UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549  FORM10-Q  xQUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended June 30, 2007  oTRANSITIONAL REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period fromto  Commission file number 0-115404  MPC CORPORATION (formerly, HYPERSPACE COMMUNICATIONS, INC.). (Name of registrant as specified in its charter)  COLORADO
        
        84-1577562(State or other jurisdiction of incorporation or organization)
        
        (IRS Employer identification No.)906 E. Karcher Rd., Nampa, ID 83687(Address of principal executive offices)(208)893-3434(Registrants telephone number)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the  Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YesxNoo  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  Large accelerated fileroAccelerated fileroNon-accelerated filerx  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act).  YesoNox  As of July 31, 2007 there were 14,202,026 shares of the issuers no par value Common Stock outstanding.     INDEX






Page No.PART I  FINANCIAL INFORMATIONITEM 1
        FINANCIAL STATEMENTS
        3Condensed Consolidated Balance Sheets
        3Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006
        4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006
        5Notes to Interim Condensed Consolidated Financial Statements (unaudited)
        6ITEM 2
        MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
        19ITEM 3
        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        29ITEM 4T
        CONTROLS AND PROCEDURES
        30PART II  OTHER INFORMATIONITEM 1
        LEGAL PROCEEDINGS
        30ITEM 1A
        RISK FACTORS
        31ITEM 4
        SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
        32ITEM 6
        EXHIITS
        33




A NOTE ABOUT FORWARD-LOOKING STATEMENTS



The statements, other than statements of historical fact, included in this report are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, estimate, anticipate, plan, seek, could, should, continues, or believe, or the negative or other variations thereof. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot provide assurance that such expectations will occur. Our actual future performance could differ materially from such statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially. Our Annual Report on Form 10-KSB/A
for the year ended December 31, 2006 describes many of the significant factors that could cause actual results and events to differ materially and that constitute material risks to our business. You should carefully review the risk factors set forth in such Form 10-KSB/A, as well as those described in this report. Forward-looking statements apply only as of the date of this report; as such, they should not be unduly relied upon for current circumstances. Except as required by law, we are not obligated to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this report or those that might reflect the occurrence of unanticipated events.







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PART I  FINANCIAL INFORMATION



ITEM 1: FINANCIAL STATEMENTS



MPC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except share data)




June 30,
        December 31,2007
        2006(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
        $
        1,867
        
        $
        4,839Restricted cash
        
        4,036
        
        
        4,585Accounts receivable, net
        
        21,655
        
        
        45,643Inventories, net
        
        26,532
        
        
        18,189Prepaid maintenance and warranty costs
        
        7,584
        
        
        6,391Other current assets
        
        683
        
        
        935Total Current Assets
        
        62,357
        
        
        80,582Non-Current AssetsProperty and equipment, net
        
        3,591
        
        
        4,914Goodwill
        
        22,197
        
        
        22,197Acquired intangibles, net
        
        9,203
        
        
        10,108Long-term portion of prepaid maintenance and warranty costs
        
        1,311
        
        
        844Other assets
        
        2,829
        
        
        3,792Total Non-Current Assets
        
        39,131
        
        
        41,855TOTAL ASSETS
        $
        101,488
        
        $
        122,437LIABILITIES AND SHAREHOLDERS' EQUITYCurrent LiabilitiesAccounts payable
        $
        24,208
        
        $
        32,536Accrued expenses
        
        4,696
        
        
        4,354Accrued licenses and royalties
        
        1,533
        
        
        1,540Current portion of accrued warranties
        
        2,323
        
        
        2,220Current portion of deferred revenue
        
        18,938
        
        
        15,607Notes payable and debt
        
        31,025
        
        
        34,834Total Current Liabilities
        
        82,723
        
        
        91,091Long Term LiabilitiesNon-current portion of accrued warranties
        
        1,978
        
        
        2,127Non-current portion of deferred revenue
        
        21,567
        
        
        22,979Derivative warrant liability
        
        11,768
        
        
        6,129Derivative financial instruments at estimated fair value
        
        34,362
        
        
        21,234Total Long Term Liabilities
        
        69,675
        
        
        52,469TOTAL LIABILITIES
        
        152,398
        
        
        143,560COMMITMENTS AND CONTINGENCIESShareholders' EquityPreferred Stock, no par value; 1,000,000 shares authorized; no shares issued and outstanding at 2007 and 2006
        
        -
        
        
        -Common Stock, no par value, 100,000,000 shares authorized; 13,505,018 and 12,147,438 shares issued and outstanding at 2007 and 2006, respectively
        
        62,169
        
        
        61,454Accumulated Deficit
        
        (113,079
        )
        
        (82,577
        )Total Shareholders' Equity (Deficit)
        
        (50,910
        )
        
        (21,123
        )TOTAL LIABILITIES AND EQUITY
        $
        101,488
        
        $
        122,437

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

.



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MPC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except for per share data)




Three Months Ended
        
        Six Months EndedJune 30
        
        June 302007
        2006
        
        2007
        2006Revenue
        $
        53,613
        
        $
        68,529
        
        
        $
        110,365
        
        $
        134,993Cost of revenue
        
        46,591
        
        
        60,065
        
        
        
        96,772
        
        
        118,438Gross margin
        
        7,022
        
        
        8,464
        
        
        
        13,593
        
        
        16,555Operating expensesResearch and development expense
        
        542
        
        
        985
        
        
        
        1,039
        
        
        2,135Selling, general and administrative expense
        
        8,855
        
        
        10,189
        
        
        
        18,768
        
        
        21,098Depreciation and amortization
        
        1,153
        
        
        2,020
        
        
        
        2,304
        
        
        4,040Impairment of acquired intangibles
        
        -
        
        
        19,484
        
        
        
        -
        
        
        19,484Total operating expenses
        
        10,550
        
        
        32,678
        
        
        
        22,111
        
        
        46,757Operating loss
        
        (3,528
        )
        
        (24,214
        )
        
        
        (8,518
        )
        
        (30,202
        )Other (income) expenseInterest expense, net
        
        1,503
        
        
        1,166
        
        
        
        3,021
        
        
        2,644Gain on vendor settlements
        
        (225
        )
        
        (843
        )
        
        
        (225
        )
        
        (843
        )Change in estimated fair value of derivative financial
instruments
        
        20,559
        
        
        909
        
        
        
        19,313
        
        
        909Other income
        
        (44
        )
        
        (85
        )
        
        
        (125
        )
        
        (49
        )Total other (income) expense, net
        
        21,793
        
        
        1,147
        
        
        
        21,984
        
        
        2,661Net loss
        $
        (25,321
        )
        $
        (25,361
        )
        
        $
        (30,502
        )
        $
        (32,863
        )Basic and diluted weighted average CommonShares outstanding
        
        13,260
        
        
        12,041
        
        
        
        12,979
        
        
        11,696Basic and diluted loss per Common Share
        $
        (1.91
        )
        $
        (2.11
        )
        
        $
        (2.35
        )
        $
        (2.81
        )

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



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MPC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)




Six Months Ended June 30,2007
        
        
        2006OPERATING ACTIVITIESNet Loss
        $
        (30,502
        )
        $
        (32,863
        )Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation
        
        1,399
        
        
        1,510Amortization of intangibles
        
        905
        
        
        2,530Impairment of intangibles
        
        -
        
        
        19,484Amortization of deferred loan costs
        
        459
        
        
        365Change in estimated fair value of derivative financial instruments
        
        19,313
        
        
        909Stock compensation expense from vesting of restricted stock units
        
        170
        
        
        36Gain on vendor settlements
        
        (225
        )
        
        (843
        )Valuation of warrant exchange
        
        -
        
        
        767Loss on disposal of assets
        
        -
        
        
        43Accrued interest included in notes payable
        
        27
        
        
        32Provision for bad debt
        
        71
        
        
        (30
        )Changes in Assets and LiabilitiesAccounts receivable
        
        23,917
        
        
        12,586Inventory
        
        (8,343
        )
        
        (1,049
        )Prepaid maintenance and warranties
        
        (1,659
        )
        
        7,742Other current assets
        
        249
        
        
        627Other non-current assets
        
        504
        
        
        (432
        )Accounts payable and accrued expenses
        
        (3,184
        )
        
        (7,316
        )Accrued licenses and royalties
        
        (7
        )
        
        3,099Accrued warranties
        
        (46
        )
        
        (308
        )Deferred revenue
        
        1,919
        
        
        (5,604
        )Net Cash Provided by Operating Activities
        
        4,967
        
        
        1,285INVESTING ACTIVITIESPurchase of property and equipment
        
        (76
        )
        
        (115
        )Proceeds from the sale of fixed assets
        
        -
        
        
        2Net Cash Used by Investing Activities
        
        (76
        )
        
        (113
        )FINANCING ACTIVITIESNet activity on line of credit
        
        (7,912
        )
        
        (11,640
        )Net proceeds from notes payable
        
        -
        
        
        4,835Restricted cash related to letters of credit and financing facility
        
        549
        
        
        -Payment of note payable
        
        (500
        )
        
        (126
        )Payments on capital leases
        
        -
        
        
        (121
        )Net proceeds from the exercise of stock options
        
        -
        
        
        27Proceeds from the exercise of warrants
        
        -
        
        
        3,104Payment of stock issuance costs
        
        -
        
        
        (155
        )Net Cash Used by Financing Activities
        
        (7,863
        )
        
        (4,076
        )Net cash decrease for period
        
        (2,972
        )
        
        (2,904
        )Cash at beginning of period
        
        4,839
        
        
        3,897Cash at end of period
        $
        1,867
        
        $
        993

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







Page- 5 -


Supplemental disclosure of cash flow information:

(In thousands)



Cash paid for interest for the six months ended June 30, 2007 and 2006 was $1,674 and $968, respectively.



No cash was paid for income taxes for the six months ended June 30, 2007 and 2006.



MPC CORPORATION

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except share data)



The terms we us and our or the company as used in this quarterly report refer on a consolidated basis to MPC Corporation and to its wholly-owned subsidiaries, including MPC Computers, LLC, (MPC) which we acquired through a merger in July of 2005.






NOTE 1.
        DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

We were formed in 2001 as a Colorado-based company named HyperSpace Communications, Inc. and completed an initial public offering (IPO) in October 2004. In July 2005, we acquired MPC Computers, LLC, or MPC, which is now a wholly owned subsidiary.  We are an enterprise IT hardware business providing products and services to customers in mid-sized businesses, government agencies and education organizations. In January 2007, we changed our name to MPC Corporation.



Our primary business is providing PC-based products and services to mid-sized businesses, government agencies and education organizations. We manufacture and market ClientPro® desktop PCs, TransPort® notebook PCs, NetFRAME® servers and DataFRAME storage products. We also provide hardware-related support services such as installation, technical support, parts replacement, and recycling. In addition to PCs, servers, and storage products, we also fulfill our customers requirements for third party products produced by other vendors including printers, monitors and software.



We focus our business on the federal government, state/local government & education (SLE), and mid-size enterprise market. This focus enables us to tailor our operating model to better support the needs of these customers for customized products, services and programs. We sell directly to our customers and use a build-to-order manufacturing process that we believe is an efficient means to provide customized computing solutions.



These consolidated financial statements consolidate the accounts of MPC Corporation and its wholly owned subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.  References to a fiscal year refer to the calendar year in which such fiscal year commences. MPCs fiscal year ends on the Saturday closest to December 31. MPCs floating fiscal year-end typically results in a 52-week fiscal year, but will occasionally give rise to an additional week resulting in a 53-week fiscal year.






NOTE 2.
        GOING CONCERN

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. However, there can be no assurance that we will be able to continue in the ordinary course of business due to our significant liquidity constraints, unprofitable operations and negative operating cash flows.



Managements plans to continue operations in the ordinary course assume adequate financing initiatives along with continued vendor support through continued or increased credit lines, minimal cancellations of our backlog and successful implementation of previously announced cost cutting initiatives that are expected to be adequate to fund our operations for at least the next twelve months.  There can be no assurance that we will be successful in our efforts to achieve future profitable operations or generate sufficient cash from operations, or obtain additional



Page- 6 -


funding in the event that our financial resources become insufficient. The accompanying condensed consolidated financial statements do not include any adjustments that might result from any outcome of this uncertainty.



Since the acquisition with MPC, we have raised a limited amount of additional funds to operate the business. We have raised $12,139 of equity on the exercise of warrants and $14,486 from the sale of convertible debentures since the acquisition. The funds raised to date are not sufficient to execute our business plan. As noted in Note 4 Notes Payable and Debt, we replaced our prior credit facility with Wachovia Capital Finance Corporation (Western) with a new receivables sales financing facility with Wells Fargo Business Credit, Inc. in November 2006, and further amended the facility in February 2007, which has provided us additional limited liquidity.  The shortfall in funding has been financed by vendors and other creditors who have allowed us to fall behind on our payment obligations or who have settled amounts due to them at amounts less than the original obligation. This funding shortfall
and losses since our acquisition of MPC has resulted in extreme liquidity constraints. There can be no assurance that vendors and other creditors will continue to extend credit to us.  It may be necessary for us to raise additional funds in the near future and we may not be able to do so.  Absent raising a significant amount of additional funds in the near future, there is a material possibility that we will be required to file for bankruptcy protection unless vendors and other creditors continue to waive or defer amounts due. It is also likely that further delays in obtaining financing will do significant harm to vendor relationships and that orders received by us from customers, which are not yet shipped (i.e. in backlog), are at risk of being cancelled.



Certain vendors have entered into agreements with us for settlements of amounts due at less than the full amount owed, and additional vendors and other creditors may be willing to do so. Management is continuing initiatives to reduce overhead expenses and improve gross margins.



On April 13, 2006, we received a notice from the American Stock Exchange (AMEX) that we had failed to satisfy a continued listing rule due to significant operating losses and inadequate liquidity. We submitted a plan to AMEX on April 26, 2006 advising of the steps to be taken to improve our operating results and liquidity. On June 15, 2006, we announced that the AMEX accepted our plan for regaining compliance with the continued listing standards and granted an extension until June 30, 2006, to regain compliance with continued listing standards. We did not meet all of the continued listing standards by the target date of June 30, 2006, and requested an extension. We met with AMEX on December 12, 2006 and discussed the Companys financial projections and progress made on the plan submitted to AMEX in April 2006.  We again requested an extension to regain compliance.  On January 26, 2007 the
AMEX notified us that, although we remain out of compliance with certain of AMEXs continued listing standards, we have demonstrated an ability to regain compliance with the continued listing standards.  Accordingly, the AMEX agreed to grant us an extension to May 31, 2007 (the Revised Plan Period) to become compliant with the continued listing standards.  We did not meet all of the continued listing standards as of the Revised Plan Period.  Based on a review of information provided to the AMEX on June 4, 2007 and communications we have had with the AMEX, the AMEX notified us on July 11, 2007 that we have made a reasonable demonstration of our ability to regain compliance with the continued listing standards and granted us a further extension through October 18, 2007 (the New Plan Period).  Our ability to regain compliance with the continued listing standards will be substantially dependent on our ability to implement adequate financing initiatives,
successfully execute our business plan and cost cutting initiatives of which there is no assurance. There can be no assurance that we will be able to continue our listing on the AMEX.  AMEX will periodically review and assess our progress. If we do not show progress consistent with the plan to regain compliance with continued listing standards, AMEX will review the circumstances and may immediately commence delisting proceedings.  AMEX is authorized to initiate immediate delisting proceedings as appropriate in the public interest, notwithstanding the grant of the extension through the New Plan Period.  AMEX rules state that the AMEX staff may provide a period up to eighteen months to come into compliance with the continued listing standards, from the date of a receipt of a deficiency notice.  In October 2007, eighteen months will have passed since the receipt of the initial deficiency notice, and there is no assurance that additional extensions can or will be provided beyond October
18, 2007.  Additionally, the AMEX staff indicated that if we report net and/or operating losses for the year ended December 31, 2007, pursuant to Section 1003 (a) (i) of the AMEX Company Guide, we would need to maintain shareholders equity in excess of $2,000 in order to remain in compliance.






NOTE 3.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information and Basis of Presentation





Page- 7 -


The accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. These financial statements include the accounts of MPC Corporation and all of its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.



These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and related notes contained in our 2006 Annual Report on Form 10-KSB/A. The comparative balance sheet and related disclosures at December 31, 2006 have been derived from the audited balance sheet and consolidated footnotes referred to above.



In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments of a recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of results to be expected for the full year.



The preparation of our condensed consolidated financial statements in conformity with GAAP necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the balance sheet dates, and the reported amounts of revenues and costs during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise estimates.



Our significant estimates include the collectibility of receivables and corresponding allowance for doubtful accounts, the reserve needed for possible future returns and discounts which may be granted, the carrying value and usefulness of inventory and the related inventory reserves, long-lived asset useful lives and impairment, estimated future volatility in our stock price, the timing and amount of future warranty and other product obligation expenses, the recognition of warranty revenue and the cost and settlement of current litigation or items in dispute.



Cash and Cash Equivalents



Cash equivalents consist of short-term investments that have a maturity of three months or less at the date of purchase.  We had no cash equivalents at June 30, 2007 and December 31, 2006.



Restricted cash



Restricted cash at June 30, 2007 and December 31, 2006 includes $1,500 held as collateral under our receivable financing facility, and $2,536 and $3,085 respectively, held as collateral for outstanding letters of credit.



Accounts Receivable



Accounts receivable are recorded at the invoiced amount and do not bear interest.  We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate reserve against losses resulting from collecting less than full payment on receivables. Overdue accounts are reviewed, and an additional allowance is recorded when determined necessary to state receivables at an estimated realizable value. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment, the aging of our receivables, and the financial condition of the customer.  A considerable amount of judgment is required when assessing the realization of receivables, including assessing the probability of collection and the current creditworthiness of each customer. The allowance for doubtful accounts totaled $1,759
and $1,830, respectively, as of June 30, 2007 and December 31, 2006.



Inventory



Inventory is stated at the lower of cost or market, with cost determined on an average cost basis approximating first in first out (FIFO). We regularly evaluate the realizability of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions,



Page- 8 -


as well as other factors. If circumstances related to our inventories change, estimates of the realizability of inventory could materially change. At June 30, 2007 and December 31, 2006, our inventory valuation allowance totaled $5,624 and $5,185, respectively and was recorded as a reduction of inventory in the consolidated balance sheets. Inventory balances, net of valuation allowances, at June 30, 2007 and December 31, 2006 are:




(In thousands)June 30,2007
        December 31, 2006Raw materials
        $     17,487
        $      16,092Work in process
        434
        236Finished goods
        8,611
        1,861Total inventory
        $     26,532
        $      18,189

Goodwill



We account for Goodwill in accordance with Statement of Accounting Standards (SFAS) 142,Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill no longer be amortized and that goodwill be tested annually for impairment or more frequently if events and circumstances warrant.



Goodwill represents the excess of the purchase consideration over the fair value of assets acquired less liabilities assumed in a business acquisition. Our acquisition of MPC gave rise to goodwill. We engaged an independent third party valuation expert to express an opinion on the fair value of the identifiable intangible and tangible assets of MPC as of acquisition date. Based on this valuation, we established the carrying amount of goodwill. We conduct goodwill impairment tests annually every October 31 or more frequently if impairment indicators arise.



Acquired Intangibles, net



Other intangible assets are accounted for in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,which requires that intangible assets with estimable useful lives be amortized over their estimated useful lives, and be reviewed for impairment when changes in circumstances indicate that their carrying amounts are in excess of their estimated fair value. Acquired intangibles are amortized over their estimated useful lives of 4 to 20 years.



Long-Lived Assets



Equipment and software are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives, primarily three to five years. Additions, improvements and major renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term.



We assess the recoverability of our long-lived assets whenever adverse events or changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. If undiscounted cash flows are not sufficient to support the recorded assets, impairment is recognized to reduce the carrying value of the long-lived assets to their estimated fair value. Cash flow projections are subject to a degree of uncertainty and are based on managements estimate of future performance. Additionally, in conjunction with the review for impairment, the remaining estimated lives of certain of our long-lived assets are assessed.



Deferred Revenue



Deferred revenue includes amounts billed to or received from customers for which revenue has not been recognized. This generally results from deferred software maintenance revenues that are recognized over the term of the contract, which generally range from 1-4 years. Also included in deferred revenue is revenue from the sale of enhanced and extended warranties, which are recognized as the related services are provided, which generally range from 3-5 years. These enhanced/extended warranties are deferred based on guidance provided in Technical Bulletin



Page- 9 -


90-1,Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, and are valued based on the list price, net of discounts offered to the customer.



Prepaid Maintenance and Warranty Costs



Prepaid maintenance and warranty costs include amounts paid to third party software vendors, outsourced providers of warranty fulfillment services and technology insurance vendors for which the related revenue has been deferred. These costs are recognized ratably with the related revenue.



Accrued Warranties



We record warranty liabilities at the time of sale for the estimated costs that may be incurred under our standard limited warranty. The specific warranty terms and conditions vary depending upon the product sold, but generally include technical support, repair parts, labor and a period ranging from 90 days to five years. Factors that affect the warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy warranty obligations. We regularly reevaluate our estimate to assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. If circumstances change, or a dramatic change in the failure rates were to occur, the estimate of the warranty accrual could change significantly.



Concentrations



A concentration of credit risk may exist with respect to trade receivables, particularly customers within the US federal government. We perform ongoing credit evaluations on a significant number of our customers and collateral from our customers is generally not required. Six customers accounted for approximately 30% of trade receivables as of June 30, 2007 and were either agencies of, or resellers to, the federal government.



A concentration of risk may exist with respect to our suppliers. We purchase certain products from single sources. In some cases, alternative sources of supply are not available. In other instances, we have established a procurement relationship with a single source if we determine that it makes business sense. In both of these situations, if the supply by a critical single-source supplier were interrupted or suspended, our ability to ship products in a timely manner will be adversely affected. In cases where alternative suppliers are available, the establishment and procurement from these alternative suppliers will result in delays and losses of sales, which will have an adverse effect on our operating results.



Revenue Recognition



We recognize revenue on hardware and peripherals, net of an allowance for estimated returns, when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until both title and risk of loss transfer to the customer, provided that no significant obligations remain. The timing of revenue recognition is dependent on shipping terms. For FOB destination agreements, which include all sales to the Federal government and some sales to state, local and education customers, we defer the cost of product revenue for in-transit shipments until the goods are delivered. In-transit product shipments to customers are included in inventory.



Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. We allocate revenue from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative sales price of each element when sold separately. The allocation of fair value for a multiple-element software arrangement is based on vendor specific objective evidence (VSOE). Revenue associated with undelivered elements is deferred and recorded when delivery occurs. The value of maintenance services on software sales is determined based on stated renewal rates and a comparison of the stated price of maintenance to software sold in a related transaction. To the extent we do not have VSOE
from separate post contract support sales, we defer the software and the maintenance over the term of the agreement. Service revenue from software maintenance and support are recognized ratably over the maintenance term, which in most cases is one year. Term licenses are recognized ratably over the term of the related arrangement.





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Revenue from extended warranty and service contracts, for which we are obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. In multiple element arrangements that include extended warranty and service contracts, we use the separation guidance provisions of Technical Bulletin 90-1Accounting for Separately Priced Extended Warranty and Product Maintenance Contractsto determine fair value.Revenue from sales of third-party extended warranty and service contracts, for which we are not obligated to perform, is recognized on a net basis at the time of sale.



Shipping Costs



Shipping and handling costs are included in cost of revenue in the accompanying consolidated statement of operations for all periods presented.



Royalties



We have royalty-bearing license agreements allowing us to sell certain hardware and software products and to use certain patented technology. Royalty costs are accrued and included in cost of revenue when the related revenue is recognized.



Research, Development, and Engineering Costs



Research, development, and engineering costs are expensed as incurred, in accordance with SFAS No. 2,Accounting for Research and Development Costs.Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.



Income Taxes



We recognize deferred tax assets and liabilities based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We make no provision for income taxes because, since inception, we have not been profitable. We have a net operating loss carry forward available to offset future federal and state income taxes.



Stock-Based Compensation  Stock Options



During the first quarter of fiscal 2006, we adopted the provisions of and accounted for stock-based compensation in accordance with SFAS 123R,Share-Based Payments, which replaced SFAS 123 and supersedes APB 25. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The valuation provisions of SFAS 123R applies to new grants and to grants that were outstanding as of the effective date and are subsequently modified. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. All options are granted at fair market value on the date of approval of the grant. Under the provisions of our
incentive option plans, employees with vested options who leave our employment, are required to exercise or forfeit their options within 90 days after leaving employment regardless of the exercise period of the initial grant unless the terms of their departure from us allow for such longer time for exercise based on approval of the administrator. All of our stock options were vested as of December 31, 2005, and we ceased using stock options as a compensation tool.



Stock Based Compensation  Restricted Stock Units



Subsequent to the acquisition of MPC, we began issuing Restricted Stock Units (RSUs) as stock based compensation to members of our Board of Directors and employees. We record a non-cash compensation expense over the vesting life of the RSUs determined by the number of units granted multiplied by the fair market value at the date of grant. Compensation expense for RSUs issued after the acquisition is classified on the statement of operations as operating expense. During the six months ended June 30, 2007 and 2006, we recorded $170 and $36 respectively, in stock compensation expense for RSUs issued subsequent to the acquisition. We record a non-cash compensation expense over the period the restricted stock units vest.



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Basic and Diluted Loss Per Share



We apply the provisions of SFAS No. 128,Earnings Per Share. At June 30, 2007 and 2006, dilutive potential common stock of 32,311,503 and 12,682,092, respectively, consisting of stock options, stock warrants, restricted stock units and convertible debt were not included in the computation of diluted loss per share because their effect was antidilutive; however, if we were to achieve profitable operations in the future, they could potentially dilute such earnings.



New Accounting Pronouncements



New Accounting Standards

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement 115. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial statements.



In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. We will adopt this standard January 1, 2008. We do not expect it to have a material impact on our financial position or results of operations.



Recently Adopted Accounting Standards

In June 2006, the FASB issued FIN No. 48,Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the criteria for the measurement, recognition and derecognition of income taxes under FASB Statement No. 109,Accounting for Income Taxes. It also requires additional financial statement disclosures about uncertain tax positions including classification, interest and penalties. FIN 48 is effective January 2007. Because we have not been profitable since our initial public offering and the uncertainty as a going concern, we have not realized any deferred tax assets. FIN No. 48 did not have a material impact on our financial position or results of operations. If our tax status were to change in the future, we would have to reevaluate the impact of FIN No. 48 on
our financial position and results of operations at that time.



NOTE4NOTES PAYABLE AND DEBT




(In thousands)June 30, 2007
        
        December 31, 2006Wells Fargo Receivables Advance Facility
        $                  26,251
        
        $                    34,164Debt Incurred in Acquisition
        370
        
        370Convertible Bridge Loans
        300
        
        300Payable to Lessor
        1,958
        
        -Payable to TPV
        2,146
        
        -Total Notes Payable and Debt
        $                  31,025
        
        $                    34,834

Wells Fargo Receivables Advance Facility



On November 16, 2006 we entered into an agreement with Wells Fargo Business Credit, Inc. (Wells Fargo) for an accounts receivable assignment and advance facility (Receivables Advance Facility) that replaced our prior line of credit with Wachovia Capital Finance Corporation (Western).  Under the new facility, we may assign to Wells Fargo, and Wells Fargo may purchase from us, Accounts (as defined in the Receivables Advance Facility). Wells Fargo will advance 90% of the value of the purchased Accounts. Wells Fargo may adjust the advancement



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percentage at any time in its commercially reasonable discretion upon prior notice to us. We will pay fees equal to the Wells Fargo Prime Rate (as defined in the Receivables Advance Facility), plus 1.75% per annum multiplied by the total amount of Accounts purchased and not yet paid by our customers, computed daily. The effective rate at June 30, 2007 was 10.0%.  Wells Fargo has the right to require that we re-purchase the Accounts in the event our customer does not pay the receivable within a timeframe specified under the Receivables Advance Facility, if a material customer dispute arises or in the event of a default under the Receivables Advance Facility. The Receivables Advance Facility is subject to customary default provisions. Wells Fargo has discretion under the Receivables Advance Facility as to the Accounts purchased and the percentage advanced after submission of the Account for approval.
Wells Fargo is not obligated to buy any Account from us that Wells Fargo does not deem acceptable in its sole discretion. There is no minimum amount of Accounts to be purchased by Wells Fargo under the Receivables Advance Facility. The facility is secured by substantially all of our assets. The Receivables Advance Facility is for a term of three (3) years. There is an annual fee of $100 in addition to a minimum fee. Early termination fees apply if the Receivables Advance Facility is terminated before the end of its term. The Receivables Advance Facility also provides for a $1,500 collateral account for the benefit of Wells Fargo for repayment of any obligations arising under the Receivables Advance Facility.



In February 2007, we entered into an amendment of the Receivables Advance Facility under which Wells Fargo agreed to advance an additional 7.5% of the face amount of currently outstanding Accounts assigned to Wells Fargo, provided that the total advance does not exceed 97.5% of the face amount of any Account (the Temporary Advance), and increase the advance rate on new Accounts assigned to Wells Fargo to 98% of the amount of the Accounts for a period of eight weeks (the Special Facility Period). We must repay the difference between the Advance and the Temporary Advance within four weeks after termination of the Special Facility Period. Failure to repay amounts advanced under the Special Facility would constitute an event of default under the Agreements. At any time when the Temporary Advance has been paid in full for a minimum of 60 days, we may request that the Special Facility be
reinstated for another eight week period with repayment to be made within four weeks.



Debt Incurred in Acquisition



Debt incurred in connection with the acquisition with MPC of $370, was due July 25, 2006 including any unpaid interest, which is accrued at 5% per annum. We were unable to repay this amount due to our liquidity constraints. We have held discussions with these note holders about an extension to repay the amounts due. There is no assurance that we will be successful in renegotiating the terms of these notes. The holders have the right, at any time prior to payment, to convert all or any part of the then outstanding balance of principal and interest under these notes into shares of common stock at the conversion price of $3.00 per share, which was determined at the date of issuance. The common stock underlying these notes are covered by a registration rights agreement.  We filed the registration statement with the SEC on November 8, 2006 and it was declared effective on June 28, 2007.



Convertible Bridge Loans



Convertible Bridge Loans were issued prior to our IPO. The outstanding amount was due April 2006 including any unpaid interest which is accrued at 12% per annum. The holder has the right, at any time prior to repayment, to convert all or any part of the then outstanding balance of principal and interest under these notes into shares of common stock at the conversion price of $3.50 per share. The notes include detachable warrants for purchase of common stock. The value of the warrants was recorded as interest expense in 2004. All of our assets at MPC Corporation collateralize the notes. These notes have registration rights. In May 2006, we repaid principal and interest to one note holder. There are two remaining note holders who have not yet been repaid. We are in default of the repayment terms on these notes and the default interest provision of 18% has been accruing on these notes since April 15,
2006. We have been in discussions with these note holders about an extension to repay the amounts due. There is no assurance that we will be successful in renegotiating the terms of these notes.



Warrants and convertible debt issued in connection with financing activities are subject to the provisions of Emerging Issues Task Force (EITF) Issue 00-19:Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.EITF 00-19 provides that derivatives should be classified as either equity or a liability. If the derivative is determined to be a liability, the liability is fair valued each reporting period with the changes recorded to the consolidated balance sheet and consolidated statement of operations. In regard to the convertible debt set out above, we determined that the embedded conversion option qualified as equity under EITF 00-19 and would not be subject to bifurcation from the host instrument.





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Payable to Lessor



We are party to a commercial lease with Micron Technology dated April 30, 2001 (as amended, the Lease) under which we lease our primary manufacturing facility in Nampa, Idaho. A Fifth Amendment to the Lease deferred our rent payment obligations due or to become due between January 16, 2006 and May 31, 2007, without incurring late charges, provided that we pay base rent and other amounts (the Extended Rent Obligation) under the Lease at any time before May 31, 2007.  The total amount of the Extended Rent Obligation payable on May 31, 2007 was $2,511 and had been recorded as an accrued liability. We had paid only $500 of the Extended Rent by May 31, 2007.



On July 2, 2007, we entered into a Sixth Amendment to the Lease of this manufacturing facility. The Sixth Amendment to Lease provides that we will pay the balance of the Extended Rent Obligation in twelve equal monthly installments in the amount of $174, including interest at the annual rate of 12%. If any installment is not made, we will incur a late charge of 5% of the amount of such installment and interest shall increase to an annual default rate of 18%. The Sixth Amendment also provides that we will pay the full amount of the Extended Rent Obligation in the event we receive equity investment funds in an amount that exceeds $12,000. Additionally, if our unrestricted cash and cash equivalents balance, combined with available lines of credit, exceeds $5,000 at any time after January 1, 2008, the monthly installment amount increases to $348 until the total Extended Rent Obligation is paid in full. In
addition to making the Extended Rent Obligation payments, we are obligated to pay current rent and all other Lease obligations as they become due and payable, including property taxes per the terms of the Lease.



Payable to TPV



On June 30, 2006 we entered into a settlement agreement with TVP International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd  (collectively TPV).  See Note 7, Commitments and Contingencies.  Under the agreement we agreed to pay TPV $2,145 over a period of twelve months with interest at 8%.  The agreement provides for monthly payments of $120 for six months and $254 thereafter. The settlement amount had been previously recorded as accounts payable.



NOTE 5DERIVATIVE WARRANT LIABILITES AND CONVERTIBLE DEBENTURES



Derivative warrant liabilities and convertible debentures consist of the following:




(In thousands)June 30, 2007Derivative Warrants
        
        Convertible DebenturesFair Value
        
        Fair Value
        Face ValueNew Convertible Debentures and Warrants
        $            6,003
        
        $    23,594
        $     9,849September 29, 2006 Financing
        5,765
        
        10,768
        4,636$           11,768
        
        $    34,362
        $    14,485




(In thousands)December 31, 2006Derivative Warrants
        
        Convertible DebenturesFair Value
        
        Fair Value
        Face ValueNew Convertible Debentures and Warrants
        $            3,123
        
        $    14,114
        $     9,849September 29, 2006 Financing
        3,006
        
        7,120
        4,936$            6,129
        
        $    21,234
        $    14,785

Bridge Loan



On April 24, 2006, we entered into a Securities Purchase Agreement with certain existing investors pursuant to which we sold convertible debentures for an aggregate of $5,000. The investors also received an aggregate of 1,370,000 5-year warrants to purchase our no par value common stock for $3.12 per share, the fair market value of our common stock on the day the transaction closed. In connection with the Bridge Loan we issued 64,103 shares of common stock as payment of an origination fee to the investors.



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The convertible debentures accrued interest at 10% per annum and the $5,000 aggregate principal amount was originally scheduled to become due and payable July 24, 2006. We prepaid interest expense through July 24, 2006 with 40,064 shares of common stock at the time of the closing. On July 24, 2006, the maturity date on these debentures was extended to August 24, 2006 in return for an increase to the effective interest rate to 12%, payable in cash, for the period July 24, 2006 to August 24, 2006.



We concurrently entered into a registration rights agreement with the investors that required us to file a registration statement, and have it declared effective, covering all securities issued or issuable under this agreement. We filed the registration statement on November 8, 2006 and it was declared effective on June 28, 2007.  The registration rights agreement contains customary indemnification and contribution provisions.



These convertible notes were hybrid financial instruments that embody certain features that meet the definition of derivative financial instruments and require bifurcation under SFAS No. 133Accounting for Derivative Financial Instruments. These embedded derivatives were required to be combined into one compound derivative financial instrument and carried at fair value as derivative liabilities.



We early adopted and applied the provisions of SFAS 155Accounting for Certain Hybrid Instrumentswhich permits fair value remeasurement for any hybrid instrument (on an instrument-by-instrument basis) that contains an embedded derivative that would otherwise have to be bifurcated. Under SFAS 155, the entire hybrid instrument was initially recorded at fair value and subsequent changes in fair value were recognized in earnings. As noted below, the debentures were rolled into a new financing for New Convertible Debentures and Warrants on September 6, 2006.



New Convertible Debentures and Warrants



On September 6, 2006, we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we sold convertible debentures for an aggregate of $4,550. Additionally, the investors of the April 24, 2006 Bridge Loan exchanged $5,000 face value of their convertible debentures plus $226 of accrued interest thereon into the new convertible debentures and the existing and new investors received 4,924,500 warrants. The debentures become convertible into shares of common stock at a conversion price of $0.75 per share. The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum after shareholder approval was obtained in December 2006, and the aggregate principal amount becomes due and payable September 6, 2009. In the event that the debentures are not repaid on the
maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum or the maximum amount permitted by law, whichever is less. The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.



Because the conversion price for the debentures and the exercise price for the warrants was below market value at the time of issuance and below the exercise and/or conversion price for certain previously issued warrants and convertible securities, anti-dilution rights of various security holders were triggered and resulted in the downward adjustment of the exercise and/or conversion price for various security holders, including the holders of our publicly traded warrants. See Note 8  Subsequent Events.



Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holders beneficial ownership of our common stock would exceed 9.99%.  We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to investors. The registration rights agreement contains customary indemnification and contribution provisions. We filed the registration statement with the SEC on November 8, 2006 and it was declared effective on June 28, 2007. Not all of the common stock underlying the debentures and warrants were registered under the registration statement due to blocker provisions imposed by certain investors on their registerable shares and from a reduction in the number of shares as
required by the SEC. We believe we have substantially fulfilled our obligation under the registration rights agreement and will register the remaining unregistered shares when the blocker provisions are waived by the investors and when allowed by the SEC.



On March 5, 2007, we obtained amendments and waivers to, the registration rights agreement and the debentures. Pursuant to a letter agreement, the majority of the investors, including Crestview Capital Master, LLC and Toibb



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Investment LLC agreed to waive the penalty provisions for not yet having an effective registration statement, extended the dates for filing a registration statement and all related deadlines, including the date by which the initial registration statement must be declared effective by the SEC, by 120 days. The investors in this offering also agreed that no Event of Default is presently deemed to have occurred under the debentures. The 120-day extension period lapsed and the registration statement was not declared effective until June 28, 2007. For the six months ended June 30, 2007, we incurred liquidated damages of $339 under the registration rights agreement related to the delay in the effectiveness of our registration statement.



We issued to one of the investors additional warrants to purchase up to 360,000 shares of common stock for $1.10 per share. The terms of these warrants are identical to the warrants issued as part of the financing. The warrants were accounted for as additional consideration given to the investors as part of the financing. In connection with this financing, we issued 546,000 warrants with a 5-year term to the placement agent to purchase our common stock for $1.10 per share.



The New Convertible Debentures are hybrid financial instruments that embody certain features that meet the definition of derivative financial instruments and require bifurcation under Statements on Financial Accounting Standards No. 133 as follows:




(i)    The conversion and anti-dilution protection features embedded in the debentures require bifurcation under FAS 133 because the risks associated with these features are not clearly and closely related to the host debt instrument. The conventional convertible exemption is not available for the hybrid instrument due to anti-dilution protections afforded the holders. In addition, an exemption for instruments indexed to a companys own stock was not available because the hybrid instrument did not possess all conditions necessary for equity classification.(ii)   The default redemption put embedded in the debentures requires bifurcation because the risks associated with these features are not clearly and closely related to the host debt instrument and they do not meet the definition of indexed to a companys own stock which is necessary for equity classification.(iii) Certain buy-in and share delivery features met the definition for derivative accounting. However, we determined that share delivery was within our control and, therefore, the value of this feature would be de minimus.

Embedded derivatives that require bifurcation are required to be combined into one compound derivative financial instrument and carried at fair value as derivative liabilities. The 4,924,500 of detachable warrants, and related anti-dilution protection features were evaluated as freestanding derivative financial instruments under EITF 00-19, which provides the guidelines for equity classification. The warrants did not possess all of the conditions for equity classification due to the registration rights that require the delivery of registered shares, and did not provide for a mechanism for settlement should we be unable to deliver registered shares; in these instances, net-cash settlement is presumed. As such, the detachable warrants were required to be carried as liabilities at fair value. The warrants issued to the placement agent possessed all of the conditions for equity classification and were therefore
classified as equity.



We applied the provisions of SFAS 155 for the New Convertible Debentures and Warrants as a hybrid instrument that contains an embedded derivative that would otherwise have to be bifurcated. The entire hybrid instrument was therefore initially recorded at fair value and subsequent changes in fair value were recognized in earnings.



In determining the fair value of our derivative financial instruments we assumed an expiration term of 4.2 years, a volatility of 93.72% and interest rate of 4.92%. The estimated fair value of these derivative instruments at June 30, 2007 and December 31, 2006 are as follows:




Fair Value
        
        Fair Value(In thousands)
        
        of Debt
        
        of Warrants
        
        TotalJune 30, 2007
        $
        23,594
        $
        6,002
        $
        29,596December 31, 2006
        $
        14,114
        $
        3,123
        $
        17,237





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September 29, 2006 Financing



On September 29, 2006 we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we agreed to sell convertible debentures for an aggregate of $4,936. The majority of the transaction closed October 4, 2006.  The investors also received an aggregate of 2,468,125 warrants to purchase our common stock. The debentures become convertible into shares of common stock at a conversion price of $0.75 per share. The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum after shareholder approval was obtained in December 2006 and the aggregate principal amount becomes due and payable September 29, 2009. In the event that the debentures are not repaid on the maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum
or the maximum amount permitted by law, whichever is less. The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.



Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holders beneficial ownership of our common stock would exceed 9.99%. We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to the investors. The registration rights agreement contains customary indemnification and contribution provisions. The terms, conditions, features and accounting treatment of these debentures and warrants are substantially identical to the New Convertible Debentures and Warrants.



We filed the registration statement with the SEC on November 8, 2006 and it was declared effective on June 28, 2007. Not all of the common stock underlying the debentures and warrants was registered under this registration statement due to the large number of shares of common stock to be registered relative to the number of shares of our common stock then outstanding.  In order to register the shares on a Form S-3, the SEC required that we reduce in the number of shares being registered. We believe we have substantially fulfilled our obligations under the registration rights agreement and will register the remaining unregistered shares as required by the registration rights agreement and as allowed by the SEC.



We did not obtain any amendments or waivers from these investors and as a result, as of February 1, 2007 we began incurring liquidated damages under the registration rights agreement at the rate of 1.5% of the aggregate amount invested per month until the registration statement was declared effective on June 28, 2007. These liquidated damages must be paid in cash, and they accrue interest at a rate of 18% per annum. We have notified the investors that we are currently unable to pay the interest and will accrue the interest if unpaid to their account. There is no assurance that they will allow us to defer payment of the liquidated damages. We accrued $344 in liquidated damages under the registration rights agreement during the six months ended June 30, 2007.  Since we have not paid the interest or penalties due under the debentures or the registration rights agreement, a holder could declare
the debentures to be in default and accelerate the debt due under the debentures.  If this were to happen, the debentures would accrue interest at the rate of 22% per annum. We may be required to pay interest or other required payments in cash rather than stock and could be forced to use our limited cash to redeem all or a portion of the outstanding debentures.



In connection with this financing, we issued 499,867 warrants with a 5-year term to the placement agent to purchase our common stock for $1.10 per share.



In determining the fair value of our derivative financial instruments we assumed an expiration term of 4.3 years, a volatility of 93.72% and an interest rate of 4.92%.  The estimated probability of a dilutive financing transaction occuring is based on managements estimate of such a transaction in the future. The estimated fair value of these derivative instruments at June 30, 2007 and December 31, 2006 are as follows:




Fair Value
        
        Fair Value(In thousands)
        
        of Debt
        
        of Warrants
        
        TotalJune 30, 2007
        $
        10,768
        $
        5,765
        $
        16,533December 31, 2006
        $
        7,120
        $
        3,006
        $
        10,126





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NOTE 6SHAREHOLDERS EQUITY



During the six months ended June 30, 2007, we issued 409,700 shares of common stock upon conversion of $300 face value of convertible debentures plus accrued interest with a fair value of $546. We also issued 947,880 shares of common stock upon the vesting of restricted stock units.



NOTE 7COMMITMENTS AND CONTINGENCIES



Letters of Credit



On June 30, 2007, we had outstanding letters of credit totaling $2,500. The letters of credit were fully collateralized with cash on deposit at the issuing bank.



Litigation



Phillip Adams & Associates, LLC



We are a defendant in a lawsuit, alleging infringement of certain patents, relating to floppy disk controllers, owned by Phillip Adams & Associates, LLC. We were added to this suit by an amended complaint filed on May 31, 2005 in the U.S. District Court, District of Utah. We have tendered indemnification demands to certain of our component suppliers. Because the case is still in the discovery phase, we are not able to determine the financial impact, if any, arising from an adverse result in the matter.



Bingham McCutchen, LLP



We were a defendant in a lawsuit filed by a law firm seeking damages for unpaid legal services. Bingham McCutchen alleged that approximately $530 was owed for services rendered. The suit was filed on or about December 20, 2006 in the District Court of the 3rdJudicial Court of the State of Idaho, Canyon County. The matter was settled on July 11, 2007 with a payment to Bingham in the amount of $225.



TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd.



We were a defendant in a lawsuit filed by TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd. filed in the 98thJudicial Court of Travis County, Texas, alleging that we failed to pay invoices for computer equipment.  In June 2007, we settled the case by agreeing to pay $2,146 over a period of 12 months with interest accruing at 8%.



Wacom Technology Corporation



We are a defendant in a lawsuit filed by Wacom Technology Corporation. This suit was filed on March 6, 2007 in the U.S. District Court, District of Idaho alleging that we have failed to pay invoices for computer equipment in the amount of approximately $1,200.  A default judgment has been entered against us in this case and Wacom is seeking to enforce the judgment.



Other Matters



We are involved in various other legal proceedings from time to time in the ordinary course of our business. We are not currently subject to any other legal proceedings that we believe will have a material impact on our business. However, due to the inherent uncertainties of the judicial process, we are unable to predict the ultimate outcome or financial exposure, if any, with respect to these matters.



NOTE 8SUBSEQUENT EVENTS



Warrant Exercise Price Adjustments





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In August 2007, we announced an adjustment to the exercise price of our publicly traded warrants (AMEX:MPZ.WS). As stated in our September 30, 2004 Prospectus, the exercise price of each warrant was originally $5.50 per share of common stock. Effective August 7, 2007, the exercise price for each warrant was adjusted to $3.77 per share of common stock. A total of 3,600,000 publicly traded warrants were outstanding as of the date of this report. Additionally, the exercise price of certain warrants issued in connection with our acquisition of MPC Computers, LLC in July 2005 were also adjusted. A total of 2,678,238 such warrants initially issued at an exercise price of $5.50 per share of common stock were adjusted to an exercise price of $3.77 per share. A total of 75,008 warrants initially issued at an exercise price of $3.00 per share of common stock were adjusted to an exercise price of $2.06 per share. The
adjustments to the respective warrants were made in accordance with the anti-dilution provisions of the warrant agreements. All other terms and conditions of the warrants remain unchanged.



Conversion of Debentures



In July 2007, 690,261 shares of our common stock were issued upon conversion of convertible debentures with a face value $450 plus accrued interest and penalties.



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



Managements discussion and analysis of the results of operations and financial condition should be read in conjunction with the financial statements and related notes included in Item 1 of this report and with the Companys Annual Report in Form 10-KSB/A for the year ended December 31, 2006.



OVERVIEW AND EXECUTIVE SUMMARY



We were formed in 2001 as a Colorado-based software company and completed an IPO in October 2004. In July 2005, we acquired MPC, which is now our wholly owned subsidiary. Because of the MPC acquisition, the size and nature of our business and sales and marketing strategy has changed significantly from the time of our IPO. All discussion in this section will cover our ownership of MPC as our only current business.



Current Business



Our primary business is providing PC-based products and services to mid-sized businesses, government agencies and education organizations. We manufacture and market ClientPro® desktop PCs, TransPort® notebook PCs, NetFRAME® servers and DataFRAME storage products. We also provide hardware-related support services such as installation, technical support, parts replacement, and recycling. In addition to PCs, servers, and storage products, we also fulfill our customers requirements for third party products produced by other vendors, including printers, monitors and software.



We focus primarily on three markets: federal government, state/local government & education (SLE), and mid-size enterprise commercial. This focus enables us to tailor our operating model to better support the needs of these customers for customized products, services and programs. We sell directly to customers in each of our markets.



We use a build-to-order manufacturing process that we believe is an efficient means to provide customized computing solutions.



Strategic Plans and Initiatives



We plan to expand our enterprise IT hardware business of providing products and services to customers in mid-sized businesses, government agencies and education organizations.  The desktop and notebook market is intensely competitive and customers increasingly view those products as commodities. Our strategy is to grow our server and storage business, while taking advantage of opportunities in our traditional desktop and notebook PC markets.



In 2006 we implemented several strategic initiatives including, the following:




Aligning our cost structure with our revenue and margin levels;Streamlining executive management;



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Realigning the MPC manufacturing process to improve overall efficiencyReducing overhead spending in areas such as marketing, IT, research and development and human resources.

Although these initiatives will reduce our expense base, we cannot assure that we will be profitable going forward or that the initiatives will achieve the intended results.



Gross Margin Initiatives



We launched initiatives to improve gross margin in 2006. We are focusing on returns, freight costs, manufacturing productivity and customer evaluation units as areas of opportunity to improve our gross margins. We continue to be active in cost management and constantly seek ways to run our business more cost effectively.  There can be no assurance that improvements can be achieved.



Furthermore, we expect to focus on:




Increasing the liquidity in our business and improving our balance sheet;Improving our gross margins;Continuing to make our operations more cost efficient;Seeking ways to sell and distribute our products more effectively;Penetrating segments of the US federal government where we have historically not made significant sales;Continuing to focus on higher margin business; andWorking with our vendors to negotiate further credit extensions or larger lines of credit

RESULTS OF OPERATIONS




RESULTS OF OPERATIONS
        Three months ended
        
        Six months ended(In millions)
        June 30,
        
        June 30,2007
        2006
        % Change
        2007
        2006
        % ChangeRevenue
        $
        53.6
        
        $
        68.5
        
        -21.8%
        $
        110.4
        
        $
        135.0
        
        -18.2%Cost of revenue
        
        46.6
        
        
        60.0
        
        -22.3%
        
        96.8
        
        
        118.4
        
        -18.2%Gross margin
        
        7.0
        
        
        8.5
        
        -17.6%
        
        13.6
        
        
        16.6
        
        -18.1%Gross margin %
        
        13.1%
        
        
        12.4%
        
        
        
        12.3%
        
        
        12.3%Operating expensesResearch and development expense
        
        0.5
        
        
        1.0
        
        -50.0%
        
        1.0
        
        
        2.1
        
        -52.4%Selling, general and administrativeexpense
        
        8.8
        
        
        10.2
        
        -13.7%
        
        18.8
        
        
        21.1
        
        -10.9%Depreciation and amortization
        
        1.2
        
        
        2.0
        
        -40.0%
        
        2.3
        
        
        4.1
        
        -43.9%Impairment of acquired intangibles
        
        -
        
        
        19.5
        
        -100.0%
        
        -
        
        
        19.5
        
        -100.0%Total operating expenses
        
        10.5
        
        
        32.7
        
        -67.9%
        
        22.1
        
        
        46.8
        
        -52.8%Operating expenses as a % of revenue
        
        19.6%
        
        
        47.7%
        
        
        
        20.0%
        
        
        34.7%Operating loss
        $
        (3.5
        )
        $
        (24.2
        )
        -85.5%
        $
        (8.5
        )
        $
        (30.2
        )
        -71.9%Operating loss as a % of revenue
        
        -6.5%
        
        
        -35.3%
        
        
        
        -7.7%
        
        
        -22.4%Other (income) expenseInterest expense, net
        
        1.5
        
        
        1.2
        
        
        
        3.0
        
        
        2.6Gain on vendor settlements
        
        (0.2
        )
        
        (0.8
        )
        
        
        (0.2
        )
        
        (0.8
        )Change in estimated fair value ofderivative financial instruments
        
        20.5
        
        
        0.9
        
        
        
        19.3
        
        
        0.9Other income
        
        -
        
        
        (0.1
        )
        
        
        (0.1
        )
        
        -Total other (income) expense
        
        21.8
        
        
        1.2
        
        
        
        22.0
        
        
        2.7Net loss
        $
        (25.3
        )
        $
        (25.4
        )
        
        $
        (30.5
        )
        $
        (32.9
        )



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OPERATING RESULTS



Revenue



Revenue for the three months ended June 30, 2007 was $53.6 million, a decline of $14.9 million or 21.8% from the comparable period in 2006. Revenue for the six months ended June 30, 2007 was $110.4 million, a decline of $24.6 million or 18.2% from the same period in 2006. The decrease in revenue for the three and six months ended June 30, 2007 was due in part to lower sales to our commercial, state/local government, and education customers. Due to our cash constraints in the second half of 2006, many of these customers orders were delayed and they therefore placed fewer orders with us during the first half of 2007. Lower revenues from commercial, state/local government, and education customers were partially offset by higher revenues to federal government customers. Our orders in backlog increased from approximately $28 million at the end of 2006 to approximately $39
million at the end of the second quarter 2007. The increase in the backlog resulted primarily from a large federal order late in the 2ndquarter that did not ship until the next quarter.



Our contract with the Department of Veterans Affairs (VA) terminated in August 2006. Thereafter, we were required to seek sales to the VA under other contracts that are less advantageous. In April 2007, we were awarded a prime contractor position on a new federal government-wide acquisition contract for the procurement of IT hardware and software. The contract, which runs over a seven-year period, allows several large federal agencies, including the VA, to procure IT hardware and software. We began making deliveries under the contract beginning in June 2007. There can be no assurance that material sales under the contract will be achieved, as such contracts with federal, state and local governments do not guarantee any level of sales.



Our revenues have declined from 2005 to 2006, and to date in 2007 compared to 2006.  While we have recently enjoyed moderate increases in sales to federal customers, it is not certain this improvement in federal sales will continue or that it will be sufficient to overcome declines in sales to other customers.  Several factors have contributed to the downward trend in revenue.   Some major competitors have significantly stronger brand recognition and larger marketing budgets than we do.  Additionally, many of our competitors have larger operations than we do and, generally have stronger financial positions. We believe these factors result in our competitors being able to procure raw materials at prices lower than us. These factors, along with our low manufacturing facility capacity utilization, results in our competitors having a greater ability to reduce selling prices in highly competitive bidding
situations. We experienced a number of situations where sales opportunities were lost as a result of lower prices offered by our competitors that we were unable to match.



Gross Margin



As a percentage of net sales, gross margin increased to 13.1% for the three months ended June 30, 2007 from 12.4% for the same period in 2006, and remained unchanged for the six months ended June 30, 2007 compared to the same period in 2006. Gross margins for the second quarter of 2007 increased sequentially compared to the first quarter of 2007. The improvements in gross margin are due primarily to our continued focus on tighter controls on customer returns, freight costs, and manufacturing productivity, along with improved margins on our federal government sales and focus, in general, on higher margin business.



Researchand Development Expense



Research and development expenses decreased $0.5 million or 50.0% and $1.1 million or 52.4% for the three and six months ended June 30, 2007, respectively from the same periods in 2006, primarily due to our cost cutting initiatives initiated in 2006.



Selling, General and Administrative Expense (SG&A)



Our SG&A expense for the three and six months ended June 30, 2007 decreased $1.4 million and $2.3 million, or 13.7% and 10.9%, respectively, compared to the same periods in 2006. Our ongoing cost reduction efforts initiated in 2006 and lower sales commissions from lower sales are the primary factors contributing to the decline.



Depreciation and Amortization





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Deprecation and amortization consists of depreciation of purchased fixed assets and the non-cash amortization of acquired intangibles at the time of our acquisition of MPC in July 2005. Depreciation and amortization declined $0.8 million and $1.8 million or 40.0% and 43.9%, respectively, for the three months and six months ended June 30, 2007 from the comparable periods of 2006, primarily due to the $19.5 million impairment of acquired intangibles during the second quarter of 2006. The impairment resulted in a lower remaining balance of acquired intangibles and therefore a reduction of future amortization expense.



Impairment of Acquired Intangibles



In 2006, we were challenged by difficult market trends such as declining average selling prices and declining margins. Our financial projections in June 2006 were updated to reflect such trends. Based on the updated projections at that time, we determined that acquired intangibles relating to customer relationships that arose at the time of the acquisition of MPC had been impaired primarily due to the future expected declines in revenue to federal government customers and other customers. We recognized a non-cash impairment charge of $19.5 million for the three and six months ended June 30, 2006. For the comparable periods in 2007, we had no further indication of impairment of our acquired intangibles.



Change in Estimated Fair Value of Derivative Financial Instruments



On April 24, 2006, we sold convertible debentures (the Bridge Loan) for an aggregate of $5.0 million and issued 1.37 million 5-year warrants to purchase, our common stock for $3.12 per share, the fair value of our common stock on the date of the close of the transaction. These debentures plus accrued interest thereon were rolled into a new financing (New Convertible Debentures) on September 6, 2006 for which we received an additional $4.55 million in cash. In addition, we issued 4.9 million 5-year warrants to purchase our common stock for $1.10 per share, which was below the market value per share of $1.61 of our common stock on that date. As a result of anti-dilution provisions, the conversion price of the Bridge Loan warrants was reduced to $1.10. We entered into another financing (September 29, 2006 Financing) in which we sold $4.9 million of convertible debentures and issued 2.5 million 5-year
warrants to purchase our common stock for $1.10 per share, which was below the market value of our common stock on that date. Additional warrants were issued in connection with these transactions.



These convertible debentures and warrants are derivative financial instruments that are carried at fair value as derivative liabilities. See Note 5  Derivative Warrant Liabilities and Convertible Debentures in Notes to Consolidated Financial Statements in Item 1 of this report for more information regarding these financial instruments. During the three and six months ended June 30, 2007, we recognized non-cash expense of $20.5 million and $19.3 million, respectively, related to changes in fair value of these derivative financial instruments primarily as a result of an increase in the market price of our stock during the second quarter of 2007. For the three months ended June 30, 2006, we recognized expense of $0.9 million related to the initial recognition of the Bridge Loan and the associated change in the fair value of the underlying derivatives during that quarter.



Significant estimates and assumptions are used in the determination of the fair values of these derivative financial instruments. The fair values are determined in part by, and will fluctuate with, the market value of our stock. If the market price of our stock increases during a period, the fair value of the derivatives is expected to increase and will adversely affect our earnings. A decline in the market price of our stock will cause a decrease in fair value of the derivatives and have a positive impact to earnings. We anticipate that the change in fair value of derivative financial instruments may likely have a material positive or negative effect on our earnings in future periods. The change in the fair value of these derivative financial instruments has no impact on our cash flows.



Income taxes



We make no provision for income taxes because, since inception, we have not been profitable. We have a net operating loss carry-forward available to offset future federal and state income tax expenses to an amount that approximates our accumulated deficits. Our net operating loss carry-forward will expire in varying amounts from 2021 to 2026. The utilization of the net operating loss carry-forward as an offset to future taxable income is subject to the limitations under US federal income tax laws. One such limitation is imposed where there is a greater than 50% change in ownership of our company.



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OFF BALANCE SHEET ARRANGEMENTS



We have no off the balance sheet arrangements.



GUARANTEES



During our normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to customers and licensees in connection with the use, sale and/or license of our products, (ii) indemnities to lessors in connection with our facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct, (iv) indemnities involving the accuracy of representations in certain contracts, and (v) guarantees to certain vendors and creditors for balances owed. The duration of these indemnities and commitments in certain cases may be indefinite. The majority of these indemnities and commitments do not provide for any limitation of
the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities and commitments in the accompanying consolidated financial statements.



NEW AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS



New Accounting Standards

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement 115. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial statements.



In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. We will adopt this standard January 1, 2008. We do not expect it to have a material impact on our financial position or results of operations.



Recently Adapted Accounting Standards

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109.FIN No. 48 clarifies the criteria for the measurement, recognition and derecognition of income taxes under FASB Statement No. 109,Accounting for Income Taxes. It also requires additional financial statement disclosures about uncertain tax positions including classification, interest and penalties. FIN 48 is effective January 2007. Because we have not been profitable since our initial public offering and the uncertainty as a going concern, we have not realized any deferred tax assets. FIN No. 48 did not have a material impact on our financial position or results of operations. If our tax status were to change in the future, we would have to reevaluate the impact of FIN No. 48 on
our financial position and results of operations at that time.



CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES



We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of GAAP financial statements requires certain estimates, assumptions, and judgments to be made that may affect our consolidated statement of financial position and results of operations. Critical accounting estimates are those that are most important and material to our financial condition and results of operations and require managements most difficult, subjective, or complex judgments, often as a result of the need to estimate matters that are inherently uncertain. We believe our most critical accounting policies and estimates relate to revenue recognition, including reserves needed for possible future returns and discounts; the carrying value and usefulness of inventory and related inventory reserves; the timing and amount of future
warranty obligations; accounting for derivative financial instruments; and the impairment of acquired intangible assets. We have discussed the development, selection, and disclosure of our critical accounting policies and use of estimates with the Audit Committee of our Board of Directors. These critical accounting policies and our other accounting policies are described in Note 1 of Notes to Interim Consolidated Financial Statements included in Item 1  Financial Statements.



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Revenue Recognition



We frequently enter into sales arrangements with customers that contain multiple elements or deliverables such as hardware, software, peripherals, and services. Judgments and estimates are critical to ensure compliance with GAAP. These judgments relate to the allocation of the proceeds received from an arrangement to the multiple elements, the determination of whether any undelivered elements are essential to the functionality of the delivered elements, and the appropriate timing of revenue recognition. We offer extended warranty and service contracts to customers that extend and/or enhance the technical support, parts, and labor coverage offered as part of the base warranty included with the product. Revenue from separately priced extended warranty and service contracts, for which we are obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract. The
amount recognized on a periodic basis within this term is based on managements best estimate of how it will perform its obligations in future periods. This is based on past historic trends and other factors likely to have a future impact on warranty claims. The actual rate of warranty claims could differ materially from managements estimates.



We record reductions in revenue in the current period for estimated future product returns related to current period sales. Management analyzes historical returns, current trends, changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowances in any accounting period. If actual returns exceed estimated returns, we would be required to record additional reductions to revenue which would affect earnings in the period the adjustments are made.



Inventory Valuation



We operate in a business environment subject to rapid changes in technology and customer demand. We record write-downs for components and products which have become obsolete or are in excess of anticipated demand or net realizable value. Historically, these write-downs have primarily related to warranty inventory. We perform an assessment of inventory each quarter, which includes a review of, among other factors, inventory on hand and forecast requirements, product life cycle (including end of life product) and development plans, component cost trends, product pricing and quality issues. Based on this analysis, we record an adjustment for excess and obsolete inventory. We may be required to record additional write-downs if actual demand, component costs or product life cycles differ from estimates, which would affect earnings in the period the write-downs are made.



Warranty Liabilities



We record warranty liabilities at the time of sale for the estimated costs that may be incurred under our standard limited warranty. The specific warranty terms and conditions vary depending upon the product sold but generally include technical support, parts, and labor over a period ranging from 90 days to three years. Factors that affect our warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and the average cost of claims on our installed base to satisfy our warranty obligation. The anticipated rate of warranty claims is the primary factor impacting our estimated warranty obligation. The other factors are less significant due to the fact that the average remaining aggregate warranty period of the covered installed base is approximately 9 months, repair parts are generally already in stock or
available at pre-determined prices, and labor rates which are fairly predictable and historically have not fluctuated significantly from period to period.  Warranty claims are relatively predictable based on historical experience of failure rates. If actual results differ from our estimates, we revise our estimated warranty liabilities to reflect such changes. Each quarter, we reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.



Derivative Financial Instruments



The accounting for convertible debt with derivative features is highly complex, subject to a number of accounting pronouncements and subject to broad interpretations. Determination of the treatment of these convertible debt instruments is based on current interpretation of the facts, treatment by other companies and discussion with industry experts. Management is also required to make highly subjective estimates of future share price volatility, the probability of future events and effective discount rates. We anticipate that future changes in the fair value of our derivative financial instruments may have a material impact in our results of operations. Among other factors, the fair value of our derivative financial instruments is affected by the market value of our common stock. Increases in



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the market price of our common stock will adversely impact our financial results.  Declines in the market value of our common stock will have a positive impact. The changes in the fair value of these derivatives have no impact on our cash flows.



Impairment of Acquired Intangible Assets



The estimates used by management in determining the impairment of acquired intangible assets is a critical accounting estimate susceptible to change from period to period. It requires management to make assumptions about future cash flows over future years and utilize an estimated discount rate. Managements assumptions about future cash flows involves significant judgment because actual operating levels have fluctuated in the past and may continue to do so in the future and economic conditions may change. Also, the adoption of any new strategic plan inherently involves uncertainty. A significant adverse change in our business could result in a future impairment of the value of our acquired intangible assets.



LIQUIDITY AND CAPITAL RESOURCES



Our primary sources of liquidity have been our Wells Fargo Receivables Advance Facility and additional funding through $14.5 million in private placements made during 2006.



We face significant constraints with respect to our liquidity and working capital that have materially impacted our business and are expected to continue to impact our business.  As of June 30, 2007, we had cash and cash equivalents of $1.9 million, current assets of $62.4 million and current liabilities (exclusive of deferred revenue which is not yet earned) totaling $63.8 million. At June 30, 2007 our shareholders equity was a deficit of $50.9 million. Our operations have not generated positive annual cash flows since our IPO. For the six months ended June 30, 2007, cash provided by operating activities was $5.0 million primarily as a result of collections on accounts receivables, partially offset by an increase in inventory as we prepare for orders received from the federal government.  Cash provided by operating activities fro the six months ended June 30, 2006 totaled $1.3 million.



Background



Our liquidity has been constrained because of various factors. A significant amount of cash withdrawn by MPC Computers prior owner in the years before the acquisition left the business without adequate liquidity at the time of the acquisition. Since the acquisition, we have used funds to consummate the MPC acquisition, had insufficient revenues and gross margins to sustain our operations, incurred ongoing operating losses and interest expense on our debt, and have expended cash to support fundraising initiatives.



Since inception, we have financed our operations through the private placements of equity securities, convertible debt, loans from our founder and other members of our Board of Directors, short-term loans, a line of credit and net proceeds of $7.1 million from our IPO. In connection with our IPO, we also issued 3.6 million warrants. These warrants were exercisable at $5.50 per share, but have subsequently been adjusted to $3.77 due to anti-dilution provisions triggered due to convertible debentures and warrants issued by us in September 2007 with conversion features at below then current market prices. The warrants are callable by us at $0.25 per share if our common stock trades at or above $9.50 per share for 20 consecutive days. None of these warrants have yet been exercised, and we do not anticipate that a material amount of the warrants will be exercised unless we are able to exercise our call
right, which would require our stock trading price to close at a price of at least $9.50 for 20 consecutive trading days. Our stock has never traded above $9.50 per share. From December 2005 to February 2006, we raised approximately $12.6 million, prior to expenses and commissions, through warrant exercises.



Because our liquidity has been constrained, we have managed our cash position by extending payments to suppliers, some of whom have placed us on credit hold, reduced credit lines or placed on a pre-pay position for products. On many occasions this has delayed delivery of components to our manufacturing facility until payments were made. We have also received notices of default and threatened litigation from numerous suppliers, including Microsoft, but have generally cured the defaults or settled the amount owed or otherwise managed the supplier relationship. However, in recent months, a number of suppliers have commenced litigation in an effort to collect alleged debts. Further recurring late payments will result in additional credit holds, additional requirements that we pre-pay for products, a refusal to deliver components or termination of supply arrangements, any of which could have a material
adverse effect on our financial condition and results of operations.





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During the quarters ended June 30, 2006 and September 30, 2006, delivery and credit issues with suppliers increased compared to prior periods because of late payments, but were alleviated to a limited extent later in our fourth quarter when we replaced our Wachovia Credit Facility with the Wells Fargo Receivables Advance Facility on November 16, 2006. Initially, the Receivables Advance Facility provided approximately $13 million in availability over the Wachovia Credit Facility. In February 2007, we amended the Receivables Advance Facility to obtain additional temporary liquidity as needed subject to the terms of the amendment as noted below. Financing under the Receivables Advance Facility is dependant upon our sales volume and related receivables to assign to Wells Fargo. Historically, our sales volume has been lower during the first two quarters of the year and increases during the third and
fourth quarters due to the Federal-buying season. Periods of lower revenue volume and lower related receivables reduce our assignment of receivables, borrowing capacity, and our ability to cover our operating expenses. We continue to look for opportunities to increase our liquidity through extension of credit lines with our vendors, improved cash management and funding from other sources. There can be no assurance that vendors and other creditors will continue to extend credit to us. Any inability to maintain adequate liquidity may do significant harm to vendor relationships and that orders received by us from customers, which are not yet shipped (i.e. in backlog), are at risk of being cancelled. Insufficient liquidity may also impair our ability to execute our business plan and initiatives. Management is continuing initiatives to reduce overhead expenses and improve gross margins.



Funds raised through private placements, through the warrant exercises and through the Receivable Advance Facility have not been sufficient to fully address our liquidity constraints. We may need to raise a significant amount of additional funds to satisfy supplier payment obligations and to cover continued operating losses and negative operating cash flow. There can be no assurance that we will be able to secure additional sources of financing. Even if we do obtain additional funding, the amount of such funding may not be sufficient to fully address all of our liquidity constraints. If we are unable to obtain significant additional liquidity from third party financing sources, it will be difficult or impossible for us to cure our liquidity needs, and we may be forced to seek additional extension of credit terms with creditors and suppliers, which they may not be willing to provide. We may incur additional
interest expenses or grant other concessions to suppliers in return for granting additional terms. Continuing liquidity constraints could negatively and materially impact our business and results of operations. In particular, our liquidity constraints could impact our ability to obtain components from suppliers, our ability to satisfy obligations to customers and to sell additional product to customers in the future, our ability to retain key employees and our ability to fund capital expenditures or execute our business strategies, or could result in bankruptcy.



Wells Fargo Receivables Advance Facility



On November 16, 2006, we entered into an agreement with Wells Fargo Business Credit, Inc. (Wells Fargo) for an accounts receivable assignment and advance facility (Receivables Advance Facility) that replaced our existing line of credit with Wachovia Capital Finance Corporation (Western). Under the new facility, we may assign to Wells Fargo, and Wells Fargo may purchase from us, Accounts (as defined in the Receivables Advance Facility). Wells Fargo will advance 90% of the value of the purchased Accounts. Wells Fargo may adjust the advancement percentage at any time in its commercially reasonable discretion upon prior notice to us. We will pay fees equal to the Wells Fargo Prime Rate (as defined in the Receivables Advance Facility), plus 1.75% per annum multiplied by the total amount of Accounts purchased and not yet paid by our customers, computed daily. The effective rate at June 30,
2007 was 10.0%.  Wells Fargo has the right to require that we re-purchase the Accounts in the event our customer does not pay the receivable within a timeframe specified under the Receivables Advance Facility, if a material customer dispute arises or in the event of a default under the Receivables Advance Facility. The Receivables Advance Facility is subject to customary default provisions. Wells Fargo has discretion under the Receivables Advance Facility as to the Accounts purchased and the percentage advanced after submission of the Account for approval. Wells Fargo is not obligated to buy any Account from us that Wells Fargo does not deem acceptable in its sole discretion. There is no minimum amount of Accounts to be purchased by Wells Fargo under the Receivables Advance Facility. The facility is secured by substantially all of our assets. The Receivables Advance Facility is for a term of three (3) years. There is an annual fee of $100 thousand in addition to a minimum fee. Early
termination fees apply if the Receivables Advance Facility is terminated before the end of the term. The agreement also provides for a $1.5 million collateral account for the benefit of Wells Fargo for repayment of any obligations arising under the  Receivables Advance Facility .



In February 2007, we entered into an amendment to of the Receivables Advance Facility under which Wells Fargo agreed to advance an additional 7.5% of the face amount of currently outstanding Accounts assigned to Wells Fargo, provided that the total advance does not exceed 97.5% of the face amount of any Account (the Temporary Advance), and increase the advance rate on new accounts assigned to Wells Fargo to 98% of the amount of the



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accounts for a period of eight weeks (the Special Facility Period). We must repay the difference between the Advance and the Temporary Advance within four weeks after termination of the Special Facility Period. Failure to repay amounts advanced under the Special Facility would constitute an event of default under the Receivables Advance Facility. At any time when the Temporary Advance has been paid in full for a minimum of 60 days, we may request that the Special Facility be reinstated for another eight week period with repayment to be made within four weeks.



Capital Raising Activities



Bridge Loan



On April 24, 2006, we obtained a bridge loan in the amount of $5 million. This bridge loan was obtained through a Securities Purchase Agreement with certain existing investors pursuant to which we sold convertible debentures for an aggregate of $5 million. The investors also received an aggregate of 1,370,000 warrants to purchase our no par value common stock for $3.12 per share, the fair market value on the day the transaction closed.



The convertible debentures accrued interest at 10% per annum and the $5 million aggregate principal amount became due and payable July 24, 2006. We prepaid the interest expense through July 24, 2006 with 40,064 shares of common stock at the time of the closing. On July 24, 2006, holders of the $5 million bridge loan agreed to extend the maturity date by 30 days to August 24, 2006 in return for an increase in the effective interest rate to 12%, payable in cash, for the extended term.



The debentures were convertible at the option of the holders into shares of common stock at an initial conversion price of $3.12 per share, subject to adjustment as set forth in the debentures. The exercise price of the warrants was reduced to $1.10 in connection with a September 6, 2006 financing. Except for the initial interest paid in shares of common stock at closing, all interest payments were required to be made on cash. The debentures contained various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.



New Convertible Debentures and Warrants



On September 6, 2006, we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we sold convertible debentures for an aggregate of $4.6 million. Additionally, the investors of the April 24, 2006 bridge loan exchanged $5 million face value of their convertible debentures plus accrued interest thereon into the new convertible debentures and the existing and new investors received 4,924,500 additional warrants. The debentures become convertible into shares of common stock at a conversion price of $0.75 per share.  The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum after shareholder approval was obtained in December 2006 and the aggregate principle amount becomes due and payable September 6, 2009. In the event that the debentures are not repaid on
the maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum or the maximum amount permitted by law, whichever is less. The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.



Because the conversion price for the debentures and the exercise price for the warrants was below market value at the time of issuance and below the exercise and/or conversion price for certain previously issued warrants and convertible securities, anti-dilution rights of various security holders were triggered and resulted in the downward adjustment of the exercise and/or conversion price for various security holders, including the holders of our publicly traded warrants.



Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holders beneficial ownership of our common stock would exceed 9.99%. We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to the investors. The registration rights agreement contains customary indemnification and contribution provisions. We initially filed the registration statement with the SEC on November 8, 2006 and it was declared effective on June 28, 2007. Not all of the common stock underlying the debentures and warrants was registered under this registration statement due to the large number of shares of common stock to be registered relative to the number of shares of our common stock then
outstanding.   We believe we have substantially fulfilled our obligations under the registration rights agreement and



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will register the remaining unregistered shares as required by the registration rights agreement and as allowed by the SEC.



On March 5, 2007, we obtained amendments and waivers to, the registration rights agreement and the debentures. Pursuant to a letter agreement, the majority of the investors, including Crestview Capital Master, LLC and Toibb Investment LLC agreed to waive the penalty provisions for not yet having an effective registration statement, extended the dates for filing a registration statement and all related deadlines, including the date by which the initial registration statement must be declared effective by the SEC, by 120 days. The 120-day extension period lapsed and the registration statement was not declared effective until June 28, 2007. For the six months ended June 30, 2007, we incurred liquidated damages of $369 thousand under the registration rights agreement.



In addition, we issued to one of the investors additional warrants to purchase up to 360,000 shares of common stock for $1.10 per share. The terms of these warrants are identical to the warrants issued as part of the financing. The warrants were accounted for as additional consideration given to the investors as part of the financing.



In connection with this financing, we issued 546,000 warrants with a 5 year term to the placement agent to purchase our common stock for $1.10 per share.



September 29, 2006 Financing



On September 29, 2006 we entered into a securities purchase agreement with certain existing investors and new investors pursuant to which we sold convertible debentures for an aggregate of $4.9 million.  The majority of the transaction closed on October 4, 2006.  The investors also received an aggregate of 2,468,125 warrants to purchase our common stock.  The debentures become convertible into shares of common stock at a conversion price of $0.75 per share. The warrants allow the purchase of our common stock for $1.10 per share and are for a term of 5 years. The debentures accrue interest at 8% per annum and the aggregate principal amount becomes due and payable September 29, 2009. In the event that the debentures are not repaid on the maturity date, we will be in default and the debentures will begin to accrue interest at a rate of 22% per annum or the maximum amount permitted by law, whichever is less.
The debentures contain various customary events of default as well as negative covenants that, among other things, prohibit us from incurring additional debt.



Because the conversion price for the debentures and the exercise price for the warrants was below market value at the time of issuance and below the exercise and/or conversion price for certain previously issued warrants and convertible securities, anti-dilution rights of various security holders have been triggered and will result in the downward adjustment of the exercise and/or conversion price for various security holders, including the holders of our publicly traded warrants.



Both the debentures and the warrants contain provisions limiting conversion and exercise, or issuance of shares in lieu of interest, as the case may be, in the event that the holders beneficial ownership of our common stock would exceed 9.99%. In connection with this financing, we issued 499,867 warrants with a 5-year term to the placement agent to purchase our common stock for $1.10 per share.



We concurrently entered into a registration rights agreement with the investors that requires us to register all of the common stock issued and underlying the securities sold to the investors. The registration rights agreement contains customary indemnification and contribution provisions.



We initially filed the registration statement with the SEC on November 8, 2006 and it was declared effective June 28, 2007. Not all of the common stock underlying the debentures and warrants was registered under this registration statement due to the large number of shares of common stock to be registered relative to the number of shares of our common stock then outstanding.  In order to register the shares on a Form S-3, the SEC required that we reduce the number of shares being registered. We believe we have substantially fulfilled our obligations under the registration rights agreement and will register the remaining unregistered shares as required by the registration rights agreement an as allowed by the SEC.



We did not obtain any amendments or waivers from these investors and as a result, as of February 1, 2007, we began incurring liquidated damages under the registration rights agreement at the rate of 1.5% of the aggregate amount invested per month until the registration statement was declared effective on June 28, 2007. These liquidated damages must be paid in cash, and they accrue interest at a rate of 18% per annum. We have notified the investors



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that we are currently unable to pay the interest and will accrue the interest if unpaid to their account. There is no assurance that they will allow us to defer payment of the liquidated damages. For the six month ended June 30, 2007, we incurred liquidated damages of $344 thousand under the registration rights agreement related to the delay of the effectiveness of our registration statement.  Since we have not paid the interest or penalties due under the debentures or the registration rights agreement, a holder could declare the debentures to be in default and accelerate the debt due under the debentures.  If this were to happen, the debentures would accrue interest at a rate of 22% per annum.  We may be required to pay interest or other required payments in cash rather than stock and could be forced to use our limited cash resources to redeem all or a portion of the outstanding debentures.



Payable to Lessor



We are party to a commercial lease with Micron Technology dated April 30, 2001 (as amended, the Lease) under which we lease our primary manufacturing facility in Nampa, Idaho. A Fifth Amendment to the Lease deferred our rent payment obligations due or to become due between January 16, 2006 and May 31, 2007, without incurring late charges, provided that we pay base rent and other amounts (the Extended Rent Obligation) under the Lease at any time before May 31, 2007.  The total amount of the Extended Rent Obligation payable on May 31, 2007 was $2.5 million and had been recorded as an accrued liability. We had paid only $500 thousand of the Extended Rent by May 31, 2007.



On July 2, 2007, we entered into a Sixth Amendment to Commercial Lease of this manufacturing facility. The Sixth Amendment to Commercial Lease provides that we will pay the balance of the Extended Rent Obligation in twelve equal monthly installments in the amount of $174 thousand, including interest at the annual rate of 12%. If any installment is not made, we will incur a late charge of 5% of the amount of such installment and interest shall increase to an annual default rate of 18%. The Sixth Amendment also provides that we will pay the full amount of the Extended Rent Obligation in the event we receive equity investment funds in an amount that exceeds $12 million. Additionally, if our unrestricted cash and cash equivalents balance, combined with available lines of credit, exceeds $5 million at any time after January 1, 2008, the monthly installment amount increases to $348 thousand until the total
Extended Rent Obligation is paid in full. In addition to making the Extended Rent Obligation payments, we are obligated to pay current rent and all other Lease obligations as they become due and payable, including property taxes per the terms of the Lease.



Payable to TPV



On June 30, 2006 we entered into a settlement agreement with TVP International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd  (collectively TPV).    Under the agreement we agreed to pay TPV $2.1 million over a period of twelve months with interest at 8%.  The agreement provides for monthly payments of $120 thousand for six months and $254 thousand thereafter. The settlement amount had been previously recorded as accounts payable.



CONTRACTUAL OBLIGATIONS



During the six months ended June 30, 2007, estimated purchase obligations increased $13.3 million. During the three months ended June 30, 2007, an accrued liability for deferred rent obligations to Micron Technology was converted to an interest bearing payable totaling $2.0 million at June 30, 2007. Also an account payable of $2.1 million to TVP was converted to an interest bearing payable.  In addition, $300 thousand face value plus accrued interest of convertible debentures were converted to common stock with a fair value of $546 thousand. There were no other material changes in our contractual obligations during the six months ended June 30, 2007.



ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are subject to interest rate risk on our Wells Fargo Receivable Assignment Facility. The interest rate is a floating rate based on the prime rate plus 1.75% per annum. If interest rates continue to rise we will be subject to higher interest payments if outstanding balances remain unchanged.



We have convertible debentures and warrants that are derivative financial instruments and are carried at fair value as derivatives liabilities. The fair values are determined in part by, and fluctuate with, the market value of our stock. If the market price of our stock increases during a period, the fair value of the derivatives is expected to increase and



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will adversely affect our earnings.  A decline in the market price of our stock as expected cause a decrease in fair value of the derivatives and have a positive impact to earnings.



Currently, most of our sales are in the United States. All of our foreign sales and purchases of product are denominated in US dollars, minimizing our foreign currency risk. All of our international suppliers, mostly from Asia, denominate contracts in US dollars thereby eliminating foreign currency risk. In the future we may not be successful in negotiating most of our international supply agreements in US dollars, thereby increasing our foreign currency risk. Amounts we pay for components from international suppliers could be affected by a continued weakening of the US dollar as compared with other foreign currencies. We currently have no foreign exchange contracts, option contracts or other foreign currency hedging arrangements. We continue to evaluate our risk position on an ongoing basis to determine whether foreign exchange hedging strategies may need to be employed.



We depend on a relatively small number of third party suppliers for substantially all the components in our PC systems. Additionally, we maintain several single-source supplier relationships primarily to increase our purchasing power with these suppliers. If shortages or delays arise, the prices of these components may increase or the components may not be available at all. We do not have long-term supply contracts with suppliers that would require them to supply products to us for any specific period or in any specific quantities, which could result in shortages or delays. Supplier risks have also increased due to our liquidity problems and many suppliers have reduced credit limits and terms. Some suppliers do not grant us credit at all and require us to pre-pay for products. There is no assurance, absent future financing, that suppliers will continue to grant us credit at all. Should an increasing number
of suppliers reduce or cancel our credit terms, and we are forced to pre-pay for products, it would have a material negative impact on our business and results of operations. In the event we are unable to prepay suppliers, bankruptcy could be a result.



ITEM 4T. CONTROLS AND PROCEDURES



We maintain a set of disclosure controls and procedures designed to reasonably assure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (SEC) rules and forms. Disclosure controls are also designed to reasonably assure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The evaluation of our disclosure controls performed by our CEO and CFO included obtaining an understanding of the design and objective of the controls, the implementation of those controls and the results of the controls on this report on Form 10-Q. In the course of the evaluation of
disclosure controls, we reviewed the controls that are in place to record, process, summarize and report, on a timely basis, matters that require disclosure in our reports filed under the Securities Exchange Act of 1934. We also considered the adequacy of the items disclosed in this report on Form 10-Q.



As of the date of the financial statements, an evaluation was carried out under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures. Based on that evaluation the CEO and the CFO concluded that as of June 30, 2007 our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that all information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, in a manner that allows timely decisions regarding required disclosure.



We have also reviewed changes in our internal control over financial reporting during the most recent fiscal quarter, and our CEO and CFO have concluded that there have been no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II.OTHER INFORMATION



ITEM 1.LEGAL PROCEEDINGS



Phillip Adams & Associates, LLC



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We are a defendant in a lawsuit, alleging infringement of certain patents, relating to floppy disk controllers, owned by Phillip Adams & Associates, LLC. We were added to this suit by an amended complaint filed on May 31, 2005 in the U.S. District Court, District of Utah. We have tendered indemnification demands to certain of our component suppliers. Because the case is still in the discovery phase, we are not able to determine the financial impact, if any, arising from an adverse result in the matter.



Bingham McCutchen, LLP



We were a defendant in a lawsuit filed by a law firm seeking damages for unpaid legal services Bingham McCutchen alleged that approximately $530,000 was owed for services rendered. This suit was filed on or about December 20, 2006 in the District Court of the 3rdJudicial Court of the State of Idaho, Canyon County.  The matter was settled on July 11, 2007 with a payment to Bingham in the amount of $225 thousand.



TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd.



We were a defendant in a lawsuit filed by TPV International (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd. filed in the 98thJudicial Court of Travis County, Texas alleging that we failed to pay invoices for computer equipment.  In June 2007, we settled the case by agreeing to pay $2.1 million over a period of 12 months, with interest accruing at 8%.



Wacom Technology Corporation



We are a defendant in a lawsuit filed by Wacom Technology Corporation. This suit was filed on March 6, 2007 in the U.S. District Court, District of Idaho alleging that we have failed to pay invoices for computer equipment in the amount of approximately $1.2 million. A default judgment has been entered against us in this case and Wacom is seeking to enforce the judgment.



Other Matters



We are involved in various other legal proceedings from time to time in the ordinary course of our business. We are not currently subject to any other legal proceedings that we believe will have a material impact on our business. However, due to the inherent uncertainties of the judicial process, we are unable to predict the ultimate outcome or financial exposure, if any, with respect to these matters.





ITEM 1A.RISK FACTORS



Investing in our securities involves a high degree of risk. You should carefully consider the following risk factor, and other information included in or incorporated by reference into this report, including our financial statements and the related notes thereto. You should also carefully review and consider all of the risk factors set forth in Item I, Risk Factors in our previously filed Form 10-KSB/A for the period ending December 31, 2006.  Additional risks and uncertainties that we do not presently know about, or have not yet identified, may also adversely affect our business. Our business, operating results and financial condition could be seriously harmed and you could lose your entire investment by the occurrence of any of these risks, or by unforeseen risks not listed below.



Risks Relating to Our Company



We have failed to satisfy an AMEX listing requirement and may be delisted from the AMEX.



On April 14, 2006, we received a notice from the AMEX that we have failed to satisfy a continued listing rule. The notice was based on AMEXs review of our Form 10-KSB for the fiscal year ended December 31, 2005, which included an audit opinion containing a going-concern qualification. The notice states that we are not in compliance with the AMEX Company Guide in that we have sustained losses which are so substantial in relation to our overall operations or our existing financial resources, or our financial condition has become so impaired that it appears questionable, in the opinion of the AMEX, as to whether we will be able to continue operations and/or meet our obligations as they mature. As required by the AMEX notice, we submitted a plan advising of the action we have taken, or will take that will bring us into compliance with the listing standards.



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On June 15, 2006, we announced that the AMEX accepted our plan for regaining compliance with the continued listing standards and granted us an extension to June 30, 2006, to regain compliance with continued listing standards. We did not meet all of the continued listing standards by the target date of June 30, 2006, and requested a further extension. We met with the AMEX on December 12, 2006, and discussed our financial projections and progress on the plan we submitted to the AMEX in April 2006. We again requested an extension to regain compliance. On January 26, 2007, the AMEX notified us that, although we remain out of compliance with certain of AMEXS continued listing standards, we have demonstrated an ability to regain compliance with the continued listing standards. Accordingly, the AMEX agreed to grant us an extension to May 31, 2007 (Revised Plan Period) to become
compliant with AMEXS continued listing standards. We did not meet all of the continued listing standards as of the Revised Plan Period. Based on a review of information provided to the AMEX on June 4, 2007 and as well as communications we have had with the AMEX, the AMEX notified us on July 11, 2007 that we have made a reasonable demonstration of our ability to regain compliance with the continued listing standards and granted us a further extension through October 18, 2007 (the New Plan Period).



During the New Plan Period, we must provide monthly updates to the AMEX. These updates must include any significant corporate developments completed by us, as well as an assessment regarding our status as it relates to a potential bankruptcy filing. In addition, we must provide information concerning current cash balances, profit/loss statements and accounts payable updates, which include a list and aging of all outstanding payables, as well as whether any venders have suspended services due to lack of payment or other reason. AMEX will review us periodically to assess our progress. If we do not show progress consistent with the plan to regain compliance with continued listing standards, AMEX will review the circumstances and may immediately commence delisting proceedings. Additionally, AMEX is authorized to initiate immediate delisting proceedings as appropriate in the public interest,
notwithstanding the grant of the extension through the New Plan Period.  AMEX rules state that the AMEX staff may provide a period up to eighteen months to come into compliance with the continued listing standards from the date of a receipt of a deficiency notice.   In October 2007, eighteen months will have passed since the receipt of the initial deficiency notice, and there is no assurance that additional extensions can or will be provided beyond October 18, 2007.  Additionally, the AMEX staff indicated that if we report net and/or operating losses for the year ended December 31, 2007, pursuant to Section 1003(a)(i) of the AMEX Company Guide, we would need to maintain shareholders equity in excess of $2 million in order to remain in compliance.



Our ability to regain compliance with the continued listing standards will be substantially dependent on our ability to complete additional financing and/or operating initiatives, of which there is no assurance. There can be no assurance that we will be able to continue our listing on the AMEX. If we are unable to continue our listing on the AMEX, the value of your investment could be substantially reduced.





ITEM 4.SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS



On June 29, 2007, we held our Annual Meeting of Shareholders to consider and vote on the following proposals, including the number of votes cast for, against, withheld or abstained, with respect to each proposal:




Proposal One: Election of DirectorsFor
        
        WithheldKent L. Swanson
        7,264,285
        
        16,840Eric D. Murphy
        7,264,725
        
        16,400

Continuing directors who did not stand election this year are David A. Young and John Yeros whose terms expire in 2008 and 2009, respectively.



Proposal Two: To ratify the appointment of Ehrhardt, Keefe, Steiner & Hottman, PC as MPCs independent registered public accountants for 2007.




For
        7,265,936
        
        Against
        11,000
        
        Abstain
        4,189
        
        Broker Non votes
        0





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ITEM 6.EXHIBITS




EXHIBITINDEXExhibitNumber
        
        Description of Document3.1
        
        Amended and Restated Articles of Incorporation of the Registrant, as amended (1)3.2
        
        Articles of Amendment to Articles of Incorporation of the Registrant*3.3
        
        Amended and Restated Bylaws of the Registrant, as amended (2)10.1
        
        Sixth Amendment to Commercial Lease, between MPC Computers, LLC and Micron Technology, Inc. (3)31.1*
        
        Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
        
        Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1**
        
        Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2**
        
        Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* Filed herewith.** Furnished herewith.(1) Incorporated by reference to Exhibit No. 4.1 to the Registrants Report on Form S-3, filed with the Securities and Exchange Commission on October 6, 2005.(2) Incorporated by reference to Exhibit 3.1 on Form 8-K filed with the Securities and Exchange Commission on March 29, 2007.(3) Incorporated by reference to Exhibit 99.1, filed with the Securities and Exchange Commission on July 3, 2007.

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SIGNATURES



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






MPC CorporationDate: August 17, 2007
        /s/: John P. YerosJohn P. YerosChairman and CEO.Date: August 17, 2007
        /s/: Curtis M. AkeyCurtis M. AkeyChief Financial Officer







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EXHIBITINDEXExhibitNumber
        
        Description of Document3.1
        
        Amended and Restated Articles of Incorporation of the Registrant, as amended (1)3.2
        
        Articles of Amendment to Articles of Incorporation of the Registrant*3.3
        
        Amended and Restated Bylaws of the Registrant, as amended (2)10.1
        
        Sixth Amendment to Commercial Lease, between MPC Computers, LLC and Micron Technology, Inc. (3)31.1*
        
        Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
        
        Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1**
        
        Certification of the Chairman and Chief Executive Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2**
        
        Certification of the Chief Financial Officer of MPC Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* Filed herewith.** Furnished herewith.(1) Incorporated by reference to Exhibit No. 4.1 to the Registrants Report on Form S-3, filed with the Securities and Exchange Commission on October 6, 2005.(2) Incorporated by reference to Exhibit 3.1 on Form 8-K filed with the Securities and Exchange Commission on March 29, 2007.(3) Incorporated by reference to Exhibit 99.1, filed with the Securities and Exchange Commission on July 3, 2007.





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