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CORRESP
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    Unassociated Document

    October
29, 2009

    Via
Edgar

    United
States Securities and Exchange Commission

    450 Fifth
Street N.W.

    Washington,
DC 20549

              Attention:

              Jeffrey
      Jaramillo, Accounting Branch Chief

              Mail Stop 3030

                Re:

                Digital
      Power Corporation

    Form 10-K
for the Fiscal Year Ended December 31, 2008

    Filed March 30, 2009

    File No.
001-12711

    Dear Mr.
Jaramillo:

    Please
find below responses to comments raised by the Staff of the Division of
Corporation Finance of the United States Securities and Exchange Commission (the
“Staff”) in their letter dated September 29, 2009 regarding the Staff’s review
of the Form 10-K for the year ended December 31, 2008 filed by Digital Power
Corporation (the “Company”, “we”, “us” or “our”).  Our responses
follow your original, numbered comments.

    Form 10-K for the period
ending December 31, 2008

    Management’s Discussion and
Analysis, page 19

    Critical Accounting
Policies, page 22

    Revenue Recognition, page
22

              1.

              Comment.

              We
      note your critical accounting policy disclosure for revenue recognition
      merely repeats the policy from your significant accounting policy footnote
      without elaboration.  Accordingly, your disclosure does not
      conform to our expectations for the critical accounting
      policy.  For each identified critical accounting policy, please
      expand and describe the specific factors that in your view makes each
      critical.  Discuss the nature of estimates and uncertainties
      about those estimates inherent to each individual policy, including how
      you make those estimates.  Discuss how different assumptions,
      methods or conditions might effect your financial
      statements.  For further guidance, please refer to SEC
      interpretive Release No. 33-8350.  Revise future filings to
      comply.

    Jeffrey
Jaramillo, Accounting Branch Chief

    United
States Securities and Exchange Commission

    October
29, 2009

    Page 2

    Response.

    In future
filings, we will prepare our critical accounting policy disclosure for revenue
recognition in accordance with the guidance provided in SEC interpretive Release
No. 33-8350.

    Liquidity and Capital
Resources, page 23

              2.

              Comment.

    We note
elsewhere, page 16, that you will require a larger facility in
2009.  Also, capital expenditures approximated only $79 thousand in
2009.  However, we see in your liquidity discussion that you “will
pursue a strategy to mitigate any reductions in cash flow…by reducing capital
expenditures and other discretionary spending.”  Please tell us and in
future filings explain how the need to occupy a larger facility affects your
strategy and impacts your expected liquidity.

    Response.

    At the
end of 2008, we recognized the need to increase our United States facility in
order to support our future strategic plans and expected growth, which, we were
aware, may result in an increase in capital expenditures. At the same time,
we adopted and acted upon a strategy to tighten and closely monitor our
operating expenses in all areas of activity, including capital
expenditures.  Due to the global recession, we have cut down on
operating expenses and have decided not to take on a larger facility in the
United States at this time.

    The need
to increase our current United States facility still exists.  We are
reassessing the need on an ongoing basis in order to determine the appropriate
time to make such a move in light of the global recession and our results of
operations.

              3.

              Comment.

    Also, we
note from your disclosure on page 16 that the lease for the Gresham facility
expires on September 16, 2009, with certain repairing covenants.  In
this regard, please tell us and disclose in future filings the terms associated
with the certain repairing covenants referred by you on page
16.  Additionally, please provide us with and disclose in your future
filings the potential adverse consequence on your future financial position,
results of operations and cash flows if you are not able to renew the lease of
the Gresham facility.

    Jeffrey
Jaramillo, Accounting Branch Chief

    United
States Securities and Exchange Commission

    October
29, 2009

    Page
3

    Response.

    On
September 26, 2009, a sublease (the “Sublease”) between Digital Power Limited,
our United Kingdom subsidiary (“DPL”), as sublessee, and Cray Electronics
Holdings Limited, now known as Anite plc, as sublessor (“Anite”),
expired.  The Sublease had originally commenced on March 13, 1995
between Gresham Lion Technology Limited (“Gresham”) and Anite, but was assigned
to DPL on October 2, 1999 when we acquired the present business from
Gresham.  The Sublease was subject to a lease agreement (the “Lease”)
between Anite, as tenant, and the building owner, Wotan (Salisbury) Limited (the
“Landlord”), that commenced November 8, 1976 and expired on September 26,
2009.  The Lease, as is common in the UK, is a full repairing lease
that requires the tenant to perform certain repairing covenants, such as
redecorating the internal and external structure/foundation of the building at
intervals during the term of the Lease and generally keeping the building in
good repair.

    Although
the Lease has expired, DPL continues to occupy the facility for business
purposes, and thus, the Landlord and Tenant Act of 1954 (the “Act”) applies in
the United Kingdom.  Accordingly, since the Landlord did not give
notice of termination before the expiration of the Lease, DPL’s right to
occupancy automatically continues.  Under the Act, DPL has the right
to apply to the court to be granted a new lease with respect to the premises on
essentially the same terms as its original lease for a term of up to 15
years.

    DPL
intends to renew the lease for an additional term and has already received an
offer of a new lease from the Landlord for an additional period of 15 years,
such that all that remains is for DPL to agree to the terms of said new
lease.  To date, with the approval of the Landlord, DPL has paid rent
through December, 2009.

    In
the unlikely event, however, that the new tenancy is not granted, we
believe that the only potential adverse consequence on DPL’s future financial
position, results of operations and cash flows would be the disruption of the
business while alternative premises were sought and relocation was made, along
with the costs associated with such search for new premises and relocation,
which, to date, have not been estimated, as DPL has no plans to
move.

    Jeffrey
Jaramillo, Accounting Branch Chief

    United
States Securities and Exchange Commission

    October
29, 2009

    Page
4

    It should
be noted that, upon the expiration of the Lease and surrender of the building to
the Landlord, the Landlord is entitled to compensation for any diminution of its
reversionary interest that might have taken place during the course of the
tenancy.  In connection with the expiration of the Lease, Anite
received from the Landlord a list of dilapidations to the building to be
addressed in accordance with the Lease.  The list of dilapidations
includes various matters of repair, as well as a requirement to restore the
building to its original configuration in 1976, which was largely a
warehouse.  Anite claims that the work to be performed in the list of
dilapidations should be undertaken by DPL as part of its liabilities under the
Sublease.

    Upon
receiving legal advice, we responded to the claim made by Anite by explaining
that DPL’s obligations relate to the Sublease granted in 1995 to Gresham, and
subsequently assigned to DPL in 1999, and thus DPL’s obligations can only relate
back to the condition of the building in 1995, not 1976.  Upon the
expiration of the Sublease in September, 2009, the building had the same
configuration that it had in 1995.  Furthermore, DPL has made ongoing
repairs to the facility that it believes materially comply with the covenants of
the lease to maintain the building in good repair during the lease
term.  Accordingly, we believe that Anite’s claim has no merit, that a
related liability is not probable and that there is no need to record a
provision in accordance with FAS 5.

    In the
event that DPL enters into a new lease with the Landlord, since the building
will not be surrendered to the Landlord, the above issue will become moot until
the expiration of the new lease.

    We will
disclose in future filings the terms associated with the repairing covenants, as
well as the potential adverse consequence on our future financial position,
results of operations and cash flows in the event that the lease is not
renewed.

    Jeffrey
Jaramillo, Accounting Branch Chief

    United
States Securities and Exchange Commission

    October
29, 2009

    Page
5

    Consolidated Financial
Statements

    Note 6. Commitments and
Contingent Liabilities, page F-18

              4.

              Comment.

    Reference
is made to your disclosure in Note 6 on page F-18.  Please provide us
with and disclose in the notes to your financial statements in future filings
your accounting policy related to the various operating lease agreements, which
expire on various dates and the lease agreement for the U.K. facility, which
expires on September 2009.  In this regard, if the lease agreements
are operating leases as defined in paragraph 6 of SFAS No. 13, please tell us if
you apply paragraph 15 of SFAS No. 13 in accounting for operating
leases.  If you do apply paragraph 15 of SFAS No. 13, please explain
to us why rent expense for all years presented in Note 6 vary in
amount.

    Response.

    We have
two operating lease agreements: one for the United States facility that expires
in 2012 (with an option to renew for an additional five years) and one for the
United Kingdom facility that expires in September, 2009.  Both of
these agreements are deemed operating leases as defined in paragraph 6 of SFAS
No. 13.  The rental payments for for the United States facility are
approximately $70,000 per year until 2012, and the rental payments for the
United Kingdom facility are approximately 25,000 British Pounds per quarter
until September, 2009.  The rent in connection with the operating
leases is charged to expense over the lease term.  As the lease for
the United States facility calls for an annual base rent that increases during
the lease term, we have applied paragraph 15 of SFAS No. 13, such that if rental
payments are not made on a straight-line basis, rental expense shall
nevertheless be recognized on a straight line basis.  As of December
31, 2008, the deferred rent liability was $12,000.

    Despite
our application of paragraph 15 of SFAS No. 13, the rent expense in 2008 was
less than that in 2007 by $52,000 for the following reasons.  First,
the exchange rate of the British Pound from 2007 to 2008 decreased against the
United States dollar from 2.008 to 1.845, resulting in a decrease in the rent
expense in the United Kingdom by approximately $15,000.  Second, we
leased a larger facility in the United States until the third quarter of 2007,
during which period the annual rent expense of such facility was approximately
$130,000; we entered into a new operating lease for a smaller facility, and the
annual rent expense of such facility was approximately $70,000, and, thus, there
was a decrease in the rent expense in the United States by approximately
$37,000.

    Jeffrey
Jaramillo, Accounting Branch Chief

    United
States Securities and Exchange Commission

    October
29, 2009

    Page
6

    We will
disclose in future filings our accounting policy in respect of our operating
lease agreements.

    Note 7. Shareholders’
Equity, page F-18

              5.

              Comment.

    We note
from your disclosure on page F-20 that in 2005 and 2006 you granted 30,000
options to Telkoor’s employees and 100,000 options to a non-employee
consultant.  The fair value of these options was estimated using a
Black Scholes option pricing model with assumptions for 2008.  In this
regard, please explain to us in detail why you used assumptions as of 2008 to
fair value options issued in 2005 and 2006.  Also, please provide us
with a detail description of your accounting used to account for such
non-employee equity compensation, supported with the applicable accounting
literature.

    Response.

    We
applied FASB Statement No. 123 (revised 2004), “Share-Based Compensation”
(“Statement 123(R)”) and  EITF Issue No. 96–18, “Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” (“EITF 96-18”) in connection with
the options granted to Telkoor’s employees and the non-employee consultant, as
both Telkoor’s employees and the non-employee consultant are providing services
to us but are not defined as common law employees in accordance with the
guidance of Statement 123 (R) and FASB Interpretation 44, “Accounting for
Certain Transactions Involving Stock Compensation”, since we do not have the
right under common law to exercise sufficient control to establish an
employer-employee relationship with them.  Statement 123 (R) requires
that share-based payments to non-employees be measured based on the fair value
of the services received or the fair value of the share-based payments,
whichever is more reliably measurable.  In this case, the share-based
payment of the options granted was measured based on the fair value of the
options payments using the Black-Scholes pricing model.

    Jeffrey
Jaramillo, Accounting Branch Chief

    United
States Securities and Exchange Commission

    October
29, 2009

    Page
7

    Per EITF
96-18, the measurement date for nonemployees is the earlier of (a) the date that
a commitment for performance by the counterparty to earn the equity instruments
is reached (“performance commitment”) and (b) the date that the counterparty’s
performance is complete.  With respect to the foregoing, no
performance commitment exists (i.e., performance by the counterparty is not
probable as there is no large disincentive or economic penalty for
nonperformance); therefore, the measurement date of the options is the date that
the counterparty's performance is complete.  Prior to the measurement
date, the unvested options are re-measured at their then-current fair values at
each interim financial reporting date using the accelerated method, and
compensation cost is adjusted for the changes in those fair values over the
service period, in accordance with variable plan accounting as illustrated in
FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.”  Accordingly, at each reporting
date, the unvested options are re-measured using the Black-Scholes pricing
model, and the respective assumptions of the pricing model are
updated.

    It should
be noted that, in 2005 and 2006, we granted 70,000 options to Telkoor’s
employees (rather than 30,000 options as stated in Note 7d, which is a
typographical error) and 100,000 options to a non-employee
consultant.  10,000 and 40,000 options to Telkoor employees were
forfeited in 2007 and 2008, respectively, due to termination of
employment.

              6.

              Comment.

    Additionally,
please explain in detail why you recognized “compensation income” of $12 as it
relates to stock compensation related to options granted to Telkoor’s employees
and other non-employee consultants.

    Response.

    For the
year ended December 31, 2008, we recorded compensation income of $12,000
primarily due to the fact that 40,000 options (of the 60,000 options outstanding
at January 1, 2008) to Tel