graduate courses in business administration at the University of Colorado. COMMITTEES OF THE BOARD. The Board has an Audit Committee and a Compensation Committee. The Audit Committee consists of Messrs. Lammerding and O'Neil, and the Compensation Committee consists of Messrs. O'Neil and Lee. The primary functions of the Audit Committee are to review the scope and results of audits by the Company's independent auditors, the Company's internal accounting controls, the non-audit services performed by the independent accountants, and the cost of accounting services. The Compensation Committee administers the Company's 1996 Stock Option Plan and approves compensation, remuneration, and incentive arrangements for officers and employees of the Company. EXECUTIVE COMPENSATION. The following table sets forth the Compensation of the Company's president and chief executive officer during the past three years. No other officer received annual compensation in excess of $100,000. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards Payouts Securities All Other Name and Other Annual Restricted Underlying LTIP Compensation Principal Position Year Salary ($) Compensation ($) Stock Options (#) Payouts Award(s) ($) ($) Robert O. Smith 1995 $ 105,000 $0 $0 0 $0 $0 President and CEO 1994 $ 100,000 $0 $0 0 $0 $0 1993 $ 100,000 $0 $0 104,922(1) $0 $0
(1) During fiscal year 1993, Mr. Smith received a ten year option to acquire 104,922 shares of Common Stock at $.50 per share. During fiscal year 1996, Mr. Smith exercised his option to acquire 8,022 shares of Common Stock. The Company and Mr. Smith entered into an employment contract which terminates on December 31, 1999. Under the terms of Mr. Smith's employment contract, Mr. Smith shall serve as president and chief executive officer of the Company and his salary shall be $150,000 per annum effective January 1, 1997, increasing in an amount to be determined by Mr. Smith and the Board such that Mr. Smith shall receive $200,000 per annum by January 1, 1999. Mr. Smith's current salary for 1996 is $110,000. In addition, pursuant to Mr. Smith's contract, he shall have the right to receive on the first business day of each January during the term of his contract options to acquire 100,000 shares of Common Stock at the market value as of such date. Finally, pursuant to Mr. Smith's employment contract, in the event there is a change in control, Mr. Smith shall be granted a five year consulting contract at $200,000 per year. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Sections 204 and 317 of the California General Corporation Law permit indemnification of directors, officers, and employees of corporations under certain conditions subject to certain limitations. Article V of the Company's Amended and Restated Articles of Incorporation states that the Company may provide indemnification of its agents, including its officers and directors, for breach of duty to the Company in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits set forth in Section 204 of the Corporations Code. Article VI of the Bylaws provides that the Company shall, to the maximum extent and in the manner permitted in the Corporations Code, indemnify each of its agents, including its officers and directors, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any such person is or was an agent of the Company. Pursuant to Section 317 of the California Corporations Code, the Company is empowered to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company to procure a judgment in its favor) by reason of the fact that such person is or was an officer, director, employee, or other agent of the Company or its subsidiaries, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with such proceeding, if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Company and, in the case of a criminal proceeding, the Company has no reasonable cause to believe the conduct of such person was unlawful. In addition, the Company may indemnify, subject to certain exceptions, any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was an officer, director, employee, or other agent of the Company or its subsidiaries, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith and in a manner such person believed to be in the best interest of the Company and its shareholders. The Company may advance expenses incurred in defending any proceeding prior to final disposition upon receipt of an undertaking by the agent, officer, director, or employee to repay that amount if it shall be determined that the agent is not entitled to indemnification as authorized by Section 317. In addition, the Company is permitted to indemnify its agents in excess of Section 317. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. STOCK PLANS EMPLOYEE STOCK PURCHASE PLAN. The Company adopted an Employee Stock Ownership Plan ("ESOP") in conformity with ERISA requirements. As of September 30, 1996, the ESOP owns, in the aggregate, 173,333 shares of the Company's Common Stock. In June 1996, the ESOP entered into a $500,000 loan with San Jose National bank to finance the purchase of shares. The Company has guaranteed the repayment of the loan, and it is intended that Company contributions to the ESOP will be used to pay off the loan. See "Management's Discussion and Analysis." The Company intends to make a monthly contribution of approximately $10,750 per month to the ESOP. All employees of the Company participate in the ESOP on the basis of level of compensation and length of service. Participation in the ESOP is subject to vesting over a six-year period. The shares of the Company's Common Stock owned by the ESOP are voted by the ESOP trustees. Mr. Smith, President and Chief Executive Officer of the Company, is one of two trustees of the ESOP. 1996 STOCK OPTION PLAN. The Company has established a 1996 Stock Option Plan (the "1996 Plan"). The purpose of the 1996 Plan is to encourage stock ownership by employees, officers, and directors of the Company to give them a greater personal interest in the success of the business and to provide an added incentive to continue to advance in their employment by or service to the Company. A total of 513,000 shares of Common Stock are authorized to be issued under the Plan, of which 275,500 shares have been issued pursuant to the 1996 Plan at an exercise price of $1.80 per share. In connection with the issuance of the stock options, the Company obtained a letter from its investment banker that the value of the stock options do not exceed $1.80 per share. The stock options to acquire 275,500 shares vest after two years. The 1996 Plan provides for the grant of incentive or non-statutory stock options. The exercise price of any incentive stock option granted under the 1996 Plan may not be less than 100% of the fair market value of the Common Stock of the Company on the date of grant. The fair market value for which an optionee may be granted incentive stock options in any calendar year may not exceed $100,000. Shares subject to options under the 1996 Plan may be purchased for cash. Unless otherwise provided by the Board, an option granted under the 1996 Plan is exercisable for ten years. The 1996 Plan is administered by the Compensation Committee which has discretion to determine optionees, the number of shares to be covered by each option, the exercise schedule, and other terms of the options. The 1996 Plan may be amended, suspended, or terminated by the Board, but no such action may impair rights under a previously granted option. Each option is exercisable, during the lifetime of the optionee, only so long as the optionee remains employed by the Company. No option is transferrable by the optionee other than by will or the laws of descent and distribution. Pursuant to the 1996 Plan, Messrs. Smith, Adkins, and Swany received options to acquire 61,500, 29,500, and 24,250 shares of Common Stock, respectively. 401(K) PLAN The Company has adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan"), which generally covers all of the Company's full-time employees. Pursuant to the 401(k) Plan, employees may make voluntary contributions to the 401(k) Plan up to a maximum of six percent of eligible compensation. These deferred amounts are contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching and Company contributions on behalf of Plan participants. The Company matches contributions at the rate of $.25 for each $1.00 contributed. The Company can also make discretionary contributions. The 401(k) Plan is intended to qualify under Sections 401(k) and 401(a) of the Internal Revenue Code of 1986, as amended. Contributions to such a qualified plan are deductible to the Company when made and neither the contributions nor the income earned on those contributions is taxable to Plan participants until withdrawn. All 401(k) Plan contributions are credited to separate accounts maintained in trust. CERTAIN TRANSACTIONS SIERRA RESOURCES CORPORATION Sierra Resources Corporation is a venture capital company registered as a business development company under the Securities Act of 1933. Edward L. Lammerding, Chairman of the Company, is the founder of Sierra Resources Corporation and, since 1983, has served as its chairman of the board. Sierra Resources Corporation is a principal shareholder of the Company. Previously, but not within the past two fiscal years, Sierra Resources has assisted the Company in financing through loans. In August 1996, Sierra Resources received Warrants to purchase 100,000 shares of common stock at $5.00 per share for providing certain administrative and financial advice to the Company. PRINCIPAL AND SELLING STOCKHOLDERS AND WARRANTHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of September 30, 1996, and as adjusted to reflect the sale of the Common Stock offered by the Company and the Selling Stockholders, for (i) each director, (ii) all directors and officers of the Company as a group, (iii) each person known to the Company to own beneficially five percent (5%) or more of the outstanding shares of the Company's Common Stock, and (iv) all other Selling Stockholders.
Shares Beneficially Owned Shares Beneficially Owned Prior To Offering(1) After Offering(2) Name of Selling Shareholder Number Percent Shares To Be Number Percent Sold Edward L. Lammerding 629 J Street Sacramento, CA 95814 422,131(3) 24.4 40,136 381,995 15.3 Philip M. Lee 41920 Christy Street Fremont, CA 94538 410,178(4) 23.7 6,000 404,178 15.0 Thomas W. O'Neil, Jr. 455 Capitol Mall Sacramento, CA 95814 63,100(5) 3.9 14,600 48,500 2.0 Robert O. Smith 41920 Christy Street Fremont, CA 94538 154,400(6) 8.8 10,000 144,400 5.8 Claude Adkins 41920 Christy Street Fremont, CA 94538 136,500(7) 5.7 15,000 121,500 5.0 Alaric Corporation 10,500 * 5,500 5,000 * Callopy, Christine N. 2,000 * 600 1,400 * Castillo, Joaquin 4,000 * 2,000 2,000 * Davis, Devere J. & Lois M. 9,700 * 1,000 8,700 * Flores, Louis 48,700 2.9 20,000 28,700 1.2 Gong, Sherman 3,000 * 1,000 2,000 * Greenslate, Norman C. & Dolores 6,300 * 2,000 4,300 * Harris, Patricia A. 2,000 * 500 1,500 * Haug, Bruce 1,500 * 1,500 0 0 Kai, Jimmy T. 6,500 * 1,900 4,600 * Lammerding Assoceights (A & S Part) 27,766(8) 1.6 9,366 18,400 * Lammerding, Claire M. 2,000(8) * 600 1,400 * Lammerding, Jerome C. 2,000(8) * 600 1,400 * Lammerding, Joseph E. 2,000(8) * 600 1,400 * Lammerding, Mary C. 2,000(8) * 600 1,400 * Lee Family Trust 86,266 5.1 30,266 56,000 2.3 Lucas, David 8,000 * 3,000 5,000 * Marquez, Jose 72,200 5.0 10,000 62,200 2.5 Moore, Elizabeth 63,366 3.7 20,366 43,000 1.8 Muir, Sharon 2,700 * 2,700 0 0 Mulhern, Iva Trust 17,933 1.0 6,933 11,000 * Mulhern, James M. 17,933 1.0 6,933 11,000 * Old Timers, Ltd. 18,700 1.1 6,000 12,700 * Retzer, William K. & Mary J. 62,500 3.7 16,500 46,000 1.9 Rushford Hintz, Florence 750 * 750 0 0 Catherine Rushford, Daniel Lee 750 * 750 0 0 Rushford, James William 750 * 750 0 0 Rushford, Michael Dennis 750 * 750 0 0 Sierra Resources Corp. 180,412 10.6 1,800 178,612 7.3 Skinner, Marjorie V. 7,200 * 2,200 5,000 * Takehara, Kenji 6,300 * 3,000 3,300 * Takehara, Rusby F. 6,300 * 3,000 3,300 * Taricco, Richard P. & Peggy L. T. 5,700 * 800 4,900 * Officers and Directors as a group (6 persons) 904,897(9) 45.0 117,802 787,095 28.5
Footnotes to table: * Less than 1%. (1) The persons named in the table have sole voting and investment power with respect to all of the Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to the table. (2) Assuming no exercise of the Underwriters' over-allotment option. (3) Includes 27,500 shares subject to options and Warrants exercisable within 60 days. Also includes 180,412 shares and 100,000 shares subject to Warrants exercisable within 60 days owned by Sierra Resources Corporation of which Mr. Lammerding is president and chairman of the board and has dispositive and voting power. (4) Includes 27,500 shares subject to options and Warrants exercisable within 60 days. Also includes 86,266 shares held by a family trust for which Mr. Lee serves as a trustee and 180,412 shares and 100,000 shares subject to Warrants exercisable within 60 days held by Sierra Resources Corporation for which Mr. Lee serves as a director and has dispositive and voting power. (5) Includes 27,500 shares subject to options and Warrants exercisable within 60 days. (6) Includes 154,400 shares subject to options and Warrants exercisable within 60 days. (7) Includes 57,500 shares subject to options and Warrants exercisable within 60 days. (8) Represents shares to Mr. Lammerding's adult children and shares of a family corporation to which Mr. Lammerding disclaims beneficial ownership. (9) Includes a total of 409,400 shares subject to options and Warrants exercisable within 60 days. The following table sets forth certain information with respect to the beneficial ownership of the Company's Warrants as of September 30, 1996, and as adjusted to reflect the sale of the Warrants offered by the Company and the Selling Stockholders, for each director and all other selling Warrantholders. The selling Warrantholders may sell all or none of their Warrants. Warrants Beneficially Owned Warrants Beneficially Owned Prior to Offering(1) After Offering(2)
Warrants Name of Warrantholder Number Percent to be Sold Number Percent Edward L. Lammerding 629 J Street Sacramento, CA 95814 120,000(3) 60.0 20,000 100,000 0 Philip M. Lee 41920 Christy Street Fremont, CA 94538 120,000(3) 60.0 20,000 100,000 0 Thomas W. O'Neil 455 Capitol Mall Sacramento, CA 95814 20,000 10.0 20,000 0 0 Robert O. Smith 41920 Christy Street Fremont, CA 94538 20,000 10.0 20,000 0 0 Claude Adkins 41920 Christy Street Fremont, CA 94538 20,000 10.0 20,000 0 0 Sierra Resources Corp. 100,000 50.0 100,000 0 0
Footnotes to table: (1) The persons named in the table have sole voting and investment power with respect to all of the Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to the table. (2) Assuming no exercise of the Underwriters' over-allotment option. (3) Includes Warrants to acquire 100,000 shares of Common Stock owned by Sierra Resources Corporation for which Messrs. Lammerding and Lee are directors and may have dispositive and voting power. DESCRIPTION OF SECURITIES The Company's authorized capital stock consists of 10,000,000 shares of Common Stock, no par value, and 2,000,000 shares of Preferred Stock, no par value. As of June 30, 1996, there were outstanding 1,603,275 shares of Common Stock held of record by stockholders and no shares of Preferred Stock outstanding. COMMON STOCK Each stockholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Each holder of Common Stock has the right to cumulate his votes, which means each share shall have the number of votes equal to the number of directors to be elected and all of which votes may be cast for any one nominee. Subject to such preferences as may apply to any Preferred Stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon the liquidation, dissolution, or winding up of the Company, the holders of Common Stock and any participating Preferred Stock outstanding at that time would be entitled to share ratably in all assets remaining after the payment of liabilities and the payment of any liquidation preferences with respect to any outstanding Preferred Stock. Each outstanding share of Common Stock now is, and all shares of Common Stock that will be outstanding after completion of the offering will be, fully paid and non-assessable. PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by California law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences, and rights of the shares of each wholly-unissued series and any qualifications, limitations, or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders. The Board of Directors may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. Thus, the issuance of Preferred Stock may have the effect of delaying, deterring, or preventing a change in control of the Company. The Company has no current plans to issue any shares of Preferred Stock. WARRANTS The Company is offering 500,000 Warrants at a price of $.125 per Warrant entitling the holder of each Warrant to purchase, commencing during a three-year period from the effective date of this Prospectus, a share of Common Stock at an exercise price of $5.00 per share. The Company shall have the right to call each Warrant for redemption upon not less than thirty (30) days written notice for a redemption price of $.125 per Warrant provided that the closing bid price of the Common Stock has been at least $6.00 per share for thirty (30) consecutive trading days ending within three (3) trading days of the date on which notice of redemption is given. Further, the Company has issued Warrants to purchase 200,000 shares, in the aggregate, to its Directors and an affiliate of the Company. The Warrants have the same term, exercise price, and are subject to redemption, as the Warrants offered through this offering. In addition, the Underwriters shall receive Warrants ("Representatives' Warrants") which shall entitle the holder to purchase an aggregate of 100,000 shares of Common Stock and 50,000 Warrants, similar but not identical to, the Warrants. The Representatives' Warrants are not exercisable for a one year period. See "Underwriting." STOCK OPTIONS In addition to the stock options to purchase 275,500 shares of Common Stock issued pursuant to the 1996 Plan, the Company issued options in 1993 to purchase 237,500 shares of Common Stock at $1.80 per share. The options expire in 2003 and were issued to employees and directors of the Company. Of the options to purchase 237,500 shares, options to purchase 178,125 shares are immediately exercisable and the remaining options to purchase 59,375 vest in May 1997. In addition, Mr. Smith was issued an option in 1993 that expires in 2003 to acquire 104,922 shares of Common Stock at $0.50 per share of which 96,900 options are currently outstanding. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock and Warrants is American Securities Transfer, Inc., located at 1825 Lawrence Street, Suite 444, Denver, Colorado, 80202-1817, phone number (303) 298- 5370. SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of the Company's Common Stock in the public market could have the effect of depressing the prevailing market price of its Common Stock. Upon the completion of the offerings, the Company will have outstanding 2,353,275 shares of Common Stock. Of these shares, the 1,000,000 shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless purchased by "affiliates" of the Company as that term is defined in Rule 144 of the Securities Act ("Affiliates"), which shares will be subject to the resale limitations of Rule 144 adopted under the Securities Act. Of the other shares outstanding upon the completion of the offering, 1,353,275 shares will be "restricted securities" as that term is defined under Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 promulgated under the Securities Act, which rule is summarized below. As a result of the contractual restrictions described below, and the provisions of Rule 144, additional shares will be available and eligible for sale in the public market as follows: (i) 1,272,458 currently outstanding shares upon expiration of lock-up agreements 12 months after the date of this Prospectus, (ii) 1,459,900 additional shares issuable upon the exercise of stock options and Warrants, to the extent exercisable as of such date, and (iii) 80,817 currently outstanding shares from time to time thereafter pursuant to Rule 144. Certain stockholders of the Company have entered into lock-up agreements with the representative of the Underwriters providing that, with certain limited exceptions, such stockholders will not offer, sell, contract to sell, grant an option to purchase, make a short sale, or otherwise dispose of or engage in any hedging or other transaction that is designed or reasonably expected to lead to a disposition of any shares of Common Stock for a period of 12 months after the date of this Prospectus without the prior written consent of Werbel-Roth Securities, Inc. Other than (i) the 1,000,000 shares being offered hereby, (ii) 1,459,900 shares subject to stock options and Warrants, and (iii) 80,817 shares owned by holders owning 5,000 or less shares of Common Stock as of the date of this Prospectus, no shares of Common Stock of the Company will be eligible for immediate sale in the public market until the expiration of the 12 month lock-up agreement with the representative of the Underwriters. Werbel- Roth Securities, Inc., may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 23,532 shares immediately after the offering), or (ii) the average weekly trading volume of the Company's Common Stock in the NASDAQ SmallCap Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Such sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice, and availability of current public information about the Company. The Commission has recently proposed to reduce the two year holding periods under Rule 144 to one year. If enacted, such modification will have a material effect on the timing of when certain shares of Common Stock become eligible for resale. Prior to the offerings, there has been no public market for the Common Stock of the Company, and no predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional Common Stock will have on the trading price of the Common Stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could adversely affect the trading price of the Common Stock, and could impair the Company's future ability to raise capital through an offering of its equity securities. See "Description of Securities." UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their representative, Werbel-Roth Securities, Inc., have severally agreed to purchase from the Company and the Selling Stockholders the following respective numbers of shares of Common Stock and Warrants at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus: UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS Werbel-Roth Securities, Inc. Total 1,000,000 500,000 The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of Common Stock and Warrants offered hereby if any of such shares or Warrants are purchased. The Company and the Selling Stockholders have been advised by the representative of the Underwriters that the Underwriters propose to offer the shares of Common Stock and Warrants to the public at the initial public offering prices set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $______ per share and $______ per Warrant. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $______ per share and $_______ per Warrant to certain other dealers. After the initial public offering, the public offering price and other selling terms may be changed by the representative of the Underwriters. Further, the Company has agreed to reimburse the Underwriters on a non-accountable basis for their expenses in the amount of 3% of the gross proceeds from the offering. At the closing of the sale of Shares being offered hereby, the Company will sell to the Underwriters Representatives' Warrants, for nominal consideration, entitling the Underwriters to purchase an aggregate of 100,000 shares of Common Stock and 50,000 Warrants, similar but not identical to, the Warrants. The Representatives' Warrants shall be non- exercisable and non-transferable (other than a transfer to affiliates of the Underwriters or members of the selling group) for a period of twelve months following the date of this Prospectus. The Representatives' Warrants and the underlying securities shall contain the usual anti-dilution provisions and shall not be redeemable. The Representatives' Warrants will be exercisable after twelve months from the effective date of this Prospectus and for a period of four years thereafter; and if the Representatives' Warrants are not exercised during this term, they shall, by their own terms, automatically expire. The exercise price of each of the Representatives' Warrants shall be 120% of the public offering price per Share and price per Warrant. In addition, the Company has granted to the Underwriters a single demand registration right and unlimited piggy back registration rights, related to the Common Stock and Warrants underlying the Representatives' Warrants. The Underwriters may designate that the Representatives' Warrants be issued in varying amounts directly to their officers, directors, shareholders, employees, and other proper persons and not to the Underwriters; however, such designation will only be made by the Underwriters if they determine and represent to the Company that such issuance would not violate the interpretation of the Board of Governors of the NASD relating to the review of corporate financing arrangements and would not require registration of the Representatives' Warrants or underlying securities. Upon written request of the then holder(s) of a majority of the total Representatives' Warrants and the underlying securities issued upon the exercise of the Representatives' Warrants, at any time within the period commencing on the date of the definitive Prospectus and ending five years thereafter, the Company will file, not more than once, a registration statement under the Act, registering or qualifying, as the case may be, the Representatives' Warrants and/or the underlying securities. The filing shall be made within sixty (60) days of such notice, and the Company agrees to use its best efforts to cause the above filing to become effective. All expenses of such registration or qualification, including, but not limited to, legal, accounting, printing, and mailing fees, will be borne by the Company. In addition to the above, the Company understands and agrees that if, at any time during the term of the Representatives' Warrants and for a period of five years thereafter, it should file a registration statement with the SEC pursuant to the Securities Act for a public offering of securities, either for the account of the Company or for the account of any other person, the Company, at its own expense, will offer to said holder(s) the opportunity to register or qualify the Representatives' Warrants and the underlying securities for public offering. The Company shall give such holder(s) notice by registered mail at least thirty (30) days prior to filing any such registration statement with the Commission. In addition, the Company has granted to the Underwriters an over-allotment option, exercisable not later than 45 days after the date of this Prospectus, to purchase up to 150,000 additional shares of Common Stock and 75,000 Warrants at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters shall have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock and Warrants to be purchased by it shown in the above table bears to 1,000,000, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over- allotments made in connection with the sale of Common Stock and Warrants hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 1,000,000 shares are being offered. The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. Stockholder's of the Company owning more than 5,000 shares of Common Stock not being sold in the initial public offering have agreed not to offer, sell, or otherwise dispose of any of such Common Stock for a period of 12 months after the date of this Prospectus without the prior written consent of the representative of the Underwriters. See "Shares Eligible for Future Sale." The representative of the Underwriters has advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. As part of the Underwriting Agreement, the Underwriters shall have the right to designate a member of the Board of Directors, or at the Underwriters' option, to designate one individual to attend the meetings of the Company's Board of Directors for a period of five years. Further, for a period of five years, the Underwriters shall have a right of first refusal to sell the Company's securities in a public or private offering. The preceding is a brief summary of the Underwriting Agreement and is qualified in its entirety by the Underwriting Agreement itself which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Prior to this offering, there has been no public market for the Common Stock or Warrants of the Company. Consequently, the initial public offering price for the Common Stock has been determined by negotiations between the Company, the Selling Stockholders, and the representative of the Underwriters. Among the factors considered in such negotiations were the prevailing market conditions, the results of operations of the Company in recent periods, the market capitalization, the stage of development of other companies which the Company and the representative of the Underwriters believes to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development, and other factors deemed relevant. LEGAL MATTERS The validity of the shares of Common Stock and Warrants offered by the Company and Common Stock offered by the Selling Stockholders will be passed upon by Bartel Eng Linn & Schroder, Sacramento, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Atlas, Pearlman, Trop, and Borkson, P.A., Fort Lauderdale, Florida. EXPERTS The audited consolidated financial statements of the Company as of December 31, 1995, and for each of the two years in the period ended December 31, 1995, have been included in this Prospectus and Registration Statement in reliance upon the report of Hein + Associates LLP, independent certified public accountants, appearing elsewhere herein and in the Registration Statement, and upon the authority of such firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS In June 1996, the Company decided to retain Hein + Associates LLP as the Company's independent accountants and dismissed Villanueva, Purcell & Co., the Company's former accountants. The decision to change independent accountants was ratified and approved by the Company's Board of Directors in June 1996. During the relationship between the Company and Villanueva, Purcell & Co., there were no disagreements regarding any matters with respect to accounting principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountants, would have caused Villanueva, Purcell & Co. to make reference to the subject matter of the disagreement in connection with its report. The former accountants' reports for the years ended December 31, 1994 and 1993 are not a part of the financial statements of the Company included in this Prospectus. Such reports did not contain an adverse opinion or disclaimer of opinion or qualification of modifications as to uncertainty, audit scope or accounting principles. Prior to retaining Hein + Associates LLP, the Company had not consulted with Hein + Associates LLP regarding accounting principles. ADDITIONAL INFORMATION A Registration Statement on Form SB-2, including amendments thereto, relating to the shares of Common Stock and Warrants offered hereby, has been filed by the Company with the Commission under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock and Warrants offered hereby, reference is made to such Registration Statement and exhibits. A copy of the Registration Statement may be inspected by anyone without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the regional offices of the Commission located at Room 1228, 75 Park Place, New York 10007, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the Registration Statement and the exhibits thereto may be obtained from those offices upon the payment of certain fees prescribed by the Commission. In addition, the Commission maintains a Web site (http://www.sec.gov) that contains reports proxy and information statements and other information regarding issuers that file electronically with the Commission. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE INDEPENDENT AUDITOR'S REPORT F-2 CONSOLIDATED BALANCE SHEETS - December 31, 1995 and June 30, 1996 (unaudited) F-3 CONSOLIDATED STATEMENTS OF INCOME - For the Years Ended December 31, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 (unaudited) F-4 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - For the Years Ended December 31, 1994 and December 31, 1995 and for the six months ended June 30, 1996 (unaudited) F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 (unaudited) F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 INDEPENDENT AUDITOR'S REPORT The Stockholders and Board of Directors Digital Power Corporation and Subsidiary Fremont, California We have audited the accompanying consolidated balance sheet of Digital Power Corporation and Subsidiary as of December 31, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 1994 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digital Power Corporation and Subsidiary as of December 31, 1995, and the results of their operations and their cash flows for the years ended December 31, 1994 and 1995 in conformity with generally accepted accounting principles. HEIN + ASSOCIATES LLP Certified Public Accountants Orange, California August 31, 1996 DIGITAL POWER CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, June 30, 1995 1996 (UNAUDITED) ASSETS CURRENT ASSETS: Cash $ 202,917 $ 84,614 Temporary investment 100,000 107,173 Accounts receivable - trade, net of allowance for doubtful accounts of $120,000 and $120,000 (unaudited) 1,616,497 2,249,457 Other receivables 57,858 52,262 Inventory, net 1,557,226 2,142,454 Prepaid expenses and deposits 27,792 62,480 Deferred income taxes 240,856 139,000 Total current assets 3,803,146 4,837,440 PROPERTY AND EQUIPMENT, net 357,680 546,013 DEPOSITS 18,364 30,643 DEFERRED OFFERING COSTS - 29,181 DEFERRED INCOME TAXES 139,000 - TOTAL ASSETS $ 4,318,190 $ 5,443,277 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 46,014 $ 143,097 Current portion of capital lease obligations 11,925 12,474 Debenture payable 5,000 - Accounts payable 1,131,586 1,486,381 Accrued liabilities 397,263 769,466 Total current liabilities 1,591,788 2,411,418 LONG-TERM DEBT, less current portion 1,008,131 1,471,361 OBLIGATIONS UNDER CAPITAL LEASE, less current 31,690 26,739 portion Total liabilities 2,631,609 3,909,518 COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 9) STOCKHOLDERS' EQUITY: Series A cumulative redeemable convertible preferred stock, no par value, 1,000,000 shares authorized, 415,302 and 0 (unaudited) shares issued and 747,569 - outstanding (Aggregate liquidation preference of $1,100,000) Common stock, no par value, 5,000,000 shares authorized, 963,722 and 1,603,275 (unaudited) shares issued and outstanding 4,398,322 5,539,115 Accumulated deficit (3,459,310) (3,505,356) Unearned employee stock ownership plan shares - (500,000) Total stockholders' equity 1,686,581 1,533,759 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,318,190 $ 5,443,277
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. DIGITAL POWER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1994 1995 1995 1996 (unaudited) (unaudited) REVENUES $ 6,249,333 $ 10,037,502 $ 4,947,952 $ 6,553,376 COST OF GOODS SOLD 4,663,124 7,494,427 3,885,875 4,975,557 Gross Margin 1,586,209 2,543,075 1,062,077 1,577,819 OPERATING EXPENSES: Engineering and product development 408,966 481,475 243,048 314,659 Marketing and selling 500,338 452,654 234,066 240,621 General and 418,970 581,174 252,035 332,927 administrative Total operating 1,328,274 1,515,303 729,149 888,207 expenses INCOME FROM OPERATIONS 257,935 1,027,772 332,928 689,612 OTHER INCOME (EXPENSE): Interest income 523 3,116 2,967 7,339 Interest expense (103,032) (119,146) (58,533) (59,537) Translation loss (10,450) (85,258) ( 6,851) (206) Other income (112,959) (201,288) (62,417) (52,404) (expense) INCOME BEFORE INCOME TAXES 144,976 826,484 270,511 637,208 PROVISION (BENEFIT) FOR INCOME TAXES 23,253 (277,400) 28,000 294,000 NET INCOME $ 121,723 $1,103,884 $ 242,511 $ 343,208 NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 30,357 $1,012,518 $ 196,828 $ 305,139 NET INCOME PER COMMON SHARE: Primary $ 0.02 $ 0.80 $ 0.16 $ 0.24 Fully diluted $ 0.02 $ 0.66 $ 0.15 $ 0.20 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,226,208 1,258,858 1,242,395 1,276,778
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. DIGITAL POWER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNEARNED EMPLOYEE STOCK TOTAL PREFERRED STOCK COMMON STOCK ACCUMULATED OWNERSHIP STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT DEFICIT PLAN SHARES EQUITY BALANCES, January 1, 1994 415,302 $ 747,569 963,722 $ 4,398,322 $ (4,684,917) $ - $ 460,974 Net income - - - - 121,723 - 121,723 BALANCES, December 31, 1994 415,302 747,569 963,722 4,398,322 (4,563,194) - 582,697 Net income - - - - 1,103,884 - 1,103,884 BALANCES, December 31, 1995 415,302 747,569 963,722 4,398,322 (3,459,310) - 1,686,581 Net income (unaudited) - - - - 343,208 - 343,208 Dividend on preferred stock - - 216,229 389,213 (389,254) - (41) (unaudited) Conversion of preferred stock (415,302) (747,569) 415,302 747,569 - - - (unaudited) Exercise of stock options - - 8,022 4,011 - - 4,011 (unaudited) ESOP loan and share purchases - - - - - (500,000) (500,000) (unaudited) BALANCES, June 30, 1996 - - 1,603,275 $ 5,539,115 $ (3,505,356) $ (500,000) $ 1,533,759 (unaudited)
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. DIGITAL POWER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1994 1995 1995 1996 (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 121,723 $ 1,103,884 $ 242,511 $ 343,208 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 60,334 70,140 5,077 44,238 Deferred income taxes - (374,689) - 240,856 Warranty expense 15,000 30,000 - 89,125 Inventory reserve 140,000 195,000 260,000 240,496 Bad debt expense 17,521 55,000 15,000 - Interest income - - - (7,173) Foreign currency translation adjustment 10,450 85,258 6,851 206 Changes in operating assets and liabilities: Accounts receivable (622,302) (465,047) (340,388) (632,960) Other receivables (9,895) (39,855) (101,036) 5,596 Inventory (475,396) (594,983) (242,599) (825,724) Prepaid expenses 6,620 (17,879) (6,987) (34,688) Other assets - - (1,316) (12,279) Accounts payable 344,826 266,721 241,826 354,795 Other accrued liabilities 6,452 5,485 12,562 283,078 Net adjustments (506,390) (784,849) (151,010) (254,434) Net cash provided by (used in) operating activities (384,667) 319,035 91,501 88,774 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (71,682) (254,530) (52,301) (232,571) Purchase of temporary investment (100,000) - - - Net cash used in investing activities (171,682) (254,530) (52,301) (232,571) CASH FLOWS FROM FINANCING ACTIVITIES: Deferred offering costs - - - (29,181) Proceeds from exercise of stock options - - - 4,011 Payments of preferred stock dividend - - - (41) Proceeds from notes payable 1,762,768 120,000 - 50,000 Principal payments on notes payable (1,620,750) (1,276) (1,276) (17,552) Principal payments on capital lease obligations (4,478) (9,054) (4,035) (4,402) Payment of debenture - - - (5,000) Proceeds from line of credit 4,039,000 9,422,788 4,509,788 5,795,000 Principal payments on line of credit (3,801,750) (9,344,924) (4,492,310) (5,767,135) Net cash provided by financing 374,790 187,534 12,167 25,700 activities EFFECT OF EXCHANGE RATE CHANGES ON CASH (10,450) (85,258) (6,851) (206) NET INCREASE (DECREASE) IN CASH (192,009) 166,781 44,516 (118,303) CASH AND CASH EQUIVALENTS, beginning of period 228,145 36,136 36,136 202,917 CASH AND CASH EQUIVALENTS, end of period $ 36,136 $ 202,917 $ 80,652 $ 84,614 SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Interest $ 105,634 $ 121,931 $ 57,880 $ 58,383 Income taxes $ 31,498 $ 55,803 $ 10,000 $ 69,500 Non-cash investing and financing transactions: Property and equipment acquired with capital lease $ 46,368 $ 10,779 $ 2,814 $ - Conversion of preferred stock to common stock $ - $ - $ - $ 747,569 Preferred stock dividend of common stock $ - $ - $ - $ 389,213 Notes payable for unearned employee stock ownership plan shares $ - $ - $ - $ 500,000
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. 1. NATURE OF OPERATIONS: Digital Power Corporation ("DPC"), and its wholly owned subsidiary Poder Digital, S.A. de C.V. ("PD") which is located in Guadalajara, Mexico, (collectively referred to as the "Company") are engaged in the design, manufacture and sale of switching power supplies. 2. SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. STATEMENT OF CASH FLOWS - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. INVENTORY - Inventory is stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation of equipment and furniture is calculated using the straight-line method over the estimated useful lives (ranging from 5 to 10 years) of the respective assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. The cost of normal maintenance and repairs is charged to operating expense as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of fixed assets sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any gains or losses are reflected in current operations. DEFERRED OFFERING COSTS - Direct costs incurred by the Company in connection with its proposed initial public offering of common stock have been deferred, and will be charged against the proceeds of the offering when completed. Should the offering not be completed such costs will be expensed. INCOME TAXES - The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. REVENUE RECOGNITION - Sales revenue is recognized when the products are shipped to customers, including distributors. Customers receive a one or two year product warranty and sales to distributors are subject to a right of return. The Company provides a reserve for estimated warranty costs and a reserve for estimated product returns. FOREIGN CURRENCY TRANSLATION - Gains and losses from the effects of exchange rate fluctuations on transactions denominated in foreign currencies are included in results of operations. Assets and liabilities of the Company's foreign subsidiary are translated into U.S. dollars at period-end exchange rates, and their revenues and expenses are translated at average exchange rates for the period. Translation adjustments are accumulated in a separate component of stockholders' equity until such time as the foreign subsidiary is sold or substantially liquidated. Deferred taxes have not been allocated to the cumulative foreign currency translation adjustment included in stockholders' equity because there is no intent to repatriate earnings of the foreign subsidiary. NET INCOME PER COMMON SHARE - Net income per common share is calculated upon net income applicable to common shareholders, which represents net income adjusted for cumulative preferred dividends applicable to the period. The weighted average common shares is based upon actual common stock and common stock equivalents outstanding. Additionally, common stock equivalents issued during the prior year at less than the $4.00 proposed initial public offering price have been included for all periods presented in the computation using the "treasury stock method" and the anticipated public offering price. Fully diluted net income per common share is computed using the "if converted" method for preferred stock. ACCOUNTING ESTIMATES - The preparation of financial statements in conformity generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. The actual results could differ from those estimates. The Company's financial statements are based upon a number of significant estimates, including the allowance for doubtful accounts, technological obsolescence of inventories, the estimated useful lives selected for property and equipment, realizability of deferred tax assets, allowance for sales returns, and warranty reserve. Due to the uncertainties inherent in the estimation process, it is at least reasonably possible that these estimates will be further revised in the near term and such revisions could be material. IMPAIRMENT OF LONG-LIVED ASSETS - Effective January 1, 1996, the Company adopted Financial Accounting Standards Board Statement 121 (FAS 121) entitled "Accounting for Impairment of Long-Lived Assets." In the event that facts and circumstances indicate that the cost of assets or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. Adoption of FAS 121 had no effect on the unaudited June 30, 1996 financial statements. STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (FAS 123) which the Company adopted January 1, 1996. FAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on fair value. Companies that do not adopt the fair value accounting rules must disclose the impact of adopting the new method in the notes to the financial statements. Transactions in equity instruments with non-employees for goods or services must be accounted for on the fair value method. The Company has elected not to adopt the fair value accounting prescribed by FAS 123 for employees, but is subject to the disclosure requirements prescribed by FAS 123. ACCRUED WARRANTY COSTS - Estimated warranty costs are provided for at the time of sale of the warranted product. The Company generally extends warranty coverage for one year from the time of sale. CONCENTRATIONS OF CREDIT RISK - Credit Risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or groups counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly effected by changes in economic or other conditions described below. In accordance with FASB Statement No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK, the credit risk amounts shown do not take into account the value of any collateral or security. FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for financial instruments under SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, are determined at discrete points in time based on relevant market information. These estimated involve uncertainties and cannot be determined with precision. The estimated fair values of the Company's financial instruments, which includes all cash, accounts receivables, accounts payable, long- term debt, and other debt, approximates the carrying value in the consolidated financial statements at December 31, 1995. INTERIM FINANCIAL INFORMATION - The June 30, 1995 and 1996 financial statements have been prepared by the Company without audit. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the Company's financial position as of June 30, 1996, and the results of their operations and cash flows for the six month periods ended June 30, 1995 and 1996. The results of operations for the six month periods ended June 30, 1995 and 1996 are not necessarily indicative of those that will be obtained for the entire fiscal year. DIGITAL POWER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED) 3. INVENTORY: Inventory consists of the following:
December 31, 1995 JUNE 30, 1996 Raw Materials $ 110,318 $ 114,260 Work-in-process 1,718,952 2,573,864 Finished goods 127,956 94,826 Allowance for obsolescence (400,000) (640,496) $ 1,557,226 $ 2,142,454
4. PROPERTY AND EQUIPMENT: Property and equipment consists of the following:
December 31, 1995 JUNE 30, 1996 Machinery and equipment $ 1,004,955 $ 1,182,785 Office equipment and furniture 272,614 314,663 Leasehold improvements 23,409 11,177 1,300,978 1,508,625 Accumulated Depreciation (943,298) (962,612) $ 357,680 $ 546,013
5. ACCRUED LIABILITIES: Accrued liabilities consists of the following:
December 31, 1995 JUNE 30, 1996 Accrued payroll and benefits $ 87,712 $ 292,875 Accrued commissions and royalties 58,665 68,000 Accrued warranty expense 60,000 149,125 Accrued income taxes 46,000 50,500 Other 144,886 208,966 $ 397,263 $ 769,466
6. LONG-TERM DEBT: Long-term debt consists of the following:
December 31, 1995 JUNE 30, 1996 $1,500,000 line of credit bearing interest at the bank's prime rate plus one percent (total of 9.5% at December 31, 1995), maturing October 15, 1997, collateralized by substantially all assets of DPC $ 924,145 $ 952,010 Unsecured note payable, due on demand, interest at 12% 10,000 10,000 Note payable, due in monthly installments of $3,881 including interest at 10%, due December 1998, collateralized by substantially all assets of DPC 120,000 152,448 Employee stock ownership plan loan See Note 11 - 500,000 1,054,145 1,614,458 Less current portion (46,014) (143,097) $ 1,008,131 $ 1,471,361
Aggregate maturities of long-term debt are due as follows: YEARS ENDING DECEMBER 31, AMOUNT 1996 $ 46,014 1997 964,020 1998 44,111 $ 1,054,145 7. CAPITAL LEASE OBLIGATIONS: The Company leases certain equipment under agreements classified as capital leases. Equipment under these leases has a cost of $61,680 and accumulated amortization of $15,420 at December 31, 1995. Following is a schedule of future minimum lease payments under capital leases at December 31, 1995: YEARS ENDING DECEMBER 31, AMOUNT 1996 $ 16,787 1997 16,696 1998 14,689 1999 5,375 Total future minimum lease payments 53,547 Less, amount representing interest (9,932) Present value of net minimum lease payments 43,615 Less current portion (11,925) $ 31,690 8. STOCKHOLDERS' EQUITY: PREFERRED STOCK The preferred stock has one series authorized, Series A cumulative redeemable convertible preferred stock ("Series A"), and an additional 500,000 shares of preferred stock has been authorized, but the rights, preferences, privileges and restrictions on these shares has not been determined. DPC's Board of Directors is authorized to create new series of preferred stock and fix the number of shares as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred stock. The holders of Series A are entitled to one vote for each share of common stock into which the Series A can be converted, and vote together with the common shareholders as a single class. Dividends on Series A are at an annual rate of $.22 per share and are cumulative from the date of issuance, and shall be paid prior to dividends on common stock. The Company had never declared a dividend through December 31, 1995, and the accumulated dividends on Series A were approximately $483,000 at December 31, 1995. Shares of Series A are convertible into common stock at any time at the option of the holder at a rate of one share of common stock for each share of Series A. The conversion rate is subject to adjustment under certain circumstances. Additionally, conversion is automatic on the effective date of a firm commitment for an underwritten public offering of $1,000,000 or more. The Company may redeem the Series A in whole or in part, by paying $1.80 per share plus any dividends in arrears. Partial redemptions shall be pro-rata among all Series A holders. In the event of a liquidation, dissolution, or winding up of the Company, Series A holders are entitled to receive a liquidation preference of $1.80 per share of Series A plus all dividends in arrears. The liquidation preference on the Series A was approximately $1,100,000 at December 31, 1995. Additionally, see Note 13. STOCK OPTIONS The Company has issued non-qualified options covering 104,922 shares exercisable at $.50 per share. Upon issuance, the Company recorded compensation expense for the difference between the exercise price and the fair market value of the underlying common stock of $1.80 per share. Such options expire in 2003. Subsequent to December 31, 1995, 8,022 of such option were exercised. In May 1993 the Company issued options to purchase 237,500 shares of its common stock at $1.80 per share. Such options are subject to a four year vesting plan. The exercise price of $1.80 per share approximated the fair market value at the date of grant. In May 1996, the Company adopted the 1996 Stock Option Plan covering 513,000 shares. Under the plan, the Company can issue either incentive or non-statutory stock options. Immediately thereafter, the Company issued options to purchase 275,500 shares of its common stock at $1.80 per share. Such options become 100% vested two years after issuance. The exercise price was based upon a letter from its investment banker as to the fair market value of such options based upon their terms, conditions and restrictions. The following table sets forth activity for all options: EXERCISE PRICE NUMBER PER SHARE BALANCES January 1, 1994, December 31, 1994 and December 31, 1995 342,422 $ .50 - $ 1.80 ISSUED 275,500 $ 1.80 EXERCISED (8,022) $ .50 BALANCE, JUNE 30, 1996 609,900 $ .50 - $ 1.80 AT DECEMBER 31, 1995 AND JUNE 30, 1996 OPTIONS TO PURCHASE 223,672 AND 275,025 SHARES RESPECTIVELY AT PRICES RANGING FROM $.50 TO $1.80 PER SHARE WERE EXERCISABLE. 9. COMMITMENTS: The Company leases office space in California, and a manufacturing facility in Guadalajara, Mexico under the terms of operating leases. The total future minimum lease payments are as follows: YEARS ENDING DECEMBER 31, AMOUNT 1996 $ 118,423 1997 105,640 1998 108,880 1999 109,174 2000 112,579 Thereafter 10,378 $ 565,074 Lease payments on the manufacturing facility in Mexico are to be made in Mexican Pesos. The above schedule was prepared using the conversion rate in effect at December 31, 1995. Changes in the conversion rate will have an impact on the Company's required minimum payments and its operating results. Additionally, lease payments on the facility in Mexico will increase on an annual basis in proportion to the increase in the minimum wage in the Guadalajara, Mexico area. Rent expense was $116,337 and $116,699 for 1994 and 1995, respectively. The Company has a royalty agreement with a third party on various products, and any derivatives from the base design of these products. Commitments under this agreement are as follows: 5% of first $20,000,000 in sales of these products 4% of next $25,000,000 in sales of these products 3% of next $33,333,333 in sales of these products 2% of next $50,000,000 in sales of these products 1% of next $100,000,000 in sales of these products As of December 31, 1995, the Company had sold approximately $13,630,000 of product subject to this agreement. If the Company sells an additional $6,370,000 of these products after December 31, 1995, the Company is required to grant 100,000 shares of common stock to the third party in the royalty agreement. Due to changing market demand, the Company's management currently expects to replace these products with products it is in the process of designing, and Company's management believes the Company will therefore not have to grant the 100,000 shares of common stock. The Company sold approximately $1,448,000 and $1,453,000 of these products in 1994 and 1995, respectively, and had royalty expenses of approximately $72,400 and $72,600 for 1994 and 1995, respectively. The Company has an employment contract with its President/CEO which terminates on December 31, 1999. Under the terms of the employment contract, he shall serve as president and chief executive officer of the Company and his salary shall be $150,000 per annum effective January 1, 1997, increasing in an amount to be determined by the employee and the Board such that he shall receive $200,000 per annum by January 1, 1999. His current salary for 1996 is $110,000. In addition, pursuant to the contract, he shall have the right to receive on the first day of each January during the term of his contract options to acquire 100,000 shares of Common Stock at the market value as of such date. Finally, pursuant to the employment contract, in the event there is a change in control, the employee shall be granted a five year consulting contract at $200,000 per year. 10. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER RISKS AND UNCERTAINTIES: Sales to unaffiliated customers which represent more than 10% of the Company's net sales for 1994 and 1995 were as follows (both customers are distributors): CUSTOMER 1994 1995 A 16% 27% B - % 10% The Company operates primarily in one industry segment: the manufacture and sale of switching power supplies. Additionally, most of the Company's sales are to customers located in California. Financial instruments that subject the Company to credit risk consist primarily of accounts receivable. The Company frequently sells large quantities of inventory to its customers. At December 31, 1995, approximately $1,053,000 or 65% of the Company's net accounts receivable were due from five customers. As of December 31, 1995, the Company maintained cash in a bank that was approximately $352,000 in excess of the federally insured limit. 11. EMPLOYEE BENEFIT PLANS: The Company has a 401(k) profit sharing plan (the "Plan") covering substantially all employees of DPC. Eligible employees may make voluntary contributions to the Plan, which are matched by the Company at a rate of $.25 for each $1.00 contributed, up to a maximum of six percent of eligible compensation. The Company can also make discretionary contributions. The Company made matching contributions to the Plan of $5,593 and $9,594 for 1994 and 1995, respectively. The Board of Directors of DPC elected not to make a discretionary contribution to the Plan for 1994 or 1995. The Company also has an employee stock ownership plan (the "ESOP") covering substantially all employees of DPC. The Company can make discretionary contributions of cash or company stock (as defined in the ESOP plan document) up to deductible limits prescribed by the Internal Revenue Code. The Board of Directors of DPC elected to make no contributions to the ESOP for 1994 or 1995. Effective June 13, 1996, the ESOP obtained a $500,000 loan guaranteed by the Company for the purpose of acquiring common stock of Company from existing stockholders. The loan bears interest at 10.5% per annum requires monthly payments of principle and interest of $10,784 through July 2001. Immediately upon the funding of the loan, the ESOP purchased approximately 154,000 shares of the Company's common stock from existing shareholders. In accordance with the AICPA Statements of Position 93-6 entitled "Employers Accounting for Employee Stock Ownership Plans", the Company has recorded the $500,000 loan as a debt on its books with a corresponding charge to stockholder's equity. 12. INCOME TAXES: Income tax expense is comprised of the following: FOR YEARS ENDED DECEMBER 31, 1994 1995 Federal $ - $ (351,150) State 23,253 73,750 Foreign - - $ 23,253 $ (277,400) The components of the net deferred tax asset at December 31, 1995 are as follows: Net book value of fixed assets $ (3,695) Net operating loss carryforward 383,551 Total deferred tax asset $ 379,856 As of December 31, 1995, DPC has net operating loss carryforwards for federal income tax purposes of approximately $1,044,000 which begin to expire in 2002. As of December 31, 1995, PD has a net operating loss carryforward of approximately $58,000 which expires in 1999. Total income tax expense differed from the amounts computed by applying the U.S. federal statutory tax rates to pre-tax income as follows: FOR YEARS ENDED DECEMBER 31, 1994 1995 Total expense computed by applying $ 49,292 $ 281,005 the U.S. statutory rate State income taxes 23,253 73,750 Effect of income taxable in 27,197 (14,857) Mexico Utilization of temporary (76,489) (261,135) difference Effect of valuation allowance - (356,163) $ 23,253 $ (277,400) 13. SUBSEQUENT EVENTS: On May 31, 1996, DPC signed a letter of intent for a proposed public offering of 1,000,000 shares of DPC common stock at $4.00 per share. Of the 1,000,000 shares, 750,000 are being sold by the Company and 250,000 shares are being sold by certain existing shareholders. On May 31, 1996, all of the 415,302 issued and outstanding shares of Series A preferred stock were converted into 415,302 shares of common stock. Additionally, the Company declared a dividend on the Series A preferred stock for all unpaid dividends through the conversion date and issued an aggregate of 216,229 shares of common stock to holders of Series A preferred stock effective immediately prior to such conversion. On August 19, 1996, the shareholders of the Company approved an amendment to the Company's articles of incorporation increasing the number of authorized shares of common stock from 5,000,000 shares to 10,000,000 shares and preferred stock from 1,000,000 to 2,000,000. In addition, on August 19, 1996, the Company issued 200,000 Common Stock purchase warrants to certain Company directors and affiliates. Each warrant entitles the holder to purchase one share of common stock at $5.00. TABLE OF CONTENTS Prospectus Summary ............................................3 The Company ...................................................6 Risk Factors...................................................7 Use of Proceeds...............................................14 Dividend Policy...............................................14 Capitalization................................................15 Dilution......................................................16 Selected Consolidated Financial Data .........................17 Management's Discussion and Analysis of Financial Condition and Results of Operations..........................18 Business......................................................23 Management....................................................32 Certain Transactions..........................................36 Principal and Selling Stockholders and Warrantholders.........36 Description of Securities.....................................39 Shares Eligible For Future Sale...............................41 Underwriting..................................................42 Legal Matters.................................................44 Experts.......................................................44 Change in Accountants.........................................44 Additional Information........................................44 Index To Consolidated Financial Statements...................F-1 UNTIL ___________, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. Digital Power Corporation 1,000,000 shares of Common Stock No Par Value 700,000 Redeemable Common Stock Purchase Warrants Werbel-Roth Securities, Inc. ________________, 1996 INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers Sections 204 and 317 of the California Corporations Code ("Corporations Code") permit indemnification of directors, officers, and employees of corporations under certain conditions subject to certain limitations. Article IV of the Company's Amended and Restated Articles of Incorporation ("Articles") provides that the liability of the directors for monetary damages shall be eliminated to the fullest extent permissible under California Law. Article V of the Company's Articles states that the Company may provide indemnification of its agents, including its officers and directors, for breach of duty to the Company in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits set forth in Section 204 of the Corporations Code. Article VI of the Bylaws provides that the Company shall, to the maximum extent and in the manner permitted in the Corporations Code, indemnify each of its agents, including its officers and directors, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the Company. Pursuant to Section 317 of the Corporations Code, the Company is empowered to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company to procure a judgment in its favor) by reason of the fact that such person is or was an officer, director, employee, or other agent of the Company or its subsidiaries, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with such proceeding, if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Company and, in the case of a criminal proceeding, has no reasonable cause to believe the conduct of such person was unlawful. In addition, the Company may indemnify, subject to certain exceptions, any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was an officer, director, employee, or other agent of the Company or its subsidiaries, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith and in a manner such person believed to be in the best interest of the Company and its shareholders. The Company may advance expenses incurred in defending any proceeding prior to final disposition upon receipt of an undertaking by the agent to repay that amount if it shall be determined that the agent is not entitled to indemnification as authorized by Section 317. In addition, the Company is permitted to indemnify its agents in excess of Section 317. Item 25. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses payable by the Company in connection with the issuance and distribution of the securities being registered hereunder. No expenses shall be borne by the Selling Stockholders except for commissions and expenses related to the sale of their shares. All of the amounts shown are estimates, except for the SEC and NASD registration fees. SEC registration fee $2,597.54 NASD registration fee $1,357.19 Printing and engraving expenses * $________ Accounting fees and expenses * $________ Legal fees and expenses * $________ Transfer agent and registrar fees * $________ Fees and expenses for qualification under state securities laws $________ Miscellaneous * $________ TOTAL $________ *estimated Item 26. Recent Sales of Unregistered Securities. (a) On May 21, 1996, the board approved the issuance of stock options to acquire 275,500 shares of Common Stock at $1.80 per share to employees and directors pursuant to a stock option plan. The stock option plan was approved by the shareholders on August 19, 1996. The Company believes that the issuance of the stock options is exempt from registration pursuant to section 4(2) of the Securities Act and Regulation D promulgated thereunder. (b) On May 31, 1996, the Company sold 8,022 shares of Common Stock at $.50 per share to one employee upon the exercise of an outstanding option. The Company believes that the issuance of Common Stock is exempt from registration pursuant to section 4(2) of the Securities Act. (c) On August 19, 1996, the board granted Warrants to acquire 200,000 shares of Common Stock at $5.00 per share to the directors and an affiliate of the Company. The Company believes that the issuance of the Warrants is exempt from registration pursuant to section 4(2) of the Securities Act. Item 27. Exhibits. 1.1 Underwriting Agreement between Digital Power Corporation and Werbel Roth Securities, Inc. 3.1 Amended and Restated Articles of Incorporation for Digital Power Corporation 3.2 Amendment to Articles of Incorporation 3.3 Bylaws of Digital Power Corporation 4.1 Specimen Stock Certificate* 4.2 Specimen Warrant 4.3 Representatives' Warrant 5.1 Opinion of Bartel Eng Linn & Schroder re Legality* 10.1 Revolving Credit Facility with San Jose National Bank 10.2 KDK Contract 10.3 Agreement with Fortron/Source Corp. 10.4 Employment Agreement with Robert O. Smith* 10.5 1996 Stock Option Plan 16.1 Letter on change of certifying accountant 21.1 Subsidiary of the small business issuer 23.1 Consent of Hein + Associates LLP is contained on page II-6 23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5 23.3 Consent of Micro-Tech Consultants 24.1 Power of attorney is contained on signature page *To be filed by Amendment Item 28. Undertakings The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer, or controlling person of the Company in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Company undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Digital Power Corporation and Subsidiary: We hereby consent to the use in this Registration Statement on Form SB-2 of our report dated August 31, 1996, relating to the consolidated financial statements of Digital Power Corporation and Subsidiary. We also consent to the reference to our firm under the caption "Experts" in the Prospectus. HEIN + ASSOCIATES LLP Certified Public Accountants Orange, California October 15, 1996 SIGNATURE In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, California on October 10, 1996. DIGITAL POWER CORPORATION, A CALIFORNIA CORPORATION /S/ ROBERT O. SMITH Robert O. Smith, Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert O. Smith or Edward L. Lammerding as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post- effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated. SIGNATURES DATE /S/ ROBERT O. SMITH October 10, 1996 Robert O. Smith, Chief Executive Officer (Principal Executive Officer) /S/ PHILIP G. SWANY October 10, 1996 Philip G. Swany, Chief Financial Officer (Principal Accounting and Financial Officer) /S/ EDWARD L. LAMMERDING October 10, 1996 Edward L. Lammerding, Chairman of the Board /S/ THOMAS W. O'NEIL October 10, 1996 Thomas W. O'Neil, Jr., Director /S/ PHILIP M. LEE October 10, 1996 Philip M. Lee, Director /S/ CLAUDE ADKINS October 10, 1996 Claude Adkins, Director DIGITAL POWER CORPORATION REGISTRATION STATEMENT ON FORM SB-2 EXHIBITS DATED OCTOBER 16, 1996

                 1,000,000 SHARES OF COMMON STOCK
          500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

                     DIGITAL POWER CORPORATION

                      UNDERWRITING AGREEMENT

                                              Boca Raton, Florida
                                                 __________, 1996

WERBEL-ROTH SECURITIES, INC.
As Representative of the
The Underwriters listed on Schedule A hereto
150 East Palmetto Park Road
Suite 380
Boca Raton, Florida 33432

Ladies and Gentlemen:

     Digital  Power  Corporation., a California corporation (the "Company")
confirms its agreement  with  Werbel-Roth  Securities, Inc. ("Werbel-Roth")
and each of the underwriters named in Schedule  A hereto (collectively, the
"Underwriters," which term shall also include any  underwriter  substituted
as  hereinafter provided in Section 12), for whom Werbel-Roth is acting  as
representative (in such capacity, Werbel-Roth shall hereinafter be referred
to as  "you"  or  the  "Representative"),  with  respect to the sale by the
Company  and  certain  selling  securityholders  of the  Company  named  in
Schedule  B herein, ("Selling Securityholders") and  the  purchase  by  the
Underwriters,  acting  severally  and  not  jointly,  of  an  aggregate  of
1,000,000  shares  of  Common Stock, no par value per share, of the Company
from the Company and the  Selling Securityholder's shares, of which 750,000
shares shall be offered by  the Company and 250,000 shall be offered by the
Selling  Securityholders,   (collectively   the   "Shares")   and   500,000
Redeemable  Common  Stock  Purchase Warrants, each of which, upon exercise,
entitles the holder thereof  to  purchase  one share of Common Stock during
the three years following the date hereof at  a  price  of  $5.00 per share
("Warrants"),  from  the  Company, in the respective amounts.  The  Company
shall have the right to call each Warrant for redemption upon not less than
thirty (30) days written notice for a redemption price of $.125 per Warrant
provided that the closing bid  price  of the Common Stock has been at least
$6.00 per share for thirty (30) consecutive  days  ending  within three (3)
trading  says  of  the  date  on which notice of redemption is given.   The
Shares and Warrants are hereinafter referred to as the "Securities."

     Upon your request, as provided  in Section 2(b) of this Agreement, the
Company  shall  also  sell to the Underwriters  acting  severally  and  not
jointly, up to an aggregate  of 150,000 shares of Common Stock (the "Option
Shares") and 75,000 Warrants (the  "Option  Warrants")  for  the purpose of
covering  over-allotments, if any.  Such Option Shares and Option  Warrants
are hereinafter collectively referred to as the "Option Securities."

     The Company  also  proposes  to  issue  and  sell to you warrants (the
"Representative's  Warrants")  pursuant  to  the  Representative's  Warrant
Agreement (the "Representative's Warrant Agreement") for the purchase of an
additional  100,000  shares of Common Stock (the "Underlying  Shares")  and
50,000 warrants (the "Underlying  Warrants"), similar but not identical to,
the Warrants.  The underlying shares,  underlying warrants and Common Stock
underlying  the  Warrants issuable upon exercise  of  the  Representative's
Warrants are hereinafter  referred to as the "Representative's Securities."
The Securities, the Option  Securities,  the  Representative's Warrants and
the   Representative's  Securities  are  more  fully   described   in   the
Registration Statement and the Prospectus referred to below.

     1.   REPRESENTATIONS  AND  WARRANTIES  OF  THE COMPANY AND THE SELLING
SECURITYHOLDERS.   The  Company and the Selling Securityholders  represents
and warrants to, and agrees  with,  each of the Underwriters as of the date
hereof, and as of the Closing Date (hereinafter  defined)  and  the  Option
Closing Date (hereinafter defined), if any, as follows:

          (a)  The  Company has prepared and filed with the Securities  and
Exchange Commission (the  "Commission")  a  registration  statement, and an
amendment or amendments thereto, on Form SB-2 (No. ________), including any
related   preliminary  prospectus  ("Preliminary  Prospectus"),   for   the
registration of the Securities, the Option Securities, the Representative's
Warrants and  the  Representative's  Securities  (collectively, hereinafter
referred  to as the "Securities"), under the Securities  Act  of  1933,  as
amended  (the   "Act"),  which  registration  statement  and  amendment  or
amendments have been  prepared  by  the  Company  in  conformity  with  the
requirements  of the Act, and the rules and regulations (the "Regulations")
of the Commission  under  the Act. The Company will promptly file a further
amendment to said registration  statement  in the form heretofore delivered
to the Underwriters and will not file any other  amendment thereto to which
the Underwriters shall have objected in writing after having been furnished
with  a  copy thereof.  Except as the context may otherwise  require,  such
registration statement, as amended, on file with the Commission at the time
the registration  statement  becomes  effective  (including the prospectus,
financial statements, schedules, exhibits and all  other documents filed as
a part thereof or incorporated therein (including, but not limited to those
documents  or  information  incorporated  by  reference  therein)  and  all
information  deemed  to  be  a  part  thereof  as of such time pursuant  to
paragraph (b) of Rule 430(A) of the Rules and Regulations),  is hereinafter
called the "Registration Statement", and the form of prospectus in the form
first filed with the Commission pursuant to Rule 424(b) of the Regulations,
is  hereinafter  called  the "Prospectus." For purposes hereof, "Rules  and
Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities  Exchange  Act  of  1934,  as amended (the
"Exchange Act"), as applicable.

          (b)  Neither  the  Commission nor any state regulatory  authority
has issued any order preventing  or  suspending  the use of any Preliminary
Prospectus, the Registration Statement or Prospectus  or  any  part  of any
thereof and no proceedings for a stop order suspending the effectiveness of
the  Registration  Statement  or  any of the Company's securities have been
instituted  or  are  pending  or  threatened.    Each  of  the  Preliminary
Prospectus, the Registration Statement and Prospectus at the time of filing
thereof  conformed  with  the requirements of the Act  and  the  Rules  and
Regulations,  and  none of the  Preliminary  Prospectus,  the  Registration
Statement or Prospectus  at  the time of filing thereof contained an untrue
statement of a material fact or  omitted  to state a material fact required
to be stated therein and necessary to make the statements therein, in light
of the circumstances under which they were  made, not misleading; provided,
however, that this representation and warranty does not apply to statements
made or statements omitted in reliance upon and  in conformity with written
information furnished to the Company with respect to the Underwriters by or
on  behalf  of  the  Underwriters  expressly  for use in  such  Preliminary
Prospectus, Registration Statement or Prospectus.

          (c)  When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date  (as  defined  herein)  and
each  Option  Closing  Date  (as  defined  herein), if any, and during such
longer  period  as  the  Prospectus  may be required  to  be  delivered  in
connection with sales by the Underwriters  or  a  dealer,  the Registration
Statement and the Prospectus will contain all statements which are required
to  be  stated  therein  in  accordance  with  the  Act  and the Rules  and
Regulations, and will conform to the requirements of the Act  and the Rules
and Regulations; neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will contain any untrue statement of a
material  fact  or  omit  to state any material fact required to be  stated
therein or necessary to make  the  statements  therein,  in  light  of  the
circumstances  under  which  they  were  made,  not  misleading;  PROVIDED,
HOWEVER, that this representation and warranty does not apply to statements
made  or  statements  omitted  in  reliance  upon  and  in  conformity with
information  furnished  to  the Company in writing by or on behalf  of  any
Underwriter expressly for use  in  the Preliminary Prospectus, Registration
Statement or Prospectus or any amendment thereof or supplement thereto.

          (d)  The Company has been  duly organized and is validly existing
as a corporation in good standing under  the  laws  of  the  state  of  its
incorporation.  Except as set forth in the Prospectus, the Company does not
own  an  interest  in any corporation, partnership, trust, joint venture or
other business entity.   The  Company is duly qualified and licensed and in
good standing as a foreign corporation  in  each  jurisdiction in which its
ownership or leasing of any properties or the character  of  its operations
require  such  qualification  or licensing.  The Company has all  requisite
power and authority (corporate  and  other),  and  has obtained any and all
necessary   authorizations,  approvals,  orders,  licenses,   certificates,
franchises and permits of and from all governmental or regulatory officials
and bodies, to  own  or  lease  its  properties and conduct its business as
described in the Prospectus; the Company  is and has been doing business in
compliance  with  all  such  authorizations, approvals,  orders,  licenses,
certificates, franchises and permits;  and the Company has not received any
notice of proceedings relating to the revocation  or  modification  of  any
such  authorization,  approval,  order, license, certificate, franchise, or
permit which, singly or in the aggregate,  if the subject of an unfavorable
decision,  ruling or finding, would materially  and  adversely  affect  the
condition, financial  or  otherwise,  or the earnings, position, prospects,
value, operation, properties, business  or  results  of  operations  of the
Company.  The  disclosures  in  the  Registration  Statement concerning the
effects of federal, state, local, and foreign laws,  rules  and regulations
on  the  Company's business as currently conducted and as contemplated  are
correct in  all  material respects and do not omit to state a material fact
necessary to make  the statements contained therein not misleading in light
of the circumstances in which they were made.

          (e)  The Company  has  a  duly authorized, issued and outstanding
capitalization as set forth in the Prospectus,  under  "Capitalization" and
"Description  of Securities" and will have the adjusted capitalization  set
forth therein on  the  Closing  Date  based  upon the assumptions set forth
therein,  and the Company is not a party to or  bound  by  any  instrument,
agreement or other arrangement providing for it to issue any capital stock,
rights, warrants,  options  or other securities, except for this Agreement,
Representative's Warrant Agreement and as described in the Prospectus.  The
Securities and all other securities  issued  or  issuable  by  the  Company
conform or, when paid for and issued, will conform, in all respects to  all
statements with respect thereto contained in the Registration Statement and
the  Prospectus.  All issued and outstanding securities of the Company have
been  duly   authorized   and   validly  issued  and  are  fully  paid  and
non-assessable and the holders thereof  have  no  rights of rescission with
respect  thereto, and are not subject to personal liability  by  reason  of
being such holders; and none of such securities were issued in violation of
the preemptive  rights  of  any  holders  of any security of the Company or
similar contractual rights granted by the Company.  The  Securities are not
and will not be subject to any preemptive or other similar  rights  of  any
shareholder,  have  been  duly  authorized  and,  when paid for, issued and
delivered  in  accordance with the terms hereof, will  be  validly  issued,
fully paid and nonassessable  and  will  conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the  Securities  has been duly and
validly taken; and the certificates representing the Securities  will be in
due and proper form.  Upon the issuance and delivery pursuant to the  terms
hereof  of  the  Securities  to  be  sold  by  the  Company  hereunder, the
Representatives  or  the  Representative, as the case may be, will  acquire
good and marketable title to  such  Securities  free and clear of any lien,
charge,  claim,  encumbrance, pledge, security interest,  defect  or  other
restriction or equity of any kind whatsoever.

          (f)  The  financial  statements  of the Company together with the
related  notes  and  schedules  thereto,  included   in   the  Registration
Statement,  each  Preliminary Prospectus and the Prospectus fairly  present
the  financial  position,   income,   changes  in  cash  flow,  changes  in
shareholders' equity and the results of  operations  of  the Company at the
respective  dates  and for the respective periods to which they  apply  and
such financial statements  have  been prepared in conformity with generally
accepted accounting principles and  the Rules and Regulations, consistently
applied throughout the periods involved.   There has been no adverse change
or development involving a material prospective  change  in  the condition,
financial  or  otherwise,  or in the earnings, position, prospects,  value,
operations, properties, business,  or  results of operations of the Company
whether or not arising in the ordinary course  of  business, since the date
of the financial statements included in the Registration  Statement and the
Prospectus  and  the  outstanding  debt,  the  property, both tangible  and
intangible, and the businesses of the Company conform  in  all  respects to
the  descriptions thereof contained in the Registration Statement  and  the
Prospectus.   Financial  information  set forth in the Prospectus under the
headings  "Summary  Financial  Information,"   "Selected  Financial  Data,"
"Capitalization," and "Management's Discussion and  Analysis  of  Financial
Condition  and Results of Operations," fairly present, on the basis  stated
in the Prospectus, the information set forth therein, and have been derived
from or compiled  on  a  basis  consistent  with  that  of  the audited and
unaudited financial statements included in the Prospectus.

          (g)  The Company (i) has paid, accrued or otherwise reserved for,
all  federal,  state,  local,  and  foreign  taxes  required  to  be  paid,
including,  but not limited to, withholding taxes and amounts payable under
Chapters 21 through  24  of the Internal Revenue Code of 1986 (the "Code"),
and  has  furnished all information  returns  it  is  required  to  furnish
pursuant to the Code, (ii) has established adequate reserves for such Taxes
which are not  due  and payable, and (iii) does not have any tax deficiency
or claims outstanding, proposed or assessed against it.

          (h)  No transfer  tax, stamp duty or other similar tax is payable
by or on behalf of the Representatives  in connection with (i) the issuance
by the Company of the Securities, (ii) the  purchase by the Representatives
of the Securities from the Company and the purchase  by  the Representative
of the Representatives Warrants from the Company, (iii) the consummation by
the Company of any of its obligations under this Agreement, or (iv) resales
of the Securities in connection with the distribution contemplated hereby.

          (i)  The  Company  has,  including, but not limited  to,  general
liability, product and property insurance,  which  insures  the Company and
its  employees against such losses and risks generally insured  against  by
comparable  businesses.   The  Company (A) has not failed to give notice or
present any insurance claim with  respect  to any matter, including but not
limited  to  the  Company's  business, property  or  employees,  under  the
insurance policy or surety bond  in  a  due  and  timely manner, (B) has no
disputes or claims against any underwriter of such  insurance  policies  or
surety  bonds or has failed to pay any premiums due and payable thereunder,
or (C) has  not  failed  to  comply  with  all conditions contained in such
insurance policies and surety bonds.  There  are  no facts or circumstances
under  any  such insurance policy or surety bond which  would  relieve  any
insurer of its  obligation  to  satisfy  in  full  any  valid  claim of the
Company.

          (j)  There  is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation  or governmental proceeding, domestic or foreign,
pending or threatened against  (or  circumstances that may give rise to the
same), or involving the properties or  business  of,  the Company which (i)
questions the validity of the capital stock of the Company,  this Agreement
or the Representative's Warrant Agreement, or of any action taken  or to be
taken  by  the Company pursuant to or in connection with this Agreement  or
the Representative's Warrant Agreement, (ii) is required to be disclosed in
the Registration  Statement which is not so disclosed (and such proceedings
as are summarized in  the  Registration Statement are accurately summarized
in  all  respects), or (iii) might  materially  and  adversely  affect  the
condition,  financial  or  otherwise, or the earnings, position, prospects,
shareholders' equity, value, operations, properties, business or results of
operations of the Company.

          (k)  The Company has  full  legal  right,  power and authority to
authorize,  issue,  deliver  and sell the Securities, the  Representative's
Securities,  enter into this Agreement  and  the  Representative's  Warrant
Agreement  and   to  consummate  the  transactions  provided  for  in  such
agreements; and this  Agreement, and the Representative's Warrant Agreement
have each been duly and  properly authorized, executed and delivered by the
Company.  Each of this Agreement and the Representative's Warrant Agreement
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance  with  its  terms  subject to bankruptcy,
insolvency,  and  creditor's  rights  and  the  application   of  equitable
principles  in  any  action  legal  or equitable, and none of the Company's
issue  and  sale  of  the  Securities,  the   Representative's  Securities,
execution  or  delivery of this Agreement or the  Representative's  Warrant
Agreement its performance hereunder and thereunder, its consummation of the
transactions contemplated  herein  and  therein,  or  the  conduct  of  its
business  as  described  in the Registration Statement, the Prospectus, and
any amendments or supplements thereto, conflicts with or will conflict with
or results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result
in the creation or imposition  of  any  lien,  charge,  claim, encumbrance,
pledge,  security interest, defect or other restriction or  equity  of  any
kind whatsoever  upon,  any  property or assets (tangible or intangible) of
the Company pursuant to the terms  of, (i) the articles of incorporation or
bylaws  of the Company, (ii) any license,  contract,  indenture,  mortgage,
deed of trust,  voting  trust agreement, shareholders agreement, note, loan
or credit agreement or any  other  agreement  or  instrument  to  which the
Company  is  a  party  or  by  which  it is or may be bound or to which its
properties or assets (tangible or intangible)  is or may be subject, or any
indebtedness,  or  (iii)  any  statute, judgment, decree,  order,  rule  or
regulation applicable to the Company  of  any arbitrator, court, regulatory
body  or  administrative  agency  or  other  governmental  agency  or  body
(including,   without   limitation,   those   having   jurisdiction    over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of its activities or properties.

          (l)  Except as described in the Prospectus, no consent, approval,
authorization  or order of, and no filing with, any court, regulatory body,
government agency  or  other body, domestic or foreign, is required for the
issuance of the Securities  pursuant to the Prospectus and the Registration
Statement, the issuance of the  Representative's  Warrants, the performance
of  this  Agreement  and  the Representative's Warrant  Agreement  and  the
transactions contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that any entity
or person may have for the  issue  and/or sale of any of the Securities, or
the Representative's Warrants, except  such as have been or may be obtained
under the Act or may be required under state securities or Blue Sky laws in
connection  with  the Representatives' purchase  and  distribution  of  the
Securities, and the  Representative's  Warrants  to  be sold by the Company
hereunder.

          (m)  All  executed  agreements, contracts or other  documents  or
copies  of executed agreements,  contracts  or  other  documents  filed  as
exhibits  to  the Registration Statement to which the Company is a party or
by which they may  be  bound or to which its assets, properties or business
may  be  subject  have been  duly  and  validly  authorized,  executed  and
delivered by the Company  and  constitute  the  legal,  valid  and  binding
agreements of the Company enforceable against the Company, as the case  may
be,   in  accordance  with  respective  terms.   The  descriptions  in  the
Registration  Statement  of  agreements,  contracts and other documents are
accurate  and fairly present the information  required  to  be  shown  with
respect thereto by Form SB-2, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement
or filed as  exhibits to the Registration Statement which are not described
or filed as required,  and  the exhibits which have been filed are complete
and correct copies of the documents of which they purport to be copies.

          (n)  Subsequent to  the  respective dates as of which information
is set forth in the Registration Statement  and  Prospectus,  and except as
may  otherwise be indicated or contemplated herein or therein, the  Company
has not  (i) issued any securities or incurred any liability or obligation,
direct or contingent, for borrowed money, (ii) entered into any transaction
other than  in  the  ordinary course of business, or (iii) declared or paid
any dividend or made any other distribution on or in respect of its capital
stock of any class, and  there  has  not  been  any  material  change in or
affecting   the   general   affairs,   management,   financial  operations,
shareholders equity or results of operations of the Company.

          (o)  No default exists in the due performance  and  observance of
any  term,  covenant  or  condition  of  any  material  license,  contract,
indenture,  mortgage,  installment  sale  agreement,  lease, deed of trust,
voting  trust  agreement,  shareholders  agreement, partnership  agreement,
note,  loan  or credit agreement, purchase order,  or  any  other  material
agreement or instrument evidencing an obligation for borrowed money, or any
other material  agreement  or instrument to which the Company is a party or
by which the Company may be  bound  or  to  which  the  property  or assets
(tangible or intangible) of the Company is subject or affected.

          (p)  The   Company   has   generally   enjoyed   a   satisfactory
employer-employee  relationship  with  its  employees  and  is  in material
compliance with all federal, state, local, and foreign laws and regulations
respecting  employment  and  employment practices, terms and conditions  of
employment  and  wages and hours.   There  are  no  pending  investigations
involving the Company  by  the  U.S.  Department  of  Labor,  or  any other
governmental agency responsible for the enforcement of such federal, state,
local,  or foreign laws and regulations.  There is no unfair labor practice
charge or  complaint  against the Company pending before the National Labor
Relations Board or any  strike,  picketing,  boycott,  dispute, slowdown or
stoppage  pending or threatened against or involving the  Company,  or  any
predecessor entity, and none has ever occurred.  No representation question
exists  respecting   the  employees  of  the  Company,  and  no  collective
bargaining agreement or  modification thereof is currently being negotiated
by the Company.  No grievance  or  arbitration  proceeding is pending under
any expired or existing collective bargaining agreements  of  the  Company.
No labor dispute with the employees of the Company exists, or, is imminent.

          (q)  Except as described in the Prospectus, the Company does  not
maintain,  sponsor  or  contribute to any program or arrangement that is an
"employee pension benefit  plan,"  an  "employee welfare benefit plan" or a
"multi-employer plan" as such terms are  defined in Sections 3(2), 3(1) and
3(37),  respectively, of the Employee Retirement  Income  Security  Act  of
1974, as  amended ("ERISA") ("ERISA Plans").  The Company does not maintain
or contribute, now or at any time previously, to a defined benefit plan, as
defined in  Section  3(35)  of  ERISA.  No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975  of  the Code, which could subject the
Company to any tax penalty on prohibited transactions  and  which  has  not
adequately  been  corrected.   Each  ERISA  Plan  is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA
as  they relate to any such ERISA Plan.  Determination  letters  have  been
received  from the Internal Revenue Service with respect to each ERISA Plan
which is intended  to  comply  with  Code Section 401(a), stating that such
ERISA Plan and the attendant trust are  qualified  thereunder.  The Company
has never completely or partially withdrawn from a "multi-employer plan."

          (r)  The  Company,  nor any of its officers, directors, partners,
"affiliates"  or "associates" (as  these  terms  are  defined  in  Rule 405
promulgated  under the Rules and Regulations) has ever taken or will  take,
directly or indirectly,  any action designed to or which has constituted or
which might be expected to  cause  or result in, under the Exchange Act, or
otherwise, stabilization or manipulation  of  the  price of any security of
the  Company  to  facilitate  the  sale  or  resale  of the  Securities  or
otherwise.

          (s)  Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks,  trade  names  and
copyrights,  and  licenses  and  rights to the foregoing presently owned or
held by the Company are in dispute so far as known by the Company or are in
any conflict with the right of any other person or entity.  The Company (i)
owns or has the right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all  patents,  trademarks,  service marks,
trade names and copyrights, technology and licenses and rights with respect
to  the foregoing, used in the conduct of its business as now conducted  or
proposed  to  be  conducted  without  infringing  upon  or otherwise acting
adversely to the right or claimed right of any person, corporation or other
entity  under  or  with respect to any of the foregoing; and  (ii)  is  not
obligated or under any  liability  whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant
to, any patent, trademark, service mark,  trade  name, copyright, know-how,
technology or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.

          (t)  The Company owns and has the unrestricted  right  to use all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary   or   confidential   information,   systems   or  procedures),
inventions, designs, processes, works of authorship, computer  programs and
technical   data   and   information   (collectively  herein  "intellectual
property") that are material to the development, manufacture, operation and
sale  of all products and services sold or  proposed  to  be  sold  by  the
Company  free  and clear of and without violating any right, lien, or claim
of others, including without limitation, former employers of its employees;
provided, however,  that  the  possibility  exists  that  other  persons or
entities, completely independently of the Company, as the case may  be,  or
its  employees  or  agents,  could have developed trade secrets or items of
technical information similar  or  identical  to those of the Company.  The
Company is not aware of any such development of  similar or identical trade
secrets or technical information by others.

          (u)  The  Company  has  taken  reasonable  security  measures  to
protect  the  secrecy,  confidentiality and value of all  its  intellectual
property in all material aspects.

          (v)  The Company  has  good and marketable title to, or valid and
enforceable leasehold estates in,  all  items of real and personal property
stated in the Prospectus, to be owned or leased by it free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects,
or other restrictions or equities of any  kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and payable.

          (w)  Hein +  Associates, LLP, whose  report  is  filed  with  the
Commission  as  a  part  of  the  Registration  Statement,  are independent
certified  public  accountants  as  required  by the Act and the Rules  and
Regulations and have been retained by the Company as its auditors.

          (x)  Except as provided herein and in the Registration Statement,
the Company has caused to be duly executed legally  binding and enforceable
agreements   ("Lock-up   Agreements")  pursuant  to  which  the   Company's
shareholders and holders of  securities  exchangeable or exercisable for or
convertible into shares of Common Stock have  agreed  not  to,  directly or
indirectly, publicly offer to sell, sell, grant any option for the sale of,
assign,  transfer, pledge, hypothecate or otherwise encumber or dispose  of
any shares  of  Common Stock or securities convertible into, exercisable or
exchangeable for  or  evidencing any right to purchase or subscribe for any
shares of Common Stock  (either  pursuant  to  Rule  144  of  the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for
a  period of not less than twenty-four (24) months following the  effective
date of the Registration Statement without the prior written consent of the
Representative.   On  or before the Closing Date, the Company shall deliver
instructions to the Transfer  Agent  authorizing  it  to  place appropriate
legends  on  the  certificates representing the securities subject  to  the
Lock-up Agreements  and  to  place  appropriate stop transfer orders on the
Company's ledgers.  Except for the issuance  of  shares of capital stock by
the Company in connection with a dividend, recapitalization, reorganization
or  similar  transaction  or  as a result of the exercise  of  warrants  or
outstanding options disclosed in  the  Registration  Statement, the Company
shall not, for a period of TWELVE (12) months following  the  Closing Date,
directly  or indirectly, offer, sell, issue or transfer any shares  of  its
capital  stock,  or  any  security  exchangeable  or  exercisable  for,  or
convertible  into,  shares  of the capital stock, without the prior written
consent  of  the Representative.   Prior  to  the  effective  date  of  the
Registration Statement,  the  Company  will  cause each of its shareholders
owning more than 5,000 Shares and private warrantholders  to  enter  into a
written  agreement  with  the Representative that (i) such shareholders and
warrantholders will not sell  or  otherwise  dispose  of  any shares of the
Company's Common Stock owned directly or indirectly by them or beneficially
by them (as defined by the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and rules promulgated thereunder) on the effective  date of
the  Registration  Statement  for  a  period of twelve (12) months from the
effective date without the Representative's  prior written consent and (ii)
they  will  permit  all certificates evidencing Such  Common  Stock  to  be
stamped at closing with  an  appropriate restrictive legend, and will cause
the transfer agent for the Company to note such restriction on the transfer
books and records of the Company.

          (y)  There are no claims,  payments,  issuances,  arrangements or
understandings, whether oral or written, for services in the  nature  of  a
finder's  or  origination  fee  with  respect to the sale of the Securities
hereunder or any other arrangements, agreements,  understandings,  payments
or  issuances  with  respect  to  the  Company,  or  any  of  its officers,
directors, shareholders, partners, employees or affiliates that  may affect
the   Representatives'   compensation,   as   determined  by  the  National
Association of Securities Dealers, Inc. ("NASD").

          (z)  Upon  the effective date of the Registration  Statement  the
Company  will have the  Shares  and  the  Warrants  and  underlying  Shares
registered  on  the  National  Association  of Securities Dealers Automated
Quotation System, Interdealer Quotation system  ("NASDAQ") and will use its
best efforts to maintain such listing for not less  than  five  years.  The
Company  shall  also  prior  to  the  effective  date  of  the Registration
Statement  make  application for a listing on an accelerated basis  of  the
Company's securities in Standard & Poor's.

          (aa) To  the  Company's best knowledge, no funds or assets of the
Company have been used for  illegal purposes; no unrecorded funds or assets
of the Company been established  for any purpose; no accumulation or use of
the  Company's  corporate funds or assets  have  been  made  without  being
properly accounted  for in the respective books and records of the Company;
all payments by or on  behalf  of  the  Company have been duly and properly
recorded and accounted for in the Company's  books and records; no false or
artificial entry has been made in the books and  records of the Company for
any reason; no payment has been made by or on behalf  of  Company  with the
understanding  that  any part of such payment is to be used for any purpose
other than that described  in  the  documents supporting such payments; the
Company has not made, directly or indirectly,  any illegal contributions to
any  political  party  or  candidate.   The Company's  internal  accounting
controls are sufficient to cause the Company  to  comply  with  the Foreign
Corrupt Practices Act of 1977, as amended.

          (bb) Except as set forth in the Prospectus, no officer, director,
shareholder  or  partner  of the Company, or any "affiliate" or "associate"
(as these terms are defined  in  Rule  405  promulgated under the Rules and
Regulations) of any of the foregoing persons  or  entities  has or has had,
either  directly  or  indirectly, (i) an interest in any person  or  entity
which (A) furnishes or  sells  services  or products which are furnished or
sold  or  are  proposed to be furnished or sold  by  the  Company;  or  (B)
purchases from or  sells or furnishes to the Company any goods or services,
or (ii) a beneficiary  interest  in  any contract or agreement to which the
Company is a party or by which it may  be bound or affected.  Except as set
forth in the Prospectus under "Management" or "Certain Transactions," there
are  no  existing  material  agreements,  arrangements,  understandings  or
transactions,  or  proposed  agreements,  arrangements,  understandings  or
transactions,  between or among the Company,  and  any  officer,  director,
Principal Shareholder  (as  such  term is defined in the Prospectus) of the
Company, or any partner, affiliate  or  associate  of  any of the foregoing
persons or entities.

          (cc) Any  certificate signed by any officer of  the  Company  and
delivered to the Representatives or to Representatives' Counsel (as defined
herein) shall be deemed a representation and warranty by the Company to the
Representatives as to the matters covered thereby.

          (dd) The minute  book  of  the Company has been made available to
the Representatives and contains a complete  summary  of  all  meetings and
actions of the directors and shareholders of the Company since the  time of
its  incorporation,  and  reflects  all  transactions  referred  to in such
minutes accurately in all respects.

          (ee) Except  and  to  the extent described in the Prospectus,  no
holders of any securities of the  Company  or  of  any options, warrants or
other convertible or exchangeable securities of the  Company have the right
to  include  any  securities  issued  by  the  Company in the  Registration
Statement or any registration statement to be filed  by  the  Company or to
require the Company to file a registration statement under the  Act  and no
person  or  entity  holds  any  anti-dilution  rights  with  respect to any
securities of the Company.

          (ff) The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with Robert  O. Smith in
the  form  filed as Exhibit 10.___ of the Registration Statement, and  (ii)
has purchased  keyman  life  insurance on the life of Robert O. Smith.  The
policy shall provide for coverage  in  the  amount  of  $1,000,000, and the
policy shall name the Company as the sole beneficiary thereof.

     2.  REPRESENTATIONS AND WARRANTIES OF THE SELLING SECURITYHOLDERS

          (a)  The Selling Securityholders will have on the  Closing  Date,
good,  valid and marketable title to securities listed on Schedule B hereto
to be sold by such Selling Securityholders to the Representatives, free and
clear of  any  liens,  charges,  claims,  encumbrances,  pledges,  security
interests, restrictions, equities, stockholders' agreements, voting  trusts
or  defects  in  title whatsoever; and upon delivery of such Securities and
payment of the purchase  price  therefor as contemplated in this Agreement,
each of the Representatives will  receive good and marketable title to such
Securities  purchased by it from such  Selling  Securityholders,  free  and
clear of any  lien,  charge, claim, encumbrance, pledge, security interest,
restriction,  equity,  shareholders'  agreement,  voting  trust,  community
property right or defect  in  title whatsoever; and other than as described
in the Registration Statement and  the  Prospectus or created hereby, there
are  no  outstanding  options, warrants, rights,  or  other  agreements  or
arrangements requiring such Selling Securityholders at any time to transfer
any Securities to be sold hereunder by such Selling Securityholders.

          (b)  Such  Selling   Securityholders  have  duly  authorized  (if
applicable), executed and delivered,  in  the  form heretofore furnished to
the  Representative,  a Power of Attorney (the "Power  of  Attorney")  with
___________ as attorney-in-fact,  (an  "Attorney-in-Fact"), and a Letter of
Transmittal   and   Custody  Agreement  (the  "Custody   Agreement")   with
____________________  as  custodian (the "Custodian"); each of the Power of
Attorney and Custody Agreement  constitutes  a valid and binding obligation
of such Selling Securityholders, enforceable in  accordance  with its terms
subject  to  bankruptcy,  insolvency  and  creditor's  right;  such Selling
Securityholder's  Attorney-in-Fact, acting alone, is authorized to  execute
and deliver the certificate(s)  evidencing the Securities to be sold to the
Representatives on behalf of such Selling Securityholders, to authorize the
delivery of those Securities to be  sold  by  such  Selling Securityholders
under  this  Agreement  and  to  duly endorse (in blank or  otherwise)  the
certificate or certificates representing  such  Securities or a stock power
or powers with respect thereto, to accept payment  therefor,  and otherwise
to act on behalf of such  Selling Securityholders in connection  with  this
Agreement.

          (c)  All authorizations, approvals, consents and orders necessary
for the execution and delivery by such Selling Securityholders of the Power
of Attorney and the Custody Agreement, the execution and delivery by or  on
behalf  of such Selling Securityholders of this Agreement, and the sale and
delivery  of  Securities  to  be sold by such Selling Securityholders under
this Agreement have been obtained  and  are  in full force and effect; such
Selling Securityholders have full right, power  and authority to enter into
and perform her obligations under this Agreement and such Power of Attorney
and Custody Agreement and to sell, transfer and deliver  the  Securities to
be sold by such Selling Securityholders under this Agreement.

          (d)  On the Closing Date, certificates in negotiable form for the
Securities to be sold by such Selling Securityholders under this  Agreement
on the Closing Date, together with a stock power or powers duly endorsed in
blank  by  such  Selling  Securityholders, will have been placed in custody
with the Custodian for the  purpose  of  effecting  delivery  hereunder and
thereunder.

          (e)  The  performance  of this Agreement and the consummation  of
the transactions herein contemplated  by such Selling Securityholders, will
not conflict with or result in a breach  of,  or  default  under,  (i)  any
license,  contract,  indenture,  mortgage,  deed  of  trust,  voting  trust
agreement,  shareholders'  agreement,  note,  loan or credit agreement, the
Bylaws, the Articles of Incorporation or other  agreement  or instrument to
which  such  Selling  Securityholders  is a party or by which such  Selling
Securityholders is or may be bound or to  which  any  of her property is or
may  be  subject,  or (ii) any statute, judgment, decree,  order,  rule  or
regulation applicable  to  such  Selling Securityholders of any arbitrator,
court,  regulatory  body or administrative  agency  or  other  governmental
agency or body, domestic  or foreign, having jurisdiction over such Selling
Securityholders  or any of such  Selling  Securityholders's  activities  or
properties; this Agreement  when  executed  and  delivered  by  the Selling
Securityholders and, to the extent this Agreement is a binding agreement of
the  Representatives, constitutes the valid and binding agreement  of  such
Selling Securityholders, enforceable in accordance with its terms except as
such enforceability  may  be  limited by applicable bankruptcy, insolvency,
moratorium or other laws of general  application  relating  to or affecting
enforcement   of   creditors'  rights  and  the  application  of  equitable
principles in any action,  legal  or  equitable,  and  except  as rights to
indemnity or contribution may be limited by applicable law.

          (f)  Such Selling Securityholders have reviewed and are  familiar
with the Registration Statement as originally filed with the Commission and
all  amendments  and supplements thereto, if any, filed with the Commission
prior to the date  hereof,  and  with  the  Preliminary  Prospectus and the
Prospectus, as supplemented, if applicable, to the date hereof,  and has no
knowledge  of  any  fact,  condition  or  information  not disclosed in the
Registration Statement and Prospectus, as so supplemented,  if  applicable,
which  has  adversely  affected  or  could  adversely affect the condition,
financial  or  otherwise,  or  the  earnings, position,  prospects,  value,
operation, properties, business or results  of  operations  of the Company;
and  the  information  relating  to  such Selling Securityholders  and  the
Securities  and  other  securities  of  the   Company   owned   by  Selling
Securityholders  that  is  set  forth  in  such Registration Statement  and
Prospectus, as so supplemented, does not and  at the Closing Date, will not
contain  any  untrue statement of a material fact  or  omit  to  state  any
material fact necessary  in order to make such information, in light of the
circumstances  under  which   they   were  made,  not  misleading  and  all
information furnished by or on behalf  of  such Selling Securityholders for
use  in  the  Registration  Statement,  the  Preliminary   Prospectus,  the
Prospectus, or any amendment or supplement thereto is, and,  at the Closing
Date  will be true and complete in all material respects; and such  Selling
Securityholders  are not prompted to sell the Securities to be sold by such
Selling Securityholders  under this Agreement by any information concerning
the Company which is not set forth in the Prospectus, as so supplemented.

          (g)  Nothing  has   come   to   the  attention  of  such  Selling
Securityholders to cause such Selling Securityholders  to  believe that the
Company's  representations  and warranties contained in this Agreement  are
not accurate in all material respects.

          (h)  There is not pending  or  threatened  against  such  Selling
Securityholders  any action, suit or proceeding (or circumstances that  may
give rise to the same)  which (i) questions the validity of this Agreement,
the Custody Agreement, the  Power  of Attorney or of any action taken or to
be taken by such Selling Securityholders  pursuant to or in connection with
any of the foregoing; or (ii) which is required  to  be  disclosed  in  the
Registration  Statement  and the Prospectus which is not disclosed and such
proceedings which are summarized in all material respects.

          (i)  No stamp duty  or  similar tax is payable by or on behalf of
the Representatives in connection with (i) the sale of the Securities to be
sold  by  such  Selling  Securityholders;   (ii)   the   purchase   by  the
Representatives   of   the   Securities   to   be   sold  by  such  Selling
Securityholders; (iii) the consummation by such Selling  Securityholders of
any of its obligations under this Agreement, the Custody Agreement  or  the
Power of Attorney; or (iv) resales of the Securities in connection with the
distribution contemplated hereby.

          (j)  Except   as  set  forth  in  the  Prospectus,  such  Selling
Securityholders does not  have  any registration rights with respect to any
securities of the Company; and such Selling Securityholders do not have any
right of first refusal or other similar right to purchase any securities of
the Company upon the issuance or  sale  thereof  by the Company or upon the
sale thereof by any other stockholder of the Company.

          (k)  Such Selling Securityholders have not  since  the  filing of
the  initial Registration Statement (i) sold, bid for, purchased, attempted
to induce  any  person  to  purchase,  or  paid anyone any compensation for
soliciting purchases of, Common Stock, or (ii) paid or agreed to pay to any
person any compensation for soliciting another  to  purchase any securities
of   the   Company  (except  for  the  sale  of  the  Securities   to   the
Representatives  under  this Agreement and except as otherwise permitted by
law).

          (l)  Such Selling  Securityholders  have  not taken, and will not
take,  directly  or indirectly, any action which has constituted  or  which
might reasonably be  expected  to  cause  or result in stabilization of the
price of any security of the Company to facilitate  the distribution of the
Securities.

          (m)  Such Selling Securityholders will review  the Prospectus and
will comply with all agreements and satisfy all conditions  on  its part to
be  complied  with  or  satisfied  pursuant  to this Agreement, the Custody
Agreement and the Power of Attorney at or prior  to  the  Closing  Date and
will advise one of its Attorneys-in-Fact prior to the Closing Date,  as the
case  may  be,  if  any  statement  to  be  made  on behalf of such Selling
Securityholders  in  this  Agreement  contains any untrue  statement  of  a
material fact or omitted to state a material  fact  required  to  be stated
therein or necessary to make the statements therein not misleading  if made
as of such Closing Date, as the case may be.

          (n)  Any  certificate  signed  by  or  on  behalf of such Selling
Securityholders  and  delivered to the Representatives shall  be  deemed  a
representation  and  warranty   by  such  Selling  Securityholders  to  the
Representatives as to the matters covered thereby.


     3.   PURCHASE,   SALE   AND   DELIVERY    OF    THE   SECURITIES   AND
REPRESENTATIVE'S WARRANTS.

          (a)  On  the basis of the representations, warranties,  covenants
and agreements herein  contained,  but  subject to the terms and conditions
herein set forth, the Company and the Selling Securityholders agree to sell
to each Representative, and each Representative, severally and not jointly,
agrees to purchase from the Company and the Selling Securityholders, as the
case may be, at a price of $4.00  per share  of Common Stock and $.125  per
Warrant, that number of Securities set forth in  Schedule  A  opposite  the
name   of   such   Representative,   subject  to  such  adjustment  as  the
Representative in its sole discretion  shall make to eliminate any sales or
purchases  of  fractional shares of Common  Stock  or  Warrants,  plus  any
additional number  of  Securities  which  such  Representative  may  become
obligated to purchase pursuant to the provisions of Section 1 hereof.

          (b)  In   addition,   on   the   basis  of  the  representations,
warranties, covenants and agreements, herein  contained, but subject to the
terms and conditions herein set forth, the Company  hereby grants an option
to the Representatives, severally and not jointly, to  purchase  all or any
part  of  the  Option  Shares  (up to an aggregate of an additional 150,000
shares of Common Stock and 75,000  Warrants) at the initial offering price,
less the Representative's discount.   The option granted hereby will expire
45 days after (i) the date the Registration Statement becomes effective, if
the  Company has elected not to rely on  Rule  430A  under  the  Rules  and
Regulations,  or (ii) the date of this Agreement if the Company has elected
to rely upon Rule  430A  under  the  Rules  and  Regulations,  and  may  be
exercised  in  whole  or  in part from time to time only for the purpose of
covering over-allotments which  may be made in connection with the offering
and distribution of the Securities upon notice by the Representative to the
Company setting forth the number  of  Option  Securities  as  to  which the
several  Representatives  are  then exercising the option and the time  and
date of payment and delivery for any such Option Securities.  Any such time
and date of delivery (an "Option  Closing Date") shall be determined by the
Representative, but shall not be later  than seven full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Representative and
the Company.  Nothing herein contained shall  obligate  the Representatives
to  make  any  over-allotments.   No Option Securities shall  be  delivered
unless  the  Securities  shall  be  simultaneously   delivered   or   shall
theretofore have been delivered as herein provided.

          (c)  Payment   of   the  purchase  price  for,  and  delivery  of
securities  for, the Securities  shall  be  made  at  the  offices  of  the
Representative  at  150  East  Palmetto  Park  Road, Suite 380, Boca Raton,
Florida  33432,  or  at such other place as shall be  agreed  upon  by  the
Representative and the Company.  Such delivery and payment shall be made at
10:00 a.m. (Florida time)  on  __________,  1996, or at such other time and
date as shall be agreed upon by the Representative and the Company, but not
less than THREE (3) nor more than TEN (10) full  business  days  after  the
effective date of the Registration Statement (such time and date of payment
and  delivery  being  herein  called  "Closing Date").  In addition, in the
event  that  any  or  all of the Option Securities  are  purchased  by  the
Representatives,  payment  of  the  purchase  price  for  and  delivery  of
certificates for, such  Option  Securities  shall  be  made  at  the above-
mentioned firm office of the Representative or at such other place as shall
be agreed upon by the Representative and the Company on the Option  Closing
Date  as  specified  in  the notice from the Representative to the Company.
Delivery of the certificates  for the Securities and the Option Securities,
if  any,  shall  be  made to the Representatives  against  payment  by  the
Representatives, severally  and  not jointly, of the purchase price for the
Securities and the Option Securities,  if  any,  by New York Clearing House
funds.  In the event such option is exercised, each of the Representatives,
acting  severally and not jointly, shall purchase that  proportion  of  the
total number  of Option Securities then being purchased which the number of
Securities set  forth  in  Schedule  A  hereto  opposite  the  name of such
Representative  bears  to the total number of Securities, subject  in  each
case to such adjustments as the Representative in its discretion shall make
to eliminate any sales or purchases of fractional shares.  Certificates for
the Securities and the Option  Securities,  if any, shall be in definitive,
fully registered form, shall bear no restrictive  legends  and  shall be in
such denominations and registered in such names as the Representatives  may
request in writing at least two (2) business days prior to the Closing Date
or  the  Option Closing Date, as the case may be.  The certificates for the
Securities  and  the  Option Securities, if any, shall be made available to
the Representative at such office or such other place as the Representative
may designate for inspection,  checking  and  packaging  no later than 9:30
a.m.  on  the  last  business day prior to the Closing Date or  the  Option
Closing Date, as the case may be.

          (d)  On the Closing Date, the Company shall issue and sell to the
Representative the Representative's  Warrants  for  nominal  consideration,
which  warrants shall entitle the holders thereof to purchase an  aggregate
of  100,000   shares   of   Common   Stock   and   50,000   Warrants, similar
but not identical to, the Warrants.   The Representative's  Warrants  shall
be  non-exercisable and non-transferable (other than a transfer to affiliates
of  the  Representative  or members of the  selling  group)  for a period of 12
months following the date  of  the definitive Prospectus.  The  Representative's
Warrants  and the underlying securities shall contain the usual anti-dilution 
provisions  and  shall not be redeemable. The Representative's Warrants will be
exercisable 12  months after the date of the definitive Prospectus used in the 
offering and for  a period  of  four years thereafter; and if the 
Representative's Warrants are not exercised  during  this term, they shall, by 
their terms, automatically expire. The exercise price  of  each of the 
Representative's Warrants shall be 120% of the public offering price per Share 
and Offered Warrants.

          The Company and the Representative  agree that the Representative
may  designate  that the Representative's Warrants  be  issued  in  varying
amounts directly  to  its officers, directors, shareholders, employees, and
other  proper  persons  and   not  to  the  Representative;  however,  such
designation will only be made by  the  Representative  if it determines and
represents  to  the  Company  that  such  issuance  would  not violate  the
interpretation of the Board of Governors of the NASD relating to the review
of  corporate financing arrangements and would not require registration  of
the Representative's Warrants or underlying securities.

     4.   PUBLIC   OFFERING   OF   THE   SECURITIES.   As  soon  after  the
Registration  Statement  becomes  effective  as  the  Representative  deems
advisable,  the  Representatives  shall  make  a  public  offering  of  the
Securities  (other  than  to residents of or in any jurisdiction  in  which
qualification of the Securities  is  required and has not become effective)
at  the  price  and  upon  the  terms set forth  in  the  Prospectus.   The
Representative  may  from time to time  increase  or  decrease  the  public
offering price after distribution  of  the Securities has been completed to
such extent as the Representative, in its  sole discretion deems advisable.
The  Representatives  may  enter  into  one  or  more   agreements  as  the
Representatives, in each of their sole discretion, deem advisable  with one
or  more  broker-dealers  who  shall act as dealers in connection with such
public offering.

     5.   COVENANTS AND AGREEMENTS  OF  THE COMPANY.  The Company covenants
and agrees with each of the Representatives as follows:

          (a)  The  Company  shall  use  its  best  efforts  to  cause  the
Registration Statement and any amendments  thereto  to  become effective as
promptly as practicable and will not at any time, whether  before  or after
the effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under  the  Act  or Exchange Act before termination of the offering of  the
Securities by the  Representatives  of  which  the Representative shall not
previously have been advised and furnished with  a  copy,  or  to which the
Representative shall have objected or which is not in compliance  with  the
Act, the Exchange Act or the Rules and Regulations.

          (b)  As  soon  as  the  Company  is  advised or obtains knowledge
thereof, the Company will advise the Representative  and confirm the notice
in  writing,  (i)  when  the  Registration  Statement, as amended,  becomes
effective, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed  in  accordance  with  said
Rule  430A  and  when  any  post-effective  amendment  to  the Registration
Statement becomes effective; (ii) of the issuance by the Commission  of any
stop  order  or  of  the initiation, or the threatening, of any proceeding,
suspending the effectiveness  of  the  Registration  Statement or any order
preventing  or  suspending  the  use of the Preliminary Prospectus  or  the
Prospectus, or any amendment or supplement  thereto,  or the institution of
proceedings for that purpose; (iii) of the issuance by the Commission or by
any state securities commission of any proceedings for  the  suspension  of
the  qualification  of  any  of  the Securities for offering or sale in any
jurisdiction or of the initiation,  or  the  threatening, of any proceeding
for that purpose; (iv) of the receipt of any comments  from the Commission;
and  (v)  of  any  request  by  the  Commission  for any amendment  to  the
Registration Statement or any amendment or supplement  to the Prospectus or
for  additional  information.   If  the Commission or any state  securities
commission authority shall enter a stop order or suspend such qualification
at any time, the Company will make every  effort  to  obtain  promptly  the
lifting of such order.

          (c)  The Company shall file the Prospectus (in form and substance
satisfactory  to  the Representative) or transmit the Prospectus by a means
reasonably calculated  to  result in filing with the Commission pursuant to
Rule  424(b)(1)  (or,  if  applicable   and   if   consented   to   by  the
Representative, pursuant to Rule 424(b)(4)) not later than the Commission's
close  of  business on the earlier of (i) the second business day following
the execution  and  delivery of this Agreement; and (ii) the fifth business
day after the effective date of the Registration Statement.

          (d)  The Company  will  give  the  Representative  notice  of its
intention  to  file  or prepare any amendment to the Registration Statement
(including any post-effective  amendment) or any amendment or supplement to
the Prospectus (including any revised prospectus which the Company proposes
for use by the Representatives in  connection  with  the  offering  of  the
Securities  which  differs from the corresponding prospectus on file at the
Commission  at  the time  the  Registration  Statement  becomes  effective,
whether or not such  revised prospectus is required to be filed pursuant to
Rule  424(b)  of  the  Rules   and   Regulations)   and  will  furnish  the
Representative with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use,  as  the  case may be,
and will not file any such prospectus to which the Representative or Atlas,
Pearlman, Trop & Borkson, P.A. ("Representatives' Counsel"), shall object.

          (e)  The  Company  shall  endeavor  in good faith, in cooperation
with the Representative, at or prior to the time the Registration Statement
becomes effective, to qualify the Securities for  offering  and  sale under
the  securities  laws  of  such  jurisdictions  as  the  Representative may
designate to permit the continuance of sales and dealings  therein  for  as
long  as may be necessary to complete the distribution, and shall make such
applications,  file  such  documents and furnish such information; HOWEVER,
the Company shall not be required  to  qualify  as a foreign corporation or
file  a  general  or  limited  consent to service of process  in  any  such
jurisdiction.   In each jurisdiction  where  such  qualification  shall  be
effected, the Company  will,  unless  the  Representative  agrees that such
action  is  not  at  the  time  necessary  or advisable, use all reasonable
efforts to file and make such statements or reports at such times as are or
may  reasonably be required by the laws of such  jurisdiction  to  continue
such qualification.

          (f)  During  the  time  when  a  prospectus  is  required  to  be
delivered  under  the  Act,  the Company shall use all reasonable effort to
comply with all requirements imposed  upon  it  by the Act and the Exchange
Act, as now and hereafter amended and by the Rules and Regulations, as from
time  to time in force, so far as necessary to permit  the  continuance  of
sales of  or  dealings  in the Securities in accordance with the provisions
hereof and the Prospectus, or any amendments or supplements thereto.  If at
any  time  when  a  prospectus   relating   to   the   Securities   or  the
Representative's Securities is required to be delivered under the Act,  any
event  shall  have occurred as a result of which, in the opinion of counsel
for the Company  or  Representatives'  Counsel,  the  Prospectus,  as  then
amended or supplemented, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary
to  make  the  statements  therein, in the light of the circumstances under
which they were made, not misleading,  or if it is necessary at any time to
amend the Prospectus to comply with the  Act,  the  Company will notify the
Representative  promptly  and  prepare  and  file  with the  Commission  an
appropriate amendment or supplement in accordance with  Section  10  of the
Act,  each  such  amendment  or supplement to be reasonably satisfactory to
Representatives'  Counsel,  and   the   Company   will   furnish   to   the
Representatives copies of such amendment or supplement as soon as available
and in such quantities as the Representatives may reasonably request.

          (g)  As  soon  as practicable, but in any event not later than 45
days after the end of the  12-month  period  beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in  the  event  that  the end of
such  fiscal quarter is the end of the Company's fiscal year), the  Company
shall make  generally  available  to  its  securityholders,  in  the manner
specified in Rule 158(b) of the Rules and Regulations, and will deliver  to
the  Representative,  an  earnings  statement  which  will be in the detail
required  by,  and  will otherwise comply with, the provisions  of  Section
11(a) of the Act and  Rule  158(a)  of  the  Rules  and  Regulations, which
statement need not be audited unless required by the Act, covering a period
of at least twelve (12) consecutive months after the effective  date of the
Registration Statement.

          (h)  During  a  period of  five (5) years after the date  hereof,
the Company will furnish to  its  shareholders,  as  soon  as  practicable,
annual  reports  (including  financial  statements  audited  by independent
public accountants)  and will deliver to the Representative:

               i)    Concurrently with furnishing such quarterly reports to
     its shareholders, statements of income of the Company for each quarter
     in  the form furnished to the Company's shareholders and certified  by
     the Company's principal financial or accounting officer;

               ii)  concurrently with furnishing such annual reports to its
     shareholders,  a  balance  sheet  of  the Company as at the end of the
     preceding  fiscal  year,  together  with  statements   of  operations,
     shareholders'  equity, and cash flows of the Company for  such  fiscal
     year, accompanied  by a copy of the certificate thereon of independent
     certified public accountants;

               iii)  as soon  as  they are available, copies of all reports
     (financial or other) mailed to shareholders;

               iv)  as soon as they  are  available,  copies of all reports
     and  financial statements furnished to or filed with  the  Commission,
     the NASD, NASDAQ or any other securities exchange;

               v)   every  press  release  and  every material news item or
     article  of  interest to the financial community  in  respect  of  the
     Company, or its affairs which was released or prepared by or on behalf
     of the Company; and

               vi)  any   additional   information   of   a  public  nature
     concerning  the  Company or its business which the Representative  may
     request.

          During  such  five-year   period,   if  the  Company  has  active
subsidiaries, the foregoing financial statements  will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial  statements  for
any significant subsidiary which is not so consolidated.

          (i)  The Company will maintain a Transfer Agent and, if necessary
under  the jurisdiction of incorporation of the Company, a Registrar (which
may be the same entity as the Transfer Agent) for its Common Stock.

          (j)  The  Company  will  furnish  to the Representative or on the
Representative's order, without charge, at such place as the Representative
may  designate,  copies  of each Preliminary Prospectus,  the  Registration
Statement and any pre-effective  or  post-effective amendments thereto (two
of which copies will be signed and will  include  all  financial statements
and exhibits), the Prospectus, and all amendments and supplements  thereto,
including   any  prospectus  prepared  after  the  effective  date  of  the
Registration  Statement,  in  each  case  as  soon as available and in such
quantities as the Representative may reasonably request.

          (k)  On  or  before  the  effective  date   of  the  Registration
Statement, the Company shall provide the Representative with true copies of
duly executed, legally binding and enforceable Lock-up  Agreements pursuant
to which for a period of twenty-four (24) months from the effective date of
the  Registration Statement, shareholders of the Company owning  shares  of
Common  Stock  and holders of securities exchangeable or exercisable for or
convertible into  shares of Common Stock (owning Warrants) agree that it or
he or she will not  directly  or indirectly, publicly issue, offer to sell,
sell,  grant  an  option  for  the  sale   of,  assign,  transfer,  pledge,
hypothecate or otherwise encumber or dispose  of any shares of Common Stock
or  securities  convertible  into,  exercisable  or   exchangeable  for  or
evidencing  any  right  to purchase or subscribe for any shares  of  Common
Stock  (either pursuant to  Rule  144  of  the  Rules  and  Regulations  or
otherwise)  or dispose of any beneficial interest therein without the prior
written consent  of the Representative.  On or before the Closing Date, the
Company shall deliver  instructions to the Transfer Agent authorizing it to
place appropriate legends  on  the certificates representing the securities
subject to the Lock-up Agreements  and  to  place appropriate stop transfer
orders on the Company's ledgers.  Except for  the  issuance  of  shares  of
capital   stock   by   the   Company   in   connection   with  a  dividend,
recapitalization, reorganization or similar transaction or  as  a result of
the   exercise   of  warrants  or  outstanding  options  disclosed  in  the
Registration Statement,  the Company shall not, for a period of twenty-four
(24) months following the  Closing  Date,  directly  or  indirectly, offer,
sell,  issue or transfer any shares of its capital stock, or  any  security
exchangeable or exercisable for, or convertible into, shares of the capital
stock, without  the prior written consent of the Representative, except the
Company may issue options, not to exceed 120,000 options (without the prior
written consent of  the  Representative)  pursuant  to  the Company's Stock
Option Plan.

          (l)  The Company shall apply the net proceeds from  the  sale  of
the  Securities  in  the  manner,  and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus.   No portion of the net proceeds
will be used, directly or indirectly, to acquire  any  securities issued by
the Company.

          (m)  The  Company  shall timely file all such reports,  forms  or
other documents as may be required  (including,  but not limited to, a Form
SR  as may be required pursuant to Rule 463 under the  Act)  from  time  to
time,  under  the Act, the Exchange Act, and the Rules and Regulations, and
all such reports,  forms  and  documents  filed  will comply as to form and
substance with the applicable requirements under the Act, the Exchange Act,
and the Rules and Regulations.

          (n)  The Company shall furnish to the Representative  as early as
practicable  prior  to  each of the date hereof, the Closing Date and  each
Option Closing Date, if any, but no later than two full business days prior
thereto,  a  copy  of  the latest  available  unaudited  interim  financial
statements of the Company   (which  in  no event shall be as of a date more
than  thirty  (30) days prior to the date of  the  Registration  Statement)
which have been  read  by  the Company's independent public accountants, as
stated in their letters to be furnished pursuant to Section 7(1) hereof.

          (o)  The Company shall  cause the Common Stock and Warrants to be
quoted on NASDAQ and for a period of  five  years from the date hereof, use
its best efforts to maintain the NASDAQ listing  of  the  Common  Stock or,
upon  the  written  consent of the Representative, quotation on a principal
stock exchange.

          (p)  For a  period  of  five  years  from  the  Closing Date, the
Company shall furnish to the Representative at the Company's  sole expense,
(i) daily consolidated transfer sheets relating to the Common Stock if such
transfer sheets have been furnished to the Company by its transfer agent at
no  additional  cost,  (ii)  the  list  of  holders of all of the Company's
securities and (iii) a Blue Sky "Trading Survey" for secondary sales of the
Company's securities prepared by counsel.

          (q)  As soon as practicable, (i) but  in  no  event more than ten
business days before the effective date of the Registration Statement, file
a  Form  8-A with the Commission providing for the registration  under  the
Exchange Act  of the Securities; and (ii) but in no event more than 30 days
from the effective  date  of the Registration Statement, take all necessary
and appropriate actions to  be  included in Standard and Poor's Corporation
Descriptions and to continue such  inclusion  for a period of not less than
five (5) years.

          (r)  Until the completion of the distribution  of the Securities,
the   Company   shall  not  without  the  prior  written  consent  of   the
Representative and  Representatives' Counsel, issue, directly or indirectly
any press release or  other communication or hold any press conference with
respect to the Company  or  its  activities  or  the  offering contemplated
hereby,  other  than trade releases issued in the ordinary  course  of  the
Company's business  consistent  with  past  practices  with  respect to the
Company's operations.

          (s)  For a period equal to the lesser of (i) five (5)  years from
the  date  hereof,  and (ii) the sale to the public of the Representative's
Securities, the Company  will  not  take  any  action  or actions which may
prevent or disqualify the Company's use of Form SB-2 (or  other appropriate
form)   for   the  registration  under  the  Act  of  the  Representative's
Securities.

          (t)  For  a  period of five (5) years after the effective date of
the Registration Statement,  the  Representative  shall  have  the right to
designate one individual to be elected to the Company's Board of  Directors
(the  "Board")  and  the  Company  shall use its best efforts to cause such
designee to be elected to the Board.  In the event the Representative shall
not have designated such individual at the time of any meeting of the Board
or such person is unavailable to serve,  then for a period of two (2) years
after the effective date of the Registration  Statement,  the Company shall
timely  notify  the  Representative  of  each meeting of the Board  and  an
individual selected by the Representative  shall be permitted to attend all
meetings  of  the  Board.   In  addition, the Company  shall  send  to  the
Representative's  designee  all  notices   and   other  correspondence  and
communications sent by Company to members of the Board  at  least  two  (2)
days  before  any  meeting, if applicable.  The Company shall reimburse the
Representative's  designee   for   all   reasonable  expenses  incurred  in
connection with his service on, or attendance  of, meetings of the Board to
the same extent as is provided to all non-employee  members of the Board of
Directors.

          (u)  On  or  before  the  effective  date  of  the   Registration
Statement, the Company shall have an authorized capital stock acceptable to
the Representative including, without limitation, any stock option plans of
the Company.

          (v)  On   or  before  the  effective  date  of  the  Registration
Statement, the Company  shall have (i) entered into an employment agreement
with  Robert  O.  Smith  in  the  form  filed  as  Exhibit  10.___  of  the
Registration Statement, and (ii) has purchased keyman life insurance on the
life of Robert O. Smith.  The  policy  shall  provide  for  coverage in the
amount  of  $1,000,000, and the policy shall name the Company as  the  sole
beneficiary thereof.

          (w)  If  the  transactions  contemplated  by  this  Agreement are
consummated, during the five (5) year period from the Effective  Date,  the
Representative and its successors will have the right of first refusal (the
"Right  of  First  Refusal")  to act (1) as underwriter, placement agent or
investment  banker for any and all  public  or  private  offerings  of  the
securities, whether equity, debt or a combination of equity and debt of the
Company, or any  successor  to  or  any current or future subsidiary of the
Company (collectively referred to in  this Section (w) as the "Company") by
the Company (the "Subsequent Company Offerings")  or any secondary offering
(the  "Secondary Offering") of the Company's securities  by  any  principal
shareholder of the Company (the "Principal Shareholders") and (2) to act as
the Company's  investment  banker  on  such other transactions as may arise
from  time  to  time,  including without limitation,  acting  as  financial
advisor  or  intermediary   in   connection  with  merger  and  acquisition
opportunities introduced to the Company  by  Werbel-Roth.   Accordingly, if
during  such  period  the  Company  intends  to  make  a Subsequent Company
Offering, the Company receives notification from any of  the such Principal
Shareholders  of  its  securities  of  such holders' intention  to  make  a
Secondary  Offering,  or  the Company proposes  a  merger,  acquisition  or
disposition of assets, the  Company  shall  notify  the  Representative  in
writing  of  such  intention  and  of the proposed terms of the offering or
transaction.    The   Company  shall  thereafter   promptly   furnish   the
Representative with such information concerning the business, condition and
prospects of the Company as the Representative may reasonably request.  If,
within thirty (30) business days of the receipt of such notice of intention
and statement of terms,  the Representative does not accept in writing such
offer to act as underwriter,  placement  agent  or  investment  banker with
respect to such offering upon the terms proposed, the Company and  each  of
the  Principal  Shareholders  shall  be  free to negotiate terms with other
underwriters with respect to such offering  and  to effect such offering on
such proposed terms within six (6) months after the  end  of  such ten (10)
business days.  Before the Company and/or any of the Principal Shareholders
shall  accept any modified proposal from such other underwriter,  placement
agent or  investment  banker, the Representative's preferential right shall
be reinstated in the same  procedure with respect to such modified proposal
as provided above shall be adopted.   The  failure by the Representative to
exercise its Right of First Refusal in any particular  instance  shall  not
affect  in  any way such right with respect to any other Subsequent Company
Offering or Secondary Offering.

          (x)  The  Representative  and its successors will have a Right of
First Refusal for a period of five (5)  years  from  the  Effective Date to
purchase for the Representative's account or to sell for the account of the
Company's principal stockholders any securities sold pursuant  to  Rule 144
under  the Act.  Each of the principal stockholders agrees to consult  with
the Representative  with  respect  to  any  such  sales  and will offer the
Representative   the  exclusive  opportunity  to  purchase  or  sell   such
securities on terms at least as favorable to such principal stockholders as
they can secure elsewhere.   If  the  Representative  fails  to  accept  in
writing  any  such  proposal for sale by such principal stockholders within
three (3) business days after receipt of a notice containing such proposal,
then the Representative  shall  have  no claim or right with respect to any
such sales contained in any such notice.   If, thereafter, such proposal is
modified in any material respect, such principal  stockholders  shall adopt
the same procedure as with respect to the original proposal.

          (y)  The  Company  shall  on  the  Closing  Date,  enter  into  a
financial   advisory   agreement   ("Consulting    Agreement")   with   the
Representative for a term of three (3) years commencing  on  the  Effective
Date  which will provide that the Representatives will be paid a consulting
fee of  one  percent  of  the gross proceeds from the Company's offering of
Securities.

     6.   PAYMENT OF EXPENSES.

          (a)  The Company hereby agrees to pay on each of the Closing Date
and  the  Option  Closing  Date   (to  the  extent  not  paid  as  fees  of
Representatives' Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the  Company under this Agreement and the
Representative's Warrant Agreement, including,  without limitation, (i) the
fees  and expenses of accountants and counsel for  the  Company,  (ii)  all
costs  and   expenses   incurred   in   connection  with  the  preparation,
duplication, printing,  filing, delivery  and  mailing  of the Registration
Statement and the Prospectus and any amendments and supplements thereto and
the printing, mailing and delivery of this Agreement, the  Agreement  Among
Representatives,  the  Selected  Dealer  Agreements,  if  any,  the Selling
Agreements, if any, and related documents, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus  and  any
amendments  thereof  or supplements thereto supplied to the Representatives
and such dealers as the  Representatives  may  request,  in  quantities  as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of
the  Securities  including,  but  not  limited  to, (x) the purchase by the
Representatives of the Securities and the purchase by the Representative of
the Representative's Warrants from the Company, and (y) the consummation by
the  Company  of  any  of  its  obligations under this  Agreement  and  the
Representative's  Warrant  Agreement,    (iv)   the  qualification  of  the
Securities  under  state  or  foreign  securities or "Blue  Sky"  laws  and
determination  of  the statues of such securities  under  legal  investment
laws, including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental  Blue  Sky  Memorandum,"  "Legal Investments
Survey," if any, and the "Final Blue Sky Memorandum" and disbursements  and
fees   of   counsel   in   connection   therewith,  it  being  agreed  that
Representative's  Counsel  shall  perform the  required  "Blue  Sky"  legal
services  for  the account of the Company,(v) advertising costs
and  expenses, consisting of the Company's  travel  costs  and  preparation
expenses  in  connection  with  the  "road  show," information meetings and
presentations,  bound  volumes and prospectus memorabilia  and  one  "tomb-
stone" advertisement  in The Wall Street Journal, with expenses relating to
travel, postage and tomb-stone advertising shall not exceed $15,000 in
the aggregate, (vi) fees and expenses of the transfer agent and registrar,
(vii) the fees payable to the Commission and the NASD, and (viii)  the fees and
expenses incurred in connection with the listing of the Securities with NASDAQ 
and any other exchange.

          (b)  The Selling  Securityholders  agree  that  they will pay all
stock transfer taxes, stamp duties and other similar taxes, if any, payable
(i)  upon  the  sale, issuance or delivery of the Securities sold  by  such
Selling Securityholders,  (ii)  upon the purchase by the Representatives of
the Securities sold by such Selling  Securityholders, (iii) upon resales of
the Securities sold by such Selling Securityholders  in connection with the
distribution   contemplated   hereby  or  (iv)  in  connection   with   the
consummation by such Selling Securityholders  of  any  of their obligations
under this Agreement and further authorizes the payment  of any such amount
(and any amounts payable pursuant to Section 5(c) hereof) by deduction from
the proceeds of the Shares to be sold by them under this Agreement.

          (c)  If  this  Agreement is terminated by the Representatives  in
accordance with the provisions  of  Section  6  or  Section 12, the Company
shall  reimburse and indemnify the Representative for  all  of  its  actual
out-of-pocket   expenses,   including   the   fees   and  disbursements  of
Representatives' Counsel, less any amounts already paid pursuant to Section
5(d) hereof.

          (d)  The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 6,  it  will  pay to the
Representative  on the Closing Date by deduction from the proceeds  of  the
offering contemplated  herein  a non-accountable expense allowance equal to
three percent (3%) of the gross  proceeds  received by the Company from the
sale of the Securities and Option Securities,  if  any,  of  which has been
paid upon the execution of the Letter of Intent between the parties hereto.
The  Company  also  agrees  to pay certain due diligence fees and  expenses
incurred  by  the  Representative   in   connection   with  (i)  background
investigation of officers, directors and the shareholder  of  the  Company,
pursuant  to  judgment,  UCC and Commission searches and (ii) due diligence
meetings for syndicate members and others.

     7.   CONDITIONS OF THE  REPRESENTATIVES'  OBLIGATIONS. The obligations
of  the  Representatives  hereunder  shall  be subject  to  the  continuing
accuracy of the representations and warranties  of  the Company and Selling
Securityholders herein as of the date hereof and as of the Closing Date and
each Option Closing Date, if any, with respect to the  Company  as  if they
had been made on and as of the Closing Date or each Option Closing Date, as
the  case  may  be;  the  accuracy  on  and  as  of the Closing Date of the
statements of the Selling Securityholders and officers  of the Company made
pursuant to the provisions hereof; and the performance by  the  Company and
the  Selling  Securityholder  and  on  and as of the Closing Date and  each
Option  Closing  Date, if any, of its or their  covenants  and  obligations
hereunder and to the following further conditions:

          (a)  The  Registration  Statement shall have become effective not
later than 12:00 P.M., Florida time,  on the date of this Agreement or such
later  date  and  time  as  shall  be  consented   to  in  writing  by  the
Representative, and, at Closing Date and each Option  Closing Date, if any,
no  stop  order suspending the effectiveness of the Registration  Statement
shall have  been issued and no proceedings for that purpose shall have been
instituted or  shall  be  pending or contemplated by the Commission and any
request on the part of the Commission for additional information shall have
been  complied  with  to the reasonable  satisfaction  of  Representatives'
Counsel.  If the Company  has  elected  to rely upon Rule 430A of the Rules
and  Regulations,  the  price  of  the  Securities  and  any  price-related
information  previously omitted from the effective  Registration  Statement
pursuant to such  Rule  430A  shall have been transmitted to the Commission
for filing pursuant to Rule 424(b)  of  the Rules of Regulations within the
prescribed time period, and prior to Closing  Date  the  Company shall have
provided evidence satisfactory to the Representative of such timely filing,
or  a post-effective amendment providing such information shall  have  been
promptly  filed  and declared effective in accordance with the requirements
of Rule 430A of the Rules and Regulations.

          (b)  The Representative shall not have advised the Company or the
Selling Securityholders  that  either  the  Registration  Statement, or any
amendment thereto, or the Prospectus, contains an untrue statement  of fact
which,  in  the Representative's opinion, is material, or omits to state  a
fact which, in the Representative's opinion, is material and is required to
be stated therein  or is necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.

          (c)  On or  prior  to  the Closing Date, the Representative shall
have received from Company's Counsel,  and shall have used its best efforts
to cause such counsel to deliver such opinion  or  opinions with respect to
the  organization  of  the  Company,  the validity of the  Securities,  the
Representative's Warrants, the Registration  Statement,  the Prospectus and
other   related   matters   as   the   Representative   may   request   and
Representatives' Counsel shall have received such papers and information as
they request to enable them to pass upon such matters.

          (d)  At the Closing Date, the Representatives shall have received
the  favorable  opinion  of  Bartel  Eng  Linn  &  Schroder, counsel to the
Company,  dated the Closing Date, addressed to the Representatives  and  in
form and substance  reasonably satisfactory to Representatives' Counsel, to
the effect that:

               i)   the  Company (A) has been duly organized and is validly
     existing as a corporation  in  good  standing  under  the  laws of its
     jurisdiction, (B) is duly qualified and licensed and in good  standing
     as a foreign corporation in each jurisdiction where the nature  of its
     properties  or  the conduct of its business requires such registration
     and the failure to  register  or  so  qualify  would  have  a material
     adverse  effect on the Company, (C) has all requisite corporate  power
     and authority,  and has obtained any and all necessary authorizations,
     approvals, orders,  licenses,  certificates, franchises and permits of
     and  from  all  governmental  or  regulatory   officials   and  bodies
     (including,   without   limitation,  those  having  jurisdiction  over
     environmental or similar  matters), to own or lease its properties and
     conduct its business as described  in  the Prospectus; (D) the Company
     is and has been doing business in material  compliance  with  all such
     authorizations,  approvals, orders, licenses, certificates, franchises
     and  permits  and  all  federal,  state  and  local  laws,  rules  and
     regulations; and, (E)  the  Company  has  not  received  any notice of
     proceedings  relating  to the revocation or modification of  any  such
     authorization, approval,  order,  license,  certificate,  franchise or
     permit  which,  singly  or  in  the  aggregate,  if the subject of  an
     unfavorable  decision,  ruling or finding, would materially  adversely
     affect  the  business,  condition,  financial  or  otherwise,  or  the
     earnings, affairs,  position, prospects, value, operation, properties,
     business or results of  operations of the Company.  The disclosures in
     the Registration Statement  concerning  the  effects of federal, state
     and  local  laws, rules and regulations on the Company's  business  as
     currently conducted  and  as contemplated are  correct in all material
     respects or do not omit to state a material fact necessary to make the
     statements  contained  therein   not   misleading   in  light  of  the
     circumstances in which they were made.

               ii)   the  Company   has  a  duly  authorized,  issued  and
     outstanding capitalization as set  forth  in  the  Prospectus, and any
     amendment or supplement thereto, under "Capitalization",  and  to  our
     knowledge,  the  Company is not a party to or bound by any instrument,
     agreement or other  arrangement  providing for it to issue any capital
     stock, rights, warrants, options or  other securities, except for this
     Agreement and the Representative's Warrant  Agreement and as described
     in the Prospectus.  The Securities, the Representative's  Warrants and
     all other securities issued or issuable by the Company conform  in all
     material respects to all statements with respect thereto contained  in
     the  Registration  Statement  and  the  Prospectus.   All  issued  and
     outstanding  securities  of  the Company have been duly authorized and
     validly  issued and are fully paid  and  non-assessable;  the  holders
     thereof have no rights to rescission with respect thereto, and are not
     subject to  personal  liability  by  reason of being such holders; and
     none of such securities were issued in  violation  of  the  preemptive
     rights  of any holders of any security of the Company.  The Securities
     and  the  Representative's  Securities  to  be  sold  by  the  Company
     hereunder and under the Representative's Warrant Agreement are not and
     will not be  subject  to any preemptive or other similar rights of any
     shareholder, have been  duly authorized and, when issued, paid for and
     delivered in accordance with the terms hereof, will be validly issued,
     fully paid and non-assessable  and  conform to the description thereof
     contained in the Prospectus; the holders  thereof  will not be subject
     to any liability solely as such holders; all corporate action required
     to  be taken for the authorization, issue and sale of  the  Securities
     and the  Representative's  Securities has been duly and validly taken;
     and   the   certificates   representing   the   Securities   and   the
     Representative's Warrants are  in  due  and  proper  form.  Subject to
     compliance with the registration provisions of the Act  and applicable
     state  registration and qualification provisions, the Representative's
     Warrants  constitute  valid  and binding obligations of the Company to
     issue and sell, upon exercise thereof and payment therefor, the number
     and type of securities of the  Company  called  for  thereby. Upon the
     issuance and delivery pursuant to this Agreement of the Securities and
     the  Representative's  Warrants  to be sold by the Company,  and  upon
     payment in full therefor the Representatives  and  the Representative,
     respectively, will acquire good and marketable title to the Securities
     and  Representative  Warrants  free  and  clear  of any pledge,  lien,
     charge,  claim, encumbrance, security interest, or  other  restriction
     (excluding   securities  law  restrictions)  or  equity  of  any  kind
     whatsoever, except  with  respect  to  any  actions that may have been
     taken  or  omitted  to  be  taken  by  the  Representatives   or   the
     Representative  after  the date hereof.  No transfer tax is payable by
     or  on  behalf  of the Representatives  in  connection  with  (A)  the
     issuance by the Company  of  the  Securities,  (B) the purchase by the
     Representatives  and  the  Representative  of the Securities  and  the
     Representative's Securities, respectively, from  the  Company, (C) the
     consummation  by  the  Company  of  any of its obligations under  this
     Agreement or the Representative's Warrant Agreement, or (D) resales of
     the  Securities  in  connection  with  the  distribution  contemplated
     hereby.

               iii)  the Registration Statement  has  become effective under
     the  Act,  and, if applicable, filing of all pricing  information  has
     been timely  made in the appropriate form under Rule 430A, and no stop
     order  suspending   the   use   of  the  Preliminary  Prospectus,  the
     Registration Statement or Prospectus  or  any  part  of any thereof or
     suspending  the effectiveness of the Registration Statement  has  been
     issued and no proceedings for that purpose have been instituted or are
     pending or, to  the  best  of  such counsel's knowledge, threatened or
     contemplated under the Act.

              iv)   each of the Preliminary  Prospectus,  the  Registration
     Statement,  and  the  Prospectus  and  any amendments a statements  or
     supplements thereto (other than the financial statements and the notes
     thereto and other financial and statistical  data included therein, as
     to  which  no  opinion  need be rendered) comply as  to  form  in  all
     material respects with the  requirements  of the Act and the Rules and
     Regulations.

               v)  to the best of such counsel's  knowledge, (A) there are
     no agreements, contracts or other documents required  by the Act to be
     described in the Registration Statement and the Prospectus  and  filed
     as  exhibits  to the Registration Statement other than those described
     in the Registration  Statement  (or  required  to  be  filed under the
     Exchange Act if upon such filing they would be incorporated,  in whole
     or  in  part,  by  reference therein) and the Prospectus and filed  as
     exhibits thereto, and  the  exhibits which have been filed are correct
     copies of the documents of which  they  purport  to be copies; (B) the
     descriptions in the Registration Statement and the  Prospectus and any
     supplement  or amendment thereto of contracts and other  documents  to
     which the Company  is  a  party or by which it is bound, including any
     document to which the Company  is  a  party  or  by which it is bound,
     incorporated by reference into the Prospectus and  any  supplement  or
     amendment  thereto,  are accurate and fairly represent the information
     required to be shown by  Form  SB-2;  or  (C)  there is not pending or
     threatened   against  the  Company  any  action,  arbitration,   suit,
     proceeding,  inquiry,  investigation,  litigation,  legal,  statutory,
     regulatory,  governmental  or  other  proceeding  (including,  without
     limitation, those  having  jurisdiction  over environmental or similar
     matters),  domestic  or  foreign, pending or  threatened  against,  or
     involving the properties or  business  of  the  Company  which  (x) is
     required to be disclosed in the Registration Statement which is not so
     disclosed  (and such proceedings as are summarized in the Registration
     Statement are  accurately  summarized  in all respects), (y) questions
     the validity of the capital stock  of the Company or this Agreement or
     the Representative's Warrant Agreement,  or  of any action taken or to
     be taken by the Company pursuant to or in connection  with  any of the
     foregoing;  (D)  no  statute  or  regulation  or legal or governmental
     proceeding required to be described in the Prospectus is not described
     as required; and (E) there is no action, suit or  proceeding,  pending
     or  threatened,  against or affecting the Company before any court  or
     arbitrator or governmental  body,  agency  or  official  (or any basis
     thereof  known  to  such  counsel)   which  in  any manner draws  into
     question  the  validity  or  enforceability of this Agreement  or  the
     Representative's Warrant Agreement;

               vi)  the Company has  full legal right, power and authority
     to enter into each of this Agreement  and the Representative's Warrant
     Agreement, and to consummate the transactions  provided  for  therein;
     and  each of this Agreement and the Representative's Warrant Agreement
     has been duly authorized, executed and delivered by the Company.  Each
     of this Agreement and the Representative's Warrant Agreement, assuming
     due authorization,  execution and delivery by each other party thereto
     constitutes a legal,  valid  and  binding  agreement  of  the  Company
     enforceable  against  the Company in accordance with its terms (except
     as  such enforceability  may  be  limited  by  applicable  bankruptcy,
     insolvency,  reorganization,  moratorium  or  other  laws  of  general
     application  relating to or affecting enforcement of creditors' rights
     and the application  of  equitable  principles in any action, legal or
     equitable, and except as rights to indemnity  or  contribution  may be
     limited  by  applicable  law),  and none of the Company's execution or
     delivery of this Agreement and the Representative's Warrant Agreement,
     its  performance  hereunder or thereunder,  its  consummation  of  the
     transactions contemplated  herein  or  therein,  or the conduct of its
     business as described in the Registration Statement,  the  Prospectus,
     and  any  amendments  or  supplements thereto, conflicts with or  will
     conflict with or results or  will result in any breach or violation of
     any of the terms or provisions of, or constitutes or will constitute a
     default under, or result in the  creation  or  imposition of any lien,
     charge, claim, encumbrance, pledge, security interest, defect or other
     restriction  or equity of any kind whatsoever upon,  any  property  or
     assets (tangible  or  intangible) of the Company pursuant to the terms
     of, (A) the articles of  incorporation  or by-laws of the Company; (B)
     any  license, contract, indenture, mortgage,  deed  of  trust,  voting
     trust   agreement,   shareholders  agreement,  note,  loan  or  credit
     agreement or any other agreement or instrument to which the Company is
     a party or by which it  is  or  may  be  bound  or to which any of its
     properties or assets (tangible or intangible) is or may be subject, or
     any indebtedness, or (C) any statute, judgment, decree, order, rule or
     regulation  applicable  to  the  Company  of  any  arbitrator,  court,
     regulatory body or administrative agency or other governmental  agency
     or body (including, without limitation, those having jurisdiction over
     environmental   or  similar  matters),  domestic  or  foreign,  having
     jurisdiction over the Company or any of its activities or properties.

               vii)   no  consent, approval, authorization or order,and no
     filing with, any court,  regulatory  body,  government agency or other
     body (other than such as may be required under  Blue  Sky  laws, as to
     which no opinion need be rendered) is required in connection  with the
     issuance of the Securities pursuant to the Prospectus, the issuance of
     the  Representative's  Warrants,  and the Registration Statement,  the
     performance  of  this  Agreement  and  the   Representative's  Warrant
     Agreement, and the transactions contemplated hereby and thereby;

               viii)  the properties and business of  the  Company conform in
     all  material  respects  to the description thereof contained  in  the
     Registration Statement and the Prospectus;

               ix)   the Company  is  not in breach of, or in default under,
     any term or provision of any material  license,  contract,  indenture,
     mortgage,  installment  sale  agreement,  deed of trust, lease, voting
     trust agreement, shareholders' agreement, partnership agreement, note,
     loan or credit agreement or any other material agreement or instrument
     evidencing an obligation for borrowed money,  or  any  other  material
     agreement  or  instrument  to which the Company is a party or by which
     any of the Company may be bound  or  to  which  the property or assets
     (tangible or intangible) of any of the Company is subject or affected;
     and the Company is not in violation of any term or  provision  of  its
     Articles of Incorporation or by-laws or in violation of any franchise,
     license, permit, judgment, decree, order, statute, rule or regulation;

               x)  the  statements  in  the  Prospectus  under "PROSPECTUS
     SUMMARY   -   THE   COMPANY,"   "BUSINESS,"   "MANAGEMENT,"   "SELLING
     SECURITYHOLDERS,"  "CERTAIN  RELATIONSHIPS  AND RELATED TRANSACTIONS,"
     "SECURITY  OWNERSHIP  OF  CERTAIN BENEFICIAL OWNERS  AND  MANAGEMENT,"
     "DESCRIPTION OF SECURITIES,"  and  "SHARES  ELIGIBLE  FOR FUTURE SALE"
     have  been  reviewed  by  such counsel, and insofar as they  refer  to
     statements  of  law, descriptions  of  statutes,  licenses,  rules  or
     regulations or legal conclusions are correct in all material respects;

               xi)  the  Securities  will  be  listed  on  NASDAQ upon the
     effective date of the Registration statement.

               xii)    the  person  listed  under  the  caption  "Security
     Ownership  of  Certain   Beneficial  Owners  and  Management"  in  the
     Prospectus are the respective  "beneficial  owners" (as such phrase is
     defined in Regulation 13d-3 under the Exchange  Act) of the securities
     set forth opposite their respective names thereunder  as  and  to  the
     extent set forth therein;

               xiii)   except  as  described  in  the Prospectus, no person,
     corporation, trust, partnership, association  or  other entity has the
     right to include and/or register any securities of  the Company in the
     Registration  Statement, require the Company to file any  registration
     statement or, if  filed,  to include any security in such registration
     statement;

               xiv)  except as described  in  the  Prospectus,  there are no
     claims,  payments,  issuances,  arrangements  or  understandings   for
     services  in  the nature of a finder's or origination fee with respect
     to  the sale of  the  Securities  hereunder  or  financial  consulting
     arrangement  or  any  other  arrangements, agreements, understandings,
     payments   or   issuances  that  may   affect   the   Representatives'
     compensation, as determined by the NASD;

               xv)  assuming  due  execution  by the parties thereto other
     than the Company, the Lock-up Agreements hereof  are  legal, valid and
     binding obligations of parties thereto, enforceable against  the party
     and  any  subsequent  holder  of  the  securities  subject  thereto in
     accordance  with  its  terms  (except  as  such enforceability may  be
     limited   by   applicable   bankruptcy,   insolvency,   reorganization
     moratorium  or  other  laws  of  general application  relating  to  or
     affecting enforcement of creditors'  rights  and  the  application  of
     equitable  principles in any action, legal or equitable, and except as
     rights to indemnity or contribution may be limited by applicable law);

               xvi)   except  as  described in the Prospectus, the Company
     does not (A) maintain, sponsor  or  contribute to any ERISA Plans, (B)
     maintain or contribute, now or at any  time  previously,  to a defined
     benefit plan, as defined in Section 3(35) of ERISA, and (C)  has never
     completely or partially withdrawn from a "multi-employer plan;"

               xvii)  except  as  set forth in the Prospectus, no officer,
     director  of  shareholder  of  the  Company,  or  any  "affiliate"  or
     "associate" (as these terms are  defined in Rule 405 promulgated under
     the Rules and Regulations) of any of the foregoing persons or entities
     has or has had, either directly or  indirectly, (A) an interest in the
     person or entity which (x) furnishes  or  sells  services  or products
     which are furnished or sold or are proposed to be furnished or sold by
     the  Company,  or  (y)  purchases  from  or sells or furnishes to  the
     Company  any goods or services, or (B) a beneficial  interest  in  any
     contract or agreement to which the Company is a party or by which they
     may be bound or affected.  Except as set forth in the Prospectus under
     "Management" or "Certain Transactions," there are no existing material
     agreements,  arrangements, understandings or transactions, or proposed
     agreements, arrangements,  understandings  or transactions, between or
     among the Company, and any officer, director, or Principal Shareholder
     of the Company, or any affiliate or associate  of  any  such person or
     entity.

     Such  counsel  shall state that during the course of its participation
in the preparation of the Registration Statement and the Prospectus and the
amendments thereto, no  facts  have  come  to the attention of such counsel
which lead them to believe that either the Registration  Statement  or  any
amendment  thereto,  at  the  time such Registration Statement or amendment
became effective or the Preliminary  Prospectus  or Prospectus or amendment
or supplement thereto as of the date of such opinion  contained  any untrue
statement  of  a material fact or omitted to state a material fact required
to be stated therein  or  necessary  to  make  the  statements  therein not
misleading  (it being understood that such counsel need express no  opinion
with respect  to the financial statements and schedules and other financial
and  statistical   data   included   in  the  Preliminary  Prospectus,  the
Registration Statement or Prospectus).

     In rendering such opinion, such counsel  may  rely  (A)  as to matters
involving the application of laws other than the laws of the United  States
and  jurisdictions  in  which they are admitted, to the extent such counsel
deems proper and to the extent  specified  in such opinion, if at all, upon
an   opinion   or   opinions  (in  form  and  substance   satisfactory   to
Representatives' Counsel)  of  other counsel acceptable to Representatives'
Counsel, familiar with the applicable  laws;  (B) as to matters of fact, to
the  extent  they deem proper, on certificates and  written  statements  of
responsible officers  of  the  Company  and  certificates  or other written
statements  of  officers  of  departments  of various jurisdictions  having
custody of documents respecting the corporate existence or good standing of
the Company, provided that copies of any such  statements  or  certificates
shall  be delivered to Representatives' Counsel if requested.  The  opinion
of such  counsel  for  the Company shall state that the opinion of any such
other  counsel  is in form  satisfactory  to  such  counsel  and  that  the
Representative and they are justified in relying thereon.

          (e)  At  the Closing Date, the Representative shall have received
the favorable opinion  of  Bartel  Eng  Linn & Schroder with respect to the
Selling  Securityholders  dated  the  Closing   Date,   addressed   to  the
Representatives  and in form and substance satisfactory to Representatives'
Counsel, to the effect that:

               i)   The  Selling Securityholders have full right, power and
     authority to enter into  and  to  perform  its  obligations under this
     Agreement,  his  Power  of Attorney, Custody Agreement  and  to  sell,
     transfer  and deliver the  Securities  to  be  sold  by  such  Selling
     Securityholders under this Agreement.

               ii)  This  Agreement  and   the Powers of Attorney have been
     duly  executed  and  delivered  by  or  on  behalf   of   the  Selling
     Securityholders,  and  are the valid and binding obligations  of  such
     Selling   Securityholders,    enforceable    against    such   Selling
     Securityholders in accordance with their respective terms;

               iii)   The  execution,  delivery  and  performance  of  this
     Agreement  and  the  consummation  of  the  transactions  contemplated
     hereby, including the issuance, sale and delivery of the Securities to
     be sold by the Selling Securityholders, will not result in a breach or
     violation  of,  or  constitute  a  default  under,  any will, license,
     contract  indenture,  mortgage, voting trust agreement,  shareholders'
     agreement, deed of trust,  note,  loan  or  credit agreement, or other
     agreement or instrument to which such Selling  Securityholders  are  a
     party  or by which such Selling Securityholders are or may be bound or
     to which  any of such Selling Securityholders's property are or may be
     subject or  any indebtedness, statue, judgment, decree, order, rule or
     regulation  applicable   to   such   Selling  Securityholders  of  any
     arbitrator, court, regulatory body or  administrative  agency or other
     governmental  agency  or  body  (including, without limitation,  those
     having jurisdiction over environmental  or  similar matters), domestic
     or  foreign having jurisdiction over such Selling  Securityholders  or
     any of their activities or properties;

               iv)  To  the  best  of such counsel's knowledge, no consent,
     approval, authorization, order,  registration,  filing, qualification,
     license or permit of or with any court or any public,  governmental or
     regulatory  agency  or  body  having  jurisdiction  over such  Selling
     Securityholders, or any of their respective properties  or  assets  is
     required   for   the  execution,  delivery  and  performance  of  this
     Agreement, the consummation  of  the transactions contemplated hereby,
     including the issuance, sale and delivery of the Securities to be sold
     by such Selling Securityholders, except the registration under the Act
     of   the  Shareholder  Securities  and   such   consents,   approvals,
     authorizations,   orders,   registrations,   filings,  qualifications,
     licenses and permits as may be required under state securities or Blue
     Sky  laws  in  connection  with the purchase and distribution  of  the
     Shareholder Securities to be sold by the Representatives; and

               v)   Upon delivery of the Securities set forth on Schedule B
     hereto to be sold by such Selling  Securityholders, and the receipt of
     payment therefor pursuant hereto, good, valid and  marketable title to
     such  Securities  and,  free  and  clear   of   all   liens,  charges,
     encumbrances,   equities,   claims,   pledges,   security   interests,
     restrictions,   shareholders'  agreements,  voting  trusts,  community
     property rights,  or  defects  in  title  whatsoever  will pass to the
     Representatives.

          (f)  At  each  Option  Closing  Date, if any, the Representatives
shall have received the favorable opinion of  Bartel  Eng  Linn & Schroder,
counsel  to  the Company, dated the Option Closing Date, addressed  to  the
Representatives  and in form and substance satisfactory to Representatives'
Counsel confirming  as  of  such Option Closing Date the statements made by
Bartel Eng Linn & Schroder, in  the  opinion  delivered on the Closing Date
with respect to the Option Securities.

          (g)  On  or  prior to each of the Closing  Date  and  the  Option
Closing Date, if any, Representatives'  Counsel  shall  have been furnished
such  documents,  certificates and opinions as they may reasonably  require
for the purpose of  enabling  them  to  review  or  pass  upon  the matters
referred  to  in  subsection (c) of this Section 6, or in order to evidence
the accuracy, completeness  or  satisfaction of any of the representations,
warranties or conditions of the Company, or herein contained.

          (h)  Prior to each of the  Closing  and each Option Closing Date,
if any (1) there shall been no adverse change or  development  involving  a
prospective  change  in  the  condition, financial or otherwise, prospects,
shareholder's equity with the business  activities  of the Company, whether
or  not  in the ordinary course of business, from the latest  dates  as  of
which such  condition  is  set  forth  in  the  Registration  Statement and
Prospectus;  (2) there shall have been no transaction, not in the  ordinary
course of business, entered into by the Company, from the latest date as of
which  the  financial  condition  of  the  Company  is  set  forth  in  the
Registration  Statement and Prospectus which is adverse to the Company; (3)
the Company shall  not  be in default under any provision of any instrument
relating to any outstanding  indebtedness;  (4)  the Company shall not have
issued  any  securities  (other  than  Securities  and the  Representatives
Warrants)  or  declared  or paid any dividend or made any  distribution  in
respect of its capital stock of any class and there has not been any change
in  the capital stock or change  in  the  debt  (long  or  short  term)  or
liabilities or obligations of the Company (contingent or otherwise); (5) no
material  amount  of  the  assets of the Company shall have been pledged or
mortgaged,  except  as  set  forth   in   the  Registration  Statement  and
Prospectus; (6) no action, suit or proceeding,  at  law or in equity, shall
have  been  pending or threatened (or circumstances giving  rise  to  same)
against the Company  or  affecting any of its properties or business before
or by any court or federal,  state  or  foreign  commission, board or other
administrative agency wherein an unfavorable decision,  ruling  or  finding
may  materially  adversely  affect  the  business, operations, prospects or
financial condition or income of the Company,  except  as  set forth in the
Registration  Statement  and Prospectus; and (7) no stop order  shall  have
been issued under the Act  and  no  proceedings  therefor  shall  have been
initiated, threatened or contemplated by the Commission.

          (i)  At each of the Closing Date and each Option Closing Date, if
any,  the  Representatives shall have received a certificate of the Company
signed by the  principal  executive  officer  and by the chief financial or
chief accounting officer of the Company, dated  the  Closing Date or Option
Closing Date, as the case may be, to the effect that each  of  such persons
has carefully examined the Registration Statement, the Prospectus  and this
Agreement, and that:

               i)   The  representations  and warranties of the Company  in
     this Agreement are true and correct in  all  material  respects, as if
     made on and as of the Closing Date or the Option Closing  Date, as the
     case  may  be,  and  the Company has complied with all agreements  and
     covenants and satisfied  all conditions contained in this Agreement on
     its part to be performed or satisfied at or prior to such Closing Date
     or Option Closing Date, as the case may be;

               ii)  No  stop order  suspending  the  effectiveness  of  the
     Registration Statement  or  any  part  thereof has been issued, and no
     proceedings for that purpose have been instituted  or  are pending or,
     to the best of each of such person's knowledge, after due  inquiry are
     contemplated or threatened under the Act;

               iii)    Each   Preliminary   Prospectus,   the  Registration
     Statement  and  the  Prospectus and, if any, each amendment  and  each
     supplement thereto, contain all statements and information required to
     be included therein; and

               iv)  Subsequent   to   the  respective  dates  as  of  which
     information is given in the Registration Statement and the Prospectus,
     (a) the Company has not incurred up  to and including the Closing Date
     or the Option Closing Date, as the case  may  be,  other  than  in the
     ordinary   course   of  its  business,  any  material  liabilities  or
     obligations, direct or  contingent;  (b)  the  Company has not paid or
     declared any dividends or other distributions on  its  capital  stock;
     (c)  the  Company  has  not  entered  into any transactions not in the
     ordinary course of business; (d) there  has not been any change in the
     capital  stock  or long-term debt or any increase  in  the  short-term
     borrowings (other  than  any  increase in the short-term borrowings in
     the ordinary course of business)  of  the Company; (e) the Company has
     not sustained any material loss or damage  to  its property or assets,
     whether or not insured; (f) there is no litigation which is pending or
     threatened (or circumstances giving rise to same)  against the Company
     or any affiliated party of the foregoing which is required  to  be set
     forth in an amended or supplemented Prospectus which has not been  set
     forth; and (g) there has occurred no event required to be set forth in
     an amended or supplemented Prospectus, which has not been set forth.

References  to  the  Registration  Statement  and  the  Prospectus  in this
subsection  (i)  are  to  such documents as amended and supplemented at the
date of such certificate.

          (j)  At the Closing  Date,  if any, the Representative shall have
received   a   certificate   of  an  Attorney-in-Fact   for   the   Selling
Securityholders,  dated  as of such  date,  to  the  effect  that  (i)  the
representations and warranties  of  such Selling Securityholders, contained
herein  are true and correct with the  same  force  and  effect  as  though
expressly  made  at  and  as  of  such  Closing  Date,  (ii)  such  Selling
Securityholders  have reviewed the Prospectus, and any supplements thereto,
and the information  relating  to  such  Selling  Securityholders  and such
Selling  Securityholders's  shares of Common Stock and other securities  of
the Company owned by such Selling  Securityholders that is set forth in the
Prospectus,  and  any supplements thereto,  does  not  contain  any  untrue
statement of a material  fact  or omit to state any material fact necessary
to  make  such information not  misleading,  and  all  of  the  information
furnished by  or  on  behalf of such Selling Securityholders for use in the
Prospectus is true, correct and complete in all respects.

          (k)  The Representative  shall have the obligation to satisfy the
requirements set forth by the rules  and  regulations of the NASD as to the
amount  of compensation allowable or payable  by  the  Representative  and,
accordingly,  by  the  Closing Date, the Representatives will have received
clearance from the NASD  as  to  the  amount  of  compensation allowable or
payable to the Representatives, as described in the Registration Statement.

          (l)  At the time this Agreement is executed,  the Representatives
shall  have  received  a  letter,  dated  such  date,  addressed   to   the
Representatives   in   form   and  substance  satisfactory  (including  the
non-material nature of the changes  or  decreases,  if  any, referred to in
clause   (iii)   below)   in  all  respects  to  the  Representatives   and
Representatives' Counsel, from ___________________:

               i)   confirming  that  they are independent certified public
     accountants with respect to the Company  within the meaning of the Act
     and the applicable Rules and Regulations;

               ii)  stating  that it is their opinion  that  the  financial
     statements and supporting  schedules  of  the  Company included in the
     Registration Statement comply as to form in all material respects with
     the applicable accounting requirements of the Act  and  the  Rules and
     Regulations  thereunder and that the Representative may rely upon  the
     opinion of Hein  +  Associates,  LLP,  with  respect  to the financial
     statements  and  supporting  schedules  included  in  the Registration
     Statement;

               iii)  stating that, on the basis of a limited  review  which
     included a reading of the latest available unaudited interim financial
     statements  of  the  Company  (with  an  indication of the date of the
     latest available unaudited interim financial statements), a reading of
     the  latest  available  minutes  of  the  shareholders  and  board  of
     directors and the various committees of the boards of directors of the
     Company,  consultations  with  officers  and other  employees  of  the
     Company  responsible for financial and accounting  matters  and  other
     specified  procedures and inquiries, nothing has come to its attention
     which would  lead  it  to  believe  that  (A)  the unaudited financial
     statements  and supporting schedules of the Company  included  in  the
     Registration  Statement  do  not  comply  as  to  form in all material
     respects with the applicable accounting requirements  of  the  Act and
     the  Rules  and  Regulations or are not fairly presented in conformity
     with generally accepted  accounting  principles  applied  on  a  basis
     substantially consistent with that of the audited financial statements
     of  the  Company  included  in the Registration Statement, or (B) at a
     specified date not more than  five days prior to the effective date of
     the Registration Statement, there  has  been any change in the capital
     stock  or  long-term  debt  of the Company, or  any  decrease  in  the
     shareholder's equity or net assets  of  the  Company  as compared with
     amounts  shown  in  the  June 30, 1996 balance sheet included  in  the
     Registration Statement, other  than as set forth in or contemplated by
     the Registration Statement, or,  if  there was any change or decrease,
     setting forth the amount of such change  or  decrease;  and (C) during
     the period from June 30, 1996, to a specified date not more  than five
     (5)  days  prior  to the effective date of the Registration Statement,
     there was any decrease  in  net  revenues, net earnings or increase in
     net earnings per common share of the  Company,  as  compared  with the
     corresponding period beginning June 30, 1996, other than as set  forth
     in or contemplated by the Registration Statement, or, if there was any
     such  decrease,  setting  forth  the  amount of such decrease; setting
     forth, at a date not later than five (5) days prior to the date of the
     Registration  Statement,  the  amount of liabilities  of  the  Company
     (including  a break-down of commercial  paper  and  notes  payable  to
     banks).

               iv)  stating   that   they  have  compared  specific  dollar
     amounts,  numbers of shares, percentages  of  revenues  and  earnings,
     statements  and  other financial information pertaining to the Company
     set forth in the Prospectus  in  each  case  to  the  extent that such
     amounts,  numbers,  percentages,  statements  and information  may  be
     derived from the general accounting records, including work sheets, of
     the Company and excluding any questions requiring an interpretation by
     legal  counsel,  with  the results obtained from  the  application  of
     specified readings,  inquiries and other appropriate procedures (which
     procedures  do  not  constitute  an  examination  in  accordance  with
     generally accepted auditing  standards)  set  forth  in the letter and
     found them to be in agreement;

               v)   stating  that  they  have  not  during  the immediately
     preceding  five-year  period  brought to the attention of any  of  the
     Company's  management  any "weakness,"  as  defined  in  Statement  of
     Auditing Standard No. 60  "Communication of Internal Control Structure
     Related Matters Noted in an  Audit,"  in any of the Company's internal
     controls;
               vi)  statements as to such other  matters  incident  to  the
     transaction  contemplated  hereby as the Representative may reasonably
     request.

          (m)  At Closing Date and  each  Option  Closing Date, if any, the
Representatives  shall have received from Bartel Eng  Linn  &  Schroder,  a
letter, dated as of  the  Closing  Date  or the Option Closing Date, as the
case may be, to the effect that they reaffirm  those statements made in the
letter furnished pursuant to SUBSECTION (l) of this  Section,  except  that
the  specified  date  referred  to  shall be a date not more than five days
prior to Closing Date or the Option Closing  Date, as the case may be, and,
if  the  Company  has  elected  to  rely  on Rule 430A  of  the  Rules  and
Regulations, to the further effect that they have carried out procedures as
specified  in  subsection  (l)  of this Section  with  respect  to  certain
amounts,  percentages  and  financial   information  as  specified  by  the
Representative  and  deemed  to  be a part of  the  Registration  Statement
pursuant  to Rule 430A(b) and have  found  such  amounts,  percentages  and
financial information to be in agreement with the records specified in such
subsection (l).

          (n)  On  each  of  Closing  Date and Option Closing Date, if any,
there shall have been duly tendered to  the  Representative for the several
Representatives' accounts the appropriate number of Securities.

          (o)  No  order  suspending  the sale of  the  Securities  in  any
jurisdiction, which in the judgment of  the  Representative  is material to
Closing  of  the transaction, designated by the Representative pursuant  to
subsection (e)  of  Section  4  hereof shall have been issued on either the
Closing Date or the Option Closing  Date,  if  any,  and no proceedings for
that purpose shall have been instituted or shall be contemplated.

          (p)  On  or  before  the  Closing  Date, the Company  shall  have
executed  and  delivered to the Representative,  (i)  the  Representative's
Warrant Agreement  substantially  in  the form filed as Exhibit ____ to the
Registration  Statement in final form and  substance  satisfactory  to  the
Representative,   and   (ii)   the   Representative's   Warrants   in  such
denominations  and  to  such  designees  as shall have been provided to the
Company.

          (q)  Upon the effective date of  the Registration Statement,  the
Securities shall have been duly approved for  quotation  on NASDAQ, subject
to official notice of issuance.

          (r)  On or before Closing Date, there shall have  been  delivered
to  the Representative all of the Lock-up Agreements, in form and substance
reasonably satisfactory to Representatives' Counsel.

          (s)  On  or  before  the  Closing  Date,  the  Company shall have
executed  and  delivered  to  the  Representative the Consulting  Agreement
substantially in the form filed as Exhibit ____.

          If any condition to the Representatives' obligations hereunder to
be fulfilled prior to or at the Closing Date or the relevant Option Closing
Date,  as  the case may be, is not so  fulfilled,  the  Representative  may
terminate this  Agreement or, if the Representative so elects, it may waive
any such conditions  which  have  not been fulfilled or extend the time for
their fulfillment.

     8.   INDEMNIFICATION.

          (a)  The Company and the  Selling  Securityholders, severally but
not   jointly  agrees  to  indemnify  and  hold  harmless   each   of   the
Representatives  (for  purposes  of  this  Section 8 "Representative" shall
include the officers, directors, partners, employees, agents and counsel of
the  Representative,  including  specifically  each   person   who  may  be
substituted  for  an Representative as provided in Section 12 hereof),  and
each person, if any, who controls the Representative ("controlling person")
within the meaning  of  Section  15  of  the  Act  or  Section 20(a) of the
Exchange  Act,  from  and  against  any  and  all losses, claims,  damages,
expenses or liabilities, joint or several (and actions in respect thereof),
whatsoever (including but not limited to any and  all  expenses  whatsoever
reasonably  incurred  in investigating, preparing or defending against  any
litigation, commenced or  threatened, or any claim whatsoever), as such are
incurred, to which the Representative or such controlling person may become
subject under the Act, the  Exchange  Act or any other statute or at common
law or otherwise or under the laws of foreign  countries, arising out of or
based upon any untrue statement or alleged untrue  statement  of a material
fact   contained  (i)  in  any  Preliminary  Prospectus,  the  Registration
Statement   or   the   Prospectus   (as  from  time  to  time  amended  and
supplemented); (ii) in any post-effective  amendment  or  amendments or any
new  registration statement and prospectus in which is included  securities
of the Company issued or issuable upon exercise of the Securities; or (iii)
in any  application  or  other  document  or written communication (in this
Section 8 collectively called "application")  executed  by  the  Company or
based upon written information furnished by the Company in any jurisdiction
in  order  to  qualify the Securities under the securities laws thereof  or
filed with the Commission,  any  state  securities  commission  or  agency,
NASDAQ  or  any  other  securities  exchange;  or  the  omission or alleged
omission  therefrom  of  a material fact required to be stated  therein  or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of  the circumstances under which they were made),
unless  such  statement or omission  was  made  in  reliance  upon  and  in
conformity with  written  information furnished to the Company with respect
to any Representative by or  on behalf of such Representative expressly for
use  in  any  Preliminary  Prospectus,   the   Registration   Statement  or
Prospectus,  or  any  amendment  thereof or supplement thereto, or  in  any
application, as the case may be.

          The indemnity agreement  in  this  subsection  (a)  shall  be  in
addition  to any liability which the Company or the Selling Securityholders
may have at common law or otherwise.

          (b)  Each   of  the  Representatives  agree  severally,  but  not
jointly, to indemnify and hold harmless the Company, each of its directors,
proposed directors, each  of  its  officers who has signed the Registration
Statement, counsel for the Company,  the  Selling Securityholders, and each
other person, if any, who controls the Company  within  the  meaning of the
Act, to the same extent as the foregoing indemnity from the Company and the
Selling  Securityholders  to  the Representatives but only with respect  to
statements or omissions, if any,  made  in  any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto  or  in  any  application  made in reliance  upon,  and  in  strict
conformity with, written information  furnished to the Company with respect
to any Preliminary Prospectus, the Registration  Statement or Prospectus or
any  amendment thereof or supplement thereto or in  any  such  application,
provided  that  such  written  information  or   omissions  only pertain to
disclosures  in  the Preliminary Prospectus, the Registration Statement  or
Prospectus  directly   relating   to   the  transactions  effected  by  the
Representatives in connection with this Offering.  The Company acknowledges
that the statements with respect to the  public  offering of the Securities
set forth under the heading "Underwriting" and the  stabilization legend in
the Prospectus have been furnished by the Representatives expressly for use
therein and constitute the only information furnished  in  writing by or on
behalf of the Representatives for inclusion in the Prospectus.

          (c)  Promptly  after receipt by an indemnified party  under  this
Section 8 of notice of the  commencement of any action, suit or proceeding,
such indemnified party shall,  if  a claim in respect thereof is to be made
against one or more indemnifying parties  under this Section 8, notify each
party  against  whom indemnification is to be  sought  in  writing  of  the
commencement thereof  (but  the  failure so to notify an indemnifying party
shall  not relieve it from any liability  which  it  may  have  under  this
Section 8 except to the extent that it has been prejudiced in any  material
respect by such failure or from any liability which it may have otherwise).
In case  any  such  action is brought against any indemnified party, and it
notifies an indemnifying  party or parties of the commencement thereof, the
indemnifying party or parties  will be entitled to participate therein, and
to the extent it may elect by written  notice  delivered to the indemnified
party promptly after receiving the aforesaid notice  from  such indemnified
party,  to assume the defense thereof with counsel reasonably  satisfactory
to such indemnified  party.  Notwithstanding the foregoing, the indemnified
party or parties shall have the right to employ its or their own counsel in
any such case but the  fees  and  expenses  of such counsel shall be at the
expense of such indemnified party or parties  unless  (i) the employment of
such  counsel  shall have been  authorized in writing by  the  indemnifying
parties in connection with the defense of such action at the expense of the
indemnifying party,  (ii)  the indemnifying parties shall not have employed
counsel reasonably satisfactory to such indemnified party to have charge of
the  defense  of such action within  a  reasonable  time  after  notice  of
commencement of  the  action,  or  (iii)  such indemnified party or parties
shall have reasonably concluded, based upon  an  opinion  of  counsel, that
there may be defenses available to it or them which are different  from  or
additional to those available to one or all of the indemnifying parties (in
which  case the indemnifying parties shall not have the right to direct the
defense  of  such action on behalf of the indemnified party or parties), in
any of which events  such fees and expenses of one additional counsel shall
be borne by the indemnifying  parties.   In no event shall the indemnifying
parties  be  liable for fees and expenses of  more  than  one  counsel,  in
addition to any  local  counsel,  separate  from  their own counsel for all
indemnified  parties  in  connection with any one action  or  separate  but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances.   Anything  in  this Section 7 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement  effected without its written consent; provided, however, that
such consent was not unreasonably withheld.

          (d)  In  order  to provide for just and equitable contribution in
any case in which (i) an indemnified  party makes claim for indemnification
pursuant to this Section 8, but it is judicially  determined  (by the entry
of a final judgment or decree by a court of competent jurisdiction  and the
expiration  of  time  to  appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding
the  fact  that the express provisions  of  this  Section  8  provides  for
indemnification  in  such  case  or  (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as  a  result  of  such losses, claims,
damages,  expenses or liabilities (or actions in respect  thereof)  (A)  in
such proportion as is appropriate to reflect the relative benefits received
by each of  the  contributing parties, on the one hand, and the party to be
indemnified on the  other  hand, from the offering of the Securities or (B)
if  the  allocation provided by  clause  (A)  above  is  not  permitted  by
applicable  law,  in  such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing  parties,  on the one hand, and the party
to be indemnified on the other hand in connection  with  the  statements or
omissions  that  resulted  in  such  losses,  claims, damages, expenses  or
liabilities,  as well as any other relevant equitable  considerations.   In
any case where  each  of  the  Company  or  the Selling Securityholders are
contributing parties and the Representatives are the indemnified party, the
relative benefits received by the Company or Selling Securityholders on the
one hand, and the Representatives, on the other,  shall  be deemed to be in
the  same  proportion  as the total net proceeds from the offering  of  the
Securities (before deducting  expenses)  bear  to  the  total  underwriting
discounts  received by the Representatives hereunder, in each case  as  set
forth in the  table  on  the  Cover Page of the Prospectus.  Relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of  a  material fact or the omission or alleged
omission to state a material fact relates  to  information  supplied by the
Company,  the Selling Securityholders, or by the Representatives,  and  the
parties' relative  intent, knowledge, access to information and opportunity
to correct or prevent  such  untrue statement or omission.  The amount paid
or payable by an indemnified party  as  a  result  of  the  losses, claims,
damages,  expenses or liabilities (or actions in respect thereof)  referred
to above in  this  subdivision  (d) shall be deemed to include any legal or
other expenses reasonably incurred  by such indemnified party in connection
with investigating or defending any such  action or claim.  Notwithstanding
the provisions of this subdivision (d), the  Representatives  shall  not be
required  to  contribute  any amount in excess of the underwriting discount
applicable to the Securities  purchased  by  the Representatives hereunder.
No person guilty of fraudulent misrepresentation  (within  the  meaning  of
Section 11(f) of the Act) shall be entitled to contribution from any person
who  was  not guilty of such fraudulent misrepresentation.  For purposes of
this Section  8,  each  person, if any, who controls the Company within the
meaning  of the Act, each  officer  of  the  Company  who  has  signed  the
Registration  Statement,  and  each  director of the Company shall have the
same rights to contribution as the Company,  subject  in  each case to this
subparagraph (d).  Any party entitled to contribution will,  promptly after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect to which a claim for contribution may be made against
another party or parties under this subparagraph (d), notify such  party or
parties from whom contribution may be sought, but the omission so to notify
such  party  or  parties  shall  not relieve the party or parties from whom
contribution  may  be  sought from any  obligation  it  or  they  may  have
hereunder or otherwise than  under  this  subparagraph  (d),  except to the
extent that such party or parties were adversely affected by such omission.
The  contribution  agreement  set forth above shall be in addition  to  any
liabilities  which  any indemnifying  party  may  have  at  common  law  or
otherwise.

     9.   REPRESENTATIONS   AND   AGREEMENTS   TO  SURVIVE  DELIVERY.   All
representations, warranties and agreements contained  in  this Agreement or
contained  in  certificates  of officers of the Company submitted  pursuant
hereto, shall be deemed to be representations, warranties and agreements at
the Closing Date and the Option  Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the indemnity
agreements contained in Section 7  hereof,  shall  remain  operative and in
full force and effect regardless of any investigation made by  or on behalf
of   any   Representative,   the   Company,  Selling  Securityholders,  any
controlling person of any Representative  or the Company, and shall survive
termination  of  this  Agreement  or  the  issuance  and  delivery  of  the
Securities to the Representatives and the Representative,  as  the case may
be.

     10.  EFFECTIVE DATE.  This Agreement shall become effective  at  10:00
a.m.,  Florida  time,  on  the  next  full  business day following the date
hereof,  or at such earlier time after the Registration  Statement  becomes
effective  as  the  Representative,  in  its  discretion, shall release the
Securities  for  the  sale  to  the  public;  provided, however,  that  the
provisions of Sections 6, 8 and 11 of this Agreement  shall at all times be
effective.  For purposes of this Section 10, the Securities  to be purchased
hereunder  shall  be  deemed  to have been so released upon the earlier  of
dispatch by the Representative of telegrams to securities dealers releasing
such  shares  for  offering  or  the  release  by  the  Representative  for
publication  of the first newspaper  advertisement  which  is  subsequently
published relating to the Securities.

     11.  TERMINATION.

          (a)  Subject   to   subsection   (b)  of  this  Section  11,  the
Representative shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence   has disrupted, or in
the  Representative's  opinion  will  in the immediate future  disrupt  the
financial markets, AND SUCH EVENTS HAVE  A  MATERIAL  AND ADVERSE IMPACT ON
THE MARKET FOR THE SECURITIES; or (ii) any material adverse  change  in the
financial markets shall have occurred; or (iii) if trading on the New  York
Stock Exchange, the American Stock Exchange, or the over-the-counter market
shall  have  been suspended, or minimum or maximum prices for trading shall
have been fixed,  or  maximum  ranges  for prices for securities shall have
been required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority  having  jurisdiction; or (iv)
if  the  United  States  shall  have  become  involved  in a war  or  major
hostilities, or if there shall have been an escalation in  an  existing war
or  major  hostilities or a national emergency shall have been declared  in
the United States;  or  (v)  if a banking moratorium has been declared by a
state or federal authority;  or  (VI) if the Company shall have sustained a
loss  material or substantial to the  Company  by  fire,  flood,  accident,
hurricane,  earthquake,  theft, sabotage or other calamity or malicious act
which, whether or not such  loss  shall  have  been  insured,  will, in the
Representative's opinion, make it inadvisable to proceed with the  delivery
of  the  Securities;  or  (VII)  if  there  shall have been such a material
adverse change in the conditions or prospects  of  the  Company  as  in the
Representative's  judgment  would  make  it inadvisable to proceed with the
offering, sale and/or delivery of the Securities;  or (VIII) IF THERE SHALL
HAVE  BEEN  A material adverse change in the general market,  political  or
economic conditions,  in  the  United  States  or  elsewhere,  THAT  HAVE A
MATERIAL AND ADVERSE IMPACT ON THE SECURITIES MARKET GENERALLY

          (b)  If  this  Agreement  is  terminated by the Representative in
accordance with the provisions of Section 11(a), the Company shall promptly
reimburse  and indemnify the Representative  for  all  of  its  actual  and
reasonable out-of-pocket  expenses, including the fees and disbursements of
counsel for the Representatives  (less  amounts previously paid pursuant to
Section 6(c) above).  Notwithstanding any  contrary  provision contained in
this Agreement, if this Agreement shall not be carried  out within the time
specified  herein, or any extension thereof granted to the  Representative,
by reason of  any  failure  on  the  part  of  the  Company  to perform any
undertaking  or  satisfy  any  condition  of  this  Agreement  by it to  be
performed or satisfied (including, without limitation, pursuant  to Section
7  or  Section 13) then, the Company shall promptly reimburse and indemnify
the Representative  for all of its actual out-of-pocket expenses, including
the fees and disbursements of counsel for the Representatives (less amounts
previously paid pursuant  to Section 6(d) above).  In addition, the Company
shall remain liable for all  reasonable  Blue Sky counsel fees and expenses
and Blue Sky filing fees.  Notwithstanding any contrary provision contained
in  this  Agreement, any election hereunder  or  any  termination  of  this
Agreement (including,  without  limitation,  pursuant to Sections 7, 11, 12
and 13 hereof), and whether or not this Agreement is otherwise carried out,
the provisions of Section 6 and Section 8 shall  not be in any way affected
by such election or termination or failure to carry  out  the terms of this
Agreement or any part hereof.

     12.  SUBSTITUTION  OF  THE  REPRESENTATIVES.   If one or more  of  the
Representatives  shall  fail  (otherwise  than for a reason  sufficient  to
justify the termination of this Agreement under  the  provisions of Section
6, Section 10 or Section 12 hereof) to purchase the Securities  which it or
they  are  obligated  to  purchase  on such date under this Agreement  (the
"Defaulted Securities"), the Representative shall have the right, within 24
hours thereafter, to make arrangement for one or more of the non-defaulting
Representatives, or any other underwriters,  to  purchase all, but not less
than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however,  the Representative shall
not have completed such arrangement within such 24-hour period, then:

          (a)  if the number of Defaulted Securities does not exceed 10% of
the  total  number  of Securities to be purchased on such  date,  the  non-
defaulting Representatives  shall  be obligated to purchase the full amount
thereof in the proportions that their  respective  underwriting obligations
hereunder  bear  to  the  underwriting  obligations  of all  non-defaulting
Representatives, or

          (b)  if  the number of Defaulted Securities exceeds  10%  of  the
total  number  of  Securities,   this  Agreement  shall  terminate  without
liability  on  the  part  of  any non-defaulting  Representatives,  or  the
Company.

     No action taken pursuant to  this Section shall relieve any defaulting
Representative  from  liability  in  respect   of   any   default  by  such
Representative under this Agreement.

     In  the  event  of  any  such  default  which  does  not result  in  a
termination of this Agreement, the Representative shall have  the  right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus  or
in any other documents or arrangements.

     13.  DEFAULT  BY  THE COMPANY AND/ OR SELLING SECURITYHOLDERS.  If the
Company or Selling Securityholders  fail at the Closing Date or the Company
shall fail at any Option Closing Date,  to  sell  and deliver the number of
Securities which it or they are obligated to sell hereunder  on  such date,
then  this Agreement shall terminate (or, if such default shall occur  with
respect to any Option Securities to be purchased on an Option Closing Date,
the Representatives  may at the Representative's option, by notice form the
Representative to the Company, terminate the Representatives' obligation to
purchase Option Securities  from  the  Company  on  such  date) without any
liability  on the part of any non-defaulting party other than  pursuant  to
Section 5, Section  7  and  Section 10 hereof.  No action taken pursuant to
this Section shall relieve the  Company  or  Selling  Securityholders  from
liability, if any, in respect of such default.

     14.  NOTICES.   All  notices  and  communications hereunder, except as
herein otherwise specifically provided, shall  be  in  writing and shall be
deemed  to have been duly given if mailed or transmitted  by  any  standard
form  of  telecommunication.   Notices  to  the  Representatives  shall  be
directed to  the  Representative  at  Werbel-Roth  Equities, Inc., 150 East
Palmetto  Park  Road,  Suite  380,  Boca  Raton, Florida 33432,  Attention:
Howard Roth, with a copy to Atlas, Pearlman,  Trop  &  Borkson,  P.A.,  New
River  Center,  Suite  1900,  200 East Las Olas Boulevard, Fort Lauderdale,
Florida 33301, Attention: Joel  D.  Mayersohn, Esq.  Notices to the Company
shall be directed to the Company at c/o  Sierra  Resources Corporation, 629
J. Street, Sacramento, CA  95814  Attention: Mr. Edward  Lammerding,  41920
Christy  Street,  Fremont, CA  94538-3158 with a copy to Bartel Eng Linn  &
Schroder, 300 Capitol  Mall,  Suite  1100, Sacramento, CA 95814, Attention:
Daniel B. Eng , Esq.

     15.  PARTIES.  This Agreement shall inure solely to the benefit of and
shall  be  binding  upon,  the  Representatives,   the   Company,   Selling
Securityholders  and  the   controlling  persons,  directors  and  officers
referred  to  in  Section  7 hereof, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed
to have any legal or equitable  right,  remedy or claim under or in respect
of or by virtue of this Agreement or any  provisions  herein contained.  No
purchaser of Securities from any Representative shall be  deemed  to  be  a
successor by reason merely of such purchase.

     16.  CONSTRUCTION.   This Agreement shall be governed by and construed
and enforced in accordance  with  the  laws of the State of Florida without
giving  effect to the choice of law or conflict  of  laws  principles.  The
parties hereto  agree  that  any  action,  proceeding  or  claim against it
arising out of or in any way related to this Agreement shall be brought and
enforced  in  the  courts of the State of Florida or the United  States  of
America for the Southern District of Florida and irrevocably submit to such
exclusive jurisdiction,  and hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum.

     17.  COUNTERPARTS. This  Agreement  may  be  executed in any number of
counterparts, each of which shall be deemed to be an  original,  and all of
which taken together shall be deemed to be one and the same instrument.

     18.  ENTIRE   AGREEMENT;   AMENDMENTS.    This   Agreement   and   the
Representative's  Warrant  Agreement constitute the entire agreement of the
parties  hereto  and  supersede  all  prior  written  or  oral  agreements,
understandings and negotiations  with respect to the subject matter hereof.
This Agreement may not be amended  except  in  a  writing,  signed  by  the
Representative and the Company.

     If  the  foregoing  correctly sets forth the understanding between the
Representatives and the Company,  please  so indicate in the space provided
below for that purpose, whereupon this letter  shall  constitute  a binding
agreement among us.

                                   Very truly yours,

                                   DIGITAL POWER CORPORATION


                                   By:________________________________
                                      Mr. Edward Lammerding,
                                      Chairman of the Board

Confirmed and accepted as of
the date first above written.      By:________________________________
                                      for Selling Securityholders

WERBEL-ROTH SECURITIES, INC.

For itself and as Representative
of the several Representatives named
in Schedule A hereto.

By:______________________________
     Howard Roth, President




                            SCHEDULE A



                                  Number of Shares    Number of Warrants
NAMES OF REPRESENTATIVES          TO BE PURCHASED     TO BE PURCHASED

Werbel-Roth Securities Corp.         1,000,000           500,000
Total                                1,000,000           500,000



                            SCHEDULE B





              AMENDED AND RESTATED ARTICLES OF INCORPORATION

                                     OF

                         DIGITAL POWER CORPORATION


          Claude Adkins and Robert Smith certify that:

          1.   They are the President and Secretary, respectively, of
Digital Power Corporation, a California corporation.

          2.   The Articles of Incorporation of this corporation are
amended and restated to read as follows:

                                I.

          The name of this corporation is Digital Power Corporation.


                                II.

          The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be
incorporated by the California Corporation Code.

                               III.

               (A)  (I)   This corporation is authorized to issue two
classes of shares to be designated respectively Preferred Stock
("Preferred") and Common Stock ("Common").  The total number of shares of
Preferred this corporation shall have authority to issue is 1,000,000 and
the total number of shares of Common the corporation shall have authority
to issue is 5,000,000.

               The corporation shall from time to time in accordance with
the laws of the State of California increase the authorized amount of its
Common if at any time the number of Common shares remaining unissued and
available for issuance shall not be sufficient to permit conversion of the
Preferred.

               (II)  The Preferred authorized by these Articles of
Incorporation shall be issued in one or more series. The first series of
Preferred shall be designated Series A Preferred Stock (the "Series A
Preferred") and shall consist of Five Hundred Thousand (500,000) shares
with the rights, preferences, privileges and restrictions set forth in
paragraph (B) below.  The Board of Directors is authorized to fix the
number of shares of any other series, and to determine the designation of
any such series.  The Board of Directors is also authorized to determine or
alter the rights, preferences, privileges and restrictions granted to or
imposed upon any such series of Preferred, and, within the limitations and
restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any such
series, to increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares in any such series subsequent
to the issue of shares of that series.

               (B)  The relative rights, preferences, privileges and
restrictions granted to or imposed upon the respective classes and series
of the shares of capital stock or the holders thereof are as follows:

                    SECTION 1.  GENERAL DEFINITIONS.  For purposes of this
Article the following definitions shall apply:

                    A.   'JUNIOR SHARES' shall mean all Common and any
other shares of this corporation other than the                  Preferred.

                    B.   'SUBSIDIARY' shall mean any corporation at least
50%, of whose outstanding voting shares shall at the time be owned by the
corporation and/or one or more of such
subsidiaries.

                    SECTION 2.  DIVIDEND RIGHTS OF PREFERRED.  The holders
of the Series A Preferred shall be entitled to receive, out of any funds
legally available therefor, cash dividends on each outstanding share of
Series A Preferred, payable in preference and priority to any payment of
any dividend on Junior Shares at the rate of Twenty-two Cents ($.22) per
Share (as appropriately adjusted for any stock dividends, stock splits
recapitalization, consolidation or the like, with respect to such shares)
per annum out of any funds legally available therefor. Such dividends shall
be payable only when and as declared by the Board of Directors.  The right
to such dividends on the Series A Preferred shall be cumulative, whether or
not declared.

          In the event that the corporation shall have declared and unpaid
dividends outstanding immediately prior to, and in the event of, a
conversion of Preferred (as provided in Section 5 hereof, the corporation
shall pay in cash to the holder(s) of the Series A Preferred subject to
such conversion the full amount of any such dividends.

                    SECTION 3.  LIQUIDATION PREFERENCE.

                    (A) In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, the holders
of the Preferred shall be entitled to receive, prior and in preference to any 
distribution of any of the assets or surplus funds of the corporation to the
holders of the Junior Shares by reason of their ownership thereof, the 
amount of (One Dollar and Eighty Cents ($1.80) per share for each share of 
Series A Preferred (as appropriately adjusted for any stock dividends, stock
splits, recapitalization consolidation or the like with respect to such shares)
then held by them, and, in addition an amount equal to all cumulative but
unpaid dividends (whether or not declared) on such Series A Preferred.  If,
upon the occurrence of such event, the assets and funds thus distributed
among the holders of the Preferred shall be insufficient to permit the
payment of the full preferential amount to such holders, then the entire
assets and funds of the corporation legally available for distribution
shall be distributed ratably among the holders of the Preferred in
proportion to the respective preferential amounts fixed for such series
upon a liquidation, dissolution or winding up of the corporation.  After
payment has been made to the holders of the Preferred of the full amounts
to which they shall be entitled as aforesaid, the holders of Junior Shares
shall be entitled to receive all remaining assets of the corporation.

                    (B)   For purposes of this Section 3, a merger or
consolidation of the corporation with or into any other corporations or
sale of all or substantially all of the assets of the Corporation, shall
not be treated as a liquidation, dissolution or winding up.

                    (C)   For purposes of this Section 3, if the
distributions or consideration received by the shareholders of the
Corporation is other than cash, its value will be deemed to be its fair
market value as determined in good faith by the Board of Directors of the
Corporation, and the holders of the Preferred will receive the same type of
distribution or consideration.  In the case of publicly traded securities
listed on an exchange, fair market value shall mean the average last
closing sale price as reported by such exchange or by a consolidated
transaction reporting system for the five-day period immediately preceding
the date of such distribution.  In the case of publicly traded securities
not listed on an exchange, fair market value shall mean the average last
closing bid price as reported by the National Association of Securities
Dealers Automatic Quotation System, Inc. or such successor or similar
organization, for the five-day period immediately preceding the date of
such distribution.

                    SECTION 4.  REDEMPTION.

                    (A)   The corporation may, at any time it may lawfully
do so and at the option of the Board of Directors, redeem the Series A
Preferred in whole or in part, by paying in cash for each share to be
redeemed the price of One Dollar Eighty Cents ($l.80) per share (as
appropriately adjusted for any stock dividends, stock splits,
recapitalization or consolidation of Series A Preferred), together with an
amount equal to any accrued and unpaid dividends on Series A Preferred to
the date fixed for redemption.  Such amount is the "Redemption Price."  Any
partial redemption shall be pro-rata among the holders of the Series A
Preferred.

                    (B)   At least thirty (30) days prior to the date fixed
for any redemption of Preferred (the "Redemption Date"), written notice
shall be mailed, postage prepaid, to each holder of record of Preferred to
be redeemed, at the post office address last shown on the records of the
corporation, notifying such holder of the election of the corporation to
redeem such shares, specifying the Redemption Date, the applicable
Redemption Price and the date on which such holder's Conversion Rights (as
defined in Section 5) as to such shares terminate, and calling upon such
holder to surrender to the corporation, in the manner and at the place
designated, the certificate or certificates representing the shares to be
redeemed (such notice is the "Redemption Notice").  On or after the
Redemption Date, each holder of Preferred to be redeemed shall surrender
the certificate or certificates representing such shares to the
corporation, in the manner and at the place designated in the Redemption
Notice, and thereupon the Redemption Price of such shares shall be payable
to the order of the person whose name appears on such certificate or
certificates as the owner of such shares, and each surrendered certificate
shall be canceled.  From and after the Redemption Date, all rights of the
holders of Preferred designated for redemption in the Redemption Notice as
holders of Preferred of the corporation shall cease and terminate with
respect to such shares (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates), and
such shares shall not subsequently be transferred on the books of the
corporation or be deemed to be outstanding for any purpose whatsoever.

                    (C)   On or prior to the Redemption Date, the
corporation shall deposit the Redemption Price of all shares of Preferred
designated for redemption in the Redemption Notice and not yet redeemed
with a bank or trust company having aggregate capital and surplus in excess
of One Hundred Million Dollars ($100,000,000) as a trust fund for the
benefit of the respective holders of such shares, together with irrevocable
instructions and authority to the bank or trust company to pay the
Redemption Price for such shares to their respective holders on or after
the Redemption Date upon receipt of notification from the corporation that
such holder has surrendered his share certificate to the corporation
pursuant to Section 4(b).  Such instructions shall also provide that any
funds deposited by the corporation hereunder for the redemption of shares
which are subsequently converted into shares of Common (pursuant to Section
5 no later than the fifth (5th) day preceding the Redemption Date) shall be
returned to the corporation forthwith upon such conversion.  The balance of
any funds deposited by the corporation pursuant to this Section 4(c)
remaining unclaimed at the expiration of one (1) year following the
Redemption Date shall be returned to the corporation.

                    SECTION 5. CONVERSION. The holders of Preferred shall
have conversion rights as follows (the "Conversion Rights"):

                    (A)   RIGHT TO CONVERT. Each share of Preferred, at the
option of its holder, at the office of the corporation or any transfer
agent for the Preferred, at any time after the date of issuance of such
share or on or prior to the fifth (5th) business day prior to the
Redemption Date with respect to such share pursuant to Section 4 above,
shall be convertible into such number of fully paid and nonassessable
shares of Common as is determined by dividing $l.80 for each share of
Series A Preferred by the Conversion Price in effect at the time of the
conversion.  The initial Conversion Price shall be $1.80 for each share of
Series A Preferred per share of Common.  Such initial Conversion Price
shall be subject to adjustment as hereinafter provided.  In the event of
delivery of a Redemption Notice pursuant to Section 4 above, the Conversion
Rights shall terminate as to the number of shares designated for redemption
at the close of business on the fifth (5th) day preceding the Redemption
Date, unless default is made in payment of the Redemption Price, in which
case the Conversion Rights for such shares shall continue.

                    (B)   AUTOMATIC CONVERSION. Each share of Preferred
automatically shall be converted into shares of Common at its then
effective Conversion Price on the effective date of a firm commitment
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, provided that the
aggregate gross proceeds to the Company are $l,000,000 or more.

                    (C)   MECHANICS OF CONVERSION. No fractional shares of
Common shall be issued upon conversion of Preferred. In lieu of any
fractional shares to which the holder would otherwise be
entitled (after aggregating all shares into which shares of Preferred held
by such holder could be converted), the corporation shall pay cash equal to
such fraction multiplied by the then fair market value of the Common, as
determined by the Board of Directors.  Before any holder of Preferred shall
be entitled to convert the same into full shares of Common, he shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the corporation or of any transfer agent for the Preferred, and
shall give written notice to the corporation at such office that he elects
to convert the same.  The corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Preferred, a
certificate or certificates for the number of shares of Common to which he
shall be entitled, together with a check payable to the holder in the
amount of any cash amounts payable as the result of a conversion into
fractional shares of Common.  Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such
surrender of the shares of Preferred to be converted, or in the case of
automatic conversion, on the effective date of the offering or merger or
consolidation as provided in Section 5(b) above, and the person or persons
entitled to receive the shares of Common issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common on such date.

                    (D)    ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS.
If the corporation at any time or from time to time effects a subdivision
of the outstanding Common, the Conversion Price then in effect immediately
before that subdivision shall be proportionately decreased, and conversely,
if the corporation at any time or from time to time combines the
outstanding shares of Common, the Conversion Price then in effect
immediately before the combination shall be proportionately increased.  Any
adjustment under this Section 5(d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.

                    (E)   ADJUSTMENT FOR CERTAIN DIVIDENDS AND
DISTRIBUTIONS.  In the event the corporation at any time or from time to
time makes, or fixes a record date for the determination of holders of
Common entitled to receive, a dividend or other distribution payable in
additional shares of Common, then and in each such event the Conversion
Price then in effect shall be decreased as of the time of such issuance or,
in the event such a record date is fixed as of the close of business on
such record date, by multiplying the Conversion Price then in effect by a
fraction (I) the numerator of which is the total number of shares of Common
issued and outstanding immediately prior to the time of such issuance on
the close business on such record date, and (2) the denominator of which
shall be the total number of shares of Common issued and outstanding
immediately prior to the time of such issuance on the close of business on
such record date, plus the number of shares of Common issuable in payment
of such dividend or distribution; provided, however, that if such record
date is fixed and such dividend is not fully paid or if such distribution
is not fully made on the date fixed therefor, the Conversion Price shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Conversion Price shall be adjusted pursuant to this Section
5(e) as of the time of actual payment of such dividends or distributions.

                    (F)   ADJUSTMENTS FOR OTHER DIVIDENDS AND
DISTRIBUTIONS.  In the event the corporation at any time or from time to
time makes, or fixes a record date for the determination of holders of
Common entitled to receive, a dividend or other distribution payable in
securities of the corporation other than shares of Common, then and in each
such event provision shall be made so that the holders of the Preferred
shall receive upon conversion thereof, in addition to the number of shares
of Common receivable thereupon, the amount of securities of the corporation
which they would have received had their Preferred been converted into
Common on the date of such event and had they thereafter, during the period
from the date of such event to and including the date of conversion,
retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period,
under this Section 5(f) with respect to the rights of the holders of
Preferred.

                    (G)   ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION.  If the Common issuable upon the conversion of the Preferred
is changed into the same or a different number of shares of any class or
classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or a stock
dividend or a reorganization, merger, consolidation or sale of assets, as
provided for elsewhere in this Section 5), then and in such event each
holder of Preferred shall have the right thereafter to convert such stock
into the kind and amount of stock and other securities and properly
receivable upon such reorganization, reclassification or other change, by
holders of the number of shares of Common into which such shares of
Preferred might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further
adjustment as provided herein.

                    (H)   REORGANIZATION OR SALES OF ASSETS.  If at any
time or from time to time there is capital reorganization of the Common
(other than a consolidation, recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this
Section 5), or the sale of all or substantially all of the corporation's
properties and assets to any other person, then, as a part of such
reorganization or sale, provision shall be made so that the holders of the
Preferred thereafter shall be entitled to receive upon conversion of the
Preferred, the number of shares of stock or other securities
or property of the corporation, or of any successor corporation resulting
from such sale, to which holder of Common would have been entitled on such
capital reorganization or sale, deliverable upon conversion.  In any such 
case, appropriate adjustment shall be made in the application of the 
provisions of this Section 5 with respect to the rights of the holders of
the Preferred after the reorganization or sale to the end that the provisions 
of this Section 5 (including adjustment of the Conversion Price then in effect
and number of shares purchasable upon conversion of the Preferred) shall be 
applicable after that event and be as nearly equivalent to the provisions 
hereof as may be practicable.  This section 5(h) shall apply to successive
reorganizations and sales.

                    (I)   CERTIFICATE AS TO ADJUSTMENTS.  Upon the
occurrence of each adjustment or readjustment of the Conversion Price
pursuant to this Section 5, the corporation at its expense promptly shall
compute such adjustment or readjustment in accordance with the terms hereof
and furnish to each holder of Preferred a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.  The corporation shall, upon the
written request at any time of any holder of Preferred, furnish or cause to
be furnished to such holder a like certificate setting forth (I) such
adjustments and readjustments, (II) the Conversion Price at the time in
effect, and (III) the number of shares of Common and the amount, if any, of
other property which at the time would be received upon the conversion of
Preferred.

                    (J)   NOTICES OF RECORD DATE.  In the event that the
corporation shall propose at any time:

                         (I)    to, declare any dividend or distribution
upon its Common, whether in cash, property, stock  other securities,
whether or not a regular cash dividend and whether or not out of earnings
or earned surplus;

                         (II)   to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock
of any class or series or other rights.

                         (III)  to effect any reclassification or
recapitalization of its outstanding Common involving a change in the
Common; or
                         (IV)   to merge or consolidate with or into any
other corporation, or sell, lease or convey all or substantially all of its
property or business, or to liquidate, dissolve or wind up;

          then, in connection with each such event, the corporation shall
send to the holders of the Preferred:

(1)   at least ten (10) days' prior  written notice of the date on which a 
record shall be taken for such dividend.  Distribution or subscription rights 
and a description thereof (and specifying the date on which the
holders of Common shall be entitled thereto) or for determining rights to vote 
in respect of the matters referred to in (III) and (IV) above; and

(2)   in the case of the matters  referred to in (III) and (IV) above, at least
ten (10) days' prior written notice of the date when the same shall take place
(and specifying the date on which the holders of Common shall be entitled to
exchange their Common for securities or other property deliverable upon the 
occurrence of such event).

          Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holders of Preferred at the address for
each such holder as shown on the books of the corporation.

                    SECTION 6. VOTING RIGHTS.  Except as otherwise required
by law, each share of Common issued and outstanding shall have one vote and
each share of Series A Preferred issued and outstanding shall have the
number of votes equal to the number of whole Common shares into which the
Preferred is convertible, as adjusted from time to time pursuant to Section
5 hereof.  The Series A Preferred Stock shall have the right to cumulate
the votes in the election of directors.

                    SECTION 7. CONSENT FOR CERTAIN REPURCHASES OF COMMON
STOCK DEEMED TO DISTRIBUTIONS.  Each holder of an outstanding share of
Preferred shall be deemed to have consented, for purposes of Section 502,
503 and 506 of the General Corporation Law, to distributions made by the
corporation in connection with the repurchase of shares of Common issued to
or held by employees or consultants upon termination of their employment or
services pursuant to agreements providing for the right of said repurchase
between the corporation and such persons.

                    SECTION 8. RESIDUAL RIGHTS.  All rights accruing to the
outstanding shares of the corporation not expressly provided for to the
contrary herein shall be vested in the Common.



                                    IV.

     The liability of the directors of this corporation for monetary damage
shall be eliminated to the fullest extent permissible under California law.

                                    V.

     This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the Corporations Code) for breach of duty to
the corporation and its stockholders through bylaws provisions or through
agreements with the agents, or both, in excess of the indemnification
otherwise permitted by Section 317 of the Corporations Code, subject to the
limits on such excess indemnification set forth in section 204 of the
Corporations Code.

          3.   The foregoing amendment of Articles of Incorporation has
been duly approved by the Board of Directors.

          4.   The foregoing amendment of Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code.  The total number of outstanding
shares of this corporation is 820,830 shares of Common Stock.  The number
of shares voting in favor of the amendment and the restatement equalled or
exceeded the vote required.  The percentage vote required was more than
fifty percent (50%) of the outstanding shares of Common Stock.


                                         /S/ CLAUDE ADKINS
                                        CLAUDE ADKINS, PRESIDENT

                                         /S/ ROBERT SMITH
                                        ROBERT SMITH, SECRETARY


          The undersigned declares under penalty of perjury that the
matters set forth in the foregoing certificate are true of his own
knowledge.

          Executed at Fremont, California on     9/29   , 1992.



                                          /S/ CLAUDE ADKINS
                                         CLAUDE ADKINS

                                          /S/ ROBERT SMITH
                                         ROBERT SMITH

                CERTIFICATE OF AMENDMENT

                           OF

                ARTICLES OF INCORPORATION


Robert O. Smith, and Philip G. Swany, certify that:

     1.   They are the president and secretary, respectively, of Digital
Power Corporation, a California corporation.

     2.   The first paragraph of Section (a)(i) of Article III of the
Articles of Incorporation of this corporation is amended to read as
follows:

          "III:  (a) (i) This corporation is authorized to issue two
          classes of shares to be designated respectively Preferred
          Stock, no par value, ("Preferred") and Common Stock, no par
          value, ("Common").  The total number of shares of Preferred
          this corporation shall have authority to issue is 2,000,000
          and the total number of shares of Common the corporation
          shall have authority to issue is 10,000,000."

     3.   The foregoing Amendment of Articles of Incorporation has been
duly approved by the board of directors.

     4.   The foregoing Amendment of Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code.  The total number of outstanding
shares of Common stock as of August 19, 1996 of the corporation is
1,700,175.  At present there are no outstanding shares of Preferred Stock.
The number of shares voting in favor of the amendment equaled or exceeded
the vote required.  The percentage vote required was more than fifty
percent (50%).

We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and
correct of our own knowledge.

DATE:         9/9/96


                                      /S/ ROBERT O. SMITH
                                   Robert O. Smith, President



                                      /S/ PHILIP G. SWANY
                                   Philip G. Swany, Secretary


                                BY-LAWS OF

                     DIGITAL POWER CORPORATION


                                 ARTICLE I

                             CORPORATE OFFICES


     1.1 PRINCIPAL OFFICE.

     The  board  of  directors  shall  fix  the  location  of the principal
executive  office  of  the  corporation at any place within or outside  the
State of California. If the principal  executive  office is located outside
such state, and the corporation has one or more business  offices  in  such
state,  the board of directors shall fix and designate a principal business
office in the State of California.

     1.2 OTHER OFFICES.

     The board of directors may at any time establish branch or subordinate
offices at  any  place  or  places where the corporation is qualified to do
business.

                                ARTICLE II

                     MEETINGS OF SHAREHOLDERS

     2.1 PLACE OF MEETINGS.

     Meetings of shareholders  shall be held at any place within or outside
the State of California designated  by  the  board  of  directors.  In  the
absence  of  any  such destination, shareholders' meetings shall be held at
the principal executive office of the corporation.

     2.2 ANNUAL MEETING.

     The annual meetings of shareholders shall be held on the second Friday
in May of each year at 10:00 a.m., or such other date or such other time as
may be fixed by the board of directors; provided, however, that should said
day fall upon a legal holiday, then any such annual meeting of shareholders
shall be held at the  same  time  and  place  on  the  next date thereafter
ensuing which is not a legal holiday; provided, further,  that if the board
of directors wishes to set an annual meeting date by resolution,  then such
resolution  must  be  passed by the board of directors not less than eighty
(80) days prior to the  date  adopted in the resolution.  At such meetings,
directors shall be elected, reports of the affairs of the corporation shall
be considered, and any other business may be transacted which is within the
powers of the shareholders.

     At an annual meeting of the  shareholders, only such business shall be
conducted as shall have been properly  brought  before  the meeting.  To be
properly brought before an annual meeting business must be (a) specified in
the  notice  of  meeting  (or any supplement thereto) given by  or  at  the
direction of the board of directors,  or  (b) or otherwise properly brought
before the meeting by or at the direction of the board of directors, or (c)
otherwise  properly  brought  before the meeting  by  a  shareholder.   For
business to be properly brought  before an annual meeting by a shareholder,
the shareholder must have given timely  notice  thereof  in  writing to the
Secretary of the corporation.  To be timely, a shareholder's notice must be
delivered or mailed and received at the principal executive offices  of the
corporation,  not  less  than  40  days  nor more than 60 days prior to the
meeting;  provided, however, that in the event  that  less  than  50  days'
notice or prior  public  disclosure  of the date of the meeting is given or
made to shareholders, notice by the shareholder  to  be  timely  must be so
received not later than the close of business of the 10th day following the
day  on  which such notice of the date of the annual meeting was mailed  or
such public  disclosure  was made.  A shareholder's notice to the Secretary
shall set forth as to each  matter the shareholder proposes to bring before
the annual meeting (a) a brief  description  of  the business desired to be
brought  before  the  annual meeting and the reasons  for  conducting  such
business at the annual meeting, (b) the name and address, as they appear on
the corporation's books,  of  the  shareholder proposing such business, (c)
the  class  and  number  of  the  shares  of   the  corporation  which  are
beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business.  Notwithstanding anything  in  the by-laws to
the  contrary, no business shall be conducted at any annual meeting  except
in accordance  with  the  procedures  set  forth  in this Article 2.2.  The
Chairman of the annual meeting shall, if the facts  warrant,  determine and
declare  to  the meeting that business was not properly brought before  the
meeting in accordance  with  the  provisions of this Article 2.2, and if he
should  so determine, he shall so declare  to  the  meeting  and  any  such
business not properly brought before the meeting shall not be transacted.

     2.3 SPECIAL MEETING.

     A special  meeting of the shareholders may be called at anytime by the
board of directors,  or  by the chairman of the board, or by the president,
or by one or more shareholders  holding shares in the aggregate entitled to
cast not less than ten percent (10%) of the votes at that meeting.

     If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of
such  meeting  and  the general nature  of  the  business  proposed  to  be
transacted, and shall be delivered personally or sent by registered mail or
by telegraphic or other  facsimile  transmission  to  the  chairman  of the
board,   the  president,  any  vice  president  or  the  secretary  of  the
corporation.  The  officer  receiving  the request shall cause notice to be
promptly given to the shareholders entitled to vote, in accordance with the
provisions of Sections 2.4 and 2.5 of these by-laws, that a meeting will be
held at the time requested by the person  or  persons  calling the meeting,
not  less  than thirty-five (35) nor more than sixty (60)  days  after  the
receipt of the  request. If the notice is not given within twenty (20) days
after receipt of  the request, the person or persons requesting the meeting
may give the notice.  Nothing  contained  in this paragraph of this Section
2.3 shall be construed as limiting, fixing  or  affecting  the  time when a
meeting of shareholders called by action of the board of directors  may  be
held.

     2.4 NOTICE OF SHAREHOLDERS' MEETINGS.

     All  notices  of  meetings  of shareholders shall be sent or otherwise
given in accordance with Section 2.5  of  these  by-laws  not less than ten
(10) nor more than sixty (60) days before the date of the meeting  to  each
shareholder  entitled to vote thereat.  The notice shall specify the place,
date, and hour of the meeting.

     In the case  of a special meeting the notice shall specify the general
nature of the business  to  be  transacted  and  no  other  business may be
transacted at said meeting.

     In  the  case  of  the  annual meeting the notice shall specify  those
matters which the board of directors,  at  the  time  of the mailing of the
notice, intends to present for action by the shareholders,  but  any proper
matter  may  be presented at the meeting.  The notice shall also state  the
general nature  of  the business or proposal to be considered or acted upon
at such meeting before  action may be taken at such meeting for approval of
(i) any transaction governed  by Section 310 of the California Corporations
Code including a proposal to enter  into  a  contract  or other transaction
between the corporation and one or more of its directors,  or  between  the
corporation  and any corporation, firm, or association in which one or more
of the corporation's  directors  has  a  material  financial interest or in
which one or more of its directors are directors; or  (ii)  a  proposal  to
amend  the  articles  of  incorporation  in  any  manner  other than may be
accomplished  by  the board of directors alone as permitted by  subsections
(b) through (d) of  Section  902  of  that  Code;  or  (iii)  a proposal to
reorganize  the  corporation  under  Section 1201 of that Code; or  (iv)  a
proposal to wind up and dissolve the corporation under Section 1900 of that
Code; or (v) if the corporation is in  the  process  of  winding up and has
both  preferred  and common shares outstanding, a proposal for  a  plan  of
distribution  of  the   shares,  obligations,  or  security  of  any  other
corporation, domestic or  foreign,  or assets other than money which is not
in  accordance  with the liquidation rights  of  the  preferred  shares  as
specified in the articles of incorporation of this corporation.

     The notice of  any  meeting at which directors are to be elected shall
include the name of any candidates intended at the time of the notice to be
presented by the board of  directors for election.  Shareholders who intend
to present their own slate of  candidates  must give notice to the board of
directors  of  the name(s), address(es), and telephone  number(s)  of  such
candidate(s) not  less  than seventy (70) days prior to the meeting date as
set forth in these by-laws  or by resolution of the board.  Notice shall be
deemed submitted to the board  if  it  is delivered to the Secretary of the
corporation personally or by first-class  mail, by telegraph, facsimile, or
other  form of written communication, charges  prepaid,  addressed  to  the
corporation's  principal  executive office.  Notice shall be deemed to have
been  given  at  the time delivered  personally,  deposited  in  the  mail,
delivered  to a common  carrier  for  transmission  to  the  recipient,  or
actually transmitted  by  facsimile or electronic means to the recipient by
the person giving the notice.

     2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.

     Notice of any meeting of shareholders shall be given either personally
or  by  first-class mail or telegraphic  or  other  written  communication,
charges prepaid,  addressed  to  the  shareholder  at  the  address of that
shareholder  appearing  on  the  books of the corporation or given  by  the
shareholder to the corporation for  the  purpose  of  notice.  If  no  such
address  appears  on  the  corporation's books or is given, notice shall be
deemed to have been given if  sent  to that shareholder by first-class mail
or  telegraphic  or  other  written  communication   to  the  corporation's
principal executive office, or if published at least once in a newspaper of
general  circulation  in  the county where that office is  located.  Notice
shall be deemed to have been given at the time when delivered personally or
deposited  in the mail or sent  by  telegram  or  other  means  of  written
communication.

     If any  notice  addressed  to  a  shareholder  at  the address of that
shareholder appearing on the books of the corporation is  returned  to  the
corporation by the United States Postal Service marked to indicate that the
United  States  Postal  Service  is  unable  to  deliver  the notice to the
shareholder at that address, all future notices or reports  shall be deemed
to  have  been  duly  given  without  further mailing if the same shall  be
available to the shareholder on written  demand  of  the shareholder at the
principal executive office of the corporation for a period  of one (1) year
from the date of the giving of the notice.

     An affidavit of the mailing or other means of giving any notice of any
shareholders'  meeting,  executed by the secretary, assistant secretary  or
any transfer agent of the  corporation  giving  the  notice, shall be PRIMA
FACIE evidence of the giving of such notice.

     2.6 QUORUM.

     The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business  at all meetings of shareholders. The shareholders  present  at  a
duly called or held meeting at which a quorum is present may continue to do
business  until  adjournment,  notwithstanding  the  withdrawal  of  enough
shareholders  to  leave less than a quorum, if any action taken (other than
adjournment) is approved  by  at least a majority of the shares required to
constitute a quorum.

    2.7 ADJOURNED MEETING; NOTICE.

     Any shareholders' meeting,  annual or special, whether or not a quorum
is present, may be adjourned from  time to time by the vote of the majority
of the shares represented at that meeting,  either  in  person or by proxy,
but in the absence of a quorum, no other business may be transacted at that
meeting, except as provided in Section 2.6 of these by-laws.

     When  any  meeting  of  shareholders,  either  annual  or special,  is
adjourned  to  another  time  or  place,  notice need not be given  of  the
adjourned meeting if the time and place are  announced  at  the  meeting at
which  the adjournment is taken, unless a new record date for the adjourned
meeting  is  fixed,  or  unless the adjournment is for more than forty-five
(45) days from the date set  for the original meeting, in which case notice
of the adjourned meeting shall  be  given.  Notice  of  any  such adjourned
meeting shall be given to each shareholder of record entitled  to  vote  at
the adjourned meeting in accordance with the provisions of Sections 2.4 and
2.5 of these by-laws. At any adjourned meeting the corporation may transact
any business which might have been transacted at the original meeting.

     2.8 VOTING.

     The shareholders entitled to vote at any meeting of shareholders shall
be  determined  in  accordance with the provisions of Section 2.11 of these
by-laws, subject to the  provisions  of. Sections 702 to 704, inclusive, of
the Code (relating to voting shares held  by  a fiduciary, in the name of a
corporation or in joint ownership).

     The shareholders' vote may be by voice vote  or  by  ballot; provided,
however, that any election for directors must be by ballot  if  demanded by
any shareholder before the voting has begun.

     On  any  matter  other than the election of directors, any shareholder
may vote part of the shares  in  favor  of  the  proposal  and refrain from
voting the remaining shares or vote them against the proposal,  but, if the
shareholder fails to specify the number of shares which the shareholder  is
voting   affirmatively,   it   will   be  conclusively  presumed  that  the
shareholder's  approving  vote is with respect  to  all  shares  which  the
shareholder is entitled to vote.

     If a quorum is present,  the  affirmative  vote of the majority of the
shares represented and voting at a duly-held meeting  (which  shares voting
affirmatively  also constitute at least a majority of the required  quorum)
shall be the act  of the shareholders, unless the vote of a greater number,
or voting by classes,  is  required  by  the  Code  or  by  the articles of
incorporation.

     At  a shareholders' meeting at which directors are to be  elected,  no
shareholder shall be entitled to cumulate votes (i.e.
cast for any candidate a number of votes greater than the number
of votes which such shareholder normally is entitled to cast)
unless the candidates' names have been placed in nomination prior
to commencement of the voting and a shareholder has given notice
prior to commencement of the voting of the shareholder's intention
to cumulate votes. If any shareholder has given such a notice,
then every shareholder entitled to vote may cumulate votes for
candidates placed in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied
by the number of votes to which that shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among
any or all of the candidates, as the shareholder thinks fit. The candidates
receiving  the highest number of votes, up to the number of directors to be
elected, shall be elected.

     2.9 VALIDATION OF MEETINGS: WAIVER OF NOTICE; CONSENT.

     The transactions  of  any  meeting  of  shareholders, either annual or
special, however called and noticed, and wherever  held,  shall be as valid
as though had at a meeting duly held after regular call and  notice,  if  a
quorum  be  present  either in person or by proxy, and if, either before or
after the meeting, each  person  entitled  to  vote, who was not present in
person or by proxy, signs a written waiver of notice  or  a  consent to the
holding of the meeting or an approval of the minutes thereof. The waiver of
notice or consent need not specify either the business to be transacted  or
the  purpose  of any annual or special meeting of shareholders, except that
if action is taken  or  proposed  to  be taken for approval of any of those
matters specified in Section 2.4 of these  by-laws, the waiver of notice or
consent shall state the general nature of the  proposal.  All such waivers,
consents and approvals shall be filed with the corporate records  or made a
part of the minutes of the meeting.

     Attendance by a person at a meeting shall also constitute a waiver  of
notice of that meeting, except when the person objects, at the beginning of
the  meeting, to the transaction of any business because the meeting is not
lawfully called or convened, and except that attendance at a meeting is not
a waiver  of  any  right  to  object  to  the consideration of a matter not
included in the notice of the meeting, if that  objection is expressly made
at the meeting

     2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.

     Any  action which may be taken at any annual  or  special  meeting  of
shareholders  may be taken without a meeting and without prior notice, if a
consent in writing,  setting  forth  the  action so taken, is signed by the
holders of outstanding shares having not less  than  the  minimum number of
votes that would be necessary to authorize or take that action at a meeting
at which all shares entitled  to  vote  on that action were present and voted.

     In  the  case  of  election  of  directors,  such  a  consent shall be
effective only if signed by the holders of all outstanding shares  entitled
to vote for the election of directors.

     All  such  consents shall be maintained in the corporate records.  Any
shareholder giving  a  written consent, or the shareholder's proxy holders,
or  a  transferee  of the shares,  or  a  personal  representative  of  the
shareholder, or their respective proxy holders, may revoke the consent by a
writing  received by  the  secretary  of  the  corporation  before  written
consents of  the number of shares required to authorize the proposed action
have been filed with the secretary.

     If the consents  of  all  shareholders  entitled to vote have not been
solicited  in writing, and if the unanimous written  consent  of  all  such
shareholders  shall not have been received, the secretary shall give prompt
notice of the corporate  action  approved  by  the  shareholders  without a
meeting. Such notice shall be given in the manner specified in Section  2.5
of  these by-laws. In the case of approval of (i) a contract or transaction
in which  a  director has a direct or indirect financial interest, pursuant
to Section 310  of  the  Code, (ii) indemnification of a corporate "agent",
pursuant  to  Section 317 of  the  Code,  (iii)  a  reorganization  of  the
corporation, pursuant  to Section 1201 of the Code, and (iv) a distribution
in dissolution other than  in  accordance  with  the  rights of outstanding
preferred shares, pursuant to Section 2007 of the Code, the notice shall be
given  at  least  ten  (10)  days  before  the consummation of  any  action
authorized by that approval.

     2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS.

     For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give  consent to corporate action
without a meeting, the board of directors may fix,  in  advance,  a  record
date,  which  shall not be more than sixty (60) days nor less than ten (10)
days before the  date  of  any  such  meeting nor more than sixty (60) days
before  any  such  action  without  a  meeting,  and  in  such  event  only
shareholders of record on the date so fixed  are  entitled to notice and to
vote or to give consents, as the case may be, notwithstanding  any transfer
of any shares on the books of the corporation after the record date, except
as otherwise provided in the Code.

     If the board of directors does not so fix a record date:

     (a) the record date for determining shareholders entitled to notice of
or  to vote at a meeting of shareholders shall be at the close of  business
on the  business day next preceding the day on which notice is given or, if
notice is  waived,  at  the  close  of  business  on  the business day next
preceding the day on which the meeting is held; and

     (b)  the  record  date for determining shareholders entitled  to  give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has  been  taken,  shall  be the day on which the first
written consent is given or (ii) when prior action  by  the  board has been
taken,  shall be the day on which the board adopts the resolution  relating
to that action,  or  the  sixtieth (60th) day before the date of such other
action, whichever is later.

     The record date for any  other purpose shall be as provided in Article
VIII of these by-laws.

     2.12 PROXIES.

     Every person entitled to vote  for  directors, or on any other matter,
shall have the right to do so either in person  or  by  one  or more agents
authorized  by  a  written  proxy  signed by the person and filed with  the
secretary  of  the corporation. A proxy  shall  be  deemed  signed  if  the
shareholder's name  is  placed  on  the  proxy whether by manual signature,
typewriting, telegraphic transmission or otherwise)  by  the shareholder or
the shareholder's attorneyin-fact. A validly executed proxy  which does not
state that it is irrevocable shall continue in full force and effect unless
(i)  revoked by the person executing it, before the vote pursuant  to  that
proxy,  by a writing delivered to the corporation stating that the proxy is
revoked,  or  by  a  subsequent  proxy executed by the person executing the
prior  proxy  and  presented  to the meeting,  or  as  to  any  meeting  by
attendance at such meeting and voting in person by the person executing the
proxy or (ii) written notice of  the  death  or  incapacity of the maker of
that proxy is received by the corporation before the  vote pursuant to that
proxy is counted; provided, however, that no proxy shall be valid after the
expiration  of  eleven  (11)  months  from  the  date of the proxy,  unless
otherwise provided in the proxy. The revocability of a proxy that states on
its  face that it is irrevocable shall be governed  by  the  provisions  of
Sections 705(e) and 705(f) of the Code.

     2.13 INSPECTORS OF ELECTION.

     Before any meeting of shareholders, the board of directors may appoint
an inspector  or  inspectors  of  election  to  act  at  the meeting or its
adjournment. If no inspector of election is so appointed,  the  chairman of
the  meeting  may, and on the request of any shareholder or a shareholder's
proxy shall, appoint  an  inspector or inspectors of election to act at the
meeting. The number of inspectors  shall be either one (1) or three (3). If
inspectors are appointed at a meeting pursuant to the request of one (1) or
more shareholders or proxies, the holders  of  a majority of shares or their
proxies present at the meeting shall  determine whether one
(1) or three (3) inspectors are to be appointed.  If any  person  appointed
as  inspector  fails to appear or fails or refuses to act, the chairman  of
the meeting may, and upon the request of any shareholder or a shareholder's
proxy shall, appoint a person to fill that vacancy.

     Such inspectors shall:

     (a)  Determine  the  number of shares outstanding and the voting power
of each of the number of shares  represented  at the meeting, the existence
of a quorum, and the authenticity, validity and effect of proxies;

     (b)  Receive votes, ballots or consents;

     (c)  Hear  and  determine  all challenges and  questions  in  any  way
arising in connection with the right to vote;

     (d)  Count and tabulate all votes or consents;

     (e)  Determine when the polls shall close;

     (f)  Determine the result; and

     (g)  Do any other acts that  may  be proper to conduct the election or
vote with fairness to all shareholders.

                                ARTICLE III

                                 DIRECTORS

     3.1 POWERS.

     Subject  to the provisions of the Code  and  any  limitations  in  the
articles of incorporation  and these by-laws relating to action required to
be approved by the shareholders  or by the outstanding shares, the business
and affairs of the corporation shall  be  managed  and all corporate powers
shall be exercised by or under the direction of the board of directors.

     Any  director  may resign effective on giving written  notice  to  the
chairman of the board,  the  president,  the  secretary  or  the  board  of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time,  the board of directors may elect a successor to take office when the
resignation becomes effective.

     No  reduction  of  the  authorized  number of directors shall have the
effect  of  removing any director before that  director's  term  of  office
expires.

     3.2 NUMBER AND QUALIFICATION OF DIRECTORS.

     The authorized number of directors shall be not less than five (5) not
more than nine  (9)  with the exact number of directors to be fixed, within
the limited specified,  by approval of the board or the shareholders in the
manner  provided  in the by-laws  and  section  204(a)  of  the  California
Corporations Code.

     3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS.

     Directors shall  be  elected at each annual meeting of shareholders to
hold office until the next  such annual meeting. Each director, including a
director elected to fill a vacancy,  shall hold office until the expiration
of the term for which elected and until  a  successor  has been elected and
qualified.

     3.4 VACANCIES.

     Vacancies in the board of directors may be filled by a majority of the
remaining  directors,  though  less than a quorum, or by a  sole  remaining
director, except that a vacancy created by the removal of a director by the
vote or written consent of the shareholders  or  by  court  order may be
filled only by the vote of a majority of the outstanding shares entitled to
vote  thereon  represented  at a duly held meeting at which a quorum  is
present, or by the unanimous written consent of all shares entitled to vote
thereon. Each director so elected  shall  hold office until the next annual
meeting  of the shareholders and until a successor  has  been  elected  and
qualified.

     A vacancy  or  vacancies  in the board of directors shall be deemed to
exist in the event of the death, resignation or removal of any director, or
if the board of directors by resolution  declares  vacant  the  office of a
director  who  has  been  declared of unsound mind by an order of court  or
convicted  of  a  felony, or if  the  authorized  number  of  directors  is
increased, or if the  shareholders  fail, at any meeting of shareholders at
which  any  director  or directors are elected,  to  elect  the  number  of
directors to be elected at that meeting.

     The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
other than to fill a vacancy  created  by  removal,  if by written consent,
shall require the consent of the holders of a majority  of  the outstanding
shares entitled to vote thereon.

     3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.

     Regular  meetings of the board of directors may be held at  any  place
within or outside  the  State  of  California that has been designated from
time  to  time  by  resolution of the board.  In  the  absence  of  such  a
designation regular meetings  shall  be  held  at  the  principal executive
office of the corporation. Special meetings of the board may be held at any
place within or outside the State of California that has been designated in
the notice of the meeting or, if not stated in the notice or if there is no
notice, at the principal executive office of the corporation.

     Any  meeting, regular or special, may be held by conference  telephone
or similar  communication equipment, so long as all directors participating
in the meeting can hear one another; and all such directors shall be deemed
to be present in person at the meeting.

     3.6 REGULAR MEETINGS.

     Regular  meetings of the board of directors may be held without notice
if the times of such meetings are fixed by the board of directors.

     3.7 SPECIAL MEETINGS.

     Special meetings of the board of directors for any purpose or purposes
may be called at  any time by the chairman of the board, the president, any
vice president, the secretary or any two directors.

     Notice of the  time  and  place of special meetings shall be delivered
personally or by telephone to each  director or sent by first-class mail or
telegram, charges prepaid, addressed  to  each  director at that director's
address as it is shown on the records of the corporation.  If the notice is
mailed, it shall be deposited in the United States mail at least  four  (4)
days  before  the  time  of  the  holding  of the meeting. If the notice is
delivered personally, or by telephone or telegram,  it  shall  be delivered
personally or by telephone or to the telegraph company at least forty-eight
(48)  hours before the time of the holding of the meeting. Any oral  notice
given personally or by telephone may be communicated either to the director
or to a  person  at  the  office  of the director who the person giving the
notice has reason to believe will promptly  communicate it to the director.
The notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the corporation.

     3.8 QUORUM.

     A majority of the authorized number of directors  shall  constitute  a
quorum  for  the  transaction of business, except to adjourn as provided in
Section 3.10 of these  by-laws.  Every  act  or  decision done or made by a
majority of the directors present at a duly held meeting  at which a quorum
is present shall be regarded as the act of the board of directors,  subject
to  the  provisions of Section 310 of the Code (as to approval of contracts
or transactions  in  which  a  director  has  a direct or indirect material
financial  interest),  Section  311  of  the  Code (as  to  appointment  of
committees)  and  Section  317(e)  of the Code (as  to  indemnification  of
directors).

     A  meeting at which a quorum is  initially  present  may  continue  to
transact  business  notwithstanding  the  withdrawal  of  directors, if any
action taken is approved by at least a majority of the required  quorum for
that meeting.

     3.9 WAIVER OF NOTICE.

     The  transactions  of  any  meeting of the board of directors, however
called and noticed or wherever held,  shall  be as valid as though had at a
meeting duly held after regular call and notice  if a quorum is present and
if, either before or after the meeting, each of the  directors  not present
signs  a written waiver of notice, a consent to holding the meeting  or  an
approval  of  the minutes thereof. The waiver of notice or consent need not
specify  the purpose  of  the  meeting.  All  such  waivers,  consents  and
approvals  shall  be filed with the corporate records or made a part of the
minutes of the meeting.  Notice  of a meeting shall also be deemed given to
any director who attends the meeting  without  protesting, before or at its
commencement, the lack of notice to that director.

     3.10 ADJOURNMENT.

     A majority of the directors present, whether  or  not  constituting  a
quorum, may adjourn any meeting to another time and place.

     3.11 NOTICE OF ADJOURNMENT.

     Notice  of the time and place of holding an adjourned meeting need not
be given, unless  the  meeting  is adjourned for more than twenty-four (24)
hours, in which case notice of the time and place shall be given before the
time of the adjourned meeting, in  the  manner  specified in Section 3.7 of
these by-laws, to the directors who were not present  at  the  time  of the
adjournment.

     3.12 ACTION WITHOUT MEETING.

     Any action required or permitted to be taken by the board of directors
may  be  taken  without  a  meeting,  if  all  members  of  the board shall
individually or collectively consent in writing to  that action. Such action 
by written consent shall have the  same  force and effect  as  a  unanimous
vote  of the board of directors. Such written consent and any counterparts
thereof shall be filed with the minutes of the proceedings of the board.

     3.13 FEES AND COMPENSATION OF DIRECT0RS.

     Directors and members of committees  may receive such compensation, if
any, for their services, and such reimbursement  of  expenses,  as  may  be
fixed  or  determined by resolution of the board of directors. This Section
3.13 shall not  be  construed  to  preclude  any  director from serving the
corporation  in  any  other  capacity  as  an officer, agent,  employee  or
otherwise, and receiving compensation for those services.

                                ARTICLE IV

                                COMMITTEES

     4.1 COMMITTEES OF DIRECTORS.

     The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one  (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors  as  alternate members of
any committee, who may replace any absent member at any meeting of the 
committee. The appointment of members or alternate members of a committee 
requires the vote of a majority of the authorized number of directors.
Any committee, to the extent provided in the resolution of the
board, shall have all the authority of the board, except with
respect to:

     (a)  the approval of any action which, under the Code,  also  requires
shareholders' approval or approval of the outstanding shares;

     (b) the  filling  of  vacancies  in  the  board of directors or in any
committee;

     (c) the fixing of compensation of the directors  for  serving  on  the
board or any committee;

     (d)  the  amendment  or repeal of these by-laws or the adoption of new
by-laws;

     (e)  the  amendment or repeal  of  any  resolution  of  the  board  of
directors which by its express terms is not so amendable or repealable;

     (f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board
of directors; or

     (g) the appointment of any other committees of the board of directors 
or the members of such committees.

4.2 MEETINGS AND ACTION OF COMMITTEES.

     Meetings and  actions of committees shall be governed by, and held and
taken in accordance  with,  the provisions of Article III of these by-laws,
Section 3.5 (place of meetings),  Section  3.6  (regular meetings), Section
3.7  (special  meetings  and  notice),  Section 3.8 (quorum),  Section  3.9
(waiver of notice), Section 3.10 (adjournment),  Section  3.11  (notice  of
adjournment)  and  Section 3.12 (action without meeting), with such changes
in  the  context of those  by-laws  as  are  necessary  to  substitute  the
committee  and  its  members  for  the  board of directors and its members,
except that the time of regular meetings  of  committees  may be determined
either  by  resolution  of the board of directors or by resolution  of  the
committee; special meetings  of committees may also be called by resolution
of the board of directors; and  notice  of  special  meetings of committees
shall also be given to all alternate members, who shall  have  the right to
attend  all  meetings  of  the committee. The board of directors may  adopt
rules  for  the government of  any  committee  not  inconsistent  with  the
provisions of these by-laws.

                                 ARTICLE V

                                 OFFICERS

     5.1 OFFICERS.

     The officers of the corporation shall be a president, a secretary, and
a chief financial officer. The corporation may also have, at the discretion
of the board  of  directors,  a  chairman  of  the  board, one or more vice
presidents,  one  or  more  assistant  secretaries, one or  more  assistant
treasurers, and such other officers as may  be appointed in accordance with
the provisions of Section 5.3 of these by-laws.  Any  number of offices may
be held by the same person.

     5.2 ELECTION OF OFFICERS.

     The  officers  of  the  corporation, except such officers  as  may  be
appointed in accordance with the  provisions  of Section 5.3 or Section 5.5
of these by-laws, shall be chosen by the board,  subject  to the rights, if
any, of an officer under any contract of employment.

     5.3 SUBORDINATE OFFICERS.

     The  board of directors may appoint, or may empower the  president  to
appoint, such  other  officers  as  the  business  of  the  corporation may
require, each of whom shall hold office for such period,
have  such  authority  and  perform  such  duties as are provided in  these
by-laws or as the board of directors may from time to time determine.

     5.4 REMOVAL AND RESIGNATION OF OFFICERS.

     Subject to the rights, if any, of an officer  under  any  contract  of
employment,  any  officer  may be removed, either with or without cause, by
the board of directors at any  regular  or special meeting of the board or,
except  in case of an officer chosen by the  board  of  directors,  by  any
officer upon  whom  such  power of removal may be conferred by the board of
directors.

     Any officer may resign  at  any  time  by giving written notice to the
corporation. Any resignation shall take effect  at  the date of the receipt
of that notice or at any later time specified in that  notice;  and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice
to  the  rights, if any, of the corporation under any contact to which  the
officer is a party.

     5.5 VACANCIES IN OFFICES.

     A vacancy  in  any  office  because  of  death,  resignation, removal,
disqualification  or  any  other  cause  shall  be  filled  in  the  manner
prescribed in these by-laws for regular appointments to that office.

     5.6 CHAIRMAN OF THE BOARD.

     The  chairman of the board, if such an officer be elected,  shall,  if
present, preside  at  meetings  of  the board of directors and exercise and
perform such other powers and duties  as  may be from time to time assigned
to him by the board of directors or prescribed  by  these by-laws. If there
is  no  president,  the  chairman  of  the board shall also  be  the  chief
executive officer of the corporation and  shall  have the powers and duties
prescribed in Section 5.7 of these by-laws.

     5.7 PRESIDENT.

     Subject to such supervisory powers, if any, as  may  be  given  by the
board  of  directors  to  the  chairman  of  the board, if there be such an
officer,  the  president  shall  be  the  chief executive  officer  of  the
corporation and shall, subject to the control  of  the  board of directors,
have  general  supervision, direction and control of the business  and  the
officers of the  corporation.  He  shall  preside  at  all  meetings of the
shareholders and, in the absence of the chairman of the board,  or if there
be  none,  at  all  meetings  of the board of directors. He shall have  the
general powers and duties of management  usually  vested  in  the office of
president of a corporation, and shall have such other powers and  duties as
may be prescribed by the board of directors or these by-laws.

     5.8 VICE PRESIDENTS.

     In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or,  if  not
ranked,  a  vice  president  designated  by  the  board of directors, shall
perform all the duties of the president and when so  acting  shall have all
the powers of, and be subject to all the restrictions upon, the  president.
The  vice  presidents  shall have such other powers and perform such  other
duties as from time to time  may be prescribed for them respectively by the
board of directors, these by-laws,  the  president  or  the chairman of the
board.

     5.9 SECRETARY.

     The  secretary  shall  keep  or  cause  to  be kept, at the  principal
executive office of the corporation, or such other  place  as  the board of
directors  may  direct,  a  book of minutes of all meetings and actions  of
directors, committees of directors,  and  shareholders,  with  the time and
place  of  holding,  whether  regular  or  special  (and,  if  special, how
authorized and the notice given), the names of those present at  directors'
meetings or committee meetings, the number of shares present or represented
at shareholders' meetings, and the proceedings thereof.

     The  secretary  shall  keep,  or  cause  to  be kept, at the principal
executive office of the corporation or at the office  of  the corporation's
transfer agent or registrar, as determined by resolution of  the  board  of
directors,  a  share  register,  or a duplicate share register, showing the
names of all shareholders and their  addresses,  the  number and classes of
shares  held by each, the number and date of certificates  evidencing  such
shares, and  the  number  and  date  of  cancellation  of every certificate
surrendered for cancellation.

     The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required by these by-laws
or  by law to be given, and he shall keep the seal of the  corporation,  if
one be  adopted,  in  safe  custody  and  shall  have such other powers and
perform such other duties as may be prescribed by the board of directors or
by these by-laws.

     5.10 CHIEF FINANCIAL OFFICER.

     The chief financial officer shall keep and maintain,  or  cause  to be
kept and maintained, adequate and correct books and records of accounts  of
the  properties  and  business  transactions  of the corporation, including
accounts  of  its  assets,  liabilities,  receipts,  disbursements,  gains,
losses, capital, retained earnings, and shares.  The books of account shall
at all reasonable times be open to inspection by any director.

     The chief financial officer shall deposit all money and other
valuables in the name and to the credit of the corporation with
such depositaries as may be designated by the board of directors.
He shall disburse the funds of the corporation as may be ordered
by  the  board of directors, shall render to the president  and  directors,
whenever they  request  it,  an account of all of his transactions as chief
financial officer and of the financial  condition  of  the corporation, and
shall  have  such  other  powers and perform such other duties  as  may  be
prescribed by the board of directors or these by-laws.

                            ARTICLE VI

       INDEMNIFICATION OF DIRECTORS, AND OFFICERS, EMPLOYEES
                         AND OTHER AGENTS

     The corporation shall, to the maximum extent and in the manner
permitted   by   the  Code,  indemnify   each   of   its   agents   against
expenses,judgments,  fines,  settlements  and  other  amounts  actually and
reasonably incurred in connection with any proceeding arising by  reason of
the  fact  any  such  person  is  or  was an agent of the corporation.  For
purposes of this Article VI, an "agent"  of  the  corporation  includes any
person  who is or was a director, officer, employee or other agent  of  the
corporation,  or  is  or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, 
joint venture, trust or other enterprise, or was a director, officer, 
employee or agent of a corporation which  was a predecessor corporation of 
the corporation or of another enterprise at the request of such predecessor
corporation.

                            ARTICLE VII

                        RECORDS AND REPORTS

     7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER.

     The corporation shall keep at its principal executive office,
or at the office of its transfer agent or registrar, if either be
appointed and as determined  by  resolution  of  the  board of directors, a
record  of  its  shareholders,  giving  the  names  and  addresses  of  all
shareholders and the number and class of shares held by each shareholder.

     A shareholder or shareholders of the corporation holding
at least five percent (5%) in the aggregate of the outstanding
voting shares of the corporation or who holds at least one percent
(1%) of such voting shares and has filed a Schedule 14B with the
Securities and Exchange Commission relating to the election of
directors, may (i) inspect and copy the records of shareholders'  names and
addresses  and shareholdings during usual business hours on five (5)  days'
prior written  demand  on  the  corporation,  (ii) obtain from the transfer
agent  of the corporation, on written demand and  on  the  tender  of  such
transfer  agent's  usual  charges  for  such  list, a list of the names and
addresses of the shareholders who are entitled  to vote for the election of
directors, and their shareholdings, as of the most  recent  record date for
which  that  list  has  been  compiled  or  as  of a date specified by  the
shareholder after the date of demand. Such list shall  be made available to
any such shareholder by the transfer agent on or before  the  later of five
(5)  days  after  the  demand  is received or five (5) days after the  date
specified in the demand as the date as of which the list is to be compiled.

     The record of shareholders  shall  also  be  open to inspection on the
written demand of any shareholder or holder of a voting  trust certificate,
at  any time during usual business hours, for a purpose reasonably  related
to the  holder's  interests  as  a shareholder or as the holder of a voting
trust certificate.

     Any inspection and copying under  this  Section  7.1  may  be  made in
person  or by an agent or attorney of the shareholder or holder of a voting
trust certificate making the demand.

     7.2 MAINTENANCE AND INSPECTION OF BY-LAWS.

     The  corporation  shall  keep at its principal executive office, or if
its principal executive office  is  not  in the State of California, at its
principal business office in such state, the  original  or  a copy of these
by-laws  as  amended to date, which by-laws shall be open to inspection  by
the shareholders  at  all  reasonable  times  during  office  hours. If the
principal  executive  office  of  the  corporation is outside the State  of
California and the corporation has no principal  business  office  in  such
state,  the  secretary  shall, upon the written request of any shareholder,
furnish to that shareholder a copy of these by-laws as amended to date.

     7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.

     The accounting books  and  records,  and the minutes of proceedings of
the shareholders and the board of directors and any committee or committees
of the board of directors, shall be kept at such place or places designated
by  the  board  of directors or, in absence of  such  designation,  at  the
principal executive office of the corporation. The minutes shall be kept in
written form and  the  accounting books and records shall be kept either in
written form or in any other  form  capable of being converted into written
form.

     The  minutes  and  accounting books  and  records  shall  be  open  to
inspection upon the written demand of any shareholder or holder of a voting
trust certificate, at any  reasonable time during usual business hours, for
a purpose reasonably related  to the holder's interests as a shareholder or
as the holder of a voting trust  certificate. The inspection may be made in
person or by an agent or attorney,  and shall include the right to copy and
make extracts. Such rights of inspection  shall  extend  to  the records of
each subsidiary corporation of the corporation.

     7.4 INSPECTION BY DIRECTORS.

     Every director shall have the absolute right at any reasonable time to
inspect  all  books,  records and documents of every kind and the  physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director  may be made in person or by an agent or attorney,
and the right of inspection includes the right to copy and make extracts of
documents.

     7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.

     The board of directors  shall cause an annual report to be sent to the
shareholders not later than one  hundred  twenty (120) days after the close
of the fiscal year adopted by the corporation. Such report shall be sent at
least fifteen (15) days before the annual meeting  of  shareholders  to  be
held during the next fiscal year and in the manner specified in Section 2.5
of these by-laws for giving notice to shareholders of the corporation.

     The  annual  report shall contain a balance sheet as of the end of the
fiscal year and an  income  statement and statement of changes in financial
position for the fiscal year,  accompanied  by  any  report  of independent
accountants  or,  if  there  is  no  such  report,  the  certificate of  an
authorized  officer  of the corporation that the statements  were  prepared
without audit from the books and records of the corporation.

     The foregoing requirement  of an annual report shall be waived so long
as the shares of the corporation  are  held  by less than one hundred (100)
holders of record.

     7.6 FINANCIAL STATEMENTS.

     A copy of any annual financial statement  and  any income statement of
the  corporation  for each quarterly period of each fiscal  year,  and  any
accompanying balance  sheet  of  the corporation as of the end of each such
period, that has been prepared by  the corporation shall be kept on file in
the principal executive office of the  corporation  for twelve (12) months;
and each such statement shall be exhibited at all reasonable  times  to any
shareholder  demanding an examination of any such statement or a copy shall
be mailed to any such shareholder.

     If a shareholder or shareholders holding at least five percent (5%) of
the outstanding  shares  of  any  class of stock of the corporation makes a
written  request  to  the  corporation  for  an  income  statement  of  the
corporation for the three-month, six-month or nine-month period of the then
current fiscal year ended more than thirty (30) days before the date of the
request, and for a balance sheet  of  the corporation as of the end of that
period,  the  chief financial officer shall  cause  that  statement  to  be
prepared, if not  already  prepared,  and  shall deliver personally or mail
that statement or statements to the person making the request within thirty
(30) days after the receipt of the request. If the corporation has not sent
to the shareholders its annual report for the last fiscal year, such report
shall likewise be delivered or mailed to the  shareholder  or  shareholders
within thirty (30) days after the request.

     The corporation shall also, on the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual or quarterly
income statement which it has prepared, and a balance sheet as of  the  end
of that period.

     The quarterly income statements and balance sheets referred to in this
section  shall  be  accompanied  by  the report, if any, of any independent
accountants engaged by the corporation  or the certificate of an authorized
officer  of  the corporation that the financial  statements  were  prepared
without audit from the books and records of the corporation.

                               ARTICLE VIII

                              GENERAL MATTERS

     8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.

     For purposes  of  determining  the  shareholders  entitled  to receive
payment of any dividend or other distribution or allotment of any rights or
entitled  to  exercise  any  rights  in  respect of any other lawful action
(other than action by shareholders by written  consent  without a meeting),
the board of directors may fix, in advance, a record date,  which shall not
be more than sixty (60) days before any such action, and in that  case only
shareholders  of  record at the close of business on the date so fixed  are
entitled to receive  the  dividend, distribution or allotment of rights, or
to exercise such rights, as  the  case may be, notwithstanding any transfer
of any shares on the books of the corporation  after  the  record  date  so
fixed, except as otherwise provided in the Code.

     If the board of directors does not so fix a record date,
the record date for determining shareholders for any such purpose
shall be at the close of business on the day on which the board
adopts the applicable resolution or the sixtieth (60th) day before
the date of that action, whichever is later.

     8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.

     All  checks,  drafts,  or other orders for payment of money, notes, or
other evidences of indebtedness,  issued  in  the name of or payable to the
corporation, shall be signed or endorsed by such  person  or persons and in
such manner as, from time to time, shall be determined by resolution of the
board of directors.

     8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.

     The board of directors, except as otherwise provided in these by-laws,
may authorize any officer or officers, or agent or agents,  to  enter  into
any  contract or execute any instrument in the name of and on behalf of the
corporation,  and  such  authority  may  be general or confined to specific
instances; and, unless so authorized or ratified  by the board of directors
or  within the agency power of an officer, no officer,  agent  or  employee
shall  have  any power or authority to bind the corporation by any contract
or engagement  or  to  pledge  its  credit  or  to render it liable for any
purpose or for any amount.

     8.4 CERTIFICATES FOR SHARES.

     A certificate or certificates for shares of  the  corporation shall be
issued to each shareholder when any of such shares are fully  paid, and the
board of directors may authorize the issuance of certificates or  shares as
partly paid provided that these certificates shall state the amount  of the
consideration  to  be  paid  for them and the amount paid. All certificates
shall be signed in the name of the corporation by the chairman of the board
or vice chairman of the board  or  the president or a vice president and by
the chief financial officer or an assistant  treasurer  or the secretary or
an assistant secretary, certifying the number of shares and  the  class  or
series  of shares owned by the shareholder. Any or all of the signatures on
the certificate may be facsimile.

     In case  any  officer,  transfer  agent or registrar who has signed or
whose  facsimile signature has been placed  on  a  certificate  shall  have
ceased to  be  that  officer,  transfer  agent  or  registrar  before  that
certificate  is  issued,  it may be issued by the corporation with the same
effect as if that person were  an  officer,  transfer agent or registrar at
the date of issue.

     8.5 LOST CERTIFICATES.

     Except as provided in this Section 8.5, no new certificates for shares
shall  be  issued  to replace a previously issued  certificate  unless  the
latter is surrendered  to  the  corporation and cancelled at the same time.
The board of directors may, in case  any  share  certificate or certificate
for any other security is lost, stolen or destroyed, authorize the issuance
of replacement certificates on such terms and conditions  as  the board may
require, including provision for indemnification of the corporation secured
by a bond or other adequate security sufficient to protect the  corporation
against  any  claim  that may be made against it, including any expense  or
liability, on account  of  the  alleged  loss,  theft or destruction of the
certificate or the issuance of the replacement certificate.

     8.6 CONSTRUCTION AND DEFINITIONS.

     Unless the context requires otherwise, the general  provisions,  rules
of  construction  and definitions in the Code shall govern the construction
of these by-laws. Without  limiting  the  generality of this provision, the
singular  number  includes  the  plural,  the plural  number  includes  the
singular, and the term "person" includes both  a  corporation and a natural
person.

                                ARTICLE IX

                                AMENDMENTS

     9.1 AMENDMENT BY SHAREHOLDERS.

     New by-laws may be adopted or these by-laws may be amended or repealed
by the vote or written consent of holders of a majority  of the outstanding
shares  entitled  to  vote;  provided,  however,  that  if the articles  of
incorporation  of  the  corporation  set  forth  the  number of  authorized
directors  of the corporation, the authorized number of  directors  may  be
changed only by an amendment as required by applicable law.

     9.2 AMENDMENT BY DIRECTORS.

     Subject  to  the rights of the shareholders as provided in Section 9.1
of these by-laws, by-laws,  other than a by-law or an amendment of a by-law
changing the authorized number  of  directors (except to fix the authorized
number of directors pursuant to a by-law providing for a variable number of
directors), may be adopted, amended, or repealed by the board of directors.

Certificate Number                                        Number of Warrants
                            DIGITAL POWER CORPORATION
                  VOID AFTER 5:00 P.M. FREMONT, CALIFORNIA TIME
                             ON NOVEMBER __, 1999
                         OR EARLIER AS PROVIDED HEREIN

             REDEEMABLE COMMON STOCK PURCHASE WARRANTS TO PURCHASE
              SHARES OF COMMON STOCK OF DIGITAL POWER CORPORATION

THIS CERTIFIES THAT, for value received,

      ________________________________________________________________
or registered assigns, _______________________________________________
is  the  registered  holder  of  the number of Redeemable Common Stock Purchase
Warrants (the "Warrants") set forth  above.   Each  Warrant entitles the holder
thereof to purchase from Digital Power Corporation (the  "Company"), subject to
the  terms  and conditions set forth hereinafter and in the  Warrant  Agreement
hereinafter referred  to, one share of the Company's common stock, no par value
(the  "Common  Stock"),  upon   presentation  and  surrender  of  this  Warrant
Certificate.  However, Warrants shall  not  be exercisable by the holder in any
state where such exercise would be unlawful.

      Unless sooner required in accordance with  the terms hereof, this Warrant
Certificate must be presented and surrendered to American  Securities Transfer,
Inc. (the "Warrant Agent"), along with the Purchase Price, at  or prior to 5:00
p.m., Denver, Colorado time, on November __, 1999, at the corporate  offices of
the   Warrant  Agent;  otherwise  the  Warrants  represented  by  this  Warrant
Certificate shall become null and void.

      Payment of the Purchase Price and any applicable taxes must accompany the
surrender  of  this  Warrant  Certificate.  The purchase price per share of the
Common Stock is $5.00 (the "Purchase Price").

      The Warrants represented  by  this  Warrant  Certificate  are  subject to
redemption by the Company upon the payment to the holder of $0.125 per Warrant.
The  Warrants  may  be redeemed only in the event that the Common Stock of  the
Company has traded at  or  above  a  price  of $6.00 per share at closing for a
minimum of thirty (30) consecutive trading days ending within three days of the
date on which notice of redemption is given.   In order to redeem the Warrants,
the Company must provide each registered holder  of  the  Warrant with at least
thirty (30) days written notice of the Company's intention  to  redeem.  Unless
the  holder exercises his right to purchase the shares of Common Stock  covered
by this  Warrant  Certificate  on  or  prior  to  the close of business on such
redemption date, the holder shall forfeit his right  to  do  so  and  shall  be
entitled only to the redemption price.

      This  Warrant Certificate is subject to all of the terms, provisions, and
conditions of the Warrant Agreement dated as of November __, 1996 (the "Warrant
Agreement"),  to  all of which terms, provisions, and conditions the registered
holder of this Warrant  Certificate consents by acceptance hereof.  The Warrant
Agreement is hereby incorporated herein by reference and made a part hereof and
to which Warrant Agreement  reference  is hereby made for a full description of
the  rights,  limitations  of  rights,  obligations,   duties,  and  immunities
hereunder of the holders of the Warrant Certificates.  Copies  of  the  Warrant
Agreement  are available for inspection at the corporate offices of the Company
and the Warrant Agent.

      This Warrant  Certificate  upon surrender at the corporate offices of the
Warrant Agent may be exchanged for  another Warrant Certificate or Certificates
evidencing  in  the  aggregate the same  number  of  Warrants  as  the  Warrant
Certificate or Certificates  so surrendered.  If the Warrants evidenced by this
Warrant Certificate shall be exercised  in  part,  the  holder  hereof shall be
entitled  to  receive  upon  surrender  hereof  another Warrant Certificate  or
Certificates evidencing the number of Warrants not  so exercised.  Reference is
made to the further provisions of the Warrant set forth  on  the reverse hereof
and such further provisions shall for all purposes have the same  effect  as if
fully set forth at this place.

      This  Warrant  Certificate shall not be valid unless countersigned by the
Warrant Agent.

      IN WITNESS WHEREOF,  the  Company  has  caused  this  certificate  to  be
executed  by  the  facsimile  signatures  of its duly authorized officers and a
facsimile of its corporate seal to be printed hereon.

Digital Power Corporation.

By:                                 Dated:              Corporate Seal


President


Attest:                             Dated:

Secretary


Countersigned:

AMERICAN SECURITIES TRANSFER, INC.
DENVER, COLORADO as Warrant Agent

By:                                 Dated:

Authorized Signature

                           DIGITAL POWER CORPORATION

      The   holder  may  exercise  this  Warrant,  in  whole  or  in  part,  by
surrendering this Warrant Certificate, with the "Form Of Election To Purchase",
properly completed  and  executed, together with payment of the Purchase Price,
in cash or by official bank  or  cashier's  check, at the office of the Warrant
Agent, American Securities Transfer, Inc., Denver, Colorado.  Upon the exercise
of the Warrants, if the number of Warrants exercised  shall  be  less  than all
Warrants  represented hereby, the Warrant Agent shall deliver to the holder  or
his assignee  a new Warrant Certificate representing the number of Warrants not
exercised.  No  adjustment  shall  be  made  for  any  cash dividends on shares
issuable upon exercise of Warrants.  No certificate for fractional shares shall
be issued, nor shall the Company or the Warrant Agent be  required  to make any
cash payments in lieu thereof upon exercise of the Warrant.  The holder  hereby
waives any right to receive fractional shares.

      The  Company  and  the  Warrant  Agent  may deem and treat the registered
holder(s)  hereof  as  the  absolute  owner(s)  of  this   Warrant  Certificate
(notwithstanding  any  notation of ownership or other writing  hereon  made  by
anyone) for the purpose  of  any  exercise  hereof,  or any distribution to the
holder(s) hereof, and for all other purposes, and neither  the  Company nor the
Warrant Agent shall be affected or bound by any notice to the contrary.  In the
event of certain contingencies provided in the Warrant Agreement,  the Purchase
Price  or  the  number  of shares of Common Stock subject to purchase upon  the
exercise of each Warrant  represented  hereby  are  subject  to modification or
adjustment.  This Warrant Certificate shall be governed by and  construed under
the laws of the State of California.

                              FORM OF ASSIGNMENT

(To  Be  Executed  By The Registered Holder If Such Holder Desires To  Transfer
Warrants Evidenced By This Warrant Certificate)

      FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto __________
______________________________ whose address is ______________________________
______________ Warrants,  evidenced  by this  Warrant Certificate, and does 
hereby irrevocably constitute  and  appoint ______________________ Attorney, 
to transfer the said Warrants evidenced by this Warrant Certificate on the 
books of the Company, with full power of substitution.

Dated:

NOTICE                         X___________________________________________
                                       (Signature)

THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.

                               X_____________________________________________
                                        (Signature)

THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION  AS  DEFINED  IN  RULE 17 Ad-15
UNDER  THE  SECURITIES  EXCHANGE  ACT  OF  1934,   AS
AMENDED:

SIGNATURE(S) GUARANTEED BY:




                         FORM OF ELECTION TO PURCHASE

(To  Be  Executed  If  Holder  Desires  To  Exercise Warrants Evidenced By This
Warrant Certificate)

To Digital Power Corporation:

      The    undersigned    hereby    irrevocably    elects     to     exercise
Warrants  evidenced  by  this  Warrant  Certificate  to purchase full shares of
Common Stock issuable upon exercise of said Warrants,  and hereby makes payment
in  full  of the Purchase Price of such shares and any applicable  taxes.   The
undersigned  requests  that  certificates for such shares be issued in the name
of:

PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER

____________________________________________________________________________
                        (Please print name and address)

and if said number of Warrants shall be less than all the Warrants evidenced by
this Warrant Certificate, requests  that  a  new Warrant Certificate evidencing
the Warrants not so exercised be issued in the name of and delivered to:

____________________________________________________________________________
                        (Please print name and address)

Dated:__________________________

NOTICE                      X_____________________________________
                                (Signature)

THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.

                             X____________________________________
                                 (Signature)

THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR  INSTITUTION  AS  DEFINED  IN RULE 17 Ad-15
UNDER  THE  SECURITIES  EXCHANGE  ACT  OF  1934,   AS
AMENDED:

SIGNATURE(S) GUARANTEED BY:





                     DIGITAL POWER CORPORATION
                    (A CALIFORNIA CORPORATION)
           ____________________________________________

                 UNDERWRITER'S WARRANT TO PURCHASE
                     SHARES OF COMMON STOCK AND
                  COMMON STOCK PURCHASE WARRANTS
               ____________________________________


          NEITHER  THIS  UNDERWRITER'S  WARRANT NOR THE SHARES OR
          STOCK PURCHASE WARRANTS ISSUABLE UPON ITS EXERCISE HAVE
          BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933
          AS  AMENDED (THE "SECURITIES ACT")  OR  THE  SECURITIES
          LAWS  OF  ANY  STATE  AND  MAY NOT BE SOLD, OFFERED FOR
          SALE, TRANSFERRED, ASSIGNED,  PLEDGED,  OR HYPOTHECATED
          IN  THE ABSENCE OF AN EFFECTIVE REGISTRATION  STATEMENT
          WITH RESPECT TO THE SECURITIES UNDER THE SECURITIES ACT
          AND ANY  APPLICABLE STATE SECURITIES LAWS OR AN OPINION
          OF  COUNSEL  SATISFACTORY  TO  THE  COMPANY  THAT  SUCH
          REGISTRATION IS NOT REQUIRED.


     THIS CERTIFIES  THAT, for value received, WERBEL-ROTH SECURITIES, INC.
or its registered assigns  (the  "Underwriter"), is entitled to purchase at
any time or from time to time during  the  Exercise  Period  (as defined in
Subsection  1.2  below):  (i)  up  to  a  maximum  of  One Hundred Thousand
(100,000) shares of fully paid and non-assessable common  stock  of DIGITAL
POWER  CORPORATION, a California corporation (the "Company"), no par  value
(the "Shares"  and/or  the "Common Stock", as applicable); and (ii) up to a
maximum of Fifty Thousand  (50,000)  stock purchase warrants, each of which
entitles the holder thereof to purchase  a single share of the Common Stock
of  the  Company, or Fifty Thousand Shares in  the  aggregate  (the  "Stock
Purchase Warrants").   The  Shares and the Stock Purchase Warrants shall be
purchased  at the per Share purchase  price  and  the  per  Stock  Purchase
Warrant purchase  price  set  forth in Subsection 1.1 below, subject to the
further provisions of this Underwriter's  Warrant.  The term "Underwriter's
Warrant" as used herein shall mean this Warrant  instrument and the various
rights into which the rights granted under this Underwriter's  Warrant  are
subsequently  divided.   The  term  "Stock Purchase Warrant" as used herein
shall mean that form of warrant instrument  attached  hereto as Exhibit "A"
and the various rights granted thereunder.

1.   EXERCISE OF WARRANT.

     The terms and conditions under which this Underwriter's Warrant may be
exercised  and  the  Common  Stock subject hereto may be purchased  are  as
follows:

     1.1  SHARE AND WARRANT PURCHASE  PRICES.   The  Share  purchase  price
shall be equal to 120% of the per Share public offering price of the Common
Stock  offered  for sale by the Company in or around November 1996, subject
to adjustment as  provided  in  Section  4,  below, and this Section 1 (the
"Share Purchase Price").  The Stock Purchase Warrant  purchase  price shall
be  equal  to  120%  of the per Warrant public offering price of the  Stock
Purchase Warrants offered  for  sale  by  the Company in or around November
1996,  subject to adjustment as provided in  Section  4,  below,  and  this
Section 1 (the "Warrant Purchase Price").

     1.2  METHOD OF EXERCISE.  The holder of this Underwriter's Warrant, on
or after  the  date  hereof  shown  at  the  end  of  this  instrument (the
"Effective  Date"),  and  from time to time until four (4) years  from  the
Effective Date (the  "Exercise  Period"),  may exercise in whole or in part
the purchase rights evidenced by this Underwriter's  Warrant, provided that
the  holder exercises the purchase rights evidenced by  this  Underwriter's
Warrant  with  respect  to  at  least One Thousand (1,000) Shares of Common
Stock  and/or One Thousand (1,000)  Stock  Purchase  Warrants,  unless  the
remaining  balance  of  such Shares or Stock Purchase Warrants is less than
One Thousand (1,000).  Such exercise shall be effected by:

          (a)  the surrender  of the Underwriter's Warrant, together with a
     duly executed copy of the form of Subscription attached hereto, to the
     Secretary of the Company at its principal offices;

          (b)  the payment to the Company in U.S. funds, by certified check
     or  bank  draft payable to its  order,  of  an  amount  equal  to  the
     aggregate Share  Purchase  Price  and  Warrant  Purchase Price for the
     number of Shares and Stock Purchase Warrants for  which  the  purchase
     rights hereunder are being exercised; and

          (c)  the  delivery  to  the  Company,  if  necessary,  to  assure
     compliance  with  federal  and state securities laws, of an instrument
     executed by the holder certifying  that  the Shares and Stock Purchase
     Warrants are being acquired for the sole account of the holder and not
     with a view to any resale or distribution  prior  to  the  filing of a
     registration statement.

     1.3  SATISFACTION   WITH  REQUIREMENTS  OF  SECURITIES  ACT  OF  1933.
Notwithstanding the provisions of Subsection 1.2(c) and Section 7, each and
every  exercise  of  this Underwriter's  Warrant  is  contingent  upon  the
Company's satisfaction that the issuance of Common Stock and Stock Purchase
Warrants  upon  the  exercise  is  exempt  from  the  requirements  of  the
Securities Act and all  applicable  state  securities  laws at the relevant
time(s).  The holder of this Underwriter's Warrant agrees  to  execute  any
and all documents deemed necessary by the Company to effect the exercise of
this  Underwriter's Warrant, including, without limitation, a form of Stock
Purchase Warrant attached hereto as Exhibit "A".

     1.4  ISSUANCE  OF  SHARES AND NEW UNDERWRITER'S WARRANT.  In the event
the purchase rights evidenced  by  this Underwriter's Warrant are exercised
in  whole or in part, one or more certificates  for  the  purchased  Shares
and/or  Stock  Purchase  Warrants  shall  be  issued as soon as practicable
thereafter to the person exercising such rights.  Such holder shall also be
issued at such time a new Underwriter's Warrant  representing the number of
Shares  and/or  Stock  Purchase Warrants (if any) for  which  the  purchase
rights under this Underwriter's  Warrant  remain unexercised and continuing
in force and effect.

     1.5  DESIGNATION   OF  RECIPIENTS  OF  UNDERWRITER'S   WARRANT.    The
Underwriter may designate  that  the  Underwriter's  Warrant  be  issued in
varying   amounts   directly  to  its  officers,  directors,  shareholders,
employees,  and affiliates  and  not  to  the  Underwriter;  however,  such
designation will  only  be  made  by  the  Underwriter if it determines and
represents  to  the  Company  that  such issuance  would  not  violate  the
interpretation of the Board of Governors  of  the  National  Association of
Securities   Dealers   relating   to  the  review  of  corporate  financing
arrangements  and  would  not require  registration  of  the  Underwriter's
Warrant or underlying securities.

     1.6  REGISTRATION RIGHTS.   Upon  the  written  request  of  the  then
holder(s) owning a majority of the Underwriter's Warrant and the underlying
securities  issued  upon  the  exercise of the Underwriter's Warrant (i.e.,
owning  in aggregate at least 75,001  Shares  or  Stock  Purchase  Warrants
combined,  or  holding  the  right  to  purchase any combination thereof in
excess of 75,001), made at anytime within  the Exercise Period, the Company
will  file,  not  more  than  once,  a  registration  statement  under  the
Securities  Act,  registering  or qualifying,  as  the  case  may  be,  the
securities underlying the Underwriter's Warrant.  The Company agrees to use
its  best  efforts to cause the above  filing  to  become  effective.   The
registration statement must be filed within sixty (60) days of such written
request.  All  expenses  of  such registration or qualification, including,
but not limited to, legal, accounting,  printing, and mailing fees, will be
borne by the Company.  In addition to the  above,  the  Company understands
and agrees that if, at any time during the Exercise Period and for a period
of five (5) years thereafter, it should file a registration statement  with
the Securities Exchange Commission (the "SEC") pursuant to  the  Act  for a
public offering of securities, either for the account of the Company or for
the  account  of  any  other  person  (except  for  a  Form S-8 or Form S-4
registration  statement), the Company, at its own expense,  will  offer  to
said holder(s)  the  opportunity to register or qualify for public offering
the securities underlying  this  Underwriter's Warrant.  In connection with
this paragraph, the Company shall  give such holder(s) notice by registered
mail  at  least thirty (30) days prior  to  filing  any  such  registration
statement with  the  SEC.   In  addition  to the rights above provided, the
Company will cooperate with the then holder(s) of the Underwriter's Warrant
and the securities issued upon the exercise of the Underwriter's Warrant in
preparing  and  signing  any registration statements  or  notification,  in
addition to the registration  statements and notifications discussed above,
required  in  order  to  sell or transfer  the  securities  underlying  the
Underwriter's Warrant and  will  supply  all information required therefor,
but such additional registration statement  or notification shall be at the
cost and expense of the then holder(s).

2.   TRANSFERS.

     2.1  TRANSFERS.   Subject  to  Section  7 hereof,  this  Underwriter's
Warrant and all rights hereunder are transferable  in  whole  or in part by
the  holder  with  the  same  effect  as with a negotiable instrument.   To
transfer rights, the transfer form below  must  be completed.  The transfer
shall be recorded on the books of the Company upon  the  surrender  of this
Underwriter's  Warrant,  properly endorsed, to the Secretary of the Company
at its principal offices and  the  payment  to  the Company of all transfer
taxes  and other governmental charges imposed on such  transfer.    In  the
event of a partial transfer, the Company shall issue to the several holders
one or more appropriate new forms of Underwriter's Warrant.

     2.2  LOCK-UP.  Except as provided in Subsection 1.5 hereof, the holder
covenants  and  agrees  to  a  restriction on the exercise, sale, transfer,
assignment, or hypothecation of  the  Underwriter's Warrant for a period of
twelve  (12) months from the effective date  of  a  registration  statement
registering   the   Common   Stock   issuable  upon  the  exercise  of  the
Underwriter's Warrant.

     2.3  REGISTERED HOLDER.  Each holder  agrees  that  until such time as
any  transfer pursuant to Subsection 2.1 is recorded on the  books  of  the
Company,  the Company may treat the registered holder of this Underwriter's
Warrant as  the  absolute  owner;  provided that nothing herein affects any
requirement  that  the transfer of any  Share  of  Common  Stock  or  Stock
Purchase Warrant issued  or issuable upon the exercise hereof be subject to
securities law compliance.

     2.3  FORM  OF  NEW  UNDERWRITER'S   WARRANT.    All   new   forms   of
Underwriter's   Warrant   issued  in  connection  with  transfers  of  this
Underwriter's Warrant shall  bear  the  same  date  as  this  Underwriter's
Warrant and shall be substantially identical in form and provision  to this
Underwriter's  Warrant  except  for the number of Shares and Stock Purchase
Warrants purchasable thereunder.

3.   FRACTIONAL SHARES OR FRACTIONAL STOCK PURCHASE WARRANTS.

     Notwithstanding that the number  of  Shares or Stock Purchase Warrants
purchasable upon the exercise of this Underwriter's  Warrant  may have been
adjusted pursuant to the terms hereof, the Company shall nonetheless not be
required  to  issue  fractions  of  Shares  or  fractions of Stock Purchase
Warrants upon the exercise of this Underwriter's  Warrant  or to distribute
certificates  that evidence fractional Shares or fractional Stock  Purchase
Warrants nor shall  the  Company  be  required to make any cash payments in
lieu thereof upon exercise of this Underwriter's  Warrant.   Holder  hereby
waives  any right to receive fractional Shares or fractional Stock Purchase
Warrants.

4.   ANTI-DILUTION PROVISIONS.

     4.1  STOCK  SPLITS AND COMBINATIONS.  If the Company shall at any time
subdivide  or  combine   its  outstanding  Shares  of  Common  Stock,  this
Underwriter's  Warrant  shall,   after  that  subdivision  or  combination,
evidence the right to purchase the  number  of  Shares  of Common Stock and
Stock Purchase Warrants that would have been issuable as  a  result of that
change  with  respect  to  the  Shares  of  Common Stock and Stock Purchase
Warrants that were purchasable under this Underwriter's Warrant immediately
before that subdivision or combination.  If the  Company  shall at any time
subdivide the outstanding shares of Common Stock, the Stock  Purchase Price
and   Warrant  Purchase  Price  then  in  effect  immediately  before  that
subdivision  shall  be proportionately decreased, and, if the Company shall
at any time combine the  outstanding  shares  of  Common  Stock,  the Stock
Purchase Price and Warrant Purchase Price then in effect immediately before
that combination shall be proportionately increased.  Any adjustment  under
this  Section  shall  become effective at the close of business on the date
the subdivision or combination becomes effective.

     4.2  RECLASSIFICATION,  EXCHANGE,  AND  SUBSTITUTION.   If  the Common
Stock issuable upon exercise of this Underwriter's Warrant shall be changed
into the same or a different number of shares of any other class or classes
of stock, whether by capital reorganization, reclassification, or otherwise
(other than a subdivision or combination of shares provided for above), the
holder of this Underwriter's Warrant shall, on its exercise, be entitled to
purchase for the same aggregate consideration, in lieu of the Common  Stock
and  Stock Purchase Warrants that the holder would have become entitled  to
purchase  but  for  such  change, a number of shares of such other class or
classes of stock equivalent  to  the  number  of shares of Common Stock and
Stock Purchase Warrants that would have been subject  to  purchase  by  the
holder  on  exercise  of this Underwriter's Warrant immediately before that
change.

     4.3  REORGANIZATIONS,  MERGERS, CONSOLIDATIONS, OR SALE OF ASSETS.  If
at any time there shall be a capital reorganization of the Company's Common
Stock   (other   than   a   subdivision,    stock    split,    combination,
reclassification,   exchange,   or  substitution  of  shares  provided  for
elsewhere above) or merger or consolidation  of  the  Company  with or into
another  corporation,  or  the  sale  of substantially all of the Company's
properties and assets as, or substantially  as,  an  entirety  to any other
person,  then, as a part of such reorganization, merger, consolidation,  or
sale,  lawful   provision  shall  be  made  so  that  the  holder  of  this
Underwriter's Warrant shall thereafter be entitled to receive upon exercise
of  this  Underwriter's  Warrant,  during  the  period  specified  in  this
Underwriter's  Warrant  and  upon  payment  of the Stock Purchase Price and
Warrant Purchase Price then in effect, the number of shares of Common Stock
and Stock Purchase Warrants or other securities or property of the Company,
or   of   the  successor  corporation  resulting  from   such   merger   or
consolidation,  to  which  a  holder  of  the Common Stock deliverable upon
exercise of this Underwriter's Warrant would  have  been  entitled  in such
capital   reorganization,   merger,   consolidation,   or   sale   if  this
Underwriter's  Warrant  had  been exercised immediately before that capital
reorganization,  merger,  consolidation,   or  sale.   In  any  such  case,
appropriate adjustment (as determined in good  faith by the Company's Board
of Directors) shall be made in the application of  the  provisions  of this
Underwriter's  Warrant  with  respect  to  the  rights and interests of the
holder  of  this  Underwriter's  Warrant after the reorganization,  merger,
consolidation, or sale to the end that the provisions of this Underwriter's
Warrant  (including adjustment of the  Stock  Purchase  Price  and  Warrant
Purchase Price  then  in  effect  and  number  of  Shares  purchasable upon
exercise  of  this  Underwriter's Warrant) shall be applicable  after  that
event, as near as reasonably  may  be,  in  relation to any Shares or Stock
Purchase  Warrants  or other property deliverable  after  that  event  upon
exercise of this Underwriter's  Warrant.   The Company shall, within thirty
(30) days after making such adjustment, give written notice (by first class
mail,  postage  prepaid)  to the registered holder  of  this  Underwriter's
Warrant at the address of that  holder  shown on the Company's books.  That
notice  shall  set forth, in reasonable detail,  the  event  requiring  the
adjustment and the  method  by  which  the  adjustment  was  calculated and
specify the Stock Purchase Price and Warrant Purchase Price then  in effect
after  the  adjustment and the increased or decreased number of Shares  and
Stock Purchase  Warrants  purchasable  upon  exercise of this Underwriter's
Warrant.  When appropriate, that notice may be given in advance and include
as part of the notice required under other provisions of this Underwriter's
Warrant.

     4.4  COMMON STOCK DIVIDENDS; DISTRIBUTIONS.   In the event the Company
should  at  any time prior to the expiration of this Underwriter's  Warrant
fix a record  date  for  the  determination  of the holders of Common Stock
entitled  to  receive a dividend or other distribution  (excluding  a  cash
dividend or distribution)  payable  in additional shares of Common Stock or
other securities or rights convertible into or entitling the holder thereof
to  receive,  directly or indirectly, additional  shares  of  Common  Stock
(hereinafter referred to as the "Common Stock Equivalents") without payment
of any consideration  by  such  holder  for the additional shares of Common
Stock  or  Common Stock Equivalents (including  the  additional  shares  of
Common Stock  issuable  upon  conversion  or exercise thereof), then, as of
such record date (or the date of such distribution,  split,  or subdivision
if   no   record  date  is  fixed),  the  Stock  Purchase  Price  shall  be
appropriately  decreased  and the number of shares of Common Stock issuable
upon exercise of the Underwriter's Warrant shall be appropriately increased
in proportion to such increase of outstanding shares.

     4.5  ADJUSTMENTS OF OTHER  DISTRIBUTIONS.   In  the  event the Company
shall  declare  a  distribution  payable  in  securities of other  persons,
evidences of indebtedness issued by the Company  or  other  persons, assets
(excluding  cash  dividends),  or  options  or  rights not referred  to  in
Subsection 4.4, then, in each such case for the purpose  of this Subsection
4.5, upon exercise of this Underwriter's Warrant, the holder  hereof  shall
be  entitled  to  a  proportionate share of any such distribution as though
such holder was the holder  of  the number of Shares of Common Stock of the
Company into which this Underwriter's  Warrant  may  be exercised as of the
record date fixed for the determination of the holders  of  Common Stock of
the Company entitled to receive such distribution.

     4.6  CERTIFICATE AS TO ADJUSTMENTS.  In the case of each adjustment or
readjustment  of the Stock Purchase Price pursuant to this Section  4,  the
Company will promptly compute such adjustment or readjustment in accordance
with the terms hereof and cause a certificate setting forth such adjustment
or readjustment  and showing in detail the facts upon which such adjustment
or  readjustment  is   based,  to  be  delivered  to  the  holder  of  this
Underwriter's Warrant.   The  Company will, upon the written request at any
time of the holder of this Underwriter's  Warrant,  furnish  or cause to be
furnished to such holder a certificate setting forth:

          (a)  Such adjustments and readjustments;

          (b)  The Stock Purchase Price and Warrant Purchase Price  at  the
               time in effect; and

          (c)  The  number  of  Shares  of  Common Stock and Stock Purchase
               Warrants issuable upon exercise of the Underwriter's Warrant
               and  the  amount,  if any, of other  property  at  the  time
               receivable upon the exercise of the Underwriter's Warrant.

     4.7  RESERVATION OF STOCK ISSUABLE  UPON  EXERCISE.  The Company shall
at all times reserve and keep available out of its  authorized but unissued
shares of Common Stock solely for the purpose of effecting  the exercise of
this  Underwriter's  Warrant such number of its shares of Common  Stock  as
shall from time to time  be  sufficient  to  effect  the  exercise  of this
Underwriter's Warrant and the underlying Stock Purchase Warrants, and if at
any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the exercise of this Underwriter's Warrant  and
Stock  Purchase  Warrants,  in  addition to such other remedies as shall be
available to the holder of this Underwriter's Warrant, the Company will use
its best efforts to take such corporate  action  as  may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common  Stock  to  such  number of shares as shall be sufficient  for  such
purposes.

5.   RIGHTS PRIOR TO EXERCISE OF UNDERWRITER'S WARRANT.

     This Underwriter's Warrant  does  not entitle the holder to any of the
rights of a stockholder of the Company,  including, without limitation, the
right  to  receive  dividends  or  other  distributions,  to  exercise  any
preemptive  rights,  to  vote, or to consent or  to  receive  notice  as  a
stockholder  of the Company.   If,  however,  at  any  time  prior  to  the
expiration of  this Underwriter's Warrant and prior to its exercise, any of
the following events shall occur:

          (a)  the  Company  shall  declare  any  dividend  payable  in any
     securities  upon  its  shares of Common Stock or make any distribution
     (other than a regular cash  dividend)  to the holders of its shares of
     Common Stock; or

          (b)  the Company shall offer to the  holders  of  its  shares  of
     Common  Stock  any  additional  shares  of  Common Stock or securities
     convertible into or exchangeable for shares of  Common  Stock  or  any
     right to subscribe for or purchase any thereof; or

          (c)  a  dissolution,  liquidation,  or  winding up of the Company
     (other  than  in  connection  with  a  consolidation,   merger,  sale,
     transfer,  or  lease  of  all  or  substantially  all of its property,
     assets, and business as an entirety) shall be proposed  and  action by
     the  Company  with  respect thereto has been approved by the Company's
     Board of Directors,

then in any one or more of  said  events  the  Company shall give notice in
writing of such event to the holder at his last  address as it shall appear
on the Company's records at least twenty (20) days  prior to the date fixed
as  a  record  date  or  the  date of closing the transfer  books  for  the
determination of the stockholders entitled to such dividends, distribution,
or subscription rights, or for  the  determination of stockholders entitled
to vote on such proposed dissolution,  liquidation,  or  winding  up.  Such
notice  shall  specify such record date or the date of closing the transfer
books, as the case  may  be.   Failure  to  publish,  mail, or receive such
notice or any defect therein or in the publication or mailing thereof shall
not  affect  the  validity  of  any  action taken in connection  with  such
dividend,  distribution,  or  subscription   rights,   or   such   proposed
dissolution,  liquidation,  or  winding up.  Each person in whose name  any
certificate for shares of Common  Stock  is  to  be  issued  shall  for all
purposes  be  deemed to have become the holder of record of such shares  on
the date on which  this instrument was surrendered and payment of the Stock
Purchase Price was made, irrespective of the date of delivery of such stock
certificate, except  that,  if  the date of such surrender and payment is a
date when the stock transfer books  of  the Company are closed, such person
shall be deemed to have become the holder of such shares of Common Stock at
the  close  of business on the next succeeding  date  on  which  the  stock
transfer books are open.

6.   NO RIGHT TO REDEEM WARRANTS.

     The Company  shall  not  have  the  right  to redeem the Underwriter's
Warrant  or  underlying  Stock Purchase Warrants at  any  time  during  the
Exercise Period.

7.   RESTRICTED SECURITIES.

     In order to enable the  Company  to comply with the Securities Act and
applicable state laws, the Company may require the holder as a condition of
the  transfer or exercise of this Underwriter's  Warrant  to  give  written
assurances  satisfactory  to  the Company that the Underwriter's Warrant is
being acquired, or in the case  of  an exercise hereof, that the Shares and
Stock Purchase Warrants subject to this  Underwriter's  Warrant  are  being
acquired,  for  its  own  account, for investment only, with no view to the
distribution of the same, and that any disposition of all or any portion of
this  Underwriter's Warrant  or  the  Shares  or  Stock  Purchase  Warrants
issuable  upon  the due exercise of this Underwriter's Warrant shall not be
made, unless and until:

          (a)  There  is then in effect a registration statement under
     the Securities Act  covering  such  proposed disposition and such
     disposition  is  made  in  accordance  with   such   registration
     statement; or

          (b)(i)  The holder has notified the Company of the  proposed
     disposition and  shall have furnished the Company with a detailed
     statement   of  the  circumstances   surrounding   the   proposed
     disposition,  and  (ii) the holder has furnished the Company with
     an opinion of counsel,  reasonably  satisfactory  to the Company,
     that  such  disposition  will  not require registration  of  such
     securities under the Securities Act and applicable state law.

     The holder acknowledges that this  Underwriter's  Warrant is, and each
of the shares of Common Stock and Stock Purchase Warrants issuable upon the
due exercise hereof will be, restricted securities, that it understands the
provisions of Rule 144 of the Securities and Exchange Commission,  and that
the certificate or certificates evidencing such shares of Common Stock  and
Stock  Purchase  Warrants  will  bear a legend substantially similar to the
following:

     "The  Shares (or Stock Purchase  Warrants)  represented  by  this
     certificate  have not been registered under the Securities Act of
     1933, as amended,  or  under  the  securities  laws of any state.
     They may not be sold, transferred, or otherwise  disposed  of  in
     the absence of an effective registration statement covering these
     securities  under  the said Act or laws, or an opinion of counsel
     satisfactory to the  Company and its counsel that registration is
     not required thereunder."

8.   SUCCESSORS AND ASSIGNS.

     The terms and provisions  of this Underwriter's Warrant shall inure to
the benefit of, and be binding upon, the Company and the holder thereof and
their respective successors and permitted assigns.

9.   LOSS OR MUTILATION.

     Upon receipt by the Company  of satisfactory evidence of the ownership
of and the loss, theft, destruction,  or  mutilation  of  any Underwriter's
Warrant, and (i) in the case of loss, theft, or destruction,  upon  receipt
by  the  Company  of  indemnity  satisfactory to it, or (ii) in the case of
mutilation, upon receipt of such Underwriter's  Warrant  and upon surrender
and cancellation of such Underwriter's Warrant, the Company  shall  execute
and  deliver  in lieu thereof a new Underwriter's Warrant representing  the
right to purchase an equal number of shares of Common Stock.

10.  NOTICES.

     All notices,  requests,  demands,  and other communications under this
Underwriter's Warrant shall be in writing  and shall be deemed to have been
duly given on the date of service if served personally on the party to whom
notice is to be given, or on the date of mailing  if mailed to the party to
whom notice is to be given, by first class mail, registered  or  certified,
postage  prepaid, and properly addressed as follows:  if to the holder,  at
his address  as shown in the Company records; and if to the Company, at its
principal office.   Any  party  may change its address for purposes of this
Section by giving the other party  written notice of the new address in the
manner set forth above.

11.  GOVERNING LAW.

     This Underwriter's Warrant and  any dispute, disagreement, or issue of
construction or interpretation arising  hereunder  whether  relating to its
execution,  its validity, the obligations provided herein, or  performance,
shall be governed  or  interpreted  according  to  the internal laws of the
State of California without regard to conflicts of law.

     DATED:  November __, 1996.


                              DIGITAL POWER CORPORATION


                              __________________________________________
                              Robert O. Smith, President



                          SUBSCRIPTION






Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538

Dear Mr. Swany:

WERBEL-ROTH SECURITIES, INC., for itself or for the  benefit of one or more
of  its  officers,  directors,  shareholders, employees, or  other  related
persons, hereby elects to purchase,  pursuant  to  the  provisions  of  the
foregoing     Underwriter's    Warrant    held    by    the    undersigned,
___________________________ (_______) shares of the Common Stock of Digital
Power Corporation ("Digital") and ______________________________ (________)
Stock Purchase Warrants.

Payment of the  total  Stock  Purchase  Price  and  Warrant  Purchase Price
required under such Underwriter's Warrant accompanies this Subscription.

DATED:  _____________________, 1996.



By:_____________________________________
Its:____________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL  33432



                 TRANSFER OF UNDERWRITER'S WARRANT





Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538

Dear Mr. Swany:

     For  value  received,  WERBEL-ROTH  SECURITIES,  INC. (or one  of  its
officers,  directors,  shareholders,  employees,  or  related  persons,  as
applicable),    hereby    assigns    this    Underwriter's    Warrant    to
_______________________________________,       whose       address       is
___________________________________________________________________________.

DATED:  _____________________, 1996.



By:_____________________________________
Its:___________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL  33432


                            EXHIBIT "A"

                     DIGITAL POWER CORPORATION
                    (A CALIFORNIA CORPORATION)
           ____________________________________________

                        WARRANT TO PURCHASE
                       SHARES OF COMMON STOCK
               ____________________________________


          NEITHER  THIS  WARRANT NOR THE SHARES ISSUABLE UPON ITS
          EXERCISE  HAVE  BEEN   REGISTERED   UNDER   EITHER  THE
          SECURITIES  ACT  OF  1933  AS  AMENDED (THE "SECURITIES
          ACT") OR THE SECURITIES LAWS OF  ANY  STATE AND MAY NOT
          BE  SOLD,  OFFERED  FOR  SALE,  TRANSFERRED,  ASSIGNED,
          PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
          REGISTRATION STATEMENT WITH RESPECT  TO  THE SECURITIES
          UNDER  THE  SECURITIES  ACT  AND  ANY APPLICABLE  STATE
          SECURITIES  LAWS OR AN OPINION OF COUNSEL  SATISFACTORY
          TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.


     THIS CERTIFIES THAT,  for value received, WERBEL-ROTH SECURITIES, INC.
or its registered assigns (the  "Underwriter"),  is entitled to purchase at
any time or from time to time during the Exercise  Period  (as  defined  in
Subsection  1.2  below):  (i)  up  to  a maximum of Fifty Thousand (50,000)
shares  of fully paid and non-assessable  common  stock  of  DIGITAL  POWER
CORPORATION,  a  California  corporation (the "Company"), no par value (the
"Shares" and/or the "Common Stock,  as  applicable).   The  Shares shall be
purchased  at  the  per  Share  purchase price set forth in Subsection  1.1
below, subject to the further provisions  of  this Warrant and that certain
"Underwriter's Warrant To Purchase Shares Of Common  Stock And Common Stock
Purchase Warrants" to which this form of Warrant is an  Exhibit.   The term
"Warrant" as used herein shall mean this Warrant instrument and the  rights
granted hereunder.

1.   EXERCISE OF WARRANT.

     The terms and conditions under which this Warrant may be exercised and
the Common Stock subject hereto may be purchased are as follows:

     1.1  SHARE PURCHASE PRICE.  The Share purchase price shall be equal to
120% of the per Share public offering price of the Common Stock offered for
sale  by  the Company in or around November 1996, subject to adjustment  as
provided in Section 4, below, and this Section 1 (the "Purchase Price").

     1.2  METHOD  OF EXERCISE.  The holder of this Warrant, on or after the
date hereof shown at  the end of this instrument (the "Effective Date") and
from time to time until  four  (4)  years  from  the  Effective  Date  (the
"Exercise  Period"),  may  exercise in whole or in part the purchase rights
evidenced by this Warrant, provided  that the holder exercises the purchase
rights evidenced by this Warrant with  respect  to  at  least  One Thousand
(1,000) Shares of Common Stock, unless the remaining balance of such Shares
is less than One Thousand (1,000).  Such exercise shall be effected by:

          (a)  the surrender of the Warrant, together with a duly  executed
     copy of the form of Subscription attached hereto, to the Secretary  of
     the Company at its principal offices;

          (b)  the payment to the Company in U.S. funds, by certified check
     or  bank  draft  payable  to  its  order,  of  an  amount equal to the
     aggregate  Purchase  Price  for  the  number of Shares for  which  the
     purchase rights hereunder are being exercised; and

          (c)  the  delivery  to  the  Company,  if  necessary,  to  assure
     compliance with federal and state securities  laws,  of  an instrument
     executed  by the holder certifying that the Shares are being  acquired
     for the sole  account  of the holder and not with a view to any resale
     or distribution prior to the filing of a registration statement.

     1.3  SATISFACTION  WITH  REQUIREMENTS   OF  SECURITIES  ACT  OF  1933.
Notwithstanding the provisions of Subsection 1.2(c) and Section 7, each and
every   exercise  of  this  Warrant  is  contingent  upon   the   Company's
satisfaction  that the issuance of Common Stock upon the exercise is exempt
from the requirements  of  the  Securities  Act  and  all  applicable state
securities laws at the relevant time(s).  The holder of this Warrant agrees
to execute any and all documents deemed necessary by the Company  to effect
the exercise of this Warrant.

     1.4  ISSUANCE  OF  SHARES  AND NEW WARRANT.  In the event the purchase
rights evidenced by this Warrant  are exercised in whole or in part, one or
more certificates for the purchased  Shares  shall  be  issued  as  soon as
practicable  thereafter  to the person exercising such rights.  Such holder
shall also be issued at such  time a new Warrant representing the number of
Shares for which the purchase rights  under this Warrant remain unexercised
and continuing in force and effect.

2.   TRANSFERS.

     2.1  TRANSFERS.  Subject to Section  7  hereof,  this  Warrant and all
rights  hereunder are transferable in whole or in part by the  holder  with
the same  effect  as with a negotiable instrument.  To transfer rights, the
transfer form below  must  be completed.  The transfer shall be recorded on
the books of the Company upon  the  surrender  of  this  Warrant,  properly
endorsed, to the Secretary of the Company at its principal offices and  the
payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer.   In the event of a partial transfer, the Company
shall  issue  to  the  several holders one or more appropriate new forms of
Warrant.

     2.2  REGISTERED HOLDER.   Each  holder  agrees that until such time as
any transfer pursuant to Subsection 2.1 is recorded  on  the  books  of the
Company, the Company may treat the registered holder of this Warrant as the
absolute  owner;  provided that nothing herein affects any requirement that
the transfer of any  Share  of  Common  Stock  issued  or issuable upon the
exercise hereof be subject to securities law compliance.

     2.3  FORM  OF  NEW  WARRANT.   All  new  forms  of Warrant  issued  in
connection with transfers of this Warrant shall bear the  same date as this
Warrant and shall be substantially identical in form and provision  to this
Warrant   except   for  the  number  of  Shares  and  Warrants  purchasable
thereunder.

3.   FRACTIONAL SHARES.

     Notwithstanding  that  the  number  of  Shares  purchasable  upon  the
exercise  of  this  Warrant  may  have  been adjusted pursuant to the terms
hereof, the Company shall nonetheless not be required to issue fractions of
Shares upon the exercise of this Warrant or to distribute certificates that
evidence fractional Shares nor shall the  Company  be  required to make any
cash payments in lieu thereof upon exercise of this Warrant.  Holder hereby
waives any right to receive fractional Shares.

4.   ANTI-DILUTION PROVISIONS.

     4.1  STOCK SPLITS AND COMBINATIONS.  If the Company  shall at any time
subdivide or combine its outstanding Shares of Common Stock,  this  Warrant
shall,  after  that  subdivision  or  combination,  evidence  the  right to
purchase the number of Shares of Common Stock that would have been issuable
as a result of that change with respect to the Shares of Common Stock  that
were purchasable under this Warrant immediately before that subdivision  or
combination.   If  the  Company shall at any time subdivide the outstanding
shares of Common Stock, the  Purchase  Price  then  in  effect  immediately
before  that  subdivision shall be proportionately decreased, and,  if  the
Company shall at  any  time combine the outstanding shares of Common Stock,
the Purchase Price then in effect immediately before that combination shall
be proportionately increased.   Any  adjustment  under  this  Section shall
become  effective  at the close of business on the date the subdivision  or
combination becomes effective.

     4.2  RECLASSIFICATION,  EXCHANGE,  AND  SUBSTITUTION.   If  the Common
Stock issuable upon exercise of this Warrant shall be changed into the same
or  a  different  number  of shares of any other class or classes of stock,
whether by capital reorganization,  reclassification,  or  otherwise (other
than a subdivision or combination of shares provided for above), the holder
of  this  Warrant shall, on its exercise, be entitled to purchase  for  the
same aggregate  consideration,  in lieu of the Common Stock that the holder
would have become entitled to purchase  but  for  such  change, a number of
shares of such other class or classes of stock equivalent  to the number of
shares  of  Common  Stock that would have been subject to purchase  by  the
holder on exercise of this Warrant immediately before that change.

     4.3  REORGANIZATIONS,  MERGERS, CONSOLIDATIONS, OR SALE OF ASSETS.  If
at any time there shall be a capital reorganization of the Company's Common
Stock   (other   than   a   subdivision,    stock    split,    combination,
reclassification,   exchange,   or  substitution  of  shares  provided  for
elsewhere above) or merger or consolidation  of  the  Company  with or into
another corporation, or the sale of the Company's properties and assets as,
or  substantially as, an entirety to any other person, then, as a  part  of
such reorganization, merger, consolidation, or sale, lawful provision shall
be made  so that the holder of this Warrant shall thereafter be entitled to
receive upon  exercise of this Warrant, during the period specified in this
Warrant and upon  payment  of the Purchase Price then in effect, the number
of shares of Common Stock or  other  securities or property of the Company,
or   of  the  successor  corporation  resulting   from   such   merger   or
consolidation,  to  which  a  holder  of  the Common Stock deliverable upon
exercise  of  this  Warrant  would  have  been  entitled  in  such  capital
reorganization, merger, consolidation, or sale if  this  Warrant  had  been
exercised   immediately   before   that   capital  reorganization,  merger,
consolidation,  or  sale.   In any such case,  appropriate  adjustment  (as
determined in good faith by the Company's Board of Directors) shall be made
in the application of the provisions  of  this  Warrant with respect to the
rights   and   interests   of  the  holder  of  this  Warrant   after   the
reorganization,  merger,  consolidation,  or  sale  to  the  end  that  the
provisions of this Warrant (including adjustment of the Purchase Price then
in effect and number of Shares  purchasable  upon exercise of this Warrant)
shall be applicable after that event, as near  as  reasonably  may  be,  in
relation  to any Shares or other property deliverable after that event upon
exercise of this Warrant.  The Company shall, within thirty (30) days after
making such  adjustment,  give written notice (by first class mail, postage
prepaid) to the registered  holder  of  this Warrant at the address of that
holder  shown on the Company's books.  That  notice  shall  set  forth,  in
reasonable  detail,  the  event  requiring the adjustment and the method by
which the adjustment was calculated  and specify the Purchase Price then in
effect after the adjustment and the increased or decreased number of Shares
purchasable upon exercise of this Warrant.   When  appropriate, that notice
may  be given in advance and include as part of the notice  required  under
other provisions of this Warrant.

     4.4  COMMON  STOCK DIVIDENDS; DISTRIBUTIONS.  In the event the Company
should at any time  prior  to  the  expiration of this Warrant fix a record
date  for the determination of the holders  of  Common  Stock  entitled  to
receive  a  dividend  or  other  distribution (excluding a cash dividend or
distribution)  payable  in additional  shares  of  Common  Stock  or  other
securities or rights convertible  into  or  entitling the holder thereof to
receive,  directly  or  indirectly,  additional  shares   of  Common  Stock
(hereinafter referred to as the "Common Stock Equivalents") without payment
of  any  consideration by such holder for the additional shares  of  Common
Stock or Common  Stock  Equivalents  (including  the  additional  shares of
Common  Stock  issuable  upon conversion or exercise thereof), then, as  of
such record date (or the date  of  such distribution, split, or subdivision
if  no record date is fixed), the Purchase  Price  shall  be  appropriately
decreased  and  the number of shares of Common Stock issuable upon exercise
of the Warrant shall  be  appropriately  increased  in  proportion  to such
increase of outstanding shares.

     4.5  ADJUSTMENTS  OF  OTHER  DISTRIBUTIONS.   In the event the Company
shall  declare  a  distribution  payable  in securities of  other  persons,
evidences of indebtedness issued by the Company  or  other  persons, assets
(excluding  cash  dividends),  or  options  or  rights not referred  to  in
Subsection 4.4, then, in each such case for the purpose  of this Subsection
4.5, upon exercise of this Warrant, the holder hereof shall  be entitled to
a  proportionate share of any such distribution as though such  holder  was
the  holder  of  the  number  of Shares of Common Stock of the Company into
which this Warrant may be exercised  as  of  the  record date fixed for the
determination  of the holders of Common Stock of the  Company  entitled  to
receive such distribution.

     4.6  CERTIFICATE AS TO ADJUSTMENTS.  In the case of each adjustment or
readjustment of  the  Stock  Purchase Price pursuant to this Section 4, the
Company will promptly compute such adjustment or readjustment in accordance
with the terms hereof and cause a certificate setting forth such adjustment
or readjustment and showing in  detail the facts upon which such adjustment
or readjustment is based, to be delivered  to  the  holder of this Warrant.
The Company will, upon the written request at any time  of  the  holder  of
this Warrant, furnish or cause to be furnished to such holder a certificate
setting forth:

          (a)  Such adjustments and readjustments;

          (b)  The Purchase Price at the time in effect; and

          (c)  The  number of Shares of Common Stock issuable upon exercise
               of the  Warrant and the amount, if any, of other property at
               the time receivable upon the exercise of the Warrant.

     4.7  RESERVATION OF  STOCK  ISSUABLE UPON EXERCISE.  The Company shall
at all times reserve and keep available  out of its authorized but unissued
shares of Common Stock solely for the purpose  of effecting the exercise of
this Warrant such number of its shares of Common  Stock  as shall from time
to time be sufficient to effect the exercise of this Warrant, and if at any
time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the exercise of this Warrant, in addition  to  such
other  remedies  as  shall  be available to the holder of this Warrant, the
Company will use its best efforts  to take such corporate action as may, in
the opinion of its counsel, be necessary  to  increase  its  authorized but
unissued  shares  of  Common  Stock  to  such number of shares as shall  be
sufficient for such purposes.

5.   RIGHTS PRIOR TO EXERCISE OF WARRANT.

     This Warrant does not entitle the holder  to  any  of  the rights of a
stockholder  of  the Company, including, without limitation, the  right  to
receive dividends  or  other  distributions,  to  exercise  any  preemptive
rights, to vote, or to consent or to receive notice as a stockholder of the
Company.  If, however, at any time prior to the expiration of this  Warrant
and prior to its exercise, any of the following events shall occur:

          (a)  the  Company  shall  declare  any  dividend  payable  in any
     securities  upon  its  shares of Common Stock or make any distribution
     (other than a regular cash  dividend)  to the holders of its shares of
     Common Stock; or

          (b)  the Company shall offer to the  holders  of  its  shares  of
     Common  Stock  any  additional  shares  of  Common Stock or securities
     convertible into or exchangeable for shares of  Common  Stock  or  any
     right to subscribe for or purchase any thereof; or

          (c)  a  dissolution,  liquidation,  or  winding up of the Company
     (other  than  in  connection  with  a  consolidation,   merger,  sale,
     transfer,  or  lease  of  all  or  substantially  all of its property,
     assets, and business as an entirety) shall be proposed  and  action by
     the  Company  with  respect thereto has been approved by the Company's
     Board of Directors,

then in any one or more of  said  events  the  Company shall give notice in
writing of such event to the holder at his last  address as it shall appear
on the Company's records at least twenty (20) days  prior to the date fixed
as  a  record  date  or  the  date of closing the transfer  books  for  the
determination of the stockholders entitled to such dividends, distribution,
or subscription rights, or for  the  determination of stockholders entitled
to vote on such proposed dissolution,  liquidation,  or  winding  up.  Such
notice  shall  specify such record date or the date of closing the transfer
books, as the case  may  be.   Failure  to  publish,  mail, or receive such
notice or any defect therein or in the publication or mailing thereof shall
not  affect  the  validity  of  any  action taken in connection  with  such
dividend,  distribution,  or  subscription   rights,   or   such   proposed
dissolution,  liquidation,  or  winding up.  Each person in whose name  any
certificate for Shares of Common  Stock  is  to  be  issued  shall  for all
purposes  be  deemed to have become the holder of record of such shares  on
the date on which  this  instrument  was  surrendered  and  payment  of the
Purchase Price was made, irrespective of the date of delivery of such stock
certificate,  except  that, if the date of such surrender and payment is  a
date when the stock transfer  books  of the Company are closed, such person
shall be deemed to have become the holder of such shares of Common Stock at
the  close  of business on the next succeeding  date  on  which  the  stock
transfer books are open.

6.   COMPANY'S RIGHT TO REDEEM WARRANTS.

     The Company shall not have the right to redeem the Warrant at any time
during the Exercise Period.

7.   RESTRICTED SECURITIES.

     In order  to  enable the Company to comply with the Securities Act and
applicable state laws, the Company may require the holder as a condition of
the  transfer or exercise  of  this  Warrant  to  give  written  assurances
satisfactory  to  the Company that the Warrant is being acquired, or in the
case of an exercise  hereof,  that  the  Shares subject to this Warrant are
being acquired, for its own account, for investment  only,  with no view to
the  distribution  of  the  same,  and that any disposition of all  or  any
portion of this Warrant or the Shares  issuable  upon  the  due exercise of
this Warrant shall not be made, unless and until:

          (a)  There is then in effect a registration statement  under
     the  Securities  Act  covering such proposed disposition and such
     disposition  is  made  in   accordance   with  such  registration
     statement; or

          (b)  (i) The holder has notified the Company of the proposed
     disposition and shall have furnished the Company  with a detailed
     statement   of   the   circumstances   surrounding  the  proposed
     disposition, and (ii) the holder has furnished  the  Company with
     an  opinion  of counsel, reasonably satisfactory to the  Company,
     that such disposition  will  not  require  registration  of  such
     securities under the Securities Act and applicable state law.

     The  holder acknowledges that this Warrant is, and each of the  Shares
of Common Stock  issuable  upon the due exercise hereof will be, restricted
securities,  that  it  understands  the  provisions  of  Rule  144  of  the
Securities  and  Exchange   Commission,   and   that   the  certificate  or
certificates  evidencing  such shares of Common Stock will  bear  a  legend
substantially similar to the following:

     "The  Shares  represented  by  this  certificate  have  not  been
     registered under the Securities Act of 1933, as amended, or under
     the securities  laws  of  any  state.   They  may  not  be  sold,
     transferred,  or  otherwise  disposed  of  in  the  absence of an
     effective registration statement covering these securities  under
     the  said  Act  or laws, or an opinion of counsel satisfactory to
     the Company and its  counsel  that  registration  is not required
     thereunder."

8.   SUCCESSORS AND ASSIGNS.

     The terms and provisions of this Warrant shall inure  to  the  benefit
of,  and  be  binding  upon,  the  Company  and the holder hereof and their
respective successors and permitted assigns.

9.   LOSS OR MUTILATION.

     Upon receipt by the Company of satisfactory  evidence of the ownership
of and the loss, theft, destruction, or mutilation  of any Warrant, and (i)
in the case of loss, theft, or destruction, upon receipt  by the Company of
indemnity  satisfactory  to  it,  or  (ii) in the case of mutilation,  upon
receipt  of  such  Warrant  and upon surrender  and  cancellation  of  such
Warrant, the Company shall execute  and  deliver  in  lieu  thereof  a  new
Warrant  representing  the  right  to purchase an equal number of shares of
Common Stock.

10.  NOTICES.

     All notices, requests, demands,  and  other  communications under this
Warrant shall be in writing and shall be deemed to  have been duly given on
the date of service if served personally on the party  to whom notice is to
be given, or on the date of mailing if mailed to the party  to  whom notice
is  to  be  given,  by  first  class mail, registered or certified, postage
prepaid, and properly addressed  as  follows:   if  to  the  holder, at his
address  as  shown  in the Company records; and if to the Company,  at  its
principal office.  Any  party  may  change its address for purposes of this
Section by giving the other party written  notice of the new address in the
manner set forth above.

11.  GOVERNING LAW.

     This Warrant and any dispute, disagreement,  or  issue of construction
or interpretation arising hereunder whether relating to  its execution, its
validity,  the  obligations  provided  herein,  or  performance,  shall  be
governed  or interpreted according to the internal laws  of  the  State  of
California without regard to conflicts of law.

12.  CONSTRUCTION.

     This Warrant  shall  be  governed and construed in accordance with the
terms and conditions of that certain  "Underwriter's  Warrant  To  Purchase
Shares   Of   Common   Stock  And  Common  Stock  Purchase  Warrants"  (the
"Underwriter's Warrant"),  of  which instrument this Warrant is an integral
part.  In the event of a conflict between the terms of this Warrant and the
terms of the Underwriter's Warrant,  the terms of the Underwriter's Warrant
shall govern and control.

     DATED:  November __, 1996.


                              DIGITAL POWER CORPORATION


                              __________________________________________
                              Robert O. Smith, President



                           SUBSCRIPTION






Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538

Dear Mr. Swany:

WERBEL-ROTH SECURITIES, INC., hereby elects  to  purchase,  pursuant to the
provisions   of   the   foregoing   Warrant   held   by   the  undersigned,
___________________________ (_______) shares of the Common Stock of Digital
Power Corporation.

Payment of the total Purchase Price required under such Warrant accompanies
this Subscription.

DATED:  _____________________, 1996.



By:_____________________________________
Its:____________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL  33432





                        TRANSFER OF WARRANT





Mr. Philip G. Swany
Corporate Secretary
DIGITAL POWER CORPORATION
41920 Christy Street
Fremont, California 94538

Dear Mr. Swany:

     For value received, WERBEL-ROTH SECURITIES, INC., hereby  assigns this
Warrant to _________________________________________________________, whose
address is ________________________________________________________________.

DATED:  _____________________, 1996.



By:_____________________________________
Its:___________________________________
WERBEL-ROTH SECURITIES, INC.
150 East Palmetto Park Road
Suite 380
Boca Raton, FL  33432



                               PROMISSORY NOTE

Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $1,500,000.00 08/12/1996 10/15/1997 1071513796R 50/75 UCC 1071513796R SLS
References in the table area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. BORROWER: DIGITAL POWER CORPORATION (TIN: LENDER: SAN JOSE NATIONAL BANK 94-1721931) P.O. BOX 1957 41920 CHRISTY STREET ONE NORTH MARKET STREET FREMONT, CA 94538 SAN JOSE, CA 95113 Principal Amt: $1,500,000.00 Initial Rate: 9.250% Date of Note: 08/12/96 PROMISE TO PAY. DIGITAL POWER CORPORATION ("Borrower") promises to pay to SAN JOSE NATIONAL BANK ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Five Hundred Thousand & 00/100 Dollars ($1,500,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one payment of all outstanding principal plus all accrued unpaid interest on October 15, 1997. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning September 15, 1996, and all subsequent interest payments are due on the same day of each month after that. Interest on this Note is computed on a 365/360 simple Interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is Lender's Prim Rate (the "Index"). This is the rate Lender charges, or would charge, on 90-day unsecured loans to the most creditworthy corporate customers. This rate may or may not be the lowest rate available from Lender at any given time. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The Index currently is 8.250% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.000 percentage point over the Index, resulting in an initial rate of 9.250% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $100.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $25.00, whichever is greater. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, if may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 6.000 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees, and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of SANTA CLARA County, the State of California. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Note shall be governed by and construed in accordance with the laws of the State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pay sis later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. COLLATERAL. This Note is secured by a SECURITY AGREEMENT OF EVEN DATE HEREWITH AND A UCC FILING DATED April 28, 1994, RECORDED AS INSTRUMENT #94106664 ON MAY 27, 1994, WITH THE SECRETARY OF STATE IN SACRAMENTO. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: CLAUDE ADKINS, PRESIDENT; ROBERT SMITH, CEO/SECRETARY; JOSEPHINE JACKEWICZ, CONTROLLER; and PHILIP G. SWANY. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; or (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender. LETTER AGREEMENT. THIS NOTE IS SUBJECT TO, AND SHALL BE GOVERNED BY, ALL THE TERMS AND CONDITIONS OF THE LETTER AGREEMENT DATED AUGUST 9, 1996, BETWEEN THE BORROWER(S) AND SAN JOSE NATIONAL BANK, WHICH LETTER AGREEMENT IS INCORPORATED HEREIN BY REFERENCE. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: DIGITAL POWER CORPORATION By: /S/ ROBERT SMITH By: /S/ PHILIP G. SWANY ROBERT SMITH, CEO/PRESIDENT PHILIP G. SWANY, SECRETARY
                         DIGITAL POWER CORPORATION


DESIGN ACQUISITION

     THIS INITIAL AGREEMENT is made and entered into in San Jose, Santa
Clara County, California, this 10th day of November, 1987, by and between
DIGITAL POWER, INC., (hereinafter referred to as "DIGI-POWER") whose
principal place of business is 686 E. Gish Road, San Jose, California
95112, and Mr. Ki Dong Kang of KDK ELECTRONICS, (hereinafter referred to as
Mr. Kang) whose principal place of business is 15520 Orbit Drive, Saratoga,
California 95070.

     For the design rights and transfer of technical know-how, Digital
Power will compensate Ki Dong Kang of KDK Electronics as follows:

     1)   $10,000 upon signing of an agreement and $10,000 on the 1st of
          each of the following nine months.

     2)   Royalties are as follows:

          5% on First $ 20,000,000 sales.
          4% on Next  $ 25,000,000 sales.
          3% on Next  $ 33,333,333 sales.
          2% on Next  $ 50,000,000 sales.
          1% on Next  $100,000,000 sales.

          At this point royalties cease.

     3)   Stock option:

          Option on 135,000 shares of Digital Power Stock at 3.50 per
     share. Optionable when the 1st $20,000,000 in sales has been reached.
     Digital Power will pay in the $472,500.00 to cover the purchase of
     shares for Mr. Kang.

          In return for the above compensation Digital Power owns all
     rights to the following products developed by Mr. Kang.
     See: Appendix "A"

          Mr. Kang will give the necessary assistance to get technology and
     know-how on these products into Digital Power manufacturing. On an
     ongoing basis Digital Power will have access to 20 hours per month of
     Mr. Kang's assistance, as long as the Royalty Agreement is in effect.
     Digital Power reserves the first right of refusal on any new products
     Mr. Kang develops in the future.

          Mr. Kang promises not to sell or divulge to any other company any
     of the technology purchased by Digital Power. Digital Power will
     compensate Mr. Kang on any new projects which require Mr. Kang's
     assistance. The compensation will be determined on a job by job basis
     mutually agreed upon by both parties.

APPENDIX "A"

Products:

STANDARD PACKAGE (L or U Bracket)

1. 80-1OOW Family AC-DC 1.5 inch high 4 output

2. 150-200W Family AC-DC 1.5 inch high 4 output

3. 80-1OOW Family DC-DC 1.5 inch high
     A. 12V input 4 outputs
     B. 24V input 4 outputs
     C. 48V input 4 outputs

4. 150-200W Family DC-DC 1.5 inch high

     A. 12V input 4 outputs
     B. 24V input 4 outputs
     C. 48V input 4 outputs

5. Up to 500W Family-Natural progression

SLIM LINE

1. lOOW 4 output 0.8 inch high AC-DC

2. lOOW 4 output 0.8 inch high 12V input DC-DC Converter

3. 100W 4 output 0.8 inch high 24V input DC-DC Converter

SPECIAL

1) AC input module integrated P.S.
   lOOW

2) 200W

                                       
                                         /S/ KI DONG KANG
                                     __________________________

                                         /S/ CLAUDE ADKINS
                                     __________________________


                          SUPPLEMENTARY AGREEMENT


     This is to clarify and supplement our agreement entered on November
10, 1987.

     KDK Electronics Inc. has no obligation to Digital Power
Corp. for the two products group listed below.

     1)   New products developed after the agreement date,
          November 10, 1987.

     2)   Products already developed by KDK but not implemented
          to production line of Digital Power Corporation as of May 23,
1988.




                         May 23,1988    /S/ KI DONG KANG
                                      __________________________

                         May 23,1988    /S/ CLAUDE ADKINS
                                      __________________________  


                             AGREEMENT

     1.   5% royalty on net sales of KD100, KD150 and KD200 power supplies
and any derivatives employing this base design.

     2.   100,000 shares stock option when net sales of Item #1 reach
$20,000,000 (subject to terms and conditions of original agreement).

     3.   All past and future royalty payments paid out at 4% of total DPC
net sales on a monthly basis (3% for the first 12 payments), the first
payment due upon signing a new agreement.

     4.   This agreement applies only to designs incorporated by DPC as of
June 22, 1990. It is our understanding that KDK has in development various
features, enhancements or other products, the purchase of which would be
the subject of a new agreement.

     5.   KDK agrees not to sell or license these products to a competing
power supply manufacturer. However, KDK is free to manufacture these
products for sale to end customers, or to license the manufacture of these
products to an end customer who would employ them, not for resale, but as a
part of their product. If DPC does not achieve $3.5 million in net sales
from July, 1990 through June, 1991, then KDK is free to sell or license
these products to a competing power supply company.

     6.   DPC is developing new designs and KDK would inspect these designs
prior to this agreement to assure that they are not KDK designs.

     7.   There will be a 1% per month penalty charge on any payments
delayed over 10 days, plus an additional 1% per month interest charge for
balances owing beyond 30 days.

     8.   DPC will provide two monthly reports to KDK as follows:

          NEW ORDERS                    SHIPMENTS
          KDK Designs         $         KDK Designs         $
          Old DPC Designs     $         Old DPC Designs     $
          New DPC Designs     $         New DPC Designs     $

     9.   If Digital Power Corporation is sold or merged, by the time of
such events, unpaid royalty is due and prorated stock option may be
exercised based on total accrued royalty.

     10.  Mutually dismiss all litigations.

  Date 6/29/90    /S/ KI DONG KANG      KDK ELECTRONICS, INC.
                Ki Dong Kang, President

  Date 6/29/90    /S/ ROBERT O. SMITH   DIGITAL POWER CORPORATION
                Robert O. Smith, CEO

                    [FORTRON/SOURCE LETTERHEAD]

                  MANUFACTURING/RESALE AGREEMENT


Between:       Digital Power Corp. And Fortron/Source Corp.

PURPOSE:

Fortron/Source  and  Digital  Power  wish  to  capitalize  on  each other's
strengths,    which   are   respectively,   high   volume,   cost-effective
manufacturing,  and  development/marketing  of  new,  innovative  products.
Accordingly,  Fortron/Source  agrees  not to sell any Digital Power designs
(or modifications of the base design) to  any  entity  other  than  Digital
Power, unless specifically agreed to, in advance, in writing.

INITIAL AGREEMENT:

Fortron/Source  agrees  (upon  receipt of firm PO from Digital) to build  a
test run of 1000 units of a particular  model  to  be determined by Digital
Power,  but  in all likelihood, a US50-341.  These units  will  be  stocked
locally and exclusively  for Digital Power, and delivered, as required at a
cost of $22.00 (or less if  similar power supply), FOB Fremont, California.
Digital Power agrees to take  delivery over a maximum of one year. from the
date originally received at Fortron/Source's  Fremont facility.  Based upon
the cost analysis provided by this initial test  run,  Fortron/Source  will
then provide Digital Power with a firm quote for volume production.

Digital  Power  agrees  to allow Fortron/Source to manufacture and sell the
model US155-201 (as F/S #  SU150D23)  to  Standard MicroSystems, located in
N.Y. with Engineering in Mass.  The cost for  the  first  250  kits on this
product,  if  purchased  through Digital Power, will be $35.00.  Also,  the
Magnetic set will be available  for  $5.00  each.  Any other kits purchased
through Digital Power will be available at $38.00  up  to a maximum of 1000
pieces.    Digital   Power   agrees  to  maintain  current  safety   agency
requirements and multiple list  Fortron/Source  on  the  model.  All agency
listing cost for this will be paid by Fortron/Source.  Digital Power agrees
to  ~protect~  Fortron/Source  at  this  account for the duration  of  this
agreement by :  not quoting on this model  at  SMC and not allowing another
Private label company to quote.

DESIGN OWNERSHIP:

This agreement does not constitute a transfer of  ownership  of  the  power
supply  designs  or  their derivatives or yet to be developed products.  As
such,  Digital  Power  is   authorizing  only  an  alternate  or  secondary
manufacturing  location  with respect  to  the  appropriate  safety  agency
certifications.  Fortron/Source  is not authorized to seek their own safety
agency certifications on these designs.



                    [FORTRON/SOURCE LETTERHEAD]


Digital agrees to provide all BOM's  (with  individual  component  prices),
AVL's,  artwork,  test  procedure  or  any  such documentation necessary to
manufacture the product.  Fortron/Source understands  that this information
is  proprietary  and  will abide by the Nondisclosure Agreement  previously
signed.

NON-COMPETITIVE STRUCTURE:

Fortron agrees not to pursue  any  account  with  a  Digital  Power product
without   written   authorization,   in  advance,  to  do  so.   If  given,
Fortron/Source will provide:  Digital  Power model number, price and volume
quoted and the customer name and address.

Fortron agrees to an inspection of its China  facility  by  a Digital Power
representative  when requested.  Should any documents be needed  to  assure
shipments or agency compliance, they will be provided then.

COMMISSIONS AND ROYALTIES:

Each party will be  responsible for paying their own sales representatives,
unless otherwise agreed upon.

Fortron/Source agrees  to  pay  Digital  Power $13.80 per US155-201 sold to
Standard  MicroSystems.  Once a cost analysis  can  be  provide  showing  a
reduction in  raw material cost (presently $35ea.), Fortron agrees to split
this difference with Digital Power.  This difference is figured from $35 to
actual finished  goods  cost.  Royalties will accrue and be due immediately
upon payment from third party customers.

TERMINATION:

Either party may terminate this agreement at will, effective any time, with
or without cause by written  notice  given to the other party not less than
one hundred and twenty (120) days prior  to  the effect of such notice.  At
that time, each party agrees to release any and  all proprietary documents.
Also, each party agrees to allow the other to minimize losses due to excess
inventory.



                    [FORTRON/SOURCE LETTERHEAD]



SUMMARY:

This  agreement  is  intended  to  be a start for future  projects  between
Fortron/Source and Digital Power.  Digital  Power  desires  to  cost reduce
products,  which  Fortron/Source  can  provide.   While  Digital Power  can
provide Fortron/Source with an expanded product line.  Any  future products
or  agreements  must  be  done  in writing.  May both parties enjoy  mutual
profit and benefit with this partnership.


X    /S/ JACKSON WONG              X      /S/

     PRESIDENT                                 CEO

Date     10/7/94                   Date    10/11/94


For: Fortron/Source Corp.          For: Digital Power Corp.
     2925 Bayview Dr.                   41920 Christy St.
     Fremont, CA 94538                  Fremont, CA 94538
     510-440-0188                       510-657-2635


                     DIGITAL POWER CORPORATION
                      1996 STOCK OPTION PLAN



1.   PURPOSE; DEFINITIONS.

     1.1  PURPOSE.   The  purpose  of  the  Plan is to attract, retain, and
motivate officers, employees, consultants, and  directors of the Company by
giving them the opportunity to acquire Stock ownership in the Company.

     1.2  DEFINITIONS.  For purposes of the Plan, the following terms shall
have the following meanings:

          1.2.1     "ADMINISTRATOR" shall mean the  Compensation  Committee
                    referred   to   in   Section   4  in  its  capacity  as
                    administrator of the Plan in accordance with Section 4.

          1.2.2     "BOARD"  shall  mean  the  Board of  Directors  of  the
                    Company.

          1.2.3     "CODE" shall mean the Internal Revenue Code of 1986, as
                    amended from time to time.

          1.2.4     "COMPANY"  shall  mean  Digital  Power  Corporation,  a
                    California corporation.

          1.2.5     "DIRECTOR" shall mean a member of the Board.

          1.2.6     "EFFECTIVE DATE" shall have  the  meaning  set forth in
                    Section 2.

          1.2.7     "ELIGIBLE PERSON" shall mean, in the case of  the grant
                    of  an  Incentive  Stock  Option, all employees of  the
                    Company,  and  in  the case of  a  Non-qualified  Stock
                    Option, any director  (including a director who is also
                    a member of the Compensation  Committee),  officer,  or
                    employee of the Company.

          1.2.8     "FAIR MARKET VALUE" shall mean the value established by
                    the  Administrator  for  purposes  of  granting Options
                    under the Plan.

          1.2.9     "GRANT  DATE"  shall  mean  the  date of grant  of  any
                    Option.

          1.2.10    "INCENTIVE STOCK OPTION" shall mean  an option which is
                    an  option  within the meaning of Section  422  of  the
                    Code, the award  of  which  contains such provisions as
                    are necessary to comply with that section.

          1.2.11    "NON-QUALIFIED STOCK OPTION" shall mean an option which
                    is designated a Non-qualified Stock Option.

          1.2.12    "OPTION" shall mean an option  to purchase Common Stock
                    under this Plan.  An Option shall  be designated by the
                    Committee as either an Incentive Stock Option or a Non-
                    qualified Stock Option.

          1.2.13    "OPTION  AGREEMENT"  shall  mean  the  written   option
                    agreement with respect to an Option.

          1.2.14    "OPTIONEE" shall mean the holder of an Option.

          1.2.15    "PLAN"  shall  mean this Digital Power Corporation 1996
                    Stock Option Plan, as amended from time to time.

          1.2.16    "STOCK" shall mean  the  Common Stock, no par value, of
                    the Company, and any successor entity.

          1.2.17    "TAX DATE" shall mean the date defined in Section 7.

          1.2.18    "VESTING DATE" shall mean  the  date on which an Option
                    becomes wholly or partially exercisable,  as determined
                    by the Administrator in its sole discretion.

2.   EFFECTIVE DATE; TERM OF PLAN.

     The Effective Date of this Plan shall be upon shareholder  approval of
this Plan pursuant to California Corporation Code 
600, which shall occur within 12 months of the date of Board approval. This Plan, but not Options already granted, shall terminate automatically ten years after its adoption by the Board, unless terminated earlier by the Board under Section 13. No Options shall be granted after termination of this Plan but all Options granted prior to termination shall remain in effect in accordance with their terms. 3. NUMBER AND SOURCE OF SHARES OF STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 8, the total number of shares of Stock with respect to which Options may be granted under this Plan is [_______________________] shares of Stock. The shares of Stock covered by any canceled, expired, or terminated Option or the unexercised portion thereof shall become available again for grant under this Plan. The shares of Stock to be issued hereunder upon exercise of an Option may consist of authorized and unissued shares or treasury shares. 4. ADMINISTRATION OF THE PLAN. This Plan shall be administered by a committee of at least two members of the Board to which administration of this Plan is delegated by the Board (the "Compensation Committee"). The "Administrator" shall mean the "Compensation Committee" referred to in this Section 4 in its capacity as administrator of the Plan in accordance with this Section 4. The Administrator may delegate nondiscretionary administrative duties to such employees of the Company as it deems proper. Each member of the Compensation Committee shall be a disinterested person within the meaning of Rule 16b-3(c)(2)(i) of the Securities Exchange Act of 1934. Subject to the express provisions of this Plan, the Administrator shall have the authority to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Optionees under this Plan; to further define the terms used in this Plan; to prescribe, amend, and rescind rules and regulations relating to the administration of this Plan; to determine the duration and purposes of leaves of absence which may be granted to Optionees without constituting a termination of their employment for purposes of this Plan; and to make all other determinations necessary or advisable for the administration of this Plan. Any decision or action of the Administrator in connection with this Plan or Options granted or shares of Stock purchased under this Plan shall be final and binding. The Administrator shall not be liable for any division, action, or omission respecting this Plan, or any Options granted or shares of Stock sold under this Plan. The Board at any time may abolish the Compensation Committee and revest in the Board the administration of the Plan. To the extent permitted by applicable law in effect from time to time, no member of the Compensation Committee or the Board of Directors shall be liable for any action or omission of any other member of the Compensation Committee or the Board of Directors nor for any act or omission on the member's own part, excepting only the member's own willful misconduct or gross negligence, arising out of or related to the Plan. The Company shall pay expenses incurred by, and satisfy a judgment or fine rendered or levied against, a present or former director or member of the Compensation Committee or Board in any action against such person (whether or not the Company is joined as a party defendant) to impose liability or a penalty on such person for an act alleged to have been committed by such person while a director or member of the Compensation Committee or Board arising with respect to the Plan or administration thereof, or out of membership on the Compensation Committee or Board, or by the Company, or all or any combination of the preceding; provided, the director or Compensation Committee member was acting in good faith, within what such director or Compensation Committee member reasonably believed to have been within the scope of his or her employment or authority, and for a purpose which he or she reasonably believed to be in the best interests of the Company or its shareholders. Payments authorized hereunder include amounts paid and expenses incurred in settling any such action or threatened action. The provisions of this section shall apply to the estate, executor, administrator, heirs, legatees, or devisees of a director or Compensation Committee member, and the term "person" as used in this section shall include the estate, executor, administrator, heirs, legatees, or devisees of such person. 5. GRANT OF OPTIONS; TERMS AND CONDITIONS OF GRANT. 5.1 GRANT OF OPTIONS. One or more Options may be granted to any Eligible Person. Subject to the express provisions of the Plan, the Administrator shall determine from the Eligible Persons those individuals to whom Options under the Plan may be granted. Each Option so granted shall be designated by the Administrator as either a Non-qualified Stock Option or an Incentive Stock Option. Subject to the express provisions of this Plan, the Administrator shall specify the Grant Date, the number of shares of Stock covered by the Option, the exercise price, and the terms and conditions for exercise of the Options. If the Administrator fails to specify the Grant Date, the Grant Date shall be the date of the action taken by the Administrator to grant the Option. As soon as practicable after the Grant Date, the Company shall provide the Optionee with a written Option Agreement in the form approved by the Administrator, which sets out the Grant Date, the number of shares of Stock covered by the Option, the exercise price, and the terms and conditions for exercise of the Option. The Administrator may, in its absolute discretion, grant Options under this Plan to an Eligible Person at any time and from time to time before the expiration of ten years from the Effective Date. 5.2 GENERAL TERMS AND CONDITIONS. Except as otherwise provided herein, the Options shall be subject to the following terms and conditions and such other terms and conditions not inconsistent with this Plan as the Administrator may impose. 5.3 EXERCISE OF OPTION. In order to exercise all or any portion of any Option granted under this Plan, an Optionee must remain as an officer, employee, consultant, or director of the Company, until the Vesting Date. The Option shall be exercisable on or after each Vesting Date in accordance with the terms set forth in the Option Agreement. 5.4 OPTION TERM. Each Option and all rights or obligations thereunder shall expire on such date as shall be determined by the Administrator, but not later than 10 years after the grant of the Option (5 years in the case of an Incentive Stock Option when the Optionee owns more than 10% of the total combined voting power of all classes of stock of the Company), and shall be subject to earlier termination as hereinafter provided. 5.5 EXERCISE PRICE. The Exercise Price of any Option shall be determined by the Administrator, but in the case of Incentive Stock Options shall not be less than 100% (110% in the case of an Optionee who owns more than 10% of the total combined voting power of all classes of stock of the Company) of the Fair Market Value of the Stock on the date the Incentive Stock Option is granted, and [100% of the Fair Market Value of the Stock on the date the Non-qualified Stock Option is granted]. 5.6 METHOD OF EXERCISE. To the extent the right to purchase shares of Stock has accrued, Options may be exercised, in whole or in part, from time to time in accordance with their terms by written notice from the Optionee to the Company stating the number of shares of Stock with respect to which the Option is being exercised, and accompanied by payment in full of the exercise price. Payment may be made in cash, certified check or, at the absolute discretion of the Administrator, by non-certified check. 5.7 RESTRICTIONS ON STOCK; OPTION AGREEMENT. At the time it grants Options under this Plan, the Company may retain, for itself or others, rights to repurchase the shares of Stock acquired under the Option, or impose other restrictions on such shares. The terms and conditions of any such rights or other restrictions shall be set forth in the Option Agreement evidencing the Option. No Option shall be exercisable until after execution of the Option Agreement by the Company and the Optionee. 5.8 NON-ASSIGNABILITY OF OPTION RIGHTS. No Option shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of an Optionee, only the Optionee may exercise an Option. 5.9 EXERCISE AFTER CERTAIN EVENTS. 5.9.1 TERMINATION AS AN EMPLOYEE, DIRECTOR, OR CONSULTANT. If for any reason other than permanent and total disability or death (as defined below) an Optionee ceases to be employed by or to be a consultant or director of the Company, Options held at the date of such termination (to the extent then exercisable) may be exercised, in whole or in part, at any time within three months after the date of such termination or such lesser period specified in the Option Agreement (but in no event after the earlier of (i) the expiration date of the Option as set forth in the Option Agreement, and (ii) ten years from the Grant Date). If an Optionee granted an Incentive Stock Option terminates employment but continues as a consultant, advisor, or in a similar capacity to the Company, Optionee need not exercise the Option within three months of termination of employment but shall be entitled to exercise within three months of termination of services to the Company (one year in the event of permanent disability or death). However, if Optionee does not exercise within three months of termination of employment, the Option will not qualify as an Incentive Stock Option. 5.9.2 PERMANENT DISABILITY AND DEATH. If an Optionee becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code), or dies while employed by the Company, or while acting as an officer, consultant, or director of the Company,(or, if the Optionee dies within the period that the Option remains exercisable after termination of employment or affiliation), Options then held (to the extent then exercisable) may be exercised by the Optionee, the Optionee's personal representative, or by the person to whom the Option is transferred by will or the laws of descent and distribution, in whole or in part, at any time within one year after the disability or death or any lesser period specified in the Option Agreement (but in no event after the earlier of (i) the expiration date of the Option as set forth in the Option Agreement, and (ii) ten years from the Grant Date). 5.10 COMPLIANCE WITH SECURITIES LAWS. The Company shall not be obligated to issue any shares of Stock upon exercise of an Option unless such shares are at that time effectively registered or exempt from registration under the federal securities laws and the offer and sale of the shares of Stock are otherwise in compliance with all applicable securities laws. Upon exercising all or any portion of an Option, an Optionee may be required to furnish representations or undertakings deemed appropriate by the Company to enable the offer and sale of the shares of Stock or subsequent transfers of any interest in such shares to comply with applicable securities laws. Evidences of ownership of shares of Stock acquired upon exercise of Options shall bear any legend required by, or useful for purposes of compliance with, applicable securities laws, this Plan, or the Option Agreement evidencing the Option. 6. LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS. 6.1 ONE HUNDRED THOUSAND DOLLARS RULE. The aggregate Fair Market Value (determined as of the Grant Date) of the Stock for which Incentive Stock Options may first become exercisable by any Optionee during any calendar year under this Plan, together with that of Stock subject to Incentive Stock Options first exercisable (other than as a result of acceleration pursuant to Section 9(a)) by such Optionee under any other plan of the Company or any Subsidiary, shall not exceed $100,000. 6.2 OPTION AGREEMENTS. There shall be imposed in the Option Agreement relating to Incentive Stock Options such terms and conditions as are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. 6.3 TEN PERCENT RULE. No Incentive Stock Option may be granted to any person who, at the time the Incentive Stock Option is granted, owns shares of outstanding Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, unless the exercise price of such Option is at least 110% of the Fair Market Value of the Stock (determined as of the Grant Date) subject to the Option, and such Option by its terms is not exercisable after the expiration of five years from the Grant Date. 6.4 NON-EMPLOYEES. No Incentive Stock Option may be granted to any person who is not an employee of the Company. 7. PAYMENT OF TAXES. Upon the disposition by an Optionee or other person of shares of an Option prior to satisfaction of the holding period requirements of Section 422 of the Code, or upon the exercise of a Non-qualified Stock Option, the Company shall have the right to require such Optionee or such other person to pay by cash, or check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such transactions. Any such payment must be made promptly when the amount of such obligation becomes determinable (the "Tax Date"). The Administrator may, in lieu of such cash payment, withhold that number of Shares sufficient to satisfy such withholding. 8. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of outstanding Options shall not affect the Company's right to effect adjustments, recapitalizations, reorganizations, or other changes in its or any other corporation's capital structure or business, any merger or consolidation, any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock, the dissolution or liquidation of the Company's or any other corporation's assets or business, or any other corporate act, whether similar to the events described above or otherwise. Subject to Section 9, if the outstanding shares of the Stock are increased or decreased in number or changed into or exchanged for a different number or kind of securities of the Company or any other corporation by reason of a recapitalization, reclassification, stock split, combination of shares, stock dividend, or other event, an appropriate adjustment of the number and kind of securities with respect to which Options may be granted under this Plan, the number and kind of securities as to which outstanding Options may be exercised, and the exercise price at which outstanding Options may be exercised will be made. 9. DISSOLUTION, LIQUIDATION, MERGER. 9.1 COMPANY NOT THE SURVIVOR. In the event of a dissolution or liquidation of the Company, a merger, consolidation, combination, or reorganization in which the Company is not the surviving corporation, or a sale of substantially all of the assets of the Company, any outstanding Option shall become fully vested immediately upon the Company's public announcement of any one of the foregoing. The Board of Directors shall determine, in its sole and absolute discretion, when the Company shall be deemed to survive for purposes of this paragraph. If the Optionee does not exercise the entire Option within ninety (90) days, the Administrator, in its sole and absolute discretion, may, with respect to the unexercised portion of the Option: 9.1.1 cancel the Option upon payment to the Optionee in an amount equal to the difference between the closing price of the stock underlying the Option quoted the day before such liquidation, dissolution, merger, consolidation, combination, reorganization and the exercise price of the Option; or 9.1.2 assign the Option and all rights and obligations under it to the successor entity, with all such rights and obligations being assumed by the successor entity. 9.2 COMPANY IS THE SURVIVOR. In the event of a merger, consolidation, combination, or reorganization in which the Company is the surviving corporation, the Board of Directors shall determine the appropriate adjustment of the number and kind of securities with respect to which outstanding Options may be exercised, and the exercise price at which outstanding Options may be exercised. The Board of Directors shall determine, in its sole and absolute discretion, when the Company shall be deemed to survive for purposes of this Plan. 10. CHANGE OF CONTROL. If there is a "change of control" in the Company, all outstanding Options shall fully vest immediately upon the Company's public announcement of such a change. A "change of control" shall mean an event involving one transaction or a related series of transactions, in which (i) the Company issues securities equal to 25% or more of the Company's issued and outstanding voting securities, determined as a single class, to any individual, firm, partnership, limited liability company, or other entity, including a "group" within the meaning of SEC Exchange Act Rule 13d-3, (ii) the Company issues voting securities equal to 25% or more of the issued and outstanding voting stock of the Company in connection with a merger, consolidation, or other business combination, (iii) the Company is acquired in a merger or other business combination transaction in which the bank is not the surviving company, or (iv) all or substantially all of the Company's assets are sold or transferred. See Section 9 with respect to Options vesting upon the occurrence of either of the events described in (iii) or (iv) of this Section 10 and the result upon the non-exercise of the Options. 11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator reasonably believes an Optionee has committed an act of misconduct specified below, the Administrator may suspend the Optionee's right to exercise any Option granted hereunder pending final determination by the Board or the Administrator. If the Administrator determines that an Optionee has committed an act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of the Company rules resulting in loss, damage, or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company, or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his estate shall be entitled to exercise any Option hereunder. In making such determination, the Board or the Administrator shall act fairly and in good faith and shall give the Optionee an opportunity to appear and present evidence on the Optionee's behalf. The determination of the Board or the Administrator shall be final and conclusive. 12. NO RIGHTS AS SHAREHOLDER OR TO CONTINUED EMPLOYMENT. An Optionee shall have no rights as a shareholder with respect to any shares of Stock covered by an Option. An Optionee shall have no right to vote any shares of Stock, or to receive distributions of dividends or any assets or proceeds from the sale of Company assets upon liquidation until such Optionee has effectively exercised the Option and fully paid for such shares of Stock. Subject to Sections 8 and 9, no adjustment shall be made for dividends or other rights for which the record date is prior to the date title to the shares of Stock has been acquired by the Optionee. The grant of an Option shall in no way be construed so as to confer on any Optionee the rights to continued employment by the Company. 13. TERMINATION; AMENDMENT. The Board may amend, suspend, or terminate this Plan at any time and for any reason, but no amendment, suspension, or termination shall be made which would impair the right of any person under any outstanding Options without such person's consent not unreasonably withheld. Further, any amendment which materially increases the benefits accruing to participants under this Plan shall be subject to the approval of the Company's shareholders. 14. GOVERNING LAW. This Plan and the rights of all persons under this Plan shall be construed in accordance with and under applicable provisions of the laws of the State of California.

                         Villanueva, Purcell & Co.
                        1550 The Alameda, Suite 204
                        San Jose, California  95126



October 4, 1996




Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C.  20549


Dear Sirs/Madams:

We  have  read  and  agree  with  the  information contained in the section
entitled "Change in Accountants" included  in  Digital  Power Corporation's
Registration Statement on Form SB-2 to be filed with the  Commission  on or
about October 9, 1996, insofar as such comments relate to us.

Yours truly,

/s/ Villanueva, Purcell & Co.










                           Exhibit 16.1




             Subsidiaries of Digital Power Corporation

Poder Digital, S.A. de C.V., a Corporation
incorporated under the Laws of Mexico































                           Exhibit 21.1


                              CONSENT

We have read those portions of the Form SB-2 Registration Statement (the 
"Registration Statement") of Digital Power Corporation (the "Company")
in which our name has been cited by the Company, and consent to the inclusion
of our name in such capacity in the Registration Statement.


                                       Micro-Tech Consultants


Date:  October 10, 1996                /s/ Mohan Mankikar
                                      Mohan Mankikar


                          Exhibit 23.3


 

5 This schedule contains summary financial information extracted from the Form SB-2 as filed with the Commission on October 16, 1996 and is qualified in its entirety by reference to such financial statements. 0000896493 DIGITAL POWER CORPORATION 6-MOS YEAR DEC-31-1996 DEC-31-1995 JUN-30-1996 DEC-31-1995 84,614 202,917 107,173 100,000 2,421,719 1,794,355 120,000 120,000 2,142,454 1,557,226 4,837,440 3,803,146 1,508,625 1,300,978 962,612 943,298 5,443,277 4,318,190 2,411,418 1,591,788 0 0 0 0 0 747,569 5,539,115 4,398,322 (4,005,356) (3,459,310) 5,443,277 4,318,190 6,553,376 10,037,502 6,553,376 10,037,502 4,975,557 7,494,427 4,975,557 7,494,427 888,207 1,515,303 1,286 90,974 59,537 119,146 637,208 826,484 294,000 277,400 343,208 0 0 0 0 0 0 0 343,208 1,103,884 0.24 0.80 0.20 0.66