SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 8-K

                Current Report Pursuant to Section 13 or 15(d) of
                       The Securities Exchange Act of 1934

         Date of Report (Date of earliest event reported) April 5, 2002



                            DIGITAL POWER CORPORATION
             (Exact name of registrant as specified in its charter)


California                      1-12711                   94-1721931
----------                      -------                   ----------
(State or other          (Commission File No.)         (I.R.S. Employer
jurisdiction                                            Identification No.)
of incorporation)



              41920 Christy Street, Fremont, California 94538-3158
                    (Address of principal executive offices)


                                 (510) 657-2635
              (Registrant's telephone number, including area code)


<PAGE>

ITEM 9. REGULATION FD DISCLOSURE

     In  connection  with its filing  with the Israeli  Securities  Authorities,
     Telkoor  Telecom,  Ltd.  included  Digital  Power  Corporation's  financial
     statements  for the years  ended  December  31,  2001,  2000 and 1999 which
     included additional  information than those financial statements filed with
     the SEC and American  Stock  Exchange.  Digital Power is providing the same
     financial statements for the years ended July 31, 2001, 2000 and 1999 filed
     with the Israeli Securities Authorities through this Form 8-K.

     Exhibit No.         Exhibit Description
     -----------         -------------------
        99.2             Digital Power Corporation and Subsidiaries. Financial
                         statements for the years ended December 31, 2001, 2000,
                         and 1999





<PAGE>

                                    SIGNATURE

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


                                   DIGITAL POWER CORPORATION,
                                   a California Corporation


Dated: April 5, 2002               /s/ David Amitai
                                   --------------------------
                                   David Amitai
                                   Chief Executive Officer




<PAGE>






                            DIGITAL POWER CORPORATION
                                AND SUBSIDIARIES

                              Financial Statements
                               For the Years Ended
                        December 31, 2001, 2000 and 1999



<PAGE>


                          INDEX TO FINANCIAL STATEMENTS


                                                                            PAGE
                                                                            ----

Independent Auditor's Report.................................................F-1

Consolidated Balance Sheets - December 31, 2001 and 2000.....................F-2

Consolidated Statements of Operations - For the Years
    Ended December 31, 2001, 2000 and 1999...................................F-3

Consolidated Statement of Stockholders' Equity - For the Years Ended
    December 31, 2001, 2000 and 1999.........................................F-4

Consolidated Statements of Cash Flows - For the Years Ended
    December 31, 2001, 2000 and 1999.........................................F-5

Notes to Consolidated Financial Statements...................................F-7

Supplemental Information....................................................F-25



<PAGE> F-1

                          INDEPENDENT AUDITOR'S REPORT



To the Stockholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California


We have audited the  accompanying  consolidated  balance sheets of Digital Power
Corporation  and  subsidiaries as of December 31, 2001 and 2000, and the related
statements of operations,  stockholders'  equity, and cash flows for each of the
years in the three year period  ended  December  31,  2001.  These  consolidated
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 auditing standards generally accepted
in the United States of America and International  Standards on Auditing.  Those
standards  require  that we plan and  perform  the  audits 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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Digital  Power
Corporation  and  subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three year
period  ended  December 31,  2001,  in  conformity  with  accounting  principles
generally accepted in the United States of America.


/S/ Hein + Associates LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants


Orange, California
February 19, 2002


<PAGE> F-2


                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<S>                                                                         <C>                   <C>



                                                                                 DECEMBER 31,         DECEMBER 31,
                                                                                     2001                 2000
                                                                             -------------------  -------------------
                                  ASSETS
                                  ------
CURRENT ASSETS:
     Cash and cash equivalents                                               $      1,242,900     $        806,407
     Accounts receivable - trade, net of allowance for doubtful accounts of
      $370,000 and $231,419 at December 31, 2001 and 2000, respectively             2,203,664            3,256,082
     Income tax refund receivable                                                      72,388              179,200
     Other receivables                                                                 91,971               90,454
     Inventories, net                                                               1,999,168            5,143,624
     Prepaid expenses and deposits                                                     47,534              213,699
     Deferred income taxes                                                                  -              334,037
                                                                               --------------     ----------------
         Total current assets                                                       5,657,625           10,023,503

PROPERTY AND EQUIPMENT, net                                                           820,318            1,094,733
EXCESS OF PURCHASE PRICE OVER NET ASSETS
     ACQUIRED, net of accumulated amortization of $1,452,189 and $433,926
     at December 31, 2001 and 2000, respectively                                            -            1,018,263
OTHER ASSETS                                                                           35,116               28,551
                                                                             ----------------     ----------------
TOTAL ASSETS                                                                 $      6,513,059     $     12,165,050
                                                                             ================     ================

                    LIABILITIES AND STOCKHOLDERS' EQUITY
                    ------------------------------------
CURRENT LIABILITIES:
     Notes payable                                                           $        652,261     $        400,000
     Current portion of capital lease obligations                                      35,856               42,954
     Accounts payable                                                               1,590,830            1,949,182
     Accrued liabilities                                                            1,510,719            1,169,702
                                                                             ----------------     ----------------
         Total current liabilities                                                  3,789,666            3,561,838

CAPITAL LEASE OBLIGATIONS, less current portion                                        24,376               61,938
OTHER LONG TERM LIABILITIES                                                            13,607                    -
                                                                             ----------------     ----------------
         Total liabilities                                                          3,827,649            3,623,776
                                                                             ----------------     ----------------

COMMITMENTS AND CONTINGENCIES (Notes 8 and 14)                                              -                    -

STOCKHOLDERS' EQUITY:
     Preferred stock issuable in series, no par value, 2,000,000 shares
         authorized, no shares issued or outstanding at December 31, 2001
         or 2000                                                                            -                    -
     Common stock, no par value, 10,000,000 shares authorized, 4,510,680
         and 3,260,680 shares issued and outstanding at December 31, 2001
         and 2000, respectively                                                    11,036,251            9,786,251
     Additional paid in capital                                                       733,256              733,256
     Accumulated deficit                                                           (8,771,654)          (1,730,934)
     Accumulated other comprehensive loss                                            (312,443)            (247,299)
                                                                             ----------------     ----------------
         Total stockholders' equity                                                 2,685,410            8,541,274
                                                                             ----------------     ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $      6,513,059     $     12,165,050
                                                                             ================     ================
/s/ David Amitai                                                        3/30/02
----------------------------------------------------------------  ---------------------------------------------------
DAVID AMITAI, PRESIDENT AND CEO                                   DATE

</TABLE>

<PAGE> F-3


                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<S>                                                       <C>                  <C>                   <C>
                                                                               FOR THE YEARS ENDED
                                                                                   DECEMBER 31,
                                                          ---------------------------------------------------------------
                                                                 2001                 2000                   1999
                                                          -------------------  -------------------    -------------------

REVENUES                                                  $     10,329,857     $     17,882,730       $     15,354,018
COST OF GOODS SOLD                                              11,939,985           13,223,441             11,277,170
                                                          ----------------     ----------------       ----------------

     Gross margin (loss)                                        (1,610,128)           4,659,289              4,076,848
                                                         -----------------     ----------------       ----------------

OPERATING EXPENSES:
     Research and development                                    1,065,872            1,166,015                952,690
     Marketing and selling                                         863,898            1,348,545              1,159,323
     General and administrative                                  2,177,611            1,895,280              1,644,170
     Impairment of goodwill                                        946,263                    -                      -
                                                          ----------------     ----------------       ----------------

         Total operating expenses                                5,053,644            4,409,840              3,756,183
                                                          ----------------     ----------------       ----------------

INCOME (LOSS) FROM OPERATIONS                                   (6,663,772)             249,449                320,665
                                                          ----------------     ----------------       ----------------

OTHER INCOME (EXPENSE):
     Interest income                                                12,829               29,920                 30,935
     Interest expense                                              (63,461)             (90,992)              (178,343)
     Other (expense)                                                (4,364)                   -                      -
     Gain (loss) on disposal of assets                             (23,069)              10,790                (16,830)
                                                          -----------------    ----------------       ----------------
         Other (expense)                                           (78,065)             (50,282)              (164,238)
                                                          -----------------    ----------------       ----------------

INCOME (LOSS) BEFORE INCOME TAXES                               (6,741,837)             199,167                156,427

INCOME TAX PROVISION                                               298,883              104,000                123,000
                                                          ----------------     ----------------       ----------------

NET INCOME (LOSS)                                         $     (7,040,720)    $         95,167       $         33,427
                                                          =================    ================       ================

     Basic net income (loss) per share                    $         (2.07)     $          0.03        $          0.01
                                                          =================    ================       ================

     Diluted net income (loss) per share                  $         (2.07)     $          0.03        $          0.01
                                                          =================    ================       ================
</TABLE>


<PAGE> F-4
<TABLE>
                                          DIGITAL POWER CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                      FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999


<S>             <C>          <C>         <C>          <C>        <C>          <C>          <C>           <C>           <C>
                                                                                                         ACCUMULATED
                      COMMON STOCK       ADDITIONAL                 NOTE                      OTHER         TOTAL
                -----------------------   PAID-IN       ESOP     RECEIVABLE   ACCUMULATED  COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
                  SHARES        AMOUNT    CAPITAL      SHARES    STOCKHOLDER    DEFICIT       (LOSS)        EQUITY        (LOSS)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ --------------
BALANCES,
January 1, 1999  2,771,435  $ 9,012,679  $ 514,304   $(184,919)    $         $ (1,859,528)  $    36,234  $  7,518,770

 Contribution
  to ESOP                -            -          -     184,919             -            -             -       184,919

 Note receivable
  for common stock       -            -     52,200           -       (52,200)           -             -             -

 Comprehensive loss:     -

  Net income             -            -          -           -             -       33,427             -        33,427    $   33,427

  Foreign currency
   translation
   adjustment            -            -          -           -             -            -       (84,909)      (84,909)      (84,909)
                                                                                                                      --------------
  Total comprehensive
  loss                   -            -          -           -             -            -             -             -       (51,482)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ ==============
BALANCES,
December31,1999  2,771,435    9,012,679     566,504          -       (52,200)  (1,826,101)      (48,675)    7,652,207

 Exercise of
 stock options    484,245       754,197     (52,200)         -        52,200            -            -       754,197

 Income tax
 benefit related
 to exercise  of
 stock options          -             -     101,397          -             -            -            -       101,397

 Stock granted
 for services       5,000        19,375           -          -             -            -            -        19,375

 Compensation cost
 recognized upon
 issuance of
 warrants for
 services               -             -     117,555          -             -            -            -       117,555

 Comprehensive loss:
  Net income            -             -           -          -             -       95,167            -        95,167    $   95,167

  Foreign currency
  translation
  adjustment            -             -           -          -             -            -     (198,624)     (198,624)     (198,624)
                                                                                                                      --------------
   Total comprehensive
   loss                 -             -           -          -             -            -            -             -    $ (103,457)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ ==============
BALANCES,
December31,2000  3,260,680    9,786,251     733,256          -             -   (1,730,934)    (247,299)    8,541,274

 Issuance of
 common stock to
 Telkoor Telecom,
 Ltd pursuant to
 investment
 agreement       1,250,000    1,250,000           -          -             -            -            -     1,250,000

 Comprehensive loss:
  Net loss               -            -           -          -             -   (7,040,720)           -    (7,040,720)  $(7,040,720)
  Foreign currency
  translation
  adjustment             -            -           -          -             -            -      (65,144)      (65,144)      (65,144)
                                                                                                                      --------------
   Total comprehensive
   loss                  -            -           -          -             -            -            -             -   $(7,105,864)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ ==============
BALANCES,
December31,2001  4,510,680  $11,036,251  $  733,256  $       -     $       -  $(8,771,654)  $ (312,443)  $ 2,685,410
                ==========  ===========  ==========  ==========  =========== =============  ===========  ============
</TABLE>


<PAGE> F-5
<TABLE>
                                                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<S>                                                               <C>                 <C>                  <C>
                                                                                     FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------
                                                                         2001                2000                 1999
                                                                  -------------------  ------------------   -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                            $     (7,040,720)    $         95,167     $         33,427

     Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:

        Depreciation and amortization                                      450,752              475,987              500,691
        (Gain) loss on disposal of assets                                   23,069              (10,790)              16,830
        Deferred income taxes                                              334,037               16,755                8,813
        Warranty expense                                                   (64,806)              55,000             (110,000)
        Increase in provision for inventory obsolescence                 2,714,941                    -               30,000
        Contribution to ESOP                                                     -                    -              184,919
        Bad debt expense                                                   158,130               23,504               35,547
        Compensation cost recognized upon issuance of warrants                   -              117,555                    -
        Income tax benefit related to exercise of stock options                  -              101,397                    -
        Stock issued for services                                                -               19,375                    -
        Impairment of goodwill                                             946,263                    -                    -
        Severance accrual                                                  658,000                    -                    -

     Changes in operating assets and liabilities:

        Accounts receivable                                                894,288             (466,506)             711,411
        Income tax refund receivable                                       106,812             (108,212)             321,658
        Other receivables                                                   (1,517)               9,421                3,167
        Inventories                                                        429,515             (612,363)             303,259
        Prepaid expenses                                                   166,164             (152,372)              (6,062)
        Other assets                                                        (6,565)             (14,493)              26,733
        Accounts payable                                                  (358,353)             753,013              (50,685)
        Accrued liabilities                                               (252,177)             (98,939)            (271,457)
        Other long-term liabilities                                         13,607              (25,000)             (10,043)
                                                                  -----------------    -----------------    -----------------
          Net cash provided by (used in) operating activities
                                                                          (828,560)             178,499            1,728,208
                                                                  -----------------    -----------------    -----------------
 CASH FLOWS FROM INVESTING ACTIVITIES:

     Purchase of property and equipment                                   (133,281)            (176,068)            (168,042)
     Proceeds from sale of assets                                            5,876               26,121                6,146
                                                                  -----------------    -----------------    -----------------
              Net cash (used in) investing activities                     (127,405)            (149,947)            (161,896)
                                                                  -----------------    -----------------    -----------------
</TABLE>


<PAGE> F-6

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)
<TABLE>
<S>                                                               <C>                  <C>                  <C>
                                                                                     FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------

                                                                          2001                2000                 1999
                                                                  -------------------  ------------------   -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options and warrants             $         -          $      754,197       $         -
   Proceeds received (payments made) on notes payable                      252,261             (540,000)            (184,919)
   Principal payments on capital lease obligations                         (44,659)             (62,426)             (72,537)
   Principal payments on notes payable                                        -                    -              (1,266,846)
   Investment from Telkoor Telecom, Ltd.                                 1,250,000                 -                    -
                                                                   ----------------     ----------------     ----------------
     Net cash provided (used in) by financing activities                 1,457,602              151,771           (1,524,302)
                                                                   ----------------     ----------------     -----------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                    (65,144)            (198,624)             (84,909)
                                                                   ----------------     ----------------     ----------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                    436,493              (18,301)             (42,899)
                                                                   ----------------     ----------------     ----------------

CASH AND CASH EQUIVALENTS, beginning of period                             806,407              824,708              867,607
                                                                   ----------------     ----------------     ----------------

CASH AND CASH EQUIVALENTS, end of period                            $    1,242,900       $      806,407       $      824,708
                                                                   ================     ================     ================

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash payments for:
     Interest                                                       $       67,009       $      131,650       $      277,935
                                                                   ================     ================     ================
     Income taxes                                                   $       97,918       $      180,000       $      117,494
                                                                   ================     ================     ================

NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Acquisition of equipment through capital leases                  $         -          $       42,846       $       19,720
                                                                   ================     ================     ================
</TABLE>

<PAGE> F-7
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS:
   -------------------------------------

     Digital Power Corporation ("DPC"), a California corporation, and its wholly
     owned  subsidiaries,  Poder  Digital,  S.A.  de  C.V.  ("PD"),  located  in
     Guadalajara,  Mexico,  and Digital  Power Limited  ("DPL"),  located in the
     United  Kingdom,  are  engaged  in the  design,  manufacture  and  sale  of
     switching power supplies.  DPC, PD, and DPL are collectively referred to as
     the "Company".

2. SIGNIFICANT ACCOUNTING POLICIES:
   -------------------------------

     Principles of Consolidation - The consolidated financial statements include
     the  accounts of DPC and its wholly  owned  subsidiaries,  PD and DPL.  All
     significant  intercompany accounts and transactions have been eliminated in
     consolidation.

     Statements  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.

     Inventories  -  Inventories  are  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 their  estimated  useful life or the term of the lease.  The
     cost of  normal  maintenance  and  repairs  is  charged  to  operations  as
     incurred.  Material  expenditures  that  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  resulting  gains or losses  are  reflected  in  current
     operations.

     Excess of  Purchase  Price  Over Net Assets  Acquired - Excess of  purchase
     price over net assets acquired  ("Goodwill")  represents the purchase price
     in excess of the fair value of the net assets of the acquired  business and
     was being  amortized  using the  straight-line  method  over its  estimated
     useful life of ten years.

     As a result of DPL's  sustained  losses during the year ended  December 31,
     2001,  management  has  determined  the value of the  unamortized  goodwill
     related to the 1998 acquisition of DPL as impaired resulting in a charge of
     $946,263.

     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 differences  between the
     financial statement carrying amounts of existing assets and liabilities and
     their  respective  tax  bases.  Deferred  tax assets  and  liabilities  are
     measured using enacted tax rates expected to apply to taxable income in the
     years in which those temporary  differences are expected to be recovered or
     settled.  The effect on deferred tax assets and  liabilities of a change in
     tax rates is recognized in income in the period that includes the enactment
     date.

<PAGE> F-8

     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 certain sales to distributors are subject to
     a limited right of return.  At the same time sales  revenue is  recognized,
     the Company  provides a reserve for estimated  warranty costs and a reserve
     for estimated product returns.

     Research and Development Costs - Research and development costs are charged
     to operations in the period incurred.

     Foreign  Currency  Translation  - Gains  and  losses  from the  effects  of
     exchange  rate   fluctuations  on   transactions   denominated  in  foreign
     currencies  are  included  in  the  results  of   operations.   Assets  and
     liabilities of the Company's foreign  subsidiaries are translated into U.S.
     dollars at year-end exchange rates. Income and expense items are translated
     at  average  exchange  rates  prevailing  during  the year.  The  resulting
     translation  adjustment  is recorded as a component  of  accumulated  other
     comprehensive income (loss), a component of stockholders' equity.

     Earnings  Per Share - Basic  earnings  per share  excludes  dilution and is
     computed  by  dividing  income  available  to  common  stockholders  by the
     weighted  average  number  of common  shares  outstanding  for the  period.
     Diluted earnings per share reflects the potential dilution that could occur
     if  securities or other  contracts to issue common stock were  exercised or
     converted  into common  stock or resulted in the  issuance of common  stock
     that then shared in the earnings of the entity.

     Use of Estimates - The preparation of the Company's  consolidated financial
     statements in conformity  with  generally  accepted  accounting  principles
     requires the Company's  management to make estimates and  assumptions  that
     affect the amounts reported in these consolidated  financial statements and
     accompanying notes. Actual results could differ from those estimates.

     The Company's  consolidated 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 and goodwill, 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 - In the event that facts and circumstances
     indicate that the cost of long lived 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.

     Stock Based  Compensation  - The  Company has elected to follow  Accounting
     Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
     (APB25) and related  interpretations  in accounting  for its employee stock
     options.  In  accordance  with  FASB  Statement  No.  123  "Accounting  for
     Stock-Based  Compensation"  (FASB123), the Company will disclose the impact
     of  adopting  the  fair  value   accounting  of  employee   stock  options.
     Transactions in equity instruments with non-

<PAGE> F-9

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     employees  for goods or  services  have been  accounted  for using the fair
     value method as prescribed by FASB123.

     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  counterparties  when they have  similar  economic
     characteristics   that  would  cause  their  ability  to  meet  contractual
     obligations  to be  similarly  affected  by  changes in  economic  or other
     conditions described below.

     The  Company  operates  in one  segment,  manufacture  and  sale  of  power
     supplies.  Financial  instruments  that  subject the Company to credit risk
     consist  of cash  balances  maintained  in  excess  of  federal  depository
     insurance  limits and  accounts  receivable,  which have no  collateral  or
     security. See Note 14 for major customers.

     Fair  Value of  Financial  Instruments  - The  estimated  fair  values  for
     financial  instruments under FASB Statement No. 107, Disclosures about Fair
     Value of Financial  Instruments,  are determined at discrete points in time
     based on relevant market information. These estimates involve uncertainties
     and cannot be determined with precision.  The estimated fair value of cash,
     cash  equivalents,  accounts  receivable and accounts payable  approximates
     their carry value due to their short-term  nature. The estimated fair value
     of  long-term  debt  approximates  its  carrying  value  because it carries
     interest rates which approximates market rates.

     Comprehensive  Income - The Company has  adopted the  Financial  Accounting
     Standards  Board  Statement  of  Financial  Accounting  Standards  No. 130,
     "Reporting  Comprehensive Income" (FASB130).  FASB130 defines comprehensive
     income as all changes in  stockholders'  equity  exclusive of  transactions
     with owners, such as capital investments. Comprehensive income includes net
     income or loss and  changes in  certain  assets  and  liabilities  that are
     reported  directly  in  equity,   such  as,   translation   adjustments  on
     investments in foreign subsidiaries.

     Impact  of  Recently  Issued  Standards  -  In  June  2001,  the  Financial
     Accounting   Standards  Board  ("FASB")  issued   Statements  of  Financial
     Accounting  Standards No. 141 "Business  Combinations" ("SFAS 141") and No.
     142 "Goodwill and Other Intangible  Assets" ("SFAS 142"). SFAS 141 requires
     all business combinations initiated after June 30, 2001 to be accounted for
     under the purchase method. For all business combinations for which the date
     of acquisition is after June 30, 2001, SFAS 141 also  establishes  specific
     criteria for the recognition of intangible  assets separately from goodwill
     and requires unallocated negative goodwill to be written off immediately as
     an extraordinary gain, rather than deferred and amortized. SFAS 142 changes
     the  accounting  for  goodwill  and  other   intangible   assets  after  an
     acquisition. The most significant changes made by SFAS 142 are: 1) goodwill
     and intangible assets with indefinite lives will no longer be amortized; 2)
     goodwill and  intangible  assets with  indefinite  lives must be tested for
     impairment at least annually; and 3) the amortization period for intangible
     assets  with  finite  lives will no longer be limited to forty  years.  The
     Company does not believe that the adoption of these  statements will have a
     material effect on its financial position,  results of operations,  or cash
     flows.



<PAGE> F-10
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In June  2001,  the  FASB  also  approved  for  issuance  SFAS  143  "Asset
     Retirement  Obligations." SFAS 143 establishes accounting  requirements for
     retirement   obligations   associated  with  tangible   long-lived  assets,
     including  (1)  the  timing  of  the  liability  recognition,  (2)  initial
     measurement of the liability,  (3) allocation of asset  retirement  cost to
     expense,  (4)  subsequent  measurement  of the  liability and (5) financial
     statement  disclosures.  SFAS 143 requires  that an asset  retirement  cost
     should be capitalized as part of the cost of the related  long-lived  asset
     and  subsequently  allocated  to expense  using a  systematic  and rational
     method.  The  Company  will  adopt the  statement  effective  no later than
     January 1, 2003, as required.  The transition adjustment resulting from the
     adoption of SFAS 143 will be reported as a cumulative effect of a change in
     accounting principle.  At this time, the Company cannot reasonably estimate
     the effect of the  adoption of this  statement on its  financial  position,
     results of operations, or cash flows

     In October  2001,  the FASB also  approved  SFAS 144,  "Accounting  for the
     Impairment or Disposal of  Long-Lived  Assets." SFAS 144 replaces SFAS 121,
     "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
     Assets to Be Disposed Of." The new accounting  model for long-lived  assets
     to be  disposed  of by sale  applies to all  long-lived  assets,  including
     discontinued operations, and replaces the provisions of APB Opinion No. 30,
     "Reporting  Results of  Operations-Reporting  the  Effects of Disposal of a
     Segment  of a  Business,"  for the  disposal  of  segments  of a  business.
     Statement  144  requires  that those  long-lived  assets be measured at the
     lower of carrying amount or fair value less cost to sell,  whether reported
     in  continuing  operations  or  in  discontinued   operations.   Therefore,
     discontinued  operations will no longer be measured at net realizable value
     or  include  amounts  for  operating  losses  that  have not yet  occurred.
     Statement  144 also broadens the  reporting of  discontinued  operations to
     include  all  components  of  an  entity  with   operations   that  can  be
     distinguished  from the rest of the entity and that will be eliminated from
     the  ongoing  operations  of the  entity  in a  disposal  transaction.  The
     provisions of Statement 144 are effective for financial  statements  issued
     for fiscal years beginning after December 15, 2001 and,  generally,  are to
     be applied  prospectively.  At this time, the Company  cannot  estimate the
     effect of this statement on its financial position,  results of operations,
     or cash flows.

3. BASIS OF PRESENTATION:

     The Company  incurred a net loss of $7,040,720  and used cash in operations
     of $828,560  during the year ended  December 31, 2001.  The Company had net
     income of $95,167 and cash provided by  operations  of $178,499  during the
     year ended December 31, 2000. The Company had working capital of $1,867,959
     and $6,461,665 at December 31, 2001 and 2000, respectively. The increase in
     the net loss and substantial  decrease of working capital is due in part to
     certain non-cash expenses, including an increase in the inventory allowance
     for  obsolescence of $2,715,000,  an impairment of goodwill by $946,000,  a
     severance  accrual of  $658,000  for  employees  in Poder,  increase in the
     allowance  for bad debt of $158,000  and the  valuation  taken  against the
     deferred tax asset of $350,000.

     The  Company's  management  has  addressed the decrease in cash and working
     capital through the execution of the Securities Purchase Agreement in which
     the Company received  $1,250,000 in cash and developed a strategic alliance
     with Telkoor  Telecom,  Ltd  (Telkoor).  The Company's  management  team is
     currently  comprised  of  officers'  of Telkoor and if needed,  Telkoor has
     committed  to lend the  Company  and/or  make  further  investments  in the
     Company to sustain it operations.  See note 11 for additional  terms of the
     Telkoor investment.


<PAGE> F-11
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In management's  opinion,  these proceeds  combined with revenue from sales
     and Telkoor's  continued  commitment to protect its investment will provide
     sufficient cash flow to pay the Company's  obligations as they come due for
     at least the next year.

4. INVENTORIES:
   -----------

                                                    DECEMBER 31,
                                     -------------------------------------------
                                             2001                   2000
                                     -------------------    --------------------

      Raw materials                    $    3,831,093         $    4,329,160
      Work-in-process                         985,924              1,011,966
      Finished goods                          146,861                459,030
                                      ----------------       ----------------
                                            4,963,878              5,800,156
      Allowance for obsolescence           (2,964,710)              (656,532)
                                      ----------------       ----------------

                                       $    1,999,168         $    5,143,624
                                      ================       ================

     During  the year  ended  December  31,  2001,  the  Company  increased  the
     allowance  for  obsolescence   and  excess   inventories  by  approximately
     $2,715,000  which was a result of the  cancellation  of purchase  orders by
     customers,  excess  inventory  levels,  lack of sales  orders and delays in
     delivery  of  products  by two  customers.  The  additional  provision  for
     obsolete and excess inventory is included in the cost of sales.

5. PROPERTY AND EQUIPMENT:
   ----------------------

                                                     DECEMBER 31,
                                        ---------------------------------------
                                               2001                 2000
                                        ------------------   ------------------

      Machinery and equipment             $    1,503,030       $    1,441,203
      Office equipment and furniture             875,726              873,429
      Leasehold improvements                     525,846              539,777
      Transportation equipment                    81,089              103,839
                                         ----------------     ----------------
                                               2,985,691            2,958,248
      Accumulated depreciation
       and amortization                       (2,165,373)          (1,863,515)
                                         ----------------     ----------------
                                          $      820,318       $    1,094,733
                                         ================     ================

     Depreciation  expense  related to property and equipment for the year ended
     December 31, 2001,  2000,  and 1999 was $378,571,  $331,987,  and $343,882,
     respectively.


<PAGE> F-12
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. ACCRUED LIABILITIES:
   -------------------
                                                        DECEMBER 31,
                                           -------------------------------------
                                                 2001                 2000
                                           ------------------   ----------------
      Accrued payroll and benefits          $      167,129       $     147,115
      Accrued commissions and royalties            120,567             126,786
      Accrued warranty and product
        return expense                             201,094             324,602
      Income taxes payable                         190,175             308,627
      Severance accrual for PD employees           508,000                -
      Other                                        323,754             262,572
                                           -----------------    ----------------

                                            $    1,510,719       $   1,169,702
                                           =================    ================

     During the year ended December 31, 2001, the Company  recorded an estimated
     severance  liability related to its Mexican  subsidiary of $658,000.  There
     was no accrual recorded as of December 31, 2000. The severance accrual is a
     result of depressed  sales of the Company's  products in the United States,
     which has resulted in excess capacity of the workforce at its  Guadalajara,
     Mexico facility.  In addition,  the Company is considering moving a portion
     of its  manufacturing  to China which would increase the excess capacity at
     PD. The liability was reduced in September 2001 by $150,000 for the payment
     of severance as a result of a reduction of PD employees.

7. NOTES PAYABLE:
   -------------

     At  December  31, 2001 and 2000,  DPC has a line of credit of $750,000  and
     $3,000,000,  respectively,  pursuant to a promissory note agreement.  As of
     December  31, 2000,  the line of credit  provided  borrowings  up to 80% of
     eligible accounts receivable, plus 20% of inventory or $500,000,  whichever
     was  less,  not to  exceed a total of  $3,000,000.  During  the year  ended
     December  31,  2001,  the  line of  credit  was  adjusted  to only  provide
     borrowings up to 80% of eligible accounts receivable.  Borrowing under this
     line of credit  bears  interest  based upon an index equal to the  lender's
     prime  rate  (totaling  6.75%  and  9.50% at  December  31,  2001 and 2000,
     respectively),  interest only,  payable monthly with outstanding  principal
     due on demand.  If no demand is made, the outstanding  principal and unpaid
     accrued  interest is due April 15, 2002. At December 31, 2001 and 2000, the
     outstanding  principal  balance was  $652,261 and  $400,000,  respectively.
     Under the terms of the  agreement,  the  Company is  required  to  maintain
     certain ratios and be in compliance with other  covenants.  At December 31,
     2001 and 2000, the Company was in compliance with all covenants.

     At December  31, 2001 and 2000,  DPL has a  (pound)500,000  bank  overdraft
     facility pursuant to a loan agreement.  Borrowing under this line of credit
     bears interest at 2% per annum over the Bank's Base rate (totaling 6.5% and
     8.5% at December 31, 2001 and 2000,  respectively),  interest only, payable
     monthly with outstanding principal due on demand. If no demand is made, the
     outstanding  principal  and accrued  interest is due March 31, 2002. In the
     event  of the  loan  being  used,  the  loan  would  be  collateralized  by
     substantially  all of the DPL's  assets.  At December 31, 2001 and 2000, no
     principal or accrued interest was outstanding.

<PAGE> F-13
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.CAPITAL LEASE OBLIGATIONS:
  -------------------------

     The  Company  leases  certain   equipment  and  vehicles  under  agreements
     classified  as capital  leases.  The net book value of assets under capital
     leases  as of  December  31,  2001  and  2000  was  $59,229  and  $106,329,
     respectively.  Depreciation  expense of $39,545,  $52,147,  and $48,702 was
     recognized  for  the  years  ended  December  31,  2001,  2000,  and  1999,
     respectively.

     The future minimum lease payments as of December 31, 2001, are as follows:

                 YEARS ENDING
                 DECEMBER 31,                                  AMOUNT
      ----------------------------------               ---------------------
                    2002                                 $     45,736
                    2003                                       31,183
                                                       -----------------
      Total future minimum lease payments                      76,919
           Less amount representing interest                  (16,687)
                                                       -----------------
      Present value of net minimum lease
           payments                                            60,232
           Less current portion                               (35,856)
                                                       -----------------
                                                         $     24,376

9. PREFERRED STOCK:
   ---------------

     As of  December  31,  2001 and 2000,  the  preferred  stock has one  series
     authorized,  500,000 shares of Series A cumulative  redeemable  convertible
     preferred  stock  ("Series  A"),  and an  additional  1,500,000  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.
     As of  December  31,  2001  and  2000,  there  were  no  shares  issued  or
     outstanding.

10. NOTE RECEIVABLE - STOCKHOLDER:
    -----------------------------

     At December 31, 1999,  the Company had a note  receivable  in the amount of
     $52,000  due from a  former  employee  received  in  consideration  for the
     exercise of stock options. The note had an interest rate of 5% and was paid
     in full in February 2000.

11. COMMON STOCK:
    ------------

     In September  2001, the Company  executed a securities  purchase  agreement
     with Telkoor  Telecom,  Ltd.  (Telkoor)  for cash proceeds of $1,250,000 in
     exchange  for the  purchase  of  1,250,000  shares of common  stock and the
     issuance of 900,000  warrants to purchase common stock at an exercise price
     of $1.25 per share and an additional  1,000,000 warrants to purchase common
     stock  at  an  exercise  price  of  $1.50  per  share.  The  warrants  vest
     immediately  and  expire  during  the year  ended  December  31,  2003.  In
     addition,  the  Company's  Board of  Directors  will  appoint  a number  of
     individuals  recommended  by Telkoor  necessary to constitute a majority of
     the Board and the then current president and CEO, Robert Smith, resigned as
     president with an individual  selected by Telkoor appointed to the position
     of president and CEO.


<PAGE> F-14
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



12. STOCK OPTIONS AND WARRANTS:
    --------------------------

     Stock Options - 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.  The price of the options granted
     pursuant to the plan will not be less than 100% of the fair market value of
     the shares on the date of grant. The compensation committee of the Board of
     Directors  will decide the vesting  period of the  options,  if any, and no
     option will be exercisable after ten years from the date granted.

     In February 1998,  the Company  adopted the 1998 Stock Option Plan covering
     240,000  shares of common  stock.  Under the plan,  the  Company  can issue
     either incentive or non-qualified stock options.  The exercise price of the
     options  granted  pursuant  to the plan  will not be less  than 100% of the
     quoted  market  value of the  shares on the grant  date.  The  compensation
     committee of the Board of Directors  will  determine the vesting  period of
     the options,  if any, and no options  will be  exercisable  after ten years
     from the date of grant.

     During the year ended  December 31, 1999, the Company  granted  options for
     the purchase of 11,900 shares of the Company's  common stock under the 1998
     Stock Option Plan to certain employees.  The exercise prices of the options
     range  from  $1.5625 to  $1.8750  per share,  which was equal to the quoted
     market value on the date of grant. The options vest over 5 years at 25% per
     year starting in the second year.

     In April 2000,  the Company  adopted  the 2000 Stock  Option Plan  covering
     500,000  shares of common  stock.  Under the plan,  the  Company  can issue
     either incentive or non-qualified stock options.  The exercise price of the
     options  granted  pursuant  to the plan  will not be less  than 100% of the
     quoted  market  value of the  shares on the grant  date.  The  compensation
     committee of the Board of Directors  will  determine the vesting  period of
     the options,  if any, and no options  will be  exercisable  after ten years
     from the date of grant.

     During the years ended  December  31,  2001,  2000,  and 1999,  the Company
     issued in each year  non-qualified  options  for the  purchase  of  100,000
     shares  of the  Company's  common  stock to Mr.  Robert  Smith  who was the
     president of the Company  until his  resignation  on November 13, 2001,  in
     accordance  with his employment  agreement.  The exercise  prices of $1.63,
     $1.56,  and $1.88 per share were equal to the  quoted  market  value on the
     date of grant for the year ended 2001, 2000, and 1999,  respectively.  Such
     options vested immediately and expire beginning in 2009.

     During the year ended  December 31, 2001, the Company  granted  options for
     the  purchase  of 200,000  shares of the  Company's  common  stock to David
     Amitai, CEO and President, and 200,000 shares of the Company's common stock
     to Ben Zion Diamant, Chairman of the Board. The exercise price of $0.70 per
     share  was equal to the  quoted  market  value on the date of  grant.  Such
     options vest over 2 years at 50% per year starting in the second year.

     During each of the years ended  December  31,  2001,  2000,  and 1999,  the
     Company granted  non-qualified  options under the 1998 plan & 2000 plan for
     the  purchase of 30,000  shares of the  Company's  common  stock to outside
     directors.  The  exercise  prices  range from $0.70 to $2.38 per share were
     equal to the quoted value on the date of grant.  The options vest after one
     year and begin expiring in 2009.


<PAGE> F-15

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     During the year ended  December 31, 2001, the Company  granted  options for
     the purchase of 136,000 shares of the Company's common stock under the 2000
     Stock  Option Plan to certain  employees.  The  exercise  prices range from
     $0.70 to $1.18 per share were equal to the quoted  market value on the date
     of grant.  The options  vest over 4 or 5 years at 25% per year  starting in
     the second year.

     During the year ended  December 31, 2000, the Company  granted  options for
     the purchase of 117,500 shares of the Company's common stock under the 1996
     Stock Option Plan to certain  employees.  The  exercise  price of $2.38 per
     share  was  equal to the  quoted  market  value on the date of  grant.  The
     options vest over 5 years at 25% per year starting in the second year.

     During the year ended  December 31, 2000, the Company  granted  options for
     the purchase of 57,500 shares of the Company's  common stock under the 1998
     Stock Option Plan to certain  employees.  The  exercise  price of $2.38 per
     share  was  equal to the  quoted  market  value on the date of  grant.  The
     options vest over 5 years at 25% per year starting in the second year.

     During the year ended  December 31, 2000, the Company  granted  options for
     the purchase of 53,000 shares of the Company's  common stock under the 2000
     Stock Option Plan to certain  employees.  The exercise price of the options
     ranges from $2.38 to $3.88 per share were equal to the quoted  market value
     on the  date of  grant.  The  options  vest  over 5 years  at 25% per  year
     starting in the second year.

     During the year ended  December 31, 1999, the Company  granted  options for
     the purchase of 70,000 shares of the Company's  common stock under the 1996
     Stock  Options Plan to certain  employees.  The exercise  prices range from
     $1.69 to $2.00 per share,  which was equal to the fair market  value on the
     date of grant.  The options  vest over 5 years at 25% per year  starting in
     the second year.

     The following table sets forth activity for all options:

                                                                   WEIGHTED
                                             NUMBER OF         AVERAGE EXERCISE
                                               SHARES          PRICE PER SHARE
                                        -------------------  -------------------
      OUTSTANDING,  January 1, 1999          1,065,930         $      2.19
               Granted                         211,900                1.90
               Forfeited                      (194,200)               2.42
                                        -----------------    ------------------

      OUTSTANDING,  December 31, 1999        1,083,630                2.09
               Granted                         366,000                2.16
               Forfeited                       (26,665)               3.31
               Exercised                      (484,245)               1.56
                                        -----------------    ------------------

      OUTSTANDING,  December 31, 2000          938,720                2.39
               Granted                         691,000                0.90
               Forfeited                       (86,625)               2.10
                                        -----------------    ------------------

      OUTSTANDING,  December 31, 2001        1,543,095                1.74
                                        ================     ==================



<PAGE> F-16
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     At December 31, 2001,  options to purchase  40,000 shares,  with a weighted
     average  exercise price of $6.06,  were  exercisable at prices ranging from
     $6.00 to $6.25 per share. These options have a weighted average contractual
     life of 6.25 years.

     At December 31, 2001,  options to purchase  729,296  shares,  respectively,
     were  exercisable  with  exercise  prices  ranging  from $1.56 to $3.88 per
     share, a weighted  average  exercise price of $2.05, and a weighted average
     remaining contractual life of 7.45 years. The remaining unvested options of
     773,799 have exercise prices ranging from $.70 to $1.18, a weighted average
     contractual life of 9.76 years, and are exercisable as follows:

                                                             WEIGHTED AVERAGE
                                         NUMBER OF            EXERCISE PRICE
      YEAR ENDING DECEMBER 31,             SHARES
      ------------------------      ---------------------  ---------------------
              2002                         122,337             $    1.77
              2003                         330,962                  1.17
              2004                         279,000                  1.02
              2005                          31,500                  0.81
              2006                          10,000                  0.70
                                    ----------------         ----------------
                                           773,799             $    1.19
                                    ================         ================

     If not previously exercised the outstanding options will expire as follows:


                                         NUMBER OF           WEIGHTED AVERAGE
      YEAR ENDING DECEMBER 31,             SHARES             EXERCISE PRICE
      ------------------------      ---------------------  ---------------------
             2003                           30,500             $    1.80
             2006                           78,250                  1.80
             2007                          105,500                  2.31
             2008                          317,845                  2.78
             2009                          100,000                  1.95
             2010                          245,000                  2.39
             2011                          666,000                  0.87
                                    ----------------         ----------------
                                         1,543,095             $    1.74
                                    ================         ================

     Warrants -In December 1996, in connection with the initial public offering,
     the Company  granted  warrants  for the  purchase of 150,000  shares of the
     Company's  common  stock.  The exercise  prices of the warrants  range from
     $4.80 to $5.00 per share.  The warrants  vested  immediately and expired in
     2001.

     During March 1997, the Company granted  warrants for the purchase of 15,000
     shares of the Company's  common stock in connection  with investor  related
     services  provided to the Company.  The warrants have an exercise  price of
     $6.75 per share, vested immediately and expire in 2002.

     In January 1998, the Company issued  warrants to purchase  30,000 shares of
     the Company's  common stock in connection  with investor  related  services
     provided to the Company.  The warrants have an exercise  price of $7.00 per
     share, vested immediately and expired in 2001.


<PAGE> F-17
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In October 2000, the Company issued  warrants to purchase  60,000 shares of
     common stock at $3.88 per share to an investor  relations firm for services
     provided.  Compensation expense of $117,555 was recognized upon issuance of
     the  warrants.  The warrants  are  immediately  exercisable  and expired in
     October 2001.

     See  footnote  11 for  additional  warrants  issued  during  the year ended
     December 31, 2001.

     The following sets forth the activity for all warrants:


                                             NUMBER OF         AVERAGE EXERCISE
                                               SHARES          PRICE PER SHARE
                                        -------------------  -------------------
      OUTSTANDING, January 1, 1999              838,090          $   5.09
              Expired                          (643,090)             5.00
                                          ----------------     --------------
      OUTSTANDING, December 31, 1999            195,000              5.38
              Granted                            60,000              3.88
                                          ----------------      --------------
      OUTSTANDING, December 31, 2000            255,000              5.03
              Granted                         1,900,000              1.43
              Expired                          (240,000)             4.92
                                          ----------------    ----------------
      OUTSTANDING, December 31, 2001          1,915,000         $    1.42
                                          ================    ================

     As stated in Note 2, the Company has not adopted the fair value  accounting
     prescribed  by  FASB123  for  employees.  Had  compensation  cost for stock
     options or warrants issued to employees been  determined  based on the fair
     value at grant date for awards in 2001, 2000, and 1999, consistent with the
     provisions  of  FASB123,  the  Company's  net income  (loss) and net income
     (loss) per share would have been reduced to the proforma amounts  indicated
     below:
<TABLE>
<S>                               <C>                       <C>                      <C>

                                           2001                    2000                     1999
                                  ---------------------    --------------------     --------------------

      Net loss                        $  (7,413,887)           $    (158,079)           $    (320,445)
                                    ================         ================         ================
      Net loss per common share:
          Basic and diluted           $       (2.18)           $       (0.05)           $       (0.12)
                                    ================         ================         ================

</TABLE>

     The fair value of each option or warrant was estimated on the date of grant
     using  the   Black-Scholes   option   pricing  model  using  the  following
     assumptions for grants in 2001, 2000, and 1999:  average risk-free interest
     rates ranging from 4.23% to 5.6%,  expected life of five years for 2001 and
     2000 and an expected life of two years for 1999,  dividend yield of 0%; and
     expected volatility ranging from 55.0% to 125.9%. The weighted-average fair
     value of the  options on the grant date for the years  ended  December  31,
     2001, 2000, and 1999 was $0.70, $0.94, and $2.09 per share, respectively.



<PAGE> F-18
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



13. NET INCOME (LOSS) PER COMMON SHARE:
    ----------------------------------
     The following  represents  the  calculation of net income (loss) per common
     share:
<TABLE>
<S>                                                                 <C>                <C>                <C>
                                                                           2001              2000               1999
                                                                    -----------------  -----------------  ----------------
         BASIC
         Net income (loss) applicable to common shareholders          $   (7,040,720)    $      95,167      $     33,427
                                                                    =================  ================   ===============

         Weighted average number of common shares                          3,407,930         2,939,034         2,771,435
                                                                    =================  ================   ===============

         Basic earnings (loss) per share                              $        (2.07)    $        0.03      $       0.01
                                                                    =================  ================   ===============

         DILUTED
         Net income (loss) applicable to common shareholders          $   (7,040,720)    $      95,167      $     33,427
                                                                    =================  ================   ===============

         Weighted average number of common shares                          3,407,930         2,939,034         2,771,435

         Common stock equivalent shares representing shares
           issuable upon exercise of stock options                     Anti-dilutive           336,349            61,447
         Weighted average number of shares used in calculation of
           diluted earnings per share                                      3,407,930         3,275,383         2,832,882
                                                                    -----------------  ----------------   ---------------

         Diluted earnings (loss) per share                            $        (2.07)    $        0.03     $        0.01
                                                                    =================  ================   ===============

</TABLE>


14. COMMITMENTS:
    -----------

     LEASES - The Company leases its office space in California, a manufacturing
     facility in Guadalajara,  Mexico, and the facility and certain equipment in
     the UK under operating leases. The total future minimum lease payments,  as
     of December 31, 2001, are as follows:

      YEARS ENDING DECEMBER 31,
      -------------------------
                2002                          $     327,440
                2003                                287,760
                2004                                304,312
                2006                                310,012
                2006                                132,362
                                            ----------------
                                              $   1,361,886
                                            ================

     Lease  payments on the  manufacturing  facility in Mexico are to be made in
     Mexican  Pesos.  Lease payments on the facility and equipment in the UK are
     to be made in GB pound-sterling.  The above schedule was prepared using the
     conversion rates in effect at December 31, 2001.  Changes in the conversion
     rate will have an impact on the Company's required minimum payments and its
     operating results.


<PAGE> F-19
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Rent  expense was  $350,152,  $172,560,  and  $253,530  for the years ended
     December 31, 2001, 2000, and 1999, respectively.

     Termination  Of Employment  Agreement/Entering  Consulting  Agreement - The
     Company  entered  into  a  Termination  of  Employment   Agreement/Entering
     Consulting  Agreement  on November  13,  2001 with  Robert O.  Smith.  This
     Consulting  Agreement  will  continue  in effect  for a period of three (3)
     years unless terminated or extended upon mutual agreement.  Under the terms
     of the  agreement,  Mr.  Smith agrees to assist the Company in managing its
     power supply business and related projects.  The agreement requires payment
     of $l00,000  per annum,  at the end of each  calendar  year or pro rated by
     month.  At December 31, 2001,  the Company has $15,000  accrued  under this
     agreement.  Mr.  Smith is  entitled to receive  options to acquire  l00,000
     shares of Digital  Power's  common  stock on an annual  basis  beginning on
     January  l, 2002  pursuant  to  Digital  Power's  stock  option  plan at an
     exercise price of $3.00 per share. Mr. Smith has the opportunity to sell to
     Telkoor  Telecom,  Ltd up to 50% of the common stock held by him, but under
     no circumstances more than 5% of the issued and outstanding common stock of
     the Company on a fully diluted basis as of the date of the sale.

15. MAJOR CUSTOMERS:
    ---------------

     The  Company   frequently  sells  large  quantities  of  inventory  to  its
     customers.  For the year ended December 31, 2001,  two customers  accounted
     for 36% of the  Company's net sales.  For the year ended  December 31, 2000
     and 1999, three customers  accounted for 29% of the Company's net sales and
     two customers  accounted for 11% of the Company's net sales,  respectively.
     Of the  Company's  consolidated  revenues  for the year ended  December 31,
     2001, 63% of revenues were earned from customers in the United States,  30%
     from  customers  in the United  Kingdom,  and 7% for the rest of the world.
     Consolidated  revenues for the year ended December 31, 2000 were earned 70%
     from  customers  in the United  States,  21% from  customers  in the United
     Kingdom,  and 9% for the rest of the world.  Consolidated  revenues for the
     year ended  December 31, 1999 were earned 59% from  customers in the United
     States,  29% from customers in the United Kingdom,  and 12% for the rest of
     the world

     For the year ended December 31, 2001,  2000, and 1999, DPL contributed 37%,
     29%, and 42%,  respectively,  of the Company's revenues. No one customer of
     DPL contributed greater than 10% of the Company's consolidated revenues for
     the years ended December 31, 2001, 2000, and 1999.



16. EMPLOYEE BENEFIT PLANS:
    ----------------------

     401(K) PROFIT  SHARING PLAN - 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 $12,238,  $12,665,  and $11,400 for years ended  December 31, 2001,
     2000, and 1999, respectively.


<PAGE> F-20
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Company's  subsidiary  DPL, has a group personal  pension plan covering
     substantially all of its employees.  Eligible  employees may make voluntary
     contributions to the plan. The Company will contribute 7% of the employees'
     basic annual salary to the plan. Contributions are charged to operations as
     incurred.  The Company made contributions  totaling $55,334,  $66,908,  and
     $71,400 to the plan for the years ended December 31, 2001,  2000, and 1999,
     respectively.

     EMPLOYEE  STOCK  OWNERSHIP  PLAN - 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.

     Effective June 13, 1996, the ESOP obtained a $500,000,  loan  guaranteed by
     the Company for the purpose of  acquiring  common stock of the Company from
     existing  stockholders.  The  loan  bore  interest  at 8.5% per  annum  and
     required  monthly payments of principal and interest of $8,852 through June
     2000.   Immediately   upon  funding  of  the  loan,   the  ESOP   purchased
     approximately  167,504  shares of the Company's  common stock from existing
     stockholders. The Company was required to contribute amounts to the plan to
     sufficiently  cover the debt  payments.  Contributions  to the plan in 1999
     were $184,919.

17. INCOME TAXES:
    ------------

     Income tax expense (benefit)is comprised of the following:

                                    FOR THE YEARS ENDED
                                        DECEMBER 31,
                     -----------------------------------------------------------
                              2001               2000              1999
                       -----------------  -----------------  -----------------
      Current
          Federal        $         -        $    60,000        $   (28,000)
          State                  800             21,000              1,000
          Foreign            (36,506)            23,000            143,000
                       -----------------  -----------------  -----------------
                             (35,706)           104,000            116,000
                       -----------------  -----------------  -----------------

      Deferred
          Federal            299,995                  -              2,000
          State               50,528                  -              5,000
          Foreign            (15,934)                 -                  -
                       -----------------  -----------------  -----------------
                             334,589                  -              7,000
                       -----------------  -----------------  -----------------

                         $   298,883          $ 104,000        $   123,000
                       =================  =================  =================


<PAGE> F-21
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The  components of the net deferred tax asset and liability  recognized are
     as follows:
<TABLE>
<S>                                                                <C>                    <C>

                                                                                   DECEMBER 31,
                                                                   --------------------------------------------
                                                                          2001                    2000
                                                                   --------------------   ---------------------
      Current deferred tax assets (liabilities):
          Accounts receivable, principally due to allowance for
               doubtful accounts                                     $      148,518          $      92,723
          Compensated absences, principally due to accrual for
               financial reporting purposes                                  21,422                 30,317
          Accrued commissions                                                28,326                  2,267
          Accrued payroll                                                    10,035                      -
          Accrued severance                                                 203,911                      -
          Inventory reserve                                               1,190,035                204,714
          Warranty reserve                                                   64,764                100,350
          Stock rotation liability                                           20,070                 20,070
          UNICAP                                                             28,546                 16,104
          Accrued liabilities                                                66,065                      -
          Other                                                                (272)               (16,758)
                                                                   --------------------   ---------------------
                                                                          1,781,420                449,787
               Valuation allowance                                       (1,781,420)              (115,750)
                                                                   --------------------   ---------------------
               Net current deferred tax asset                        $            -         $      334,037
                                                                   ====================   =====================
      Long-term deferred tax assets (liabilities):
          Net operating loss carryforwards                           $    1,935,548         $       36,300
          UNICAP credit carryforward                                         74,167                      -
          Goodwill                                                          505,188                127,290
          Depreciation                                                       56,618                 24,142
                                                                   --------------------   ---------------------
                                                                          2,571,521                187,732
                           Valuation allowance                           (2,571,521)              (187,732)
                                                                   --------------------   ---------------------
                           Net long-term deferred tax liability      $            -         $            -
                                                                   ====================   =====================
</TABLE>
     Total income tax expense differed from the amounts computed by applying the
     U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<S>                                                                 <C>               <C>              <C>

                                                                                      For the Years Ended
                                                                                         DECEMBER 31
                                                                   -----------------------------------------------------
                                                                        2001               2000               1999
                                                                   ----------------   ---------------    ---------------
      Total expense computed by applying the U.S. statutory rate
                                                                       (34.0%)             34.0%              34.0%
      Permanent differences                                             (0.1)               5.1                2.3
      State income taxes                                                 0.2               10.9                3.8
      Tax effect resulting from foreign activities                       8.0             (101.0)              41.5
      Change in valuation allowance                                     (5.3)             105.2                0.0
      Change in beginning deferred asset                                35.6                0.0                0.0
      Other                                                              0.0                0.3                0.0
                                                                   ----------------   ---------------    ---------------
                                                                         4.4%              54.5%              81.6%
                                                                   ================   ===============    ===============

</TABLE>


<PAGE> F-22
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company will continue to assess the  realizability  of the deferred tax
     assets in future periods.  The valuation  allowance increased by $4,049,459
     during the year ended  December  31, 2001.  During March 2001,  the Company
     fully  valued the  deferred  tax asset  recorded  at  December  31, 2000 of
     $350,523 due to the  uncertainty of the Company's  ability to recognize the
     benefit of the deferred tax asset in the future.  The  valuation  allowance
     increased by $212,559 during the year ended December 31, 2000.

     At December 31, 2001, the Company has net operating loss  carryforwards for
     Federal tax purposes of  approximately  $3,599,674 which begin to expire in
     the year 2020. The Company has California net operating loss  carryforwards
     as of December 31, 2001 of  $1,854,876  which  expire  through  2011.  As a
     result of certain  non-qualified stock options,  which have been exercised,
     the tax benefit from the utilization of the net operating loss carryforward
     will be charged to  additional-paid in capital when, and if, the losses are
     utilized.  The net operating  loss may be subject to Internal  Revenue Code
     Section 382 limitations.

     No  provision  has been made for U.S.  Federal  and state  income  taxes or
     foreign taxes that may result from future  remittance of the  undistributed
     earnings of foreign  subsidiaries because it is expected that such earnings
     will be reinvested  overseas  indefinitely.  Determination of the amount of
     any unrecognized deferred income tax liability on these unremitted earnings
     is not practicable.


<PAGE> F-23
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. SEGMENT REPORTING:
    -----------------

     The  Company  has   identified  its  segments  based  upon  its  geographic
     operations.  These  segments  are  represented  by  each  of the  Company's
     individual legal entities: DPC, PD and DPL. Segment operations are measured
     consistent with accounting  policies used in these  consolidated  financial
     statements. Segment information is as follows:
<TABLE>
<S>                              <C>                  <C>                 <C>              <C>                <C>

                                                                     December 31, 2001
                                                                    -------------------
                                     DPC                 PD                DPL            Eliminations          Totals
                              ------------------  -----------------  -----------------  ------------------ ------------------

      Revenues                  $    6,475,533      $           -      $   3,854,324      $            -     $   10,329,857
                              ==================  =================  =================  ================== ==================
      Intersegment
        Revenues                $            -      $     778,450      $     599,848      $   (1,378,298)    $            -
                              ==================  =================  =================  ================== ==================

      Interest Income           $       24,350      $         310      $      12,519      $      (24,350)    $       12,829
                              ==================  =================  =================  ================== ==================

      Interest Expense          $       56,874      $           -      $      30,937      $      (24,350)    $       63,461
                              ==================  =================  =================  ================== ==================
      Depreciation and
        Amortization            $      196,555      $     139,526      $     114,671      $            -     $      450,752
                              ==================  =================  =================  ================== ==================

      Income Tax                $      350,523      $      11,356      $     (62,996)     $            -     $      298,883
                              ==================  =================  =================  ================== ==================

      Net Income(loss)          $   (5,360,730)     $  (1,596,321)     $    (207,140)     $      123,471     $   (7,040,720)
                              ==================  =================  =================  ================== ==================
      Expenditures for
        Segment Assets          $      104,257      $       5,424      $      23,600      $            -     $      133,281
                              ==================  =================  =================  ================== ==================

      Segment Assets            $    6,833,699      $     409,601      $   2,562,562      $   (3,292,803)    $    6,513,059
                              ==================  =================  =================  ================== ==================
</TABLE>


<PAGE> F-24
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S>                            <C>                <C>               <C>                <C>                 <C>

                                                                     December 31, 2000
                                                                    -------------------
                                     DPC                 PD                DPL            Eliminations          Totals
                              ------------------  -----------------  -----------------  ------------------ ------------------

      Revenues                  $   12,721,567      $      15,302      $   5,145,861      $            -     $   17,882,730
                              ==================  =================  =================  ================== ==================
      Intersegment Revenues
                                $            -      $   3,026,933      $     483,394      $   (3,510,327)    $            -
                              ==================  =================  =================  ================== ==================

      Interest Income           $       63,010      $       1,742      $       5,711      $      (40,543)    $       29,920
                              ==================  =================  =================  ================== ==================

      Interest Expense          $       79,997      $       2,021      $      49,517      $      (40,543)    $       90,992
                              ==================  =================  =================  ================== ==================
      Depreciation and
        Amortization            $      303,890      $      54,346      $     117,751      $            -     $      475,987
                              ==================  =================  =================  ================== ==================
      Income Tax Expense
                                $       80,000      $           -      $      24,000      $            -     $      104,000
                              ==================  =================  =================  ================== ==================

      Net Income                $     (525,919)     $     179,333      $     441,753      $            -     $       95,167
                              ==================  =================  =================  ================== ==================
      Expenditures for
        Segment Assets          $      133,972      $      19,517      $      65,425      $            -     $      218,914
                              ==================  =================  =================  ================== ==================

      Segment Assets            $   10,674,886      $     180,624      $   2,631,015      $   (1,321,475)    $   12,165,050
                              ==================  =================  =================  ================== ==================

                                                                      December 31, 1999
                                                                     -------------------
                                     DPC                 PD                DPL            Eliminations          Totals
                              ------------------  -----------------  -----------------  ------------------ ------------------
      Revenues                  $    9,085,554      $      19,989      $   6,428,475      $            -     $   15,354,018
                              ==================  =================  =================  ================== ==================
      Intersegment Revenues
                                $            -      $   2,150,000      $     221,138      $   (2,371,138)    $            -
                              ==================  =================  =================  ================== ==================

      Interest Income           $      128,106      $       3,806      $      12,936      $     (113,913)    $       30,935
                              ==================  =================  =================  ================== ==================

      Interest Expense          $      130,173      $       7,098      $     154,985      $     (113,913)    $      178,343
                              ==================  =================  =================  ================== ==================
      Depreciation and
        Amortization            $      161,490      $      49,357      $     289,844      $            -     $      500,691
                              ==================  =================  =================  ================== ==================
      Income Tax Expense        $      (20,000)     $           -      $     143,000      $            -     $      123,000
                              ==================  =================  =================  ================== ==================
      Net Income                $      (67,081)     $     (70,437)     $     170,945      $            -     $       33,427
                              ==================  =================  =================  ================== ==================
      Expenditures for
        Segment Assets          $       42,282      $      51,686      $      93,794      $            -     $      187,762
                              ==================  =================  =================  ================== ==================
      Segment Assets            $    9,251,925      $     829,095      $   4,924,991      $   (3,845,178)    $   11,160,833
                              ==================  =================  =================  ================== ==================
</TABLE>


<PAGE> F-25














                            SUPPLEMENTAL INFORMATION




<PAGE> F-26

                          INDEPENDENT AUDITOR'S REPORT
                           ON SUPPLEMENTAL INFORMATION

                                                                            PAGE
                                                                            ----

Independent Auditor's Report on Supplemental Information....................F-27

Schedule 1 - Balance Sheets, Digital Power Corporation - Parent
 Company Only, Equity Basis - December 31, 2001 and 2000....................F-28

Schedule 2 - Statements of Operations, Digital Power Corporation -
 Parent Company Only, Equity Basis - For the Years Ended
 December 31, 2001, 2000 and 1999 ..........................................F-29

Schedule 3 -Statements of Cash Flows, Digital Power Corporation -
 Parent Company Only, Equity Basis - For the Years Ended
 December 31, 2001, 2000 and 1999...........................................F-30

Supplemental Schedules of Consolidated Company Expenses
      Schedule 4 - Consolidated details of Cost of Goods Sold -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-32
      Schedule 5 - Consolidated details of Marketing and Selling  -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-34
      Schedule 6 -Consolidated details of General and Administrative -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-35
      Schedule 7 -Consolidated details of Intercompany Income -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-36



<PAGE> F-27

                          INDEPENDENT AUDITOR'S REPORT
                          ON SUPPLEMENTAL INFORMATION

To the Stockholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California


Our  report on our audits of the basic  financial  statements  of Digital  Power
Corporation  and  subsidiaries  for the years ended  December  31, 2001 and 2000
appears on page F-2.  The audits  were  conducted  for the purpose of forming an
opinion on the basic financial  statements  taken as a whole.  The  supplemental
information  contained in Schedules 1 through 7 is presented for the purposes of
additional analysis for the Company's majority shareholder, Telkoor Telecom Ltd,
for their filing under the Israeli Securities Regulations (preparation of Annual
Financial  Statements),  of  1933  and  are not a  required  part  of the  basic
financial  statements.  Such  information  has been  subjected  to the  auditing
standards  generally  accepted in the United States of America and International
Auditing  Standards  as applied in the audit of the basic  financial  statements
and, in our opinion,  is fairly  stated in all material  respects in relation to
the basic financial statements taken as a whole.


/S/ Hein + Associates LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants


Orange, California
February 19, 2002








<PAGE> F-28
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 1
                                 BALANCE SHEETS
<TABLE>
<S>                                                                   <C>                     <C>
                                                                           DECEMBER 31,             DECEMBER 31,
                                                                               2001                     2000
                                                                      ----------------------  ------------------------
                             ASSETS
                             ------
CURRENT ASSETS:
     Cash and cash equivalents                                             $   1,059,790           $     483,513
     Accounts receivable - trade, net of allowance for doubtful
      accounts of $370,000 and $231,000 at December 31, 2001 and
      2000, respectively                                                         998,746               1,843,122
     Income tax refund receivable                                                      -                 179,200
     Inventories, net                                                          1,204,634               3,896,705
     Prepaid expenses and deposits                                                43,591                 208,275
     Deferred income taxes                                                             -                 350,523
                                                                          ----------------        ----------------
         Total current assets                                                  3,306,761               6,961,338

PROPERTY AND EQUIPMENT, net                                                      216,225                 260,731
INVESTMENT IN AND ADVANCES TO PODER DIGITAL  (1)                                  65,249                 190,317
INVESTMENT IN AND ADVANCES TO DIGITAL POWER LIMITED (2)                        1,347,121               3,617,294
OTHER ASSETS                                                                      17,910                  17,910
                                                                          ----------------        ----------------
                                                                           $   4,953,266           $  11,047,590
                                                                          ================        ================
TOTAL ASSETS
                                          LIABILITIES AND STOCKHOLDERS' EQUITY
                                          ------------------------------------
CURRENT LIABILITIES:
     Notes payable                                                               652,261                 400,000
     Accounts payable                                                          1,112,217               1,462,944
     Accrued liabilities                                                         503,378                 643,372
                                                                          ----------------        ----------------
         Total liabilities                                                     2,267,856               2,506,316
                                                                          ----------------        ----------------
STOCKHOLDERS' EQUITY:
     Preferred stock issuable in series, no par value, 2,000,000
         shares authorized, no shares issued or outstanding at
         December 31, 2001 or 2000                                                     -                       -
     Common stock, no par value, 10,000,000 shares authorized,
         4,510,680 and 3,260,680 shares issued and outstanding for
         December 31, 2001 and 2000, respectively                             11,036,251               9,786,251
     Additional paid in capital                                                  733,256                 733,256
     Accumulated deficit                                                      (8,771,654)             (1,730,934)
     Accumulated other comprehensive loss                                       (312,443)               (247,299)
                                                                          ----------------        ----------------
         Total stockholders' equity                                            2,685,410               8,541,274
                                                                          ----------------        ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $   4,953,266           $  11,047,590
                                                                          ================        ================

(1)  Investment in Poder Digital  includes capital stock and additional paid in capital of $1,016,175 at December 31, 2001 and 2000.
     In addition, the investment includes incompany advances (liabilities) of $1,289,642 and ($702,178), retained earnings (deficit)
     of ($2,240,568) and ($109,718) and other comprehensive loss related to the translation adjustment of $0 and ($13,962) at
     December 31, 2001 and 2000, respectively.

(2)  Investment in Digital Power Limited includes capital stock and additional paid in capital of $1,119,051 at December 31, 2001
     and 2000. In addition, the investment includes incompany accounts receivable of $309,822 and $184,543, a long-term interest
     bearing note receivable of $1,160,647 and $2,251,589, retained earnings (deficit) of ($929,956) and $295,448 and other
     comprehensive loss related to the translation adjustments of ($312,443) and ($233,337) at December 31, 2001 and 2000,
     respectively.

/s/ David Amitai                                                        3/30/02
----------------------------------------------------------------  --------------------------------------------------------
DAVID AMITAI, PRESIDENT AND CEO                                   DATE

</TABLE>


<PAGE> F-29
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 2
                             STATEMENTS OF OPERATION

<TABLE>
<S>                                                               <C>                  <C>                   <C>
                                                                                   FOR THE YEARS ENDED
                                                                                       DECEMBER 31,
                                                                  -------------------------------------------------------
                                                                         2001               2000               1999
                                                                  -----------------  -----------------  -----------------

REVENUES                                                           $   6,475,533       $  12,721,567     $   9,085,554
COST OF GOODS SOLD                                                     7,155,132          10,043,846         7,313,704
                                                                  ----------------    ----------------  ----------------

     Gross margin (loss)                                                (679,599)          2,677,721         1,771,850
                                                                  ----------------    ----------------  ----------------

OPERATING EXPENSES:
     Research and development                                            825,787             928,348           674,566
     Marketing and selling                                               407,445             638,573           347,589
     General and administrative                                        1,364,380           1,105,805           834,709
                                                                  ----------------    ----------------  ----------------

         Total operating expenses                                      2,597,612           2,672,726         1,856,864
                                                                  ----------------    ----------------  ----------------

INCOME (LOSS) FROM OPERATIONS                                         (3,277,211)              4,995           (85,014)
                                                                  ----------------    ----------------  ----------------

OTHER INCOME (EXPENSE):
     Interest income                                                      24,350              63,010           128,106
     Interest expense                                                    (56,874)            (79,997)         (130,173)
     Gain (loss) on disposal of assets                                   (24,208)                  -                 -
                                                                  ----------------    ----------------  ----------------
         Other (expense)                                                 (56,732)            (16,987)           (2,067)
                                                                  ----------------    ----------------  ----------------

INCOME (LOSS) BEFORE INTEREST IN SUBSIDARIES AND INCOME TAXES
                                                                      (3,333,943)            (11,992)          (87,081)

INCOME TAX PROVISION (BENEFIT)                                           350,523              80,000           (20,000)
                                                                  ----------------    ----------------  ----------------

INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDARIES                (3,684,466)            (91,992)          (67,081)

EQUITY IN EARNINGS OF PODER DIGITAL                                   (2,130,850)            179,333           (70,437)
EQUITY IN EARNINGS OF DIGITAL POWER LIMITED                           (1,225,404)              7,826           170,945
                                                                  ----------------    ----------------  ----------------

NET INCOME (LOSS)                                                  $  (7,040,720)      $      95,167     $      33,427
                                                                  ================    ================  ================

</TABLE>


<PAGE> F-30
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 3
                            STATEMENTS OF CASH FLOWS
<TABLE>
<S>                                                               <C>                  <C>                 <C>

                                                                                     FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------
                                                                         2001              2000                1999
                                                                  -----------------  -----------------  -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                               $  (7,040,720)      $     95,167      $      33,427
     Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
        Equity in earnings of Poder Digital S.A de C.V                   2,130,850           (179,333)            70,437
        Equity in earnings of Digital Power Limited                      1,225,404             (7,826)          (170,945)
        Depreciation and amortization                                      124,555            159,890            161,490
        (Gain) loss on disposal of assets                                   24,208                  -                  -
        Deferred income taxes                                              350,523                (22)             8,499
        Warranty expense                                                   (88,655)            55,000           (110,000)
        Increase in provision for inventory obsolescence and
           excess                                                        2,454,710                  -             30,000
        Contribution to ESOP                                                     -                  -            184,919
        Bad debt expense                                                   139,000             21,000            (75,000)
        Compensation cost recognized upon issuance of warrants
                                                                                 -            117,555                  -
        Income tax benefit related to exercise of stock options
                                                                                 -            101,397                  -
        Stock issued for services                                                              19,375                  -
     Changes in operating assets and liabilities:
        Accounts receivable                                                705,376           (485,733)           383,265
        Income tax refund receivable                                       179,200           (108,212)           321,658
        Inventories                                                        237,361           (949,613)           241,206
        Prepaid expenses                                                   164,683           (151,585)            17,945
        Net change in subsidiaries receivable (payable)                 (1,026,157)           314,614            (83,459)
        Other assets                                                             -             (8,835)             2,408
        Accounts payable                                                  (350,703)           721,422            275,701
        Accrued liabilities                                                (51,362)            55,899           (464,165)
        Other long-term liabilities                                              -            (25,000)           (10,043)
                                                                    ----------------   ----------------   ----------------
              Net cash provided by (used in) operating activities
                                                                          (821,727)          (254,840)           817,343
                                                                    ----------------   ----------------   ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of property and equipment                                   (104,257)          (133,972)           (42,282)
                                                                    ----------------   ----------------   ----------------
              Net cash (used in) investing activities                     (104,257)          (133,972)           (42,282)
                                                                    ----------------   ----------------   ----------------
</TABLE>


<PAGE> F-31
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 3
                             STATEMENT OF CASH FLOWS
                                   (Continued)
<TABLE>
<S>                                                               <C>                <C>                <C>


                                                                                    FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------
                                                                         2001               2000               1999
                                                                  -----------------  -----------------  -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options and warrants                           -           754,197                  -
   Proceeds received (payments made) on notes payable                       252,261          (540,000)          (650,000)
   Principal payments on capital lease obligations                                -                 -             (6,094)
   Principal payments on notes payable                                            -                 -           (184,919)
   Investment from Telkoor Telecom, Ltd.                                  1,250,000                 -                  -
                                                                    ----------------   ----------------   ----------------
     Net cash provided by financing activities                            1,502,261           214,197           (841,013)
                                                                    ----------------   ----------------   ----------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                     576,277          (174,615)           (65,952)

CASH AND CASH EQUIVALENTS, beginning of period                              483,513           658,128            724,080
                                                                    ----------------   ----------------   ----------------

CASH AND CASH EQUIVALENTS, end of period                               $  1,059,790       $   483,513        $   658,128
                                                                    ================   ================   ================

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash payments for:
     Interest                                                          $    56,874        $    81,637        $   120,129
                                                                    ================   ================   ================
     Income taxes                                                      $         -        $   180,000        $         -
                                                                    ================   ================   ================
</TABLE>




<PAGE> F-32


                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES

<TABLE>
<S>                                 <C>                  <C>                 <C>                <C>                 <C>

SCHEDULE 4 - COST OF GOODS SOLD:
-------------------------------
                                                                 FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Materials consumed                 $    5,593,586      $    3,241,585      $          -       $           -      $    8,835,171
   Labor                                   1,397,591             508,023         2,966,709          (1,384,298)          3,488,025
   Contracted labor                               64              54,705                 -                   -              54,769
   Depreciation                               37,365                   -            49,708                   -              87,073
   Other manufacturing costs                 464,737                   -               944                   -             465,681
   Changes in finished goods and
     work-in-process                        (338,211)           (652,523)                -                   -            (990,734)
                                    ------------------  ------------------  ----------------    ----------------   -----------------

                                      $    7,155,132      $    3,151,790      $  3,017,361        $ (1,384,298)   $     11,939,985
                                    ==================  ==================  ================    ================   =================


                                                                 FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Materials consumed                 $    5,651,520      $    3,796,660      $          -       $    (483,394)     $    8,964,786
   Labor                                   3,669,294             637,879         2,554,990          (3,026,933)          3,835,230
   Contracted labor                           20,718              91,592                 -                   -             112,310
   Depreciation                               47,967                   -            58,613                   -             106,580
   Other manufacturing costs                 368,271            (916,138)          248,748                   -            (299,119)
   Changes in finished goods and
     work-in-process                         286,076             217,578                 -                   -             503,654
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $   10,043,846      $    3,827,571      $  2,862,351       $  (3,510,327)     $   13,223,441
                                    ==================  ==================  ================   =================  ==================

</TABLE>

<PAGE> F-33

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
<TABLE>
<S>                                 <C>                  <C>                 <C>                <C>               <C>




                                                                 FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                  DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Materials consumed                 $    4,221,683      $    4,067,212      $          -       $    (221,138)     $    8,067,757
   Labor                                   2,746,727             639,557         1,919,654          (2,150,004)          3,155,934
   Contracted labor                            4,618             133,765                 -                   -             138,383
   Depreciation                               48,447                   -            39,283                   -              87,730
   Other manufacturing costs                 169,458            (759,845)          278,193                   -            (312,194)
   Changes in finished goods and
     work-in-process                         122,771              16,789                 -                   -             139,560
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $    7,313,704      $    4,097,478      $  2,237,134       $  (2,371,142)     $   11,277,170
                                    ==================  ==================   ===============   =================  ==================
</TABLE>


<PAGE> F-34

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES



SCHEDULE 5 - MARKETING & SELLING EXPENSES:
-----------------------------------------
<TABLE>
<S>                                  <C>                 <C>                <C>                <C>                <C>

                                                                          FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                 DPL                PD             Eliminations        Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
    Labor                             $      123,405      $      202,857      $          -       $           -      $      326,262
    Commissions                              166,292              67,770                 -                   -             234,062
    Advertising                                7,175              82,279                 -                   -              89,454
    Depreciation                              16,192              30,001                 -                   -              46,193
    Other costs                               94,381              73,546                 -                   -             167,927
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $      407,445      $      456,453      $          -       $           -      $      863,898
                                    ==================  ==================  ================   =================  ==================

                                                                          FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                PD             Eliminations        Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------

            Labor                     $      128,417      $      281,477      $          -       $           -      $      409,894
            Commissions                      343,444              52,856                 -                   -             396,300
            Advertising                       13,704             115,435                 -                   -             129,139
            Depreciation                      20,786              25,000                 -                   -              45,786
            Other costs                      132,222             235,204                 -                   -             367,426
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $      638,573      $      709,972      $          -       $           -      $    1,348,545
                                    ==================  ==================  ================   =================  ==================


                                                                          FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
            Labor                     $       94,263      $      361,209      $          -       $           -      $      455,472
            Commissions                      189,645              68,600                 -                   -             258,245
            Advertising                            -             102,958                 -                   -             102,958
            Depreciation                      20,994                   -                 -                   -              20,994
            Other costs                       42,687             278,967                 -                   -             321,654
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $      347,589      $      811,734      $          -       $           -      $    1,159,323
                                    ==================  ==================  ================   ===============    ==================
</TABLE>


<PAGE> F-35

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES


SCHEDULE 6 - GENERAL & ADMINISTRATIVE EXPENSES:
----------------------------------------------
<TABLE>
<S>                                 <C>                  <C>                 <C>              <C>                 <C>

                                                                          FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Labor                              $      339,821      $      296,742      $          -       $           -      $      636,563
   Depreciation and amortization
                                             105,631             134,487            15,000                   -             255,118
   Bad debt                                  158,131               2,980                 -                   -             161,111
   Impairment of goodwill                          -             946,263                 -                   -             946,263
   Investor relations                        202,274                   -                 -                   -             202,274
   Other material items                      630,524             265,492                 -              26,529             922,545
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $    1,436,381      $    1,645,964      $     15,000       $      26,529      $    3,123,874
                                    ==================  ==================  ================   =================  ==================

                                                                          FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Labor                              $      523,740      $      221,549      $          -       $           -      $      745,289
   Depreciation and amortization
                                             187,170             487,054            35,357                   -             709,581
   Bad debt                                   24,504                 424                 -                   -              24,928
   Investor relations                        150,438                   -                 -                   -             150,438
   Other material items                      219,953             335,017                 -            (289,926)            265,044
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $    1,105,805      $    1,044,044      $     35,357       $    (289,926)     $    1,895,280
                                    ==================  ==================  ================   =================  ==================

</TABLE>

<PAGE> F-36

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
<TABLE>
<S>                                  <C>                 <C>                <C>                 <C>                <C>


                                                                  FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                  DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Labor                              $      344,785      $      244,401      $          -       $           -      $      589,186
   Depreciation and amortization
                                              43,602             299,915                 -                   -             343,517
   Bad debt                                  (75,453)             (5,520)                -                   -             (80,973)
   Investor relations                         72,155                   -                 -                   -              72,155
   Other material items                      449,620             270,665                 -                   -             720,285
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $      834,709      $      809,461      $          -       $           -      $    1,644,170
                                    ==================  ==================  ================   =================  ==================

SCHEDULE 7 -CONSOLIDATED DETAILS OF INTERCOMPANY INCOME
-------------------------------------------------------
                                                                     FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                  DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Interest earned on Note Receivable
    from Digital Power Limited        $       24,350                                             $     (24,350)     $            -
   Royalty income from Digital Power
    Limited                                   87,130                                                   (87,130)                  -
   Management services from Digital
    Power Limited                     $       56,870                                                   (56,879)                  -

                                                                     FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                 PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Interest earned on Note Receivable
    from Digital Power Limited        $       40,543                                             $     (40,543)     $            -
   Royalty income from Digital Power
    Limited                                   87,130                                                   (87,130)                  -
   Management services from Digital
    Power Limited                     $       56,870                                                   (56,879)                  -

                                                                     FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                 DPL                 PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
    Interest earned on Note Receivable
     from Digital Power Limited       $      113,913                                             $    (113,913)     $            -


</TABLE>
[{"type": "8-K", "sequence": "1", "filename": "digiform8k4april02.txt", "description": "DIGITAL  8-K", "secsgml_size_bytes": 138972}]
{"company-data": {"conformed-name": "DIGITAL POWER CORP", "cik": "0000896493", "assigned-sic": "3679", "irs-number": "941721931", "state-of-incorporation": "CA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-12711", "film-number": "02607774"}, "business-address": {"street1": "41920 CHRISTY ST", "city": "FREMONT", "state": "CA", "zip": "94538", "phone": "5106572635"}, "mail-address": {"street1": "41920 CHRISTY STREET", "city": "FREMONT", "state": "CA", "zip": "94538"}}
SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 8-K

                Current Report Pursuant to Section 13 or 15(d) of
                       The Securities Exchange Act of 1934

         Date of Report (Date of earliest event reported) April 5, 2002

                            DIGITAL POWER CORPORATION
             (Exact name of registrant as specified in its charter)

California                      1-12711                   94-1721931
----------                      -------                   ----------
(State or other          (Commission File No.)         (I.R.S. Employer
jurisdiction                                            Identification No.)
of incorporation)

              41920 Christy Street, Fremont, California 94538-3158
                    (Address of principal executive offices)

                                 (510) 657-2635
              (Registrant's telephone number, including area code)
ITEM 9. REGULATION FD DISCLOSURE

     In  connection  with its filing  with the Israeli  Securities  Authorities,
     Telkoor  Telecom,  Ltd.  included  Digital  Power  Corporation's  financial
     statements  for the years  ended  December  31,  2001,  2000 and 1999 which
     included additional  information than those financial statements filed with
     the SEC and American  Stock  Exchange.  Digital Power is providing the same
     financial statements for the years ended July 31, 2001, 2000 and 1999 filed
     with the Israeli Securities Authorities through this Form 8-K.

     Exhibit No.         Exhibit Description
     -----------         -------------------
        99.2             Digital Power Corporation and Subsidiaries. Financial
                         statements for the years ended December 31, 2001, 2000,
                         and 1999
SIGNATURE

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

                                   DIGITAL POWER CORPORATION,
                                   a California Corporation

Dated: April 5, 2002               /s/ David Amitai
                                   --------------------------
                                   David Amitai
                                   Chief Executive Officer
DIGITAL POWER CORPORATION
                                AND SUBSIDIARIES

                              Financial Statements
                               For the Years Ended
                        December 31, 2001, 2000 and 1999
INDEX TO FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

Independent Auditor's Report.................................................F-1

Consolidated Balance Sheets - December 31, 2001 and 2000.....................F-2

Consolidated Statements of Operations - For the Years
    Ended December 31, 2001, 2000 and 1999...................................F-3

Consolidated Statement of Stockholders' Equity - For the Years Ended
    December 31, 2001, 2000 and 1999.........................................F-4

Consolidated Statements of Cash Flows - For the Years Ended
    December 31, 2001, 2000 and 1999.........................................F-5

Notes to Consolidated Financial Statements...................................F-7

Supplemental Information....................................................F-25
F-1

                          INDEPENDENT AUDITOR'S REPORT

To the Stockholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California

We have audited the  accompanying  consolidated  balance sheets of Digital Power
Corporation  and  subsidiaries as of December 31, 2001 and 2000, and the related
statements of operations,  stockholders'  equity, and cash flows for each of the
years in the three year period  ended  December  31,  2001.  These  consolidated
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 auditing standards generally accepted
in the United States of America and International  Standards on Auditing.  Those
standards  require  that we plan and  perform  the  audits 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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Digital  Power
Corporation  and  subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three year
period  ended  December 31,  2001,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

/S/ Hein + Associates LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
February 19, 2002
F-2

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
DECEMBER 31,         DECEMBER 31,
                                                                                     2001                 2000
                                                                             -------------------  -------------------
                                  ASSETS
                                  ------
CURRENT ASSETS:
     Cash and cash equivalents                                               $      1,242,900     $        806,407
     Accounts receivable - trade, net of allowance for doubtful accounts of
      $370,000 and $231,419 at December 31, 2001 and 2000, respectively             2,203,664            3,256,082
     Income tax refund receivable                                                      72,388              179,200
     Other receivables                                                                 91,971               90,454
     Inventories, net                                                               1,999,168            5,143,624
     Prepaid expenses and deposits                                                     47,534              213,699
     Deferred income taxes                                                                  -              334,037
                                                                               --------------     ----------------
         Total current assets                                                       5,657,625           10,023,503

PROPERTY AND EQUIPMENT, net                                                           820,318            1,094,733
EXCESS OF PURCHASE PRICE OVER NET ASSETS
     ACQUIRED, net of accumulated amortization of $1,452,189 and $433,926
     at December 31, 2001 and 2000, respectively                                            -            1,018,263
OTHER ASSETS                                                                           35,116               28,551
                                                                             ----------------     ----------------
TOTAL ASSETS                                                                 $      6,513,059     $     12,165,050
                                                                             ================     ================

                    LIABILITIES AND STOCKHOLDERS' EQUITY
                    ------------------------------------
CURRENT LIABILITIES:
     Notes payable                                                           $        652,261     $        400,000
     Current portion of capital lease obligations                                      35,856               42,954
     Accounts payable                                                               1,590,830            1,949,182
     Accrued liabilities                                                            1,510,719            1,169,702
                                                                             ----------------     ----------------
         Total current liabilities                                                  3,789,666            3,561,838

CAPITAL LEASE OBLIGATIONS, less current portion                                        24,376               61,938
OTHER LONG TERM LIABILITIES                                                            13,607                    -
                                                                             ----------------     ----------------
         Total liabilities                                                          3,827,649            3,623,776
                                                                             ----------------     ----------------

COMMITMENTS AND CONTINGENCIES (Notes 8 and 14)                                              -                    -

STOCKHOLDERS' EQUITY:
     Preferred stock issuable in series, no par value, 2,000,000 shares
         authorized, no shares issued or outstanding at December 31, 2001
         or 2000                                                                            -                    -
     Common stock, no par value, 10,000,000 shares authorized, 4,510,680
         and 3,260,680 shares issued and outstanding at December 31, 2001
         and 2000, respectively                                                    11,036,251            9,786,251
     Additional paid in capital                                                       733,256              733,256
     Accumulated deficit                                                           (8,771,654)          (1,730,934)
     Accumulated other comprehensive loss                                            (312,443)            (247,299)
                                                                             ----------------     ----------------
         Total stockholders' equity                                                 2,685,410            8,541,274
                                                                             ----------------     ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $      6,513,059     $     12,165,050
                                                                             ================     ================
/s/ David Amitai                                                        3/30/02
----------------------------------------------------------------  ---------------------------------------------------
DAVID AMITAI, PRESIDENT AND CEO                                   DATE
F-3

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
                                                                                   DECEMBER 31,
                                                          ---------------------------------------------------------------
                                                                 2001                 2000                   1999
                                                          -------------------  -------------------    -------------------

REVENUES                                                  $     10,329,857     $     17,882,730       $     15,354,018
COST OF GOODS SOLD                                              11,939,985           13,223,441             11,277,170
                                                          ----------------     ----------------       ----------------

     Gross margin (loss)                                        (1,610,128)           4,659,289              4,076,848
                                                         -----------------     ----------------       ----------------

OPERATING EXPENSES:
     Research and development                                    1,065,872            1,166,015                952,690
     Marketing and selling                                         863,898            1,348,545              1,159,323
     General and administrative                                  2,177,611            1,895,280              1,644,170
     Impairment of goodwill                                        946,263                    -                      -
                                                          ----------------     ----------------       ----------------

         Total operating expenses                                5,053,644            4,409,840              3,756,183
                                                          ----------------     ----------------       ----------------

INCOME (LOSS) FROM OPERATIONS                                   (6,663,772)             249,449                320,665
                                                          ----------------     ----------------       ----------------

OTHER INCOME (EXPENSE):
     Interest income                                                12,829               29,920                 30,935
     Interest expense                                              (63,461)             (90,992)              (178,343)
     Other (expense)                                                (4,364)                   -                      -
     Gain (loss) on disposal of assets                             (23,069)              10,790                (16,830)
                                                          -----------------    ----------------       ----------------
         Other (expense)                                           (78,065)             (50,282)              (164,238)
                                                          -----------------    ----------------       ----------------

INCOME (LOSS) BEFORE INCOME TAXES                               (6,741,837)             199,167                156,427

INCOME TAX PROVISION                                               298,883              104,000                123,000
                                                          ----------------     ----------------       ----------------

NET INCOME (LOSS)                                         $     (7,040,720)    $         95,167       $         33,427
                                                          =================    ================       ================

     Basic net income (loss) per share                    $         (2.07)     $          0.03        $          0.01
                                                          =================    ================       ================

     Diluted net income (loss) per share                  $         (2.07)     $          0.03        $          0.01
                                                          =================    ================       ================
F-4

                                          DIGITAL POWER CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                      FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
ACCUMULATED
                      COMMON STOCK       ADDITIONAL                 NOTE                      OTHER         TOTAL
                -----------------------   PAID-IN       ESOP     RECEIVABLE   ACCUMULATED  COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
                  SHARES        AMOUNT    CAPITAL      SHARES    STOCKHOLDER    DEFICIT       (LOSS)        EQUITY        (LOSS)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ --------------
BALANCES,
January 1, 1999  2,771,435  $ 9,012,679  $ 514,304   $(184,919)    $         $ (1,859,528)  $    36,234  $  7,518,770

 Contribution
  to ESOP                -            -          -     184,919             -            -             -       184,919

 Note receivable
  for common stock       -            -     52,200           -       (52,200)           -             -             -

 Comprehensive loss:     -

  Net income             -            -          -           -             -       33,427             -        33,427    $   33,427

  Foreign currency
   translation
   adjustment            -            -          -           -             -            -       (84,909)      (84,909)      (84,909)
                                                                                                                      --------------
  Total comprehensive
  loss                   -            -          -           -             -            -             -             -       (51,482)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ ==============
BALANCES,
December31,1999  2,771,435    9,012,679     566,504          -       (52,200)  (1,826,101)      (48,675)    7,652,207

 Exercise of
 stock options    484,245       754,197     (52,200)         -        52,200            -            -       754,197

 Income tax
 benefit related
 to exercise  of
 stock options          -             -     101,397          -             -            -            -       101,397

 Stock granted
 for services       5,000        19,375           -          -             -            -            -        19,375

 Compensation cost
 recognized upon
 issuance of
 warrants for
 services               -             -     117,555          -             -            -            -       117,555

 Comprehensive loss:
  Net income            -             -           -          -             -       95,167            -        95,167    $   95,167

  Foreign currency
  translation
  adjustment            -             -           -          -             -            -     (198,624)     (198,624)     (198,624)
                                                                                                                      --------------
   Total comprehensive
   loss                 -             -           -          -             -            -            -             -    $ (103,457)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ ==============
BALANCES,
December31,2000  3,260,680    9,786,251     733,256          -             -   (1,730,934)    (247,299)    8,541,274

 Issuance of
 common stock to
 Telkoor Telecom,
 Ltd pursuant to
 investment
 agreement       1,250,000    1,250,000           -          -             -            -            -     1,250,000

 Comprehensive loss:
  Net loss               -            -           -          -             -   (7,040,720)           -    (7,040,720)  $(7,040,720)
  Foreign currency
  translation
  adjustment             -            -           -          -             -            -      (65,144)      (65,144)      (65,144)
                                                                                                                      --------------
   Total comprehensive
   loss                  -            -           -          -             -            -            -             -   $(7,105,864)
                ----------  -----------  ----------  ----------  ----------- -------------  -----------  ------------ ==============
BALANCES,
December31,2001  4,510,680  $11,036,251  $  733,256  $       -     $       -  $(8,771,654)  $ (312,443)  $ 2,685,410
                ==========  ===========  ==========  ==========  =========== =============  ===========  ============
F-5

                                                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------
                                                                         2001                2000                 1999
                                                                  -------------------  ------------------   -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                            $     (7,040,720)    $         95,167     $         33,427

     Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:

        Depreciation and amortization                                      450,752              475,987              500,691
        (Gain) loss on disposal of assets                                   23,069              (10,790)              16,830
        Deferred income taxes                                              334,037               16,755                8,813
        Warranty expense                                                   (64,806)              55,000             (110,000)
        Increase in provision for inventory obsolescence                 2,714,941                    -               30,000
        Contribution to ESOP                                                     -                    -              184,919
        Bad debt expense                                                   158,130               23,504               35,547
        Compensation cost recognized upon issuance of warrants                   -              117,555                    -
        Income tax benefit related to exercise of stock options                  -              101,397                    -
        Stock issued for services                                                -               19,375                    -
        Impairment of goodwill                                             946,263                    -                    -
        Severance accrual                                                  658,000                    -                    -

     Changes in operating assets and liabilities:

        Accounts receivable                                                894,288             (466,506)             711,411
        Income tax refund receivable                                       106,812             (108,212)             321,658
        Other receivables                                                   (1,517)               9,421                3,167
        Inventories                                                        429,515             (612,363)             303,259
        Prepaid expenses                                                   166,164             (152,372)              (6,062)
        Other assets                                                        (6,565)             (14,493)              26,733
        Accounts payable                                                  (358,353)             753,013              (50,685)
        Accrued liabilities                                               (252,177)             (98,939)            (271,457)
        Other long-term liabilities                                         13,607              (25,000)             (10,043)
                                                                  -----------------    -----------------    -----------------
          Net cash provided by (used in) operating activities
                                                                          (828,560)             178,499            1,728,208
                                                                  -----------------    -----------------    -----------------
 CASH FLOWS FROM INVESTING ACTIVITIES:

     Purchase of property and equipment                                   (133,281)            (176,068)            (168,042)
     Proceeds from sale of assets                                            5,876               26,121                6,146
                                                                  -----------------    -----------------    -----------------
              Net cash (used in) investing activities                     (127,405)            (149,947)            (161,896)
                                                                  -----------------    -----------------    -----------------
F-6

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)
FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------

                                                                          2001                2000                 1999
                                                                  -------------------  ------------------   -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options and warrants             $         -          $      754,197       $         -
   Proceeds received (payments made) on notes payable                      252,261             (540,000)            (184,919)
   Principal payments on capital lease obligations                         (44,659)             (62,426)             (72,537)
   Principal payments on notes payable                                        -                    -              (1,266,846)
   Investment from Telkoor Telecom, Ltd.                                 1,250,000                 -                    -
                                                                   ----------------     ----------------     ----------------
     Net cash provided (used in) by financing activities                 1,457,602              151,771           (1,524,302)
                                                                   ----------------     ----------------     -----------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                    (65,144)            (198,624)             (84,909)
                                                                   ----------------     ----------------     ----------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                    436,493              (18,301)             (42,899)
                                                                   ----------------     ----------------     ----------------

CASH AND CASH EQUIVALENTS, beginning of period                             806,407              824,708              867,607
                                                                   ----------------     ----------------     ----------------

CASH AND CASH EQUIVALENTS, end of period                            $    1,242,900       $      806,407       $      824,708
                                                                   ================     ================     ================

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash payments for:
     Interest                                                       $       67,009       $      131,650       $      277,935
                                                                   ================     ================     ================
     Income taxes                                                   $       97,918       $      180,000       $      117,494
                                                                   ================     ================     ================

NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Acquisition of equipment through capital leases                  $         -          $       42,846       $       19,720
                                                                   ================     ================     ================
F-7
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS:
   -------------------------------------

     Digital Power Corporation ("DPC"), a California corporation, and its wholly
     owned  subsidiaries,  Poder  Digital,  S.A.  de  C.V.  ("PD"),  located  in
     Guadalajara,  Mexico,  and Digital  Power Limited  ("DPL"),  located in the
     United  Kingdom,  are  engaged  in the  design,  manufacture  and  sale  of
     switching power supplies.  DPC, PD, and DPL are collectively referred to as
     the "Company".

2. SIGNIFICANT ACCOUNTING POLICIES:
   -------------------------------

     Principles of Consolidation - The consolidated financial statements include
     the  accounts of DPC and its wholly  owned  subsidiaries,  PD and DPL.  All
     significant  intercompany accounts and transactions have been eliminated in
     consolidation.

     Statements  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.

     Inventories  -  Inventories  are  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 their  estimated  useful life or the term of the lease.  The
     cost of  normal  maintenance  and  repairs  is  charged  to  operations  as
     incurred.  Material  expenditures  that  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  resulting  gains or losses  are  reflected  in  current
     operations.

     Excess of  Purchase  Price  Over Net Assets  Acquired - Excess of  purchase
     price over net assets acquired  ("Goodwill")  represents the purchase price
     in excess of the fair value of the net assets of the acquired  business and
     was being  amortized  using the  straight-line  method  over its  estimated
     useful life of ten years.

     As a result of DPL's  sustained  losses during the year ended  December 31,
     2001,  management  has  determined  the value of the  unamortized  goodwill
     related to the 1998 acquisition of DPL as impaired resulting in a charge of
     $946,263.

     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 differences  between the
     financial statement carrying amounts of existing assets and liabilities and
     their  respective  tax  bases.  Deferred  tax assets  and  liabilities  are
     measured using enacted tax rates expected to apply to taxable income in the
     years in which those temporary  differences are expected to be recovered or
     settled.  The effect on deferred tax assets and  liabilities of a change in
     tax rates is recognized in income in the period that includes the enactment
     date.
F-8

     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 certain sales to distributors are subject to
     a limited right of return.  At the same time sales  revenue is  recognized,
     the Company  provides a reserve for estimated  warranty costs and a reserve
     for estimated product returns.

     Research and Development Costs - Research and development costs are charged
     to operations in the period incurred.

     Foreign  Currency  Translation  - Gains  and  losses  from the  effects  of
     exchange  rate   fluctuations  on   transactions   denominated  in  foreign
     currencies  are  included  in  the  results  of   operations.   Assets  and
     liabilities of the Company's foreign  subsidiaries are translated into U.S.
     dollars at year-end exchange rates. Income and expense items are translated
     at  average  exchange  rates  prevailing  during  the year.  The  resulting
     translation  adjustment  is recorded as a component  of  accumulated  other
     comprehensive income (loss), a component of stockholders' equity.

     Earnings  Per Share - Basic  earnings  per share  excludes  dilution and is
     computed  by  dividing  income  available  to  common  stockholders  by the
     weighted  average  number  of common  shares  outstanding  for the  period.
     Diluted earnings per share reflects the potential dilution that could occur
     if  securities or other  contracts to issue common stock were  exercised or
     converted  into common  stock or resulted in the  issuance of common  stock
     that then shared in the earnings of the entity.

     Use of Estimates - The preparation of the Company's  consolidated financial
     statements in conformity  with  generally  accepted  accounting  principles
     requires the Company's  management to make estimates and  assumptions  that
     affect the amounts reported in these consolidated  financial statements and
     accompanying notes. Actual results could differ from those estimates.

     The Company's  consolidated 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 and goodwill, 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 - In the event that facts and circumstances
     indicate that the cost of long lived 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.

     Stock Based  Compensation  - The  Company has elected to follow  Accounting
     Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
     (APB25) and related  interpretations  in accounting  for its employee stock
     options.  In  accordance  with  FASB  Statement  No.  123  "Accounting  for
     Stock-Based  Compensation"  (FASB123), the Company will disclose the impact
     of  adopting  the  fair  value   accounting  of  employee   stock  options.
     Transactions in equity instruments with non-
F-9

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     employees  for goods or  services  have been  accounted  for using the fair
     value method as prescribed by FASB123.

     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  counterparties  when they have  similar  economic
     characteristics   that  would  cause  their  ability  to  meet  contractual
     obligations  to be  similarly  affected  by  changes in  economic  or other
     conditions described below.

     The  Company  operates  in one  segment,  manufacture  and  sale  of  power
     supplies.  Financial  instruments  that  subject the Company to credit risk
     consist  of cash  balances  maintained  in  excess  of  federal  depository
     insurance  limits and  accounts  receivable,  which have no  collateral  or
     security. See Note 14 for major customers.

     Fair  Value of  Financial  Instruments  - The  estimated  fair  values  for
     financial  instruments under FASB Statement No. 107, Disclosures about Fair
     Value of Financial  Instruments,  are determined at discrete points in time
     based on relevant market information. These estimates involve uncertainties
     and cannot be determined with precision.  The estimated fair value of cash,
     cash  equivalents,  accounts  receivable and accounts payable  approximates
     their carry value due to their short-term  nature. The estimated fair value
     of  long-term  debt  approximates  its  carrying  value  because it carries
     interest rates which approximates market rates.

     Comprehensive  Income - The Company has  adopted the  Financial  Accounting
     Standards  Board  Statement  of  Financial  Accounting  Standards  No. 130,
     "Reporting  Comprehensive Income" (FASB130).  FASB130 defines comprehensive
     income as all changes in  stockholders'  equity  exclusive of  transactions
     with owners, such as capital investments. Comprehensive income includes net
     income or loss and  changes in  certain  assets  and  liabilities  that are
     reported  directly  in  equity,   such  as,   translation   adjustments  on
     investments in foreign subsidiaries.

     Impact  of  Recently  Issued  Standards  -  In  June  2001,  the  Financial
     Accounting   Standards  Board  ("FASB")  issued   Statements  of  Financial
     Accounting  Standards No. 141 "Business  Combinations" ("SFAS 141") and No.
     142 "Goodwill and Other Intangible  Assets" ("SFAS 142"). SFAS 141 requires
     all business combinations initiated after June 30, 2001 to be accounted for
     under the purchase method. For all business combinations for which the date
     of acquisition is after June 30, 2001, SFAS 141 also  establishes  specific
     criteria for the recognition of intangible  assets separately from goodwill
     and requires unallocated negative goodwill to be written off immediately as
     an extraordinary gain, rather than deferred and amortized. SFAS 142 changes
     the  accounting  for  goodwill  and  other   intangible   assets  after  an
     acquisition. The most significant changes made by SFAS 142 are: 1) goodwill
     and intangible assets with indefinite lives will no longer be amortized; 2)
     goodwill and  intangible  assets with  indefinite  lives must be tested for
     impairment at least annually; and 3) the amortization period for intangible
     assets  with  finite  lives will no longer be limited to forty  years.  The
     Company does not believe that the adoption of these  statements will have a
     material effect on its financial position,  results of operations,  or cash
     flows.
F-10
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In June  2001,  the  FASB  also  approved  for  issuance  SFAS  143  "Asset
     Retirement  Obligations." SFAS 143 establishes accounting  requirements for
     retirement   obligations   associated  with  tangible   long-lived  assets,
     including  (1)  the  timing  of  the  liability  recognition,  (2)  initial
     measurement of the liability,  (3) allocation of asset  retirement  cost to
     expense,  (4)  subsequent  measurement  of the  liability and (5) financial
     statement  disclosures.  SFAS 143 requires  that an asset  retirement  cost
     should be capitalized as part of the cost of the related  long-lived  asset
     and  subsequently  allocated  to expense  using a  systematic  and rational
     method.  The  Company  will  adopt the  statement  effective  no later than
     January 1, 2003, as required.  The transition adjustment resulting from the
     adoption of SFAS 143 will be reported as a cumulative effect of a change in
     accounting principle.  At this time, the Company cannot reasonably estimate
     the effect of the  adoption of this  statement on its  financial  position,
     results of operations, or cash flows

     In October  2001,  the FASB also  approved  SFAS 144,  "Accounting  for the
     Impairment or Disposal of  Long-Lived  Assets." SFAS 144 replaces SFAS 121,
     "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
     Assets to Be Disposed Of." The new accounting  model for long-lived  assets
     to be  disposed  of by sale  applies to all  long-lived  assets,  including
     discontinued operations, and replaces the provisions of APB Opinion No. 30,
     "Reporting  Results of  Operations-Reporting  the  Effects of Disposal of a
     Segment  of a  Business,"  for the  disposal  of  segments  of a  business.
     Statement  144  requires  that those  long-lived  assets be measured at the
     lower of carrying amount or fair value less cost to sell,  whether reported
     in  continuing  operations  or  in  discontinued   operations.   Therefore,
     discontinued  operations will no longer be measured at net realizable value
     or  include  amounts  for  operating  losses  that  have not yet  occurred.
     Statement  144 also broadens the  reporting of  discontinued  operations to
     include  all  components  of  an  entity  with   operations   that  can  be
     distinguished  from the rest of the entity and that will be eliminated from
     the  ongoing  operations  of the  entity  in a  disposal  transaction.  The
     provisions of Statement 144 are effective for financial  statements  issued
     for fiscal years beginning after December 15, 2001 and,  generally,  are to
     be applied  prospectively.  At this time, the Company  cannot  estimate the
     effect of this statement on its financial position,  results of operations,
     or cash flows.

3. BASIS OF PRESENTATION:

     The Company  incurred a net loss of $7,040,720  and used cash in operations
     of $828,560  during the year ended  December 31, 2001.  The Company had net
     income of $95,167 and cash provided by  operations  of $178,499  during the
     year ended December 31, 2000. The Company had working capital of $1,867,959
     and $6,461,665 at December 31, 2001 and 2000, respectively. The increase in
     the net loss and substantial  decrease of working capital is due in part to
     certain non-cash expenses, including an increase in the inventory allowance
     for  obsolescence of $2,715,000,  an impairment of goodwill by $946,000,  a
     severance  accrual of  $658,000  for  employees  in Poder,  increase in the
     allowance  for bad debt of $158,000  and the  valuation  taken  against the
     deferred tax asset of $350,000.

     The  Company's  management  has  addressed the decrease in cash and working
     capital through the execution of the Securities Purchase Agreement in which
     the Company received  $1,250,000 in cash and developed a strategic alliance
     with Telkoor  Telecom,  Ltd  (Telkoor).  The Company's  management  team is
     currently  comprised  of  officers'  of Telkoor and if needed,  Telkoor has
     committed  to lend the  Company  and/or  make  further  investments  in the
     Company to sustain it operations.  See note 11 for additional  terms of the
     Telkoor investment.
F-11
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In management's  opinion,  these proceeds  combined with revenue from sales
     and Telkoor's  continued  commitment to protect its investment will provide
     sufficient cash flow to pay the Company's  obligations as they come due for
     at least the next year.

4. INVENTORIES:
   -----------

                                                    DECEMBER 31,
                                     -------------------------------------------
                                             2001                   2000
                                     -------------------    --------------------

      Raw materials                    $    3,831,093         $    4,329,160
      Work-in-process                         985,924              1,011,966
      Finished goods                          146,861                459,030
                                      ----------------       ----------------
                                            4,963,878              5,800,156
      Allowance for obsolescence           (2,964,710)              (656,532)
                                      ----------------       ----------------

                                       $    1,999,168         $    5,143,624
                                      ================       ================

     During  the year  ended  December  31,  2001,  the  Company  increased  the
     allowance  for  obsolescence   and  excess   inventories  by  approximately
     $2,715,000  which was a result of the  cancellation  of purchase  orders by
     customers,  excess  inventory  levels,  lack of sales  orders and delays in
     delivery  of  products  by two  customers.  The  additional  provision  for
     obsolete and excess inventory is included in the cost of sales.

5. PROPERTY AND EQUIPMENT:
   ----------------------

                                                     DECEMBER 31,
                                        ---------------------------------------
                                               2001                 2000
                                        ------------------   ------------------

      Machinery and equipment             $    1,503,030       $    1,441,203
      Office equipment and furniture             875,726              873,429
      Leasehold improvements                     525,846              539,777
      Transportation equipment                    81,089              103,839
                                         ----------------     ----------------
                                               2,985,691            2,958,248
      Accumulated depreciation
       and amortization                       (2,165,373)          (1,863,515)
                                         ----------------     ----------------
                                          $      820,318       $    1,094,733
                                         ================     ================

     Depreciation  expense  related to property and equipment for the year ended
     December 31, 2001,  2000,  and 1999 was $378,571,  $331,987,  and $343,882,
     respectively.
F-12
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. ACCRUED LIABILITIES:
   -------------------
                                                        DECEMBER 31,
                                           -------------------------------------
                                                 2001                 2000
                                           ------------------   ----------------
      Accrued payroll and benefits          $      167,129       $     147,115
      Accrued commissions and royalties            120,567             126,786
      Accrued warranty and product
        return expense                             201,094             324,602
      Income taxes payable                         190,175             308,627
      Severance accrual for PD employees           508,000                -
      Other                                        323,754             262,572
                                           -----------------    ----------------

                                            $    1,510,719       $   1,169,702
                                           =================    ================

     During the year ended December 31, 2001, the Company  recorded an estimated
     severance  liability related to its Mexican  subsidiary of $658,000.  There
     was no accrual recorded as of December 31, 2000. The severance accrual is a
     result of depressed  sales of the Company's  products in the United States,
     which has resulted in excess capacity of the workforce at its  Guadalajara,
     Mexico facility.  In addition,  the Company is considering moving a portion
     of its  manufacturing  to China which would increase the excess capacity at
     PD. The liability was reduced in September 2001 by $150,000 for the payment
     of severance as a result of a reduction of PD employees.

7. NOTES PAYABLE:
   -------------

     At  December  31, 2001 and 2000,  DPC has a line of credit of $750,000  and
     $3,000,000,  respectively,  pursuant to a promissory note agreement.  As of
     December  31, 2000,  the line of credit  provided  borrowings  up to 80% of
     eligible accounts receivable, plus 20% of inventory or $500,000,  whichever
     was  less,  not to  exceed a total of  $3,000,000.  During  the year  ended
     December  31,  2001,  the  line of  credit  was  adjusted  to only  provide
     borrowings up to 80% of eligible accounts receivable.  Borrowing under this
     line of credit  bears  interest  based upon an index equal to the  lender's
     prime  rate  (totaling  6.75%  and  9.50% at  December  31,  2001 and 2000,
     respectively),  interest only,  payable monthly with outstanding  principal
     due on demand.  If no demand is made, the outstanding  principal and unpaid
     accrued  interest is due April 15, 2002. At December 31, 2001 and 2000, the
     outstanding  principal  balance was  $652,261 and  $400,000,  respectively.
     Under the terms of the  agreement,  the  Company is  required  to  maintain
     certain ratios and be in compliance with other  covenants.  At December 31,
     2001 and 2000, the Company was in compliance with all covenants.

     At December  31, 2001 and 2000,  DPL has a  (pound)500,000  bank  overdraft
     facility pursuant to a loan agreement.  Borrowing under this line of credit
     bears interest at 2% per annum over the Bank's Base rate (totaling 6.5% and
     8.5% at December 31, 2001 and 2000,  respectively),  interest only, payable
     monthly with outstanding principal due on demand. If no demand is made, the
     outstanding  principal  and accrued  interest is due March 31, 2002. In the
     event  of the  loan  being  used,  the  loan  would  be  collateralized  by
     substantially  all of the DPL's  assets.  At December 31, 2001 and 2000, no
     principal or accrued interest was outstanding.
F-13
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.CAPITAL LEASE OBLIGATIONS:
  -------------------------

     The  Company  leases  certain   equipment  and  vehicles  under  agreements
     classified  as capital  leases.  The net book value of assets under capital
     leases  as of  December  31,  2001  and  2000  was  $59,229  and  $106,329,
     respectively.  Depreciation  expense of $39,545,  $52,147,  and $48,702 was
     recognized  for  the  years  ended  December  31,  2001,  2000,  and  1999,
     respectively.

     The future minimum lease payments as of December 31, 2001, are as follows:

                 YEARS ENDING
                 DECEMBER 31,                                  AMOUNT
      ----------------------------------               ---------------------
                    2002                                 $     45,736
                    2003                                       31,183
                                                       -----------------
      Total future minimum lease payments                      76,919
           Less amount representing interest                  (16,687)
                                                       -----------------
      Present value of net minimum lease
           payments                                            60,232
           Less current portion                               (35,856)
                                                       -----------------
                                                         $     24,376

9. PREFERRED STOCK:
   ---------------

     As of  December  31,  2001 and 2000,  the  preferred  stock has one  series
     authorized,  500,000 shares of Series A cumulative  redeemable  convertible
     preferred  stock  ("Series  A"),  and an  additional  1,500,000  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.
     As of  December  31,  2001  and  2000,  there  were  no  shares  issued  or
     outstanding.

10. NOTE RECEIVABLE - STOCKHOLDER:
    -----------------------------

     At December 31, 1999,  the Company had a note  receivable  in the amount of
     $52,000  due from a  former  employee  received  in  consideration  for the
     exercise of stock options. The note had an interest rate of 5% and was paid
     in full in February 2000.

11. COMMON STOCK:
    ------------

     In September  2001, the Company  executed a securities  purchase  agreement
     with Telkoor  Telecom,  Ltd.  (Telkoor)  for cash proceeds of $1,250,000 in
     exchange  for the  purchase  of  1,250,000  shares of common  stock and the
     issuance of 900,000  warrants to purchase common stock at an exercise price
     of $1.25 per share and an additional  1,000,000 warrants to purchase common
     stock  at  an  exercise  price  of  $1.50  per  share.  The  warrants  vest
     immediately  and  expire  during  the year  ended  December  31,  2003.  In
     addition,  the  Company's  Board of  Directors  will  appoint  a number  of
     individuals  recommended  by Telkoor  necessary to constitute a majority of
     the Board and the then current president and CEO, Robert Smith, resigned as
     president with an individual  selected by Telkoor appointed to the position
     of president and CEO.
F-14
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. STOCK OPTIONS AND WARRANTS:
    --------------------------

     Stock Options - 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.  The price of the options granted
     pursuant to the plan will not be less than 100% of the fair market value of
     the shares on the date of grant. The compensation committee of the Board of
     Directors  will decide the vesting  period of the  options,  if any, and no
     option will be exercisable after ten years from the date granted.

     In February 1998,  the Company  adopted the 1998 Stock Option Plan covering
     240,000  shares of common  stock.  Under the plan,  the  Company  can issue
     either incentive or non-qualified stock options.  The exercise price of the
     options  granted  pursuant  to the plan  will not be less  than 100% of the
     quoted  market  value of the  shares on the grant  date.  The  compensation
     committee of the Board of Directors  will  determine the vesting  period of
     the options,  if any, and no options  will be  exercisable  after ten years
     from the date of grant.

     During the year ended  December 31, 1999, the Company  granted  options for
     the purchase of 11,900 shares of the Company's  common stock under the 1998
     Stock Option Plan to certain employees.  The exercise prices of the options
     range  from  $1.5625 to  $1.8750  per share,  which was equal to the quoted
     market value on the date of grant. The options vest over 5 years at 25% per
     year starting in the second year.

     In April 2000,  the Company  adopted  the 2000 Stock  Option Plan  covering
     500,000  shares of common  stock.  Under the plan,  the  Company  can issue
     either incentive or non-qualified stock options.  The exercise price of the
     options  granted  pursuant  to the plan  will not be less  than 100% of the
     quoted  market  value of the  shares on the grant  date.  The  compensation
     committee of the Board of Directors  will  determine the vesting  period of
     the options,  if any, and no options  will be  exercisable  after ten years
     from the date of grant.

     During the years ended  December  31,  2001,  2000,  and 1999,  the Company
     issued in each year  non-qualified  options  for the  purchase  of  100,000
     shares  of the  Company's  common  stock to Mr.  Robert  Smith  who was the
     president of the Company  until his  resignation  on November 13, 2001,  in
     accordance  with his employment  agreement.  The exercise  prices of $1.63,
     $1.56,  and $1.88 per share were equal to the  quoted  market  value on the
     date of grant for the year ended 2001, 2000, and 1999,  respectively.  Such
     options vested immediately and expire beginning in 2009.

     During the year ended  December 31, 2001, the Company  granted  options for
     the  purchase  of 200,000  shares of the  Company's  common  stock to David
     Amitai, CEO and President, and 200,000 shares of the Company's common stock
     to Ben Zion Diamant, Chairman of the Board. The exercise price of $0.70 per
     share  was equal to the  quoted  market  value on the date of  grant.  Such
     options vest over 2 years at 50% per year starting in the second year.

     During each of the years ended  December  31,  2001,  2000,  and 1999,  the
     Company granted  non-qualified  options under the 1998 plan & 2000 plan for
     the  purchase of 30,000  shares of the  Company's  common  stock to outside
     directors.  The  exercise  prices  range from $0.70 to $2.38 per share were
     equal to the quoted value on the date of grant.  The options vest after one
     year and begin expiring in 2009.
F-15

                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     During the year ended  December 31, 2001, the Company  granted  options for
     the purchase of 136,000 shares of the Company's common stock under the 2000
     Stock  Option Plan to certain  employees.  The  exercise  prices range from
     $0.70 to $1.18 per share were equal to the quoted  market value on the date
     of grant.  The options  vest over 4 or 5 years at 25% per year  starting in
     the second year.

     During the year ended  December 31, 2000, the Company  granted  options for
     the purchase of 117,500 shares of the Company's common stock under the 1996
     Stock Option Plan to certain  employees.  The  exercise  price of $2.38 per
     share  was  equal to the  quoted  market  value on the date of  grant.  The
     options vest over 5 years at 25% per year starting in the second year.

     During the year ended  December 31, 2000, the Company  granted  options for
     the purchase of 57,500 shares of the Company's  common stock under the 1998
     Stock Option Plan to certain  employees.  The  exercise  price of $2.38 per
     share  was  equal to the  quoted  market  value on the date of  grant.  The
     options vest over 5 years at 25% per year starting in the second year.

     During the year ended  December 31, 2000, the Company  granted  options for
     the purchase of 53,000 shares of the Company's  common stock under the 2000
     Stock Option Plan to certain  employees.  The exercise price of the options
     ranges from $2.38 to $3.88 per share were equal to the quoted  market value
     on the  date of  grant.  The  options  vest  over 5 years  at 25% per  year
     starting in the second year.

     During the year ended  December 31, 1999, the Company  granted  options for
     the purchase of 70,000 shares of the Company's  common stock under the 1996
     Stock  Options Plan to certain  employees.  The exercise  prices range from
     $1.69 to $2.00 per share,  which was equal to the fair market  value on the
     date of grant.  The options  vest over 5 years at 25% per year  starting in
     the second year.

     The following table sets forth activity for all options:

                                                                   WEIGHTED
                                             NUMBER OF         AVERAGE EXERCISE
                                               SHARES          PRICE PER SHARE
                                        -------------------  -------------------
      OUTSTANDING,  January 1, 1999          1,065,930         $      2.19
               Granted                         211,900                1.90
               Forfeited                      (194,200)               2.42
                                        -----------------    ------------------

      OUTSTANDING,  December 31, 1999        1,083,630                2.09
               Granted                         366,000                2.16
               Forfeited                       (26,665)               3.31
               Exercised                      (484,245)               1.56
                                        -----------------    ------------------

      OUTSTANDING,  December 31, 2000          938,720                2.39
               Granted                         691,000                0.90
               Forfeited                       (86,625)               2.10
                                        -----------------    ------------------

      OUTSTANDING,  December 31, 2001        1,543,095                1.74
                                        ================     ==================
F-16
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     At December 31, 2001,  options to purchase  40,000 shares,  with a weighted
     average  exercise price of $6.06,  were  exercisable at prices ranging from
     $6.00 to $6.25 per share. These options have a weighted average contractual
     life of 6.25 years.

     At December 31, 2001,  options to purchase  729,296  shares,  respectively,
     were  exercisable  with  exercise  prices  ranging  from $1.56 to $3.88 per
     share, a weighted  average  exercise price of $2.05, and a weighted average
     remaining contractual life of 7.45 years. The remaining unvested options of
     773,799 have exercise prices ranging from $.70 to $1.18, a weighted average
     contractual life of 9.76 years, and are exercisable as follows:

                                                             WEIGHTED AVERAGE
                                         NUMBER OF            EXERCISE PRICE
      YEAR ENDING DECEMBER 31,             SHARES
      ------------------------      ---------------------  ---------------------
              2002                         122,337             $    1.77
              2003                         330,962                  1.17
              2004                         279,000                  1.02
              2005                          31,500                  0.81
              2006                          10,000                  0.70
                                    ----------------         ----------------
                                           773,799             $    1.19
                                    ================         ================

     If not previously exercised the outstanding options will expire as follows:

                                         NUMBER OF           WEIGHTED AVERAGE
      YEAR ENDING DECEMBER 31,             SHARES             EXERCISE PRICE
      ------------------------      ---------------------  ---------------------
             2003                           30,500             $    1.80
             2006                           78,250                  1.80
             2007                          105,500                  2.31
             2008                          317,845                  2.78
             2009                          100,000                  1.95
             2010                          245,000                  2.39
             2011                          666,000                  0.87
                                    ----------------         ----------------
                                         1,543,095             $    1.74
                                    ================         ================

     Warrants -In December 1996, in connection with the initial public offering,
     the Company  granted  warrants  for the  purchase of 150,000  shares of the
     Company's  common  stock.  The exercise  prices of the warrants  range from
     $4.80 to $5.00 per share.  The warrants  vested  immediately and expired in
     2001.

     During March 1997, the Company granted  warrants for the purchase of 15,000
     shares of the Company's  common stock in connection  with investor  related
     services  provided to the Company.  The warrants have an exercise  price of
     $6.75 per share, vested immediately and expire in 2002.

     In January 1998, the Company issued  warrants to purchase  30,000 shares of
     the Company's  common stock in connection  with investor  related  services
     provided to the Company.  The warrants have an exercise  price of $7.00 per
     share, vested immediately and expired in 2001.
F-17
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In October 2000, the Company issued  warrants to purchase  60,000 shares of
     common stock at $3.88 per share to an investor  relations firm for services
     provided.  Compensation expense of $117,555 was recognized upon issuance of
     the  warrants.  The warrants  are  immediately  exercisable  and expired in
     October 2001.

     See  footnote  11 for  additional  warrants  issued  during  the year ended
     December 31, 2001.

     The following sets forth the activity for all warrants:

                                             NUMBER OF         AVERAGE EXERCISE
                                               SHARES          PRICE PER SHARE
                                        -------------------  -------------------
      OUTSTANDING, January 1, 1999              838,090          $   5.09
              Expired                          (643,090)             5.00
                                          ----------------     --------------
      OUTSTANDING, December 31, 1999            195,000              5.38
              Granted                            60,000              3.88
                                          ----------------      --------------
      OUTSTANDING, December 31, 2000            255,000              5.03
              Granted                         1,900,000              1.43
              Expired                          (240,000)             4.92
                                          ----------------    ----------------
      OUTSTANDING, December 31, 2001          1,915,000         $    1.42
                                          ================    ================

     As stated in Note 2, the Company has not adopted the fair value  accounting
     prescribed  by  FASB123  for  employees.  Had  compensation  cost for stock
     options or warrants issued to employees been  determined  based on the fair
     value at grant date for awards in 2001, 2000, and 1999, consistent with the
     provisions  of  FASB123,  the  Company's  net income  (loss) and net income
     (loss) per share would have been reduced to the proforma amounts  indicated
     below:
2001                    2000                     1999
                                  ---------------------    --------------------     --------------------

      Net loss                        $  (7,413,887)           $    (158,079)           $    (320,445)
                                    ================         ================         ================
      Net loss per common share:
          Basic and diluted           $       (2.18)           $       (0.05)           $       (0.12)
                                    ================         ================         ================
The fair value of each option or warrant was estimated on the date of grant
     using  the   Black-Scholes   option   pricing  model  using  the  following
     assumptions for grants in 2001, 2000, and 1999:  average risk-free interest
     rates ranging from 4.23% to 5.6%,  expected life of five years for 2001 and
     2000 and an expected life of two years for 1999,  dividend yield of 0%; and
     expected volatility ranging from 55.0% to 125.9%. The weighted-average fair
     value of the  options on the grant date for the years  ended  December  31,
     2001, 2000, and 1999 was $0.70, $0.94, and $2.09 per share, respectively.
F-18
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. NET INCOME (LOSS) PER COMMON SHARE:
    ----------------------------------
     The following  represents  the  calculation of net income (loss) per common
     share:
2001              2000               1999
                                                                    -----------------  -----------------  ----------------
         BASIC
         Net income (loss) applicable to common shareholders          $   (7,040,720)    $      95,167      $     33,427
                                                                    =================  ================   ===============

         Weighted average number of common shares                          3,407,930         2,939,034         2,771,435
                                                                    =================  ================   ===============

         Basic earnings (loss) per share                              $        (2.07)    $        0.03      $       0.01
                                                                    =================  ================   ===============

         DILUTED
         Net income (loss) applicable to common shareholders          $   (7,040,720)    $      95,167      $     33,427
                                                                    =================  ================   ===============

         Weighted average number of common shares                          3,407,930         2,939,034         2,771,435

         Common stock equivalent shares representing shares
           issuable upon exercise of stock options                     Anti-dilutive           336,349            61,447
         Weighted average number of shares used in calculation of
           diluted earnings per share                                      3,407,930         3,275,383         2,832,882
                                                                    -----------------  ----------------   ---------------

         Diluted earnings (loss) per share                            $        (2.07)    $        0.03     $        0.01
                                                                    =================  ================   ===============
14. COMMITMENTS:
    -----------

     LEASES - The Company leases its office space in California, a manufacturing
     facility in Guadalajara,  Mexico, and the facility and certain equipment in
     the UK under operating leases. The total future minimum lease payments,  as
     of December 31, 2001, are as follows:

      YEARS ENDING DECEMBER 31,
      -------------------------
                2002                          $     327,440
                2003                                287,760
                2004                                304,312
                2006                                310,012
                2006                                132,362
                                            ----------------
                                              $   1,361,886
                                            ================

     Lease  payments on the  manufacturing  facility in Mexico are to be made in
     Mexican  Pesos.  Lease payments on the facility and equipment in the UK are
     to be made in GB pound-sterling.  The above schedule was prepared using the
     conversion rates in effect at December 31, 2001.  Changes in the conversion
     rate will have an impact on the Company's required minimum payments and its
     operating results.
F-19
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Rent  expense was  $350,152,  $172,560,  and  $253,530  for the years ended
     December 31, 2001, 2000, and 1999, respectively.

     Termination  Of Employment  Agreement/Entering  Consulting  Agreement - The
     Company  entered  into  a  Termination  of  Employment   Agreement/Entering
     Consulting  Agreement  on November  13,  2001 with  Robert O.  Smith.  This
     Consulting  Agreement  will  continue  in effect  for a period of three (3)
     years unless terminated or extended upon mutual agreement.  Under the terms
     of the  agreement,  Mr.  Smith agrees to assist the Company in managing its
     power supply business and related projects.  The agreement requires payment
     of $l00,000  per annum,  at the end of each  calendar  year or pro rated by
     month.  At December 31, 2001,  the Company has $15,000  accrued  under this
     agreement.  Mr.  Smith is  entitled to receive  options to acquire  l00,000
     shares of Digital  Power's  common  stock on an annual  basis  beginning on
     January  l, 2002  pursuant  to  Digital  Power's  stock  option  plan at an
     exercise price of $3.00 per share. Mr. Smith has the opportunity to sell to
     Telkoor  Telecom,  Ltd up to 50% of the common stock held by him, but under
     no circumstances more than 5% of the issued and outstanding common stock of
     the Company on a fully diluted basis as of the date of the sale.

15. MAJOR CUSTOMERS:
    ---------------

     The  Company   frequently  sells  large  quantities  of  inventory  to  its
     customers.  For the year ended December 31, 2001,  two customers  accounted
     for 36% of the  Company's net sales.  For the year ended  December 31, 2000
     and 1999, three customers  accounted for 29% of the Company's net sales and
     two customers  accounted for 11% of the Company's net sales,  respectively.
     Of the  Company's  consolidated  revenues  for the year ended  December 31,
     2001, 63% of revenues were earned from customers in the United States,  30%
     from  customers  in the United  Kingdom,  and 7% for the rest of the world.
     Consolidated  revenues for the year ended December 31, 2000 were earned 70%
     from  customers  in the United  States,  21% from  customers  in the United
     Kingdom,  and 9% for the rest of the world.  Consolidated  revenues for the
     year ended  December 31, 1999 were earned 59% from  customers in the United
     States,  29% from customers in the United Kingdom,  and 12% for the rest of
     the world

     For the year ended December 31, 2001,  2000, and 1999, DPL contributed 37%,
     29%, and 42%,  respectively,  of the Company's revenues. No one customer of
     DPL contributed greater than 10% of the Company's consolidated revenues for
     the years ended December 31, 2001, 2000, and 1999.

16. EMPLOYEE BENEFIT PLANS:
    ----------------------

     401(K) PROFIT  SHARING PLAN - 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 $12,238,  $12,665,  and $11,400 for years ended  December 31, 2001,
     2000, and 1999, respectively.
F-20
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Company's  subsidiary  DPL, has a group personal  pension plan covering
     substantially all of its employees.  Eligible  employees may make voluntary
     contributions to the plan. The Company will contribute 7% of the employees'
     basic annual salary to the plan. Contributions are charged to operations as
     incurred.  The Company made contributions  totaling $55,334,  $66,908,  and
     $71,400 to the plan for the years ended December 31, 2001,  2000, and 1999,
     respectively.

     EMPLOYEE  STOCK  OWNERSHIP  PLAN - 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.

     Effective June 13, 1996, the ESOP obtained a $500,000,  loan  guaranteed by
     the Company for the purpose of  acquiring  common stock of the Company from
     existing  stockholders.  The  loan  bore  interest  at 8.5% per  annum  and
     required  monthly payments of principal and interest of $8,852 through June
     2000.   Immediately   upon  funding  of  the  loan,   the  ESOP   purchased
     approximately  167,504  shares of the Company's  common stock from existing
     stockholders. The Company was required to contribute amounts to the plan to
     sufficiently  cover the debt  payments.  Contributions  to the plan in 1999
     were $184,919.

17. INCOME TAXES:
    ------------

     Income tax expense (benefit)is comprised of the following:

                                    FOR THE YEARS ENDED
                                        DECEMBER 31,
                     -----------------------------------------------------------
                              2001               2000              1999
                       -----------------  -----------------  -----------------
      Current
          Federal        $         -        $    60,000        $   (28,000)
          State                  800             21,000              1,000
          Foreign            (36,506)            23,000            143,000
                       -----------------  -----------------  -----------------
                             (35,706)           104,000            116,000
                       -----------------  -----------------  -----------------

      Deferred
          Federal            299,995                  -              2,000
          State               50,528                  -              5,000
          Foreign            (15,934)                 -                  -
                       -----------------  -----------------  -----------------
                             334,589                  -              7,000
                       -----------------  -----------------  -----------------

                         $   298,883          $ 104,000        $   123,000
                       =================  =================  =================
F-21
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The  components of the net deferred tax asset and liability  recognized are
     as follows:
DECEMBER 31,
                                                                   --------------------------------------------
                                                                          2001                    2000
                                                                   --------------------   ---------------------
      Current deferred tax assets (liabilities):
          Accounts receivable, principally due to allowance for
               doubtful accounts                                     $      148,518          $      92,723
          Compensated absences, principally due to accrual for
               financial reporting purposes                                  21,422                 30,317
          Accrued commissions                                                28,326                  2,267
          Accrued payroll                                                    10,035                      -
          Accrued severance                                                 203,911                      -
          Inventory reserve                                               1,190,035                204,714
          Warranty reserve                                                   64,764                100,350
          Stock rotation liability                                           20,070                 20,070
          UNICAP                                                             28,546                 16,104
          Accrued liabilities                                                66,065                      -
          Other                                                                (272)               (16,758)
                                                                   --------------------   ---------------------
                                                                          1,781,420                449,787
               Valuation allowance                                       (1,781,420)              (115,750)
                                                                   --------------------   ---------------------
               Net current deferred tax asset                        $            -         $      334,037
                                                                   ====================   =====================
      Long-term deferred tax assets (liabilities):
          Net operating loss carryforwards                           $    1,935,548         $       36,300
          UNICAP credit carryforward                                         74,167                      -
          Goodwill                                                          505,188                127,290
          Depreciation                                                       56,618                 24,142
                                                                   --------------------   ---------------------
                                                                          2,571,521                187,732
                           Valuation allowance                           (2,571,521)              (187,732)
                                                                   --------------------   ---------------------
                           Net long-term deferred tax liability      $            -         $            -
                                                                   ====================   =====================
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 the Years Ended
                                                                                         DECEMBER 31
                                                                   -----------------------------------------------------
                                                                        2001               2000               1999
                                                                   ----------------   ---------------    ---------------
      Total expense computed by applying the U.S. statutory rate
                                                                       (34.0%)             34.0%              34.0%
      Permanent differences                                             (0.1)               5.1                2.3
      State income taxes                                                 0.2               10.9                3.8
      Tax effect resulting from foreign activities                       8.0             (101.0)              41.5
      Change in valuation allowance                                     (5.3)             105.2                0.0
      Change in beginning deferred asset                                35.6                0.0                0.0
      Other                                                              0.0                0.3                0.0
                                                                   ----------------   ---------------    ---------------
                                                                         4.4%              54.5%              81.6%
                                                                   ================   ===============    ===============
F-22
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Company will continue to assess the  realizability  of the deferred tax
     assets in future periods.  The valuation  allowance increased by $4,049,459
     during the year ended  December  31, 2001.  During March 2001,  the Company
     fully  valued the  deferred  tax asset  recorded  at  December  31, 2000 of
     $350,523 due to the  uncertainty of the Company's  ability to recognize the
     benefit of the deferred tax asset in the future.  The  valuation  allowance
     increased by $212,559 during the year ended December 31, 2000.

     At December 31, 2001, the Company has net operating loss  carryforwards for
     Federal tax purposes of  approximately  $3,599,674 which begin to expire in
     the year 2020. The Company has California net operating loss  carryforwards
     as of December 31, 2001 of  $1,854,876  which  expire  through  2011.  As a
     result of certain  non-qualified stock options,  which have been exercised,
     the tax benefit from the utilization of the net operating loss carryforward
     will be charged to  additional-paid in capital when, and if, the losses are
     utilized.  The net operating  loss may be subject to Internal  Revenue Code
     Section 382 limitations.

     No  provision  has been made for U.S.  Federal  and state  income  taxes or
     foreign taxes that may result from future  remittance of the  undistributed
     earnings of foreign  subsidiaries because it is expected that such earnings
     will be reinvested  overseas  indefinitely.  Determination of the amount of
     any unrecognized deferred income tax liability on these unremitted earnings
     is not practicable.
F-23
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. SEGMENT REPORTING:
    -----------------

     The  Company  has   identified  its  segments  based  upon  its  geographic
     operations.  These  segments  are  represented  by  each  of the  Company's
     individual legal entities: DPC, PD and DPL. Segment operations are measured
     consistent with accounting  policies used in these  consolidated  financial
     statements. Segment information is as follows:
December 31, 2001
                                                                    -------------------
                                     DPC                 PD                DPL            Eliminations          Totals
                              ------------------  -----------------  -----------------  ------------------ ------------------

      Revenues                  $    6,475,533      $           -      $   3,854,324      $            -     $   10,329,857
                              ==================  =================  =================  ================== ==================
      Intersegment
        Revenues                $            -      $     778,450      $     599,848      $   (1,378,298)    $            -
                              ==================  =================  =================  ================== ==================

      Interest Income           $       24,350      $         310      $      12,519      $      (24,350)    $       12,829
                              ==================  =================  =================  ================== ==================

      Interest Expense          $       56,874      $           -      $      30,937      $      (24,350)    $       63,461
                              ==================  =================  =================  ================== ==================
      Depreciation and
        Amortization            $      196,555      $     139,526      $     114,671      $            -     $      450,752
                              ==================  =================  =================  ================== ==================

      Income Tax                $      350,523      $      11,356      $     (62,996)     $            -     $      298,883
                              ==================  =================  =================  ================== ==================

      Net Income(loss)          $   (5,360,730)     $  (1,596,321)     $    (207,140)     $      123,471     $   (7,040,720)
                              ==================  =================  =================  ================== ==================
      Expenditures for
        Segment Assets          $      104,257      $       5,424      $      23,600      $            -     $      133,281
                              ==================  =================  =================  ================== ==================

      Segment Assets            $    6,833,699      $     409,601      $   2,562,562      $   (3,292,803)    $    6,513,059
                              ==================  =================  =================  ================== ==================
F-24
                   DIGITAL POWER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
                                                                    -------------------
                                     DPC                 PD                DPL            Eliminations          Totals
                              ------------------  -----------------  -----------------  ------------------ ------------------

      Revenues                  $   12,721,567      $      15,302      $   5,145,861      $            -     $   17,882,730
                              ==================  =================  =================  ================== ==================
      Intersegment Revenues
                                $            -      $   3,026,933      $     483,394      $   (3,510,327)    $            -
                              ==================  =================  =================  ================== ==================

      Interest Income           $       63,010      $       1,742      $       5,711      $      (40,543)    $       29,920
                              ==================  =================  =================  ================== ==================

      Interest Expense          $       79,997      $       2,021      $      49,517      $      (40,543)    $       90,992
                              ==================  =================  =================  ================== ==================
      Depreciation and
        Amortization            $      303,890      $      54,346      $     117,751      $            -     $      475,987
                              ==================  =================  =================  ================== ==================
      Income Tax Expense
                                $       80,000      $           -      $      24,000      $            -     $      104,000
                              ==================  =================  =================  ================== ==================

      Net Income                $     (525,919)     $     179,333      $     441,753      $            -     $       95,167
                              ==================  =================  =================  ================== ==================
      Expenditures for
        Segment Assets          $      133,972      $      19,517      $      65,425      $            -     $      218,914
                              ==================  =================  =================  ================== ==================

      Segment Assets            $   10,674,886      $     180,624      $   2,631,015      $   (1,321,475)    $   12,165,050
                              ==================  =================  =================  ================== ==================

                                                                      December 31, 1999
                                                                     -------------------
                                     DPC                 PD                DPL            Eliminations          Totals
                              ------------------  -----------------  -----------------  ------------------ ------------------
      Revenues                  $    9,085,554      $      19,989      $   6,428,475      $            -     $   15,354,018
                              ==================  =================  =================  ================== ==================
      Intersegment Revenues
                                $            -      $   2,150,000      $     221,138      $   (2,371,138)    $            -
                              ==================  =================  =================  ================== ==================

      Interest Income           $      128,106      $       3,806      $      12,936      $     (113,913)    $       30,935
                              ==================  =================  =================  ================== ==================

      Interest Expense          $      130,173      $       7,098      $     154,985      $     (113,913)    $      178,343
                              ==================  =================  =================  ================== ==================
      Depreciation and
        Amortization            $      161,490      $      49,357      $     289,844      $            -     $      500,691
                              ==================  =================  =================  ================== ==================
      Income Tax Expense        $      (20,000)     $           -      $     143,000      $            -     $      123,000
                              ==================  =================  =================  ================== ==================
      Net Income                $      (67,081)     $     (70,437)     $     170,945      $            -     $       33,427
                              ==================  =================  =================  ================== ==================
      Expenditures for
        Segment Assets          $       42,282      $      51,686      $      93,794      $            -     $      187,762
                              ==================  =================  =================  ================== ==================
      Segment Assets            $    9,251,925      $     829,095      $   4,924,991      $   (3,845,178)    $   11,160,833
                              ==================  =================  =================  ================== ==================
F-25

                            SUPPLEMENTAL INFORMATION
F-26

                          INDEPENDENT AUDITOR'S REPORT
                           ON SUPPLEMENTAL INFORMATION

                                                                            PAGE
                                                                            ----

Independent Auditor's Report on Supplemental Information....................F-27

Schedule 1 - Balance Sheets, Digital Power Corporation - Parent
 Company Only, Equity Basis - December 31, 2001 and 2000....................F-28

Schedule 2 - Statements of Operations, Digital Power Corporation -
 Parent Company Only, Equity Basis - For the Years Ended
 December 31, 2001, 2000 and 1999 ..........................................F-29

Schedule 3 -Statements of Cash Flows, Digital Power Corporation -
 Parent Company Only, Equity Basis - For the Years Ended
 December 31, 2001, 2000 and 1999...........................................F-30

Supplemental Schedules of Consolidated Company Expenses
      Schedule 4 - Consolidated details of Cost of Goods Sold -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-32
      Schedule 5 - Consolidated details of Marketing and Selling  -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-34
      Schedule 6 -Consolidated details of General and Administrative -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-35
      Schedule 7 -Consolidated details of Intercompany Income -
          For the Years Ended December 31, 2001, 2000 and 1999..............F-36
F-27

                          INDEPENDENT AUDITOR'S REPORT
                          ON SUPPLEMENTAL INFORMATION

To the Stockholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California

Our  report on our audits of the basic  financial  statements  of Digital  Power
Corporation  and  subsidiaries  for the years ended  December  31, 2001 and 2000
appears on page F-2.  The audits  were  conducted  for the purpose of forming an
opinion on the basic financial  statements  taken as a whole.  The  supplemental
information  contained in Schedules 1 through 7 is presented for the purposes of
additional analysis for the Company's majority shareholder, Telkoor Telecom Ltd,
for their filing under the Israeli Securities Regulations (preparation of Annual
Financial  Statements),  of  1933  and  are not a  required  part  of the  basic
financial  statements.  Such  information  has been  subjected  to the  auditing
standards  generally  accepted in the United States of America and International
Auditing  Standards  as applied in the audit of the basic  financial  statements
and, in our opinion,  is fairly  stated in all material  respects in relation to
the basic financial statements taken as a whole.

/S/ Hein + Associates LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
February 19, 2002
F-28
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 1
                                 BALANCE SHEETS
DECEMBER 31,             DECEMBER 31,
                                                                               2001                     2000
                                                                      ----------------------  ------------------------
                             ASSETS
                             ------
CURRENT ASSETS:
     Cash and cash equivalents                                             $   1,059,790           $     483,513
     Accounts receivable - trade, net of allowance for doubtful
      accounts of $370,000 and $231,000 at December 31, 2001 and
      2000, respectively                                                         998,746               1,843,122
     Income tax refund receivable                                                      -                 179,200
     Inventories, net                                                          1,204,634               3,896,705
     Prepaid expenses and deposits                                                43,591                 208,275
     Deferred income taxes                                                             -                 350,523
                                                                          ----------------        ----------------
         Total current assets                                                  3,306,761               6,961,338

PROPERTY AND EQUIPMENT, net                                                      216,225                 260,731
INVESTMENT IN AND ADVANCES TO PODER DIGITAL  (1)                                  65,249                 190,317
INVESTMENT IN AND ADVANCES TO DIGITAL POWER LIMITED (2)                        1,347,121               3,617,294
OTHER ASSETS                                                                      17,910                  17,910
                                                                          ----------------        ----------------
                                                                           $   4,953,266           $  11,047,590
                                                                          ================        ================
TOTAL ASSETS
                                          LIABILITIES AND STOCKHOLDERS' EQUITY
                                          ------------------------------------
CURRENT LIABILITIES:
     Notes payable                                                               652,261                 400,000
     Accounts payable                                                          1,112,217               1,462,944
     Accrued liabilities                                                         503,378                 643,372
                                                                          ----------------        ----------------
         Total liabilities                                                     2,267,856               2,506,316
                                                                          ----------------        ----------------
STOCKHOLDERS' EQUITY:
     Preferred stock issuable in series, no par value, 2,000,000
         shares authorized, no shares issued or outstanding at
         December 31, 2001 or 2000                                                     -                       -
     Common stock, no par value, 10,000,000 shares authorized,
         4,510,680 and 3,260,680 shares issued and outstanding for
         December 31, 2001 and 2000, respectively                             11,036,251               9,786,251
     Additional paid in capital                                                  733,256                 733,256
     Accumulated deficit                                                      (8,771,654)             (1,730,934)
     Accumulated other comprehensive loss                                       (312,443)               (247,299)
                                                                          ----------------        ----------------
         Total stockholders' equity                                            2,685,410               8,541,274
                                                                          ----------------        ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $   4,953,266           $  11,047,590
                                                                          ================        ================

(1)  Investment in Poder Digital  includes capital stock and additional paid in capital of $1,016,175 at December 31, 2001 and 2000.
     In addition, the investment includes incompany advances (liabilities) of $1,289,642 and ($702,178), retained earnings (deficit)
     of ($2,240,568) and ($109,718) and other comprehensive loss related to the translation adjustment of $0 and ($13,962) at
     December 31, 2001 and 2000, respectively.

(2)  Investment in Digital Power Limited includes capital stock and additional paid in capital of $1,119,051 at December 31, 2001
     and 2000. In addition, the investment includes incompany accounts receivable of $309,822 and $184,543, a long-term interest
     bearing note receivable of $1,160,647 and $2,251,589, retained earnings (deficit) of ($929,956) and $295,448 and other
     comprehensive loss related to the translation adjustments of ($312,443) and ($233,337) at December 31, 2001 and 2000,
     respectively.

/s/ David Amitai                                                        3/30/02
----------------------------------------------------------------  --------------------------------------------------------
DAVID AMITAI, PRESIDENT AND CEO                                   DATE
F-29
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 2
                             STATEMENTS OF OPERATION
FOR THE YEARS ENDED
                                                                                       DECEMBER 31,
                                                                  -------------------------------------------------------
                                                                         2001               2000               1999
                                                                  -----------------  -----------------  -----------------

REVENUES                                                           $   6,475,533       $  12,721,567     $   9,085,554
COST OF GOODS SOLD                                                     7,155,132          10,043,846         7,313,704
                                                                  ----------------    ----------------  ----------------

     Gross margin (loss)                                                (679,599)          2,677,721         1,771,850
                                                                  ----------------    ----------------  ----------------

OPERATING EXPENSES:
     Research and development                                            825,787             928,348           674,566
     Marketing and selling                                               407,445             638,573           347,589
     General and administrative                                        1,364,380           1,105,805           834,709
                                                                  ----------------    ----------------  ----------------

         Total operating expenses                                      2,597,612           2,672,726         1,856,864
                                                                  ----------------    ----------------  ----------------

INCOME (LOSS) FROM OPERATIONS                                         (3,277,211)              4,995           (85,014)
                                                                  ----------------    ----------------  ----------------

OTHER INCOME (EXPENSE):
     Interest income                                                      24,350              63,010           128,106
     Interest expense                                                    (56,874)            (79,997)         (130,173)
     Gain (loss) on disposal of assets                                   (24,208)                  -                 -
                                                                  ----------------    ----------------  ----------------
         Other (expense)                                                 (56,732)            (16,987)           (2,067)
                                                                  ----------------    ----------------  ----------------

INCOME (LOSS) BEFORE INTEREST IN SUBSIDARIES AND INCOME TAXES
                                                                      (3,333,943)            (11,992)          (87,081)

INCOME TAX PROVISION (BENEFIT)                                           350,523              80,000           (20,000)
                                                                  ----------------    ----------------  ----------------

INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDARIES                (3,684,466)            (91,992)          (67,081)

EQUITY IN EARNINGS OF PODER DIGITAL                                   (2,130,850)            179,333           (70,437)
EQUITY IN EARNINGS OF DIGITAL POWER LIMITED                           (1,225,404)              7,826           170,945
                                                                  ----------------    ----------------  ----------------

NET INCOME (LOSS)                                                  $  (7,040,720)      $      95,167     $      33,427
                                                                  ================    ================  ================
F-30
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 3
                            STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------
                                                                         2001              2000                1999
                                                                  -----------------  -----------------  -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                               $  (7,040,720)      $     95,167      $      33,427
     Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
        Equity in earnings of Poder Digital S.A de C.V                   2,130,850           (179,333)            70,437
        Equity in earnings of Digital Power Limited                      1,225,404             (7,826)          (170,945)
        Depreciation and amortization                                      124,555            159,890            161,490
        (Gain) loss on disposal of assets                                   24,208                  -                  -
        Deferred income taxes                                              350,523                (22)             8,499
        Warranty expense                                                   (88,655)            55,000           (110,000)
        Increase in provision for inventory obsolescence and
           excess                                                        2,454,710                  -             30,000
        Contribution to ESOP                                                     -                  -            184,919
        Bad debt expense                                                   139,000             21,000            (75,000)
        Compensation cost recognized upon issuance of warrants
                                                                                 -            117,555                  -
        Income tax benefit related to exercise of stock options
                                                                                 -            101,397                  -
        Stock issued for services                                                              19,375                  -
     Changes in operating assets and liabilities:
        Accounts receivable                                                705,376           (485,733)           383,265
        Income tax refund receivable                                       179,200           (108,212)           321,658
        Inventories                                                        237,361           (949,613)           241,206
        Prepaid expenses                                                   164,683           (151,585)            17,945
        Net change in subsidiaries receivable (payable)                 (1,026,157)           314,614            (83,459)
        Other assets                                                             -             (8,835)             2,408
        Accounts payable                                                  (350,703)           721,422            275,701
        Accrued liabilities                                                (51,362)            55,899           (464,165)
        Other long-term liabilities                                              -            (25,000)           (10,043)
                                                                    ----------------   ----------------   ----------------
              Net cash provided by (used in) operating activities
                                                                          (821,727)          (254,840)           817,343
                                                                    ----------------   ----------------   ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of property and equipment                                   (104,257)          (133,972)           (42,282)
                                                                    ----------------   ----------------   ----------------
              Net cash (used in) investing activities                     (104,257)          (133,972)           (42,282)
                                                                    ----------------   ----------------   ----------------
F-31
                            DIGITAL POWER CORPORATION
                      (PARENT COMPANY ONLY - EQUITY BASIS)
                                   SCHEDULE 3
                             STATEMENT OF CASH FLOWS
                                   (Continued)
FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                  -----------------------------------------------------------
                                                                         2001               2000               1999
                                                                  -----------------  -----------------  -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options and warrants                           -           754,197                  -
   Proceeds received (payments made) on notes payable                       252,261          (540,000)          (650,000)
   Principal payments on capital lease obligations                                -                 -             (6,094)
   Principal payments on notes payable                                            -                 -           (184,919)
   Investment from Telkoor Telecom, Ltd.                                  1,250,000                 -                  -
                                                                    ----------------   ----------------   ----------------
     Net cash provided by financing activities                            1,502,261           214,197           (841,013)
                                                                    ----------------   ----------------   ----------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                     576,277          (174,615)           (65,952)

CASH AND CASH EQUIVALENTS, beginning of period                              483,513           658,128            724,080
                                                                    ----------------   ----------------   ----------------

CASH AND CASH EQUIVALENTS, end of period                               $  1,059,790       $   483,513        $   658,128
                                                                    ================   ================   ================

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash payments for:
     Interest                                                          $    56,874        $    81,637        $   120,129
                                                                    ================   ================   ================
     Income taxes                                                      $         -        $   180,000        $         -
                                                                    ================   ================   ================
F-32

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
SCHEDULE 4 - COST OF GOODS SOLD:
-------------------------------
                                                                 FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Materials consumed                 $    5,593,586      $    3,241,585      $          -       $           -      $    8,835,171
   Labor                                   1,397,591             508,023         2,966,709          (1,384,298)          3,488,025
   Contracted labor                               64              54,705                 -                   -              54,769
   Depreciation                               37,365                   -            49,708                   -              87,073
   Other manufacturing costs                 464,737                   -               944                   -             465,681
   Changes in finished goods and
     work-in-process                        (338,211)           (652,523)                -                   -            (990,734)
                                    ------------------  ------------------  ----------------    ----------------   -----------------

                                      $    7,155,132      $    3,151,790      $  3,017,361        $ (1,384,298)   $     11,939,985
                                    ==================  ==================  ================    ================   =================

                                                                 FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Materials consumed                 $    5,651,520      $    3,796,660      $          -       $    (483,394)     $    8,964,786
   Labor                                   3,669,294             637,879         2,554,990          (3,026,933)          3,835,230
   Contracted labor                           20,718              91,592                 -                   -             112,310
   Depreciation                               47,967                   -            58,613                   -             106,580
   Other manufacturing costs                 368,271            (916,138)          248,748                   -            (299,119)
   Changes in finished goods and
     work-in-process                         286,076             217,578                 -                   -             503,654
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $   10,043,846      $    3,827,571      $  2,862,351       $  (3,510,327)     $   13,223,441
                                    ==================  ==================  ================   =================  ==================
F-33

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                  DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Materials consumed                 $    4,221,683      $    4,067,212      $          -       $    (221,138)     $    8,067,757
   Labor                                   2,746,727             639,557         1,919,654          (2,150,004)          3,155,934
   Contracted labor                            4,618             133,765                 -                   -             138,383
   Depreciation                               48,447                   -            39,283                   -              87,730
   Other manufacturing costs                 169,458            (759,845)          278,193                   -            (312,194)
   Changes in finished goods and
     work-in-process                         122,771              16,789                 -                   -             139,560
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $    7,313,704      $    4,097,478      $  2,237,134       $  (2,371,142)     $   11,277,170
                                    ==================  ==================   ===============   =================  ==================
F-34

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES

SCHEDULE 5 - MARKETING & SELLING EXPENSES:
-----------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                 DPL                PD             Eliminations        Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
    Labor                             $      123,405      $      202,857      $          -       $           -      $      326,262
    Commissions                              166,292              67,770                 -                   -             234,062
    Advertising                                7,175              82,279                 -                   -              89,454
    Depreciation                              16,192              30,001                 -                   -              46,193
    Other costs                               94,381              73,546                 -                   -             167,927
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $      407,445      $      456,453      $          -       $           -      $      863,898
                                    ==================  ==================  ================   =================  ==================

                                                                          FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                PD             Eliminations        Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------

            Labor                     $      128,417      $      281,477      $          -       $           -      $      409,894
            Commissions                      343,444              52,856                 -                   -             396,300
            Advertising                       13,704             115,435                 -                   -             129,139
            Depreciation                      20,786              25,000                 -                   -              45,786
            Other costs                      132,222             235,204                 -                   -             367,426
                                    ------------------  ------------------  ----------------   -----------------  ------------------

                                      $      638,573      $      709,972      $          -       $           -      $    1,348,545
                                    ==================  ==================  ================   =================  ==================

                                                                          FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
            Labor                     $       94,263      $      361,209      $          -       $           -      $      455,472
            Commissions                      189,645              68,600                 -                   -             258,245
            Advertising                            -             102,958                 -                   -             102,958
            Depreciation                      20,994                   -                 -                   -              20,994
            Other costs                       42,687             278,967                 -                   -             321,654
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $      347,589      $      811,734      $          -       $           -      $    1,159,323
                                    ==================  ==================  ================   ===============    ==================
F-35

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES

SCHEDULE 6 - GENERAL & ADMINISTRATIVE EXPENSES:
----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Labor                              $      339,821      $      296,742      $          -       $           -      $      636,563
   Depreciation and amortization
                                             105,631             134,487            15,000                   -             255,118
   Bad debt                                  158,131               2,980                 -                   -             161,111
   Impairment of goodwill                          -             946,263                 -                   -             946,263
   Investor relations                        202,274                   -                 -                   -             202,274
   Other material items                      630,524             265,492                 -              26,529             922,545
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $    1,436,381      $    1,645,964      $     15,000       $      26,529      $    3,123,874
                                    ==================  ==================  ================   =================  ==================

                                                                          FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Labor                              $      523,740      $      221,549      $          -       $           -      $      745,289
   Depreciation and amortization
                                             187,170             487,054            35,357                   -             709,581
   Bad debt                                   24,504                 424                 -                   -              24,928
   Investor relations                        150,438                   -                 -                   -             150,438
   Other material items                      219,953             335,017                 -            (289,926)            265,044
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $    1,105,805      $    1,044,044      $     35,357       $    (289,926)     $    1,895,280
                                    ==================  ==================  ================   =================  ==================
F-36

                            DIGITAL POWER CORPORATION
             SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                  DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Labor                              $      344,785      $      244,401      $          -       $           -      $      589,186
   Depreciation and amortization
                                              43,602             299,915                 -                   -             343,517
   Bad debt                                  (75,453)             (5,520)                -                   -             (80,973)
   Investor relations                         72,155                   -                 -                   -              72,155
   Other material items                      449,620             270,665                 -                   -             720,285
                                    ------------------  ------------------  ----------------   -----------------  ------------------
                                      $      834,709      $      809,461      $          -       $           -      $    1,644,170
                                    ==================  ==================  ================   =================  ==================

SCHEDULE 7 -CONSOLIDATED DETAILS OF INTERCOMPANY INCOME
-------------------------------------------------------
                                                                     FOR THE YEAR ENDED DECEMBER 31, 2001
                                           DPC                  DPL                PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Interest earned on Note Receivable
    from Digital Power Limited        $       24,350                                             $     (24,350)     $            -
   Royalty income from Digital Power
    Limited                                   87,130                                                   (87,130)                  -
   Management services from Digital
    Power Limited                     $       56,870                                                   (56,879)                  -

                                                                     FOR THE YEAR ENDED DECEMBER 31, 2000
                                           DPC                 DPL                 PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
   Interest earned on Note Receivable
    from Digital Power Limited        $       40,543                                             $     (40,543)     $            -
   Royalty income from Digital Power
    Limited                                   87,130                                                   (87,130)                  -
   Management services from Digital
    Power Limited                     $       56,870                                                   (56,879)                  -

                                                                     FOR THE YEAR ENDED DECEMBER 31, 1999
                                           DPC                 DPL                 PD             Eliminations       Consolidated
                                    ------------------  ------------------  ----------------   -----------------  ------------------
    Interest earned on Note Receivable
     from Digital Power Limited       $      113,913                                             $    (113,913)     $            -