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** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                   |
| **For  the quarterly period ended June 30, 2008** |

 

| **o** | **TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom                to                **

 

**Commissionfile number 0-115404**

 

**MPCCORPORATION**

(Name of registrant as specified in itscharter)

 

| **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)     |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes  x   No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (checkone)

 
| Large accelerated filer           o     | Accelerated filer                           o |
|------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Non-accelerated filer            o | Smaller reporting company          x                                                                                               |
| (Do not check if a smaller  reporting company)                                                 |                                                                                                                                                                                 |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b–2of the Exchange Act).

 

Yes  o   No  x

 

Asof August 1, 2008 there were 34,212,677 shares of the issuer’s no parvalue Common Stock outstanding.

 

 

 

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** **

**INDEX**

 
| ** ** | ** **                                                                                                                 | **Page No.** |
|------------|----------------------------------------------------------------------------------------------------------------------------|-------------------|
|       |                                                                                                                       |              |
|       | PART I  – FINANCIAL INFORMATION                                                                                  | 4                 |
|       |                                                                                                                       |              |
| ITEM 1     | FINANCIAL  STATEMENTS                                                                                                      | 4                 |
|       | Condensed Consolidated  Balance Sheets                                                                                     | 4                 |
|       | Unaudited Condensed  Consolidated Statements of Operations for the Three and Six Months Ended  June 30, 2008 and 2007 | 5                 |
|       | Unaudited Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2008 and 2007           | 6                 |
|       | Notes to  Interim Condensed Consolidated Financial Statements (unaudited)                                                  | 7                 |
|       |                                                                                                                       |              |
| ITEM 2     | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                | 25                |
|       |                                                                                                                       |              |
| ITEM 3     | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                                                | 43                |
|       |                                                                                                                       |              |
| ITEM 4T    | CONTROLS AND PROCEDURES                                                                                                    | 43                |
|       |                                                                                                                       |              |
|       |                                                                                                                       |              |
|       | PART II – OTHER INFORMATION                                                                                      | 44                |
|       |                                                                                                                       |              |
| ITEM 1     | LEGAL PROCEEDINGS                                                                                                          | 44                |
|       |                                                                                                                       |              |
| ITEM 1A    | RISK FACTORS                                                                                                               | 44                |
|       |                                                                                                                       |              |
| ITEM 6     | EXHIBITS                                                                                                                   | 47                |

 

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**A NOTE ABOUTFORWARD-LOOKING STATEMENTS**

 

The statements, other than statements ofhistorical fact, included in this report are forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended and within the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements generally can beidentified 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 theexpectations reflected in such forward-looking statements are accurate.However, we cannot provide assurance that such expectations will occur. Ouractual future performance could differ materially from such statements. Theseforward-looking statements are subject to risks and uncertainties that couldcause actual results and events to differ materially. Our Annual Report on Form 10-Kfor the year ended December 31, 2007 describes many of the significantfactors that could cause actual results and events to differ materially andthat constitute material risks to our business. You should carefully review therisk factors set forth in such Form 10-K, as well as those described inthis report. Forward-looking statements apply only as of the date of thisreport; as such, they should not be unduly relied upon for current circumstances.Except as required by law, we are not obligated to release publicly anyrevisions to these forward-looking statements that might reflect events orcircumstances occurring after the date of this report or those that mightreflect the occurrence of unanticipated events.

 

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**PART I – FINANCIAL INFORMATION**

 

**ITEM1: FINANCIAL STATEMENTS**

 

**MPC CORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

***(In thousands except share data)***

** **
| ** **                                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                          | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                          | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                              |       |              |       |                  |       |
| Current Assets                                                                                                                                      |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                           |       | $                 | 718        |                  | $          | 9,009 |   |
| Restricted cash                                                                                                                                     |       | 9,766             |       | 9,852                 |       |
| Accounts receivable, net                                                                                                                            |       | 59,673            |       | 86,056                |       |
| Inventories, net                                                                                                                                    |       | 97,796            |       | 62,050                |       |
| Prepaid maintenance and warranty costs                                                                                                              |       | 7,627             |       | 10,699                |       |
| Other current assets                                                                                                                                |       | 1,492             |       | 1,146                 |       |
| Total Current Assets                                                                                                                                |       | 177,072           |       | 178,812               |       |
|                                                                                                                                                |       |              |       |                  |       |
| Non-Current Assets                                                                                                                                  |       |              |       |                  |       |
| Property and equipment, net                                                                                                                         |       | 6,827             |       | 10,697                |       |
| Goodwill                                                                                                                                            |       | 45,255            |       | 45,255                |       |
| Acquired intangibles, net                                                                                                                           |       | 23,814            |       | 28,455                |       |
| Long-term portion of prepaid maintenance  and warranty costs                                                                                        |       | 2,108             |       | 1,388                 |       |
| Other assets                                                                                                                                        |       | 3,237             |       | 1,668                 |       |
| Total Non-Current Assets                                                                                                                            |       | 81,241            |       | 87,463                |       |
| TOTAL ASSETS                                                                                                                                        |       | $                 | 258,313    |                  | $          | 266,275 |   |
|                                                                                                                                                |       |              |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                           |       |              |       |                  |       |
| Current Liabilities                                                                                                                                 |       |              |       |                  |       |
| Accounts payable                                                                                                                                    |       | $                 | 105,063    |                  | $          | 61,079 |   |
| Accrued expenses                                                                                                                                    |       | 13,977            |       | 26,928                |       |
| Accrued licenses and royalties                                                                                                                      |       | 4,835             |       | 5,084                 |       |
| Current portion of accrued warranties                                                                                                               |       | 20,479            |       | 24,700                |       |
| Current portion of deferred revenue                                                                                                                 |       | 31,234            |       | 33,357                |       |
| Notes payable and debt                                                                                                                              |       | 56,598            |       | 64,249                |       |
| Derivative financial instruments at  estimated fair value                                                                                           |       | 1,498             |       | 1,590                 |       |
| Total Current Liabilities                                                                                                                           |       | 233,684           |       | 216,987               |       |
|                                                                                                                                                |       |              |       |                  |       |
| Long Term Liabilities                                                                                                                               |       |              |       |                  |       |
| Non-current portion of accrued warranties                                                                                                           |       | 14,305            |       | 16,491                |       |
| Non-current portion of deferred revenue                                                                                                             |       | 29,547            |       | 25,848                |       |
| Derivative warrant liability                                                                                                                        |       | 297               |       | 634                   |       |
| Total Long Term Liabilities                                                                                                                         |       | 44,149            |       | 42,973                |       |
| TOTAL LIABILITIES                                                                                                                                   |       | 277,833           |       | 259,960               |       |
|                                                                                                                                                |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                       |       |              |       |                  |       |
|                                                                                                                                                |       |              |       |                  |       |
| PREFERRED STOCK, Series B, 260,000  shares authorized, 249,171 issued and outstanding                                                          |       | 6,308             |       | 6,308                 |       |
|                                                                                                                                                |       |              |       |                  |       |
| SHAREHOLDERS’ EQUITY                                                                                                                           |       |              |       |                  |       |
| Preferred Stock, no par value; 100,000  shares authorized; no shares issued and outstanding at 2008 and 2007                                        |       | —            |       | —                |       |
| Preferred Stock, Series A, 640,000  shares authorized; 626,546 issued and outstanding                                                          |       | 9,008             |       | 9,008                 |       |
| Common Stock, no par value, 100,000,000  shares authorized; 34,196,343 and 33,948,489 shares issued and outstanding at  2008 and 2007, respectively |       | 85,743            |       | 85,029                |       |
| Accumulated Deficit                                                                                                                                 |       | (120,579          | )          | (94,030               | )          |
| Total Shareholders’ Equity (Deficit)                                                                                                           |       | (25,828           | )          | 7                     |       |
| TOTAL LIABILITIES AND EQUITY                                                                                                                        |       | $                 | 258,313    |                  | $          | 266,275 |   |

 

*The accompanying notes are an integral part of the condensedconsolidated financial statements.*

 

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**MPCCORPORATION**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

***(Inthousands except for per share data)***

*** ***
| ** **                                                          | ** ** | **Three Months ended** | ** ** | **Six Months ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007 (1)**              | ** ** | **2008** | ** ** | **2007 (1)** | ** ** |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Revenue                                                             |       | $                                | 125,473    |                           | $          | 53,613 |   | $ | 249,180 |   | $ | 110,365 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Cost of revenue                                                     |       | 108,906                          |       | 46,972                         |       | 217,620 |   | 97,534 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Gross margin                                                        |       | 16,567                           |       | 6,641                          |       | 31,560 |   | 12,831 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Operating expenses                                                  |       |                             |       |                           |       |   |   |   |   |
| Research and development expense                                    |       | 1,324                            |       | 542                            |       | 2,395 |   | 1,039 |   |
| Selling, general and administrative expense                         |       | 22,055                           |       | 8,811                          |       | 46,181 |   | 18,643 |   |
| Depreciation and amortization                                       |       | 4,314                            |       | 772                            |       | 7,263 |   | 1,542 |   |
| Total operating expenses                                            |       | 27,693                           |       | 10,125                         |       | 55,839 |   | 21,224 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Operating loss                                                      |       | (11,126                          | )          | (3,484                         | )          | (24,279 | ) | (8,393 | ) |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Other (income) expense                                              |       |                             |       |                           |       |   |   |   |   |
| Interest expense, net                                               |       | 1,432                            |       | 1,503                          |       | 2,698 |   | 3,021 |   |
| Change in estimated fair value of  derivative financial instruments |       | 15                               |       | 20,559                         |       | (428 | ) | 19,313 |   |
| Gain on vendor settlements                                          |       | —                           |       | (225                           | )          | — |   | (225 | ) |
| Total other (income) expense, net                                   |       | 1,447                            |       | 21,837                         |       | 2,270 |   | 22,109 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                            |       | $                                | (12,573    | )                              | $          | (25,321 | ) | $ | (26,549 | ) | $ | (30,502 | ) |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Loss per common share:                                              |       |                             |       |                           |       |   |   |   |   |
| Basic                                                               |       | $                                | (0.37      | )                              | $          | (1.91 | ) | $ | (0.78 | ) | $ | (2.35 | ) |
| Diluted                                                             |       | $                                | (0.37      | )                              | $          | (1.91 | ) | $ | (0.78 | ) | $ | (2.35 | ) |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Common shares used to compute net loss per  share:                  |       |                             |       |                           |       |   |   |   |   |
| Basic                                                               |       | 34,190,472                       |       | 13,260,372                     |       | 34,128,763 |   | 12,979,052 |   |
| Diluted                                                             |       | 34,190,472                       |       | 13,260,372                     |       | 34,128,763 |   | 12,979,052 |   |

 

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(1) The results of the Gateway ProfessionalBusiness have been consolidated effective October 1, 2007, the date theacquisition by MPC Corporation became effective and therefore the results ofthe Professional Businesses are not included for periods prior to October 1,2007.

 

*The accompanying notes are an integral part of the condensedconsolidated financial statements.*

 

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**MPC CORPORATION**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

***(In thousands)***

 
| ** **                                                                  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**              | ** ** |
| ** **                                                                  | ** ** | **2008**                       | ** ** | **2007 (1)** | ** ** |
| OPERATING ACTIVITIES                                                        |       |                           |       |   |   |
| Net loss                                                                    |       | $                              | (26,549    | ) | $ | (30,502 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |       |                           |       |   |   |
| Depreciation                                                                |       | 5,070                          |       | 1,399 |   |
| Amortization of acquired intangibles                                        |       | 4,641                          |       | 905 |   |
| Amortization of deferred loan costs                                         |       | —                         |       | 459 |   |
| Change in estimated fair value of derivative  financial instruments         |       | (429                           | )          | 19,313 |   |
| Stock compensation on vesting of restricted  stock units                    |       | 620                            |       | 170 |   |
| Cumulative effect of change in accounting  principle                        |       | —                         |       | 71 |   |
| Gain on vendor settlements                                                  |       | —                         |       | (225 | ) |
| Provision for bad debt                                                      |       | 441                            |       | 27 |   |
| Gain on disposal                                                            |       | (7                             | )          | — |   |
| Changes in assets and liabilities                                           |       |                           |       |   |   |
| Accounts receivable                                                         |       | 25,942                         |       | 23,917 |   |
| Inventory                                                                   |       | (35,746                        | )          | (8,343 | ) |
| Prepaid maintenance & warranties                                   |       | 2,352                          |       | (1,659 | ) |
| Other current assets                                                        |       | (346                           | )          | 249 |   |
| Other non-current assets                                                    |       | (1,569                         | )          | 504 |   |
| Accounts payable and accrued liabilities                                    |       | 25,828                         |       | (3,184 | ) |
| Accrued licenses and royalties                                              |       | (249                           | )          | (7 | ) |
| Accrued warranties                                                          |       | (6,407                         | )          | (46 | ) |
| Deferred revenue                                                            |       | 1,576                          |       | 1,919 |   |
| Net cash (used) provided by operating  activities                           |       | (4,832                         | )          | 4,967 |   |
|                                                                        |       |                           |       |   |   |
| INVESTING ACTIVITIES                                                        |       |                           |       |   |   |
| Purchase of property and equipment                                          |       | (1,214                         | )          | (76 | ) |
| Net cash used by investing activities                                       |       | (1,214                         | )          | (76 | ) |
|                                                                        |       |                           |       |   |   |
| FINANCING ACTIVITIES                                                        |       |                           |       |   |   |
| Net activity under financing facility                                       |       | (7,699                         | )          | (7,912 | ) |
| Borrowings from debt                                                        |       | 8,735                          |       | — |   |
| Payment of note payable                                                     |       | (3,367                         | )          | (500 | ) |
| Restricted cash related to letters of  credit and financing facility        |       | 86                             |       | 549 |   |
| Net cash used by financing activities                                       |       | (2,245                         | )          | (7,863 | ) |
|                                                                        |       |                           |       |   |   |
| Net cash decrease for period                                                |       | (8,291                         | )          | (2,972 | ) |
|                                                                        |       |                           |       |   |   |
| Cash at beginning of period                                                 |       | 9,009                          |       | 4,839 |   |
|                                                                        |       |                           |       |   |   |
| Cash at end of period                                                       |       | $                              | 718        |   | $ | 1,867 |   |
|                                                                        |       |                           |       |   |   |
| ***Supplemental disclosure of cash flow  information:***                    |       |                           |       |   |   |
| Interest paid                                                               |       | $                              | 2,160      |   | $ | 1,674 |   |
| Income taxes paid                                                           |       | -0-                            |       | -0- |   |

 

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 (1) Theresults of the Gateway Professional Business have been consolidated effective October 1,2007, the date the acquisition by MPC Corporation became effective andtherefore the results of the Professional Businesses are not included forperiods prior to October 1, 2007.

 

*The accompanying notes are an integral partof the condensed consolidated financial statements*

 

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**MPC CORPORATION**

**NOTES TO INTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

***(Unaudited*)**

 

*Theterms “we” “us” and “our” or the “company” as used in this quarterly reportrefer on a consolidated basis to MPC Corporation and to its wholly-ownedsubsidiaries, including MPC Computers, LLC, (“MPC Computers”) which we acquiredthrough a merger in July of 2005 and MPC-Pro, LLC (“MPC-Pro”) whichacquired the Professional Business from Gateway Inc. on October 1, 2007.*

* *

**NOTE 1.    DESCRIPTION OFBUSINESS**

 

We were formed as HyperSpace Communications, Inc. as aColorado-based company, and completed an initial public offering in October 2004.In July 2005, we acquired MPC Computers, LLC, or MPC Computers, whichbecame a wholly-owned subsidiary and our primary business.  MPC Computersis an enterprise IT hardware business providing products and services tocustomers in mid-sized businesses, government agencies and education organizations.In January 2007, we changed our name to MPC Corporation.  On October 1,2007, MPC Corporation, through our wholly-owned subsidiary MPC-Pro, purchasedfrom Gateway Inc. (“Gateway”) and Gateway Technologies Inc., Gateway’sProfessional Division, the portion of Gateway’s Consumer Direct Division thatmarkets business-related products, and a portion of the Customer Care &Support department that provides technical services to customers of theProfessional and Consumer Direct Divisions (collectively, the “ProfessionalBusiness”).  The Professional Business is primarily engaged in the sale,resale and marketing of desktop computer systems, laptops, servers, networkinggear and other peripherals, and replacement parts to educational institutions,government entities (federal, state and local), value-added resellers andcertain other resellers, and small business sales generated by Gateway’sInternet website and phone centers.  The purchase has substantiallyincreased the size of our business.

 

Our primary business is providing PC-based products and services tomid-sized businesses, government agencies and education organizations. Wemanufacture and market ClientPro® desktop PCs, TransPort® notebook PCs,NetFRAME® servers and DataFRAMETM storage products. In addition we manufactureand market the “E-series” of desktops, notebooks, servers and storage productsunder a limited license agreement with Gateway expiring in March 2009.  We also provide hardware-related supportservices such as installation, technical support, parts replacement, andrecycling. In addition to PCs, servers, and storage products, we also fulfillour customers’ requirements for third party products produced by other vendorsincluding printers, monitors and software.

 

We serve the federal government, state/local government &education (“SLE”), and mid-size enterprise markets. This focus enables us totailor our operating model to better support the needs of our customers forcustomized products, services and programs. We sell directly to our customersand use a build-to-order manufacturing process that we believe is an efficientmeans to provide customized computing solutions.

 

***Agreement with Flextronics***

 

OnApril 14, 2008, we entered into a Manufacturing Services Agreement (the “MSA”)with Flextronics Computing Mauritius Limited (“Flextronics”).  Under the MSA, Flextronics will performprocurement, supply chain management, manufacturing, assembly and testing forMPC Corporation at the Flextronics manufacturing facility in Juarez, Mexico.  Transition of operations from our Nashville,Tennessee manufacturing facilities to Juarez is expected to be completed by December 31,2008 with transition of other manufacturing to occur on such schedules as maybe determined by MPC Corporation and Flextronics.  The MSA provides for Flextronics to achievecertain cost reduction targets, during the first twelve months following August 31,2008 that are expected to provide cost savings to MPC Corporation.  If the cost reduction targets are notachieved, our sole remedy is to terminate the MSA if Flextronics fails to curethe default.

 

We anticipatethe outsourcing of our manufacturing operations to Flextronics could result inpotential manufacturing and overhead cost savings.  Flextronics has a much larger scale ofoperations than ours that may provide a greater ability to procure products andcomponents at lower prices and with lower labor costs.  After the first twelve months of the MSA,Flextronics will continue to seek to reduce cost of manufacturing products bymethods such as elimination of materials, material price reductions,redefinition of specifications and re-design of assembly or test methods.  We will continue to evaluate additional meansof reducing costs and improving productivity in connection with our operationsand under the MSA with Flextronics. There is no guaranty, however, that any such cost savings will beachieved.  The transfer of operations toFlextronics will allow MPC Corporation to focus on its sales, 

 

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marketing,product development and service and support functions, with reduced remainingmanufacturing operations.

 

Weare responsible for applicable Nashville facility closure and relatedcosts.  We currently estimate a reductionin workforce of approximately 145 personnel from the Nashville facility.

 

***AMEXNotification***

 

On June 27, 2008,the American Stock Exchange (“AMEX”) notified us that, although we remain outof compliance with certain of continued listing standards, AMEX has acceptedour plan for regaining compliance. AMEX has granted us an extension until November 9,2009, to regain compliance with its continued listing standards.

 

Previously, on May 8,2008, the AMEX notified us that we failed to satisfy a continued listing rule.Specifically, the notice from AMEX stated that we are not in compliance with Section 1003(a) (i) ofthe AMEX Company Guide in that we have stockholder’s equity of less than $2million and have sustained losses from continuing operations or net losses intwo of our three most recent fiscal years. We were afforded the opportunity tosubmit a plan of compliance. We submitted the plan on June 9, 2008.

 

We will be subject toperiodic review by the AMEX staff during the extension period. Failure to makeprogress consistent with the plan or regain compliance with the continuedlisting standards by the end of the extension period could result in our beingdelisted from the AMEX.

 

**NOTE2.    LIQUIDITY ISSUES**

 

In February 2008, wecommenced the transition of the Professional Business IT and manufacturingsystems from Gateway to MPC Computers’ existing systems and experiencedmaterial delays in manufacturing and customer deliveries, which resulted inmuch lower than expected shipment volumes and revenues in the first quarter of2008 as compared to the fourth quarter of 2007. We also experienced delays in deliveries of parts needed for service andsupport-related matters.  Ourmanufacturing delays limited and stopped production at times over approximatelya three week period at our Nashville manufacturing facility.  The delays were caused by a number of issues,including, but not limited to, inaccurate bills of materials for ourmanufacturing processes, inadequate inventory procurement, routing problemswhich resulted in parts shortages, and order entry errors that caused someorders to be delayed in getting to our manufacturing floor.  In addition, we moved the manufacture of portablepersonal computers that had historically been manufactured in China to ourNashville facility, causing the transition-related issues we encountered tohave a more pronounced effect on our operations.  Prior to the commencement of the transition,we did not expect a significant slowing of our manufacturing process andshipments, and as a result, we procured more raw material inventory to supportour anticipated production than the amount we actually needed to fulfillcustomer orders.  The issues which slowedand stopped production in our Nashville manufacturing facility also impactedour procurement of peripheral products, such as monitors, speakers, and keyboards, from third party vendors.  Alsoduring the transition, we experienced system issues and part delivery delays inour customer service and support area, causing us to procure additional partsto support customer relationships, and resulting in some replacement parts notreaching our customers in a timely manner. These delays in manufacturing and customer deliveries, and service andsupport issues have caused our inventory and accounts payable to growmaterially during the transition and throughout the first six months of 2008.

 

In connection with theoutsourcing of the Nashville manufacturing operations to Flextronics under theMSA, we anticipated that the majority of the Professional Business productlines would be transitioned to Flextronics by August 2008, with thetransition of all lines to be completed by December 2008. To date, theramp up of the manufacturing operations by Flextronics has proceeded slowerthan planned and there has been a very limited amount of finished productsproduced for us by Flextronics.  Inaddition, we have shut down our Nashville operations and a substantial portionof our inventory has either been moved to, or is in transit to, the FlextronicsJuarez facility.   We have not yetreached agreement with Flextronics on the amount of inventory Flextronics willultimately purchase from us under the MSA, the timing of receipt of funds fromsuch sales, and so far have received $6.9 million from the sale of inventory.If Flextronics is not able to achieve acceptable production levels, we wouldhave difficulties in returning manufacturing to our facilities or finding alternatives.

 

These transition issueshave materially impacted our liquidity, and caused a substantial deteriorationin our working capital from December 31, 2007 through June 30, 2008and into the third quarter of 2008. Additionally, because of the delays in production, we have experiencedcancellations of some of our orders in backlog and a decline in sales to dateduring the third quarter.  We continue toextend payment to a number of our vendors well beyond normal 

 

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payment terms and theamount of the extended payments increased during the second quarter and intothe third quarter of 2008.  Certain ofour vendors have lowered their existing credit lines to us, restrictedcomponent product shipments to us, or have requested letters of credit tosecure credit lines.  Working with lowercredit lines, continuing to provide letters of credit or other creditenhancement to vendors constrains our liquidity as we are required to use moreof our cash, cash collateralize letters of credit or otherwise incur costs toprovide credit enhancement, and there can be no assurance that we will besuccessful in obtaining sufficient vendor credit in the future.  Anyinability to maintain adequate liquidity in the future or inability tointegrate our IT systems on a timely basis may do significant harm to vendorrelationships, and could cause us to experience credit holds, require that we pre-payfor products, and/or cause suppliers to refuse to deliver components orterminate supply arrangements, any of which could have a material adverseeffect on our financial condition and results of operations.

 

Our liquidity is highlydependent upon our sales and the advance of cash to us by Wells Fargo on theaccounts receivable from those sales. As described above, the delays in ourmanufacturing during these transitions significantly impacted our shipments andsales to our customers.   As a result, theadvance of cash from our Wells Fargo financing facility significantly declined,requiring us to fund a significant portion of our operations from our limitedcash flows from operations from management of our working capital and fromlimited existing cash reserves. Delays in our manufacturing and service andsupport fulfillment have caused us to prepay for production and service partsat times, or pay to have parts expedited to our plants and depots to alleviatethese shortages.  We also delayedpayments to certain vendors, which has impacted, and may continue to impact,our ability to obtain or maintain vendor credit.  To the extent we are unable to purchase partsand components on a timely basis in the future, we may lose orders in backlogand related customers, which could have a further adverse and materiallynegative effect on our sales and liquidity.

 

We may need to raise asignificant amount of additional funds to satisfy vendor payment obligationsand fund our business if we do not generate sufficient cash flows fromoperations and losses continue. There can be no assurance that we will be ableto secure additional sources of financing on terms acceptable to us or atall.  Continuing liquidity constraintscould negatively and materially impact our business and results of operationscould impact our ability to continue operations, or could result in bankruptcy.

 

**NOTE 3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Interim FinancialInformation and Basis of Presentation***

 

The accompanying unaudited interim condensed consolidated financialstatements and related notes have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q of Regulation S-X. Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America (“GAAP”) for completefinancial statements.  The accompanyingconsolidated financial statements consolidate the accounts of MPC Corporationand its wholly owned subsidiaries.  All intercompany accounts andtransactions have been eliminated in consolidation.  References to afiscal year refer to the calendar year in which such fiscal year commences. Thefiscal year of MPC Computers and MPC-Pro ends on the Saturday closest to December 31.The floating fiscal year-end typically results in a 52-week fiscal year, butwill occasionally give rise to an additional week resulting in a 53-week fiscalyear.

 

These unaudited interim condensed consolidated financial statementsshould be read in conjunction with the audited condensed consolidated financialstatements and related notes contained in our 2007 Annual Report on Form 10-K.The comparative balance sheet and related disclosures at December 31, 2007have been derived from the audited balance sheet and consolidated footnotesreferred to above.

 

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

 

The preparation of our condensed consolidated financial statements inconformity with GAAP necessarily requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofassets and liabilities at the balance sheet dates, and the reported amounts ofrevenues and costs during the reporting periods. Actual results could differfrom those estimates. On an ongoing basis, we review our estimates based oninformation that is currently available. Changes in facts and circumstances maycause us to revise estimates.

 

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Our significant estimates include the collectability of receivables andcorresponding allowance for doubtful accounts, the reserve needed for possiblefuture returns and discounts which may be granted, the carrying value andusefulness of inventory and the related inventory reserves, long-lived assetuseful 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 currentlitigation or items in dispute.

 

***Cash and Cash Equivalents***

 

Cashequivalents consist of short-term investments that have a maturity of threemonths or less at the date of purchase. We had no cash equivalents at June 30, 2008 and December 31,2007.

 

***Restricted cash***

 

Restricted cash at June 30, 2008 and December 31, 2007includes $4.3 million and $3.5 million, respectively, held as collateral underour receivables financing facility, and $5.5 million and $6.3 million,respectively, held as collateral for outstanding letters of credit.

 

***Accounts Receivable***

 

Accounts receivable are recorded at the invoiced amount and do not bearinterest.  We maintain an allowance fordoubtful accounts at an amount estimated to be sufficient to provide adequatereserve against losses resulting from collecting less than full payment onreceivables. Overdue accounts are reviewed, and an additional allowance isrecorded when determined necessary to state receivables at an estimatedrealizable value. In judging the adequacy of the allowance for doubtfulaccounts, we consider multiple factors including historical bad debtexperience, the general economic environment, the aging of our receivables, andthe financial condition of the customer. A considerable amount of judgment is required when assessing therealization of receivables, including assessing the probability of collectionand the current creditworthiness of each customer. The allowance for doubtfulaccounts totaled $3.2 million and $2.7 million respectively, as of June 30,2008 and December 31, 2007.

 

***Inventory***

 

Inventoryis stated at the lower of cost or market, with cost determined on an averagecost basis approximating first in first out (FIFO). We regularly evaluate therealizability of our inventory based on a combination of factors including thefollowing: historical usage rates, forecasted sales or usage, estimated serviceperiod, product end-of-life dates, estimated current and future market values,service inventory requirements and new product introductions, as well as otherfactors. If circumstances related to our inventories change, estimates of therealizability of inventory could materially change. At June 30, 2008 and December 31,2007, our inventory valuation allowance totaled $14.6 million and $12.3 millionand was recorded as a reduction of inventory in the consolidated balancesheets. Inventory balances, net of valuation allowances, at June 30, 2008and December 31, 2007 are:

 
| *(In thousands)* |   |
|------------------|--------|

 
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|            |       |              |       |                  |       |
| Raw Materials   |       | $                 | 72,755     |                  | $          | 46,569 |   |
| Work in Process |       | 866               |       | 100                   |       |
| Finished Goods  |       | 24,175            |       | 15,381                |       |
|            |       |              |       |                  |       |
| Total Inventory |       | $                 | 97,796     |                  | $          | 62,050 |   |

 

***Prepaid Maintenance and Warranty Costs***

 

Prepaidmaintenance and warranty costs include amounts paid to third party softwarevendors, outsourced providers of warranty fulfillment services and technologyinsurance vendors for which the related revenue has been deferred. These costsare recognized ratably with the related revenue.

 

***Business Combinations***

 

We account for businesscombinations under the purchase accounting method. The cost of an acquiredcompany is assigned to the tangible and intangible assets purchased and theliabilities assumed on the basis of their fair values at the date ofacquisition. The determination of fair values of assets and liabilitiesacquired requires us to make 

 

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estimates and usevaluation techniques when market value is not readily available. Any excess ofpurchase price over the fair value of the tangible and net intangible assetsacquired is allocated to goodwill. During the six months ended June 30, 2008, we had no changes tothe preliminary purchase price allocation of our October 1, 2007acquisition of the Professional Business.

 

***Goodwill***

 

Goodwillrepresents the excess of the purchase consideration over the fair value ofassets acquired less liabilities assumed in a business acquisition. Ouracquisitions of MPC Computers and the Professional Business gave rise togoodwill. We account for goodwill in accordance with Statement of AccountingStandards (“SFAS”) 142, *Goodwill and OtherIntangible Assets*. SFAS 142 requires that goodwill no longer beamortized and that goodwill be tested annually for impairment or morefrequently if events and circumstances warrant. We conduct goodwill impairmenttests annually every October 31 or more frequently if facts andcircumstances indicate such assets may be impaired.  We completed our annual assessment inaccordance with SFAS 142 in 2007 and determined that there was no impairment.

 

***Acquired Intangibles, net***

 

Otherintangible assets are accounted for in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,* which requires that intangible assets withestimable useful lives be amortized over their estimated useful lives, and bereviewed for impairment when changes in circumstances indicate that theircarrying amounts are in excess of their estimated fair value. Acquiredintangibles are amortized principally using accelerated methods over theirestimated useful lives ranging from 1 to 10 years.

 

***Long-Lived Assets***

 

Equipmentand software are stated at cost. Depreciation is computed using thestraight-line method over the estimated useful lives, primarily three to fiveyears. Additions, improvements and major renewals are capitalized. Maintenance,repairs and minor renewals are expensed as incurred. Leasehold improvements areamortized over the shorter of the estimated useful life of the asset or thelease term. Equipment held for lease is depreciated over the initial term ofthe lease to the equipment’s estimated residual value.  Our policy is to periodically review theestimated useful lives of our fixed assets. During the three and six months ended June 30, 2008, depreciationand amortization expense increased $1.3 million due to the outsourcing of themanufacturing of our Nashville, TN facility to Flextronics and the resultingreduction of the estimated useful lives of equipment, leasehold improvementsand software at the facility.  We expectan increase in depreciation and amortization expense of $1.0 million during theremainder of 2008.

 

We assess the recoverability of ourlong-lived assets whenever adverse events or changes in circumstances orbusiness climate indicate that expected undiscounted future cash flows relatedto such long-lived assets may not be sufficient to support the net book valueof such assets. If undiscounted cash flows are not sufficient to support therecorded assets, impairment is recognized to reduce the carrying value of thelong-lived assets to their estimated fair value. Cash flow projections are subjectto a degree of uncertainty and are based on management’s estimate of futureperformance. Additionally, in conjunction with the review for impairment, theremaining estimated lives of certain of our long-lived assets are assessed.

 

***Deferred Revenue***

 

Deferredrevenue includes amounts billed to or received from customers for which revenuehas not been recognized. Deferred revenue results from the sale of enhanced andextended warranties, which are deferred and recognized as the related servicesare provided, which generally range from 3-5 years. Enhanced warrantiesrun concurrent with our standard warranties. Our enhanced/extended warranties are deferred based on guidance providedin Technical Bulletin 90-1, *Accounting forSeparately Priced Extended Warranty and Product Maintenance Contracts*,and are valued based on the list price, net of discounts offered to thecustomer.  Deferred revenue also includesdeferred software maintenance revenues for which we are the primary obligorthat are recognized over the term of the contract, which is generally one year.

 

***Accrued Warranties***

 

Werecord warranty liabilities at the time of sale for the estimated costs thatmay be incurred under its standard limited warranty. The specificwarranty terms and conditions vary depending upon the product sold, butgenerally include technical support, repair parts, labor over a period rangingfrom 90 days to five years. Factors that affect the 

 

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warranty liability include the number of installed units currentlyunder warranty, historical and anticipated rates of warranty claims on thoseunits, and cost per claim to satisfy warranty obligations. We regularlyevaluate our estimate to assess the adequacy of our recorded warrantyliabilities and adjust the amounts as necessary. If circumstances change, or adramatic change in the failure rates were to occur, the estimate of thewarranty accrual could change significantly.

 

***Concentrations***

 

Aconcentration of credit risk may exist with respect to trade receivables,particularly customers within the U.S. federal government. We perform ongoingcredit evaluations on a significant number of our customers and collateral fromour customers is generally not required. Seven customers accounted for approximately 14% of trade receivables asof June 30, 2008 and were either agencies of, or resellers to,the federal government.

 

Aconcentration of risk may exist with respect to our suppliers. We purchasecertain products from single sources. In some cases, alternative sources ofsupply are not available. In other instances, we have established a procurementrelationship 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 supplierwere interrupted or suspended, our ability to ship products in a timely mannerwill be adversely affected. In cases where alternative suppliers are available,the establishment and procurement from these alternative suppliers will resultin delays and losses of sales, which will have an adverse effect on ouroperating results.

 

***Revenue Recognition***

 

****We recognize revenue on hardware and peripherals, net of an allowancefor estimated returns, when persuasive evidence of an arrangement exists,delivery has occurred, the sales price is fixed and determinable, andcollectability is reasonably assured. Delivery is not considered to haveoccurred until both title and risk of loss transfer to the customer, providedthat no significant obligations remain. For FOB destination agreements, which include all sales to the federalgovernment and some sales to state, local and education customers, we defer thecost of product revenue for in-transit shipments until the goods are deliveredassuming all other revenue recognition criteria have been met.  In-transit product shipments to customers areincluded in inventory.****

 

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

 

Revenue from extended warranty and service contracts, for which we areobligated to perform, is recorded as deferred revenue and subsequentlyrecognized over the term of the contract or when the service is completed. Inmultiple element arrangements that include extended warranty and servicecontracts, we use the separation guidance provisions of Technical Bulletin 90-1*Accounting for Separately Priced ExtendedWarranty and Product Maintenance Contracts*to determine fair value*. *Revenuefrom sales of third-party extended warranty and service contracts for which weare not obligated to perform is recognized on a net basis at the time of sale.

 

We recorded revenue net of sales taxes.  Such taxes are considered current liabilitiesand are included in accrued expenses until paid.

 

***ShippingCosts***

 

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

 

***Royalties***

 

We have royalty-bearing license agreementsallowing us to sell certain hardware and software products and to use 

 

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certain patented technology. Royalty costs areaccrued and included in cost of revenue when the related revenue is recognizedor amortized over the period of benefit when the license terms are notspecifically related to units shipped.

 

***Research******andDevelopment Costs***

 

Research and development costs are expensed asincurred, 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 directlyrelated to research and development support.

 

***Income Taxes***

 

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

 

Through 2007 we have generated losses for bothfinancial reporting and tax purposes.  Asa result, for income tax return reporting purposes, we may utilizeapproximately $36.9 million of net operating loss carryforwards, which begin toexpire in 2022 and are available as late as 2027.  We believe these net operating losscarryforwards are subject to an annual limitation on their use of $967 thousandpursuant to Internal Revenue Code Section 382.  However, we have not yet completed ouranalysis of additional limitations, if any, resulting from the acquisition ofthe Professional Business and the conversion of our debentures and the exerciseof our warrants during 2007.

 

***Stock Based Compensation – Stock Options***

 

During the first quarter of fiscal 2006, weadopted the provisions of and accounted for stock-based compensation inaccordance with the SFAS 123R *Share-Based Payments,*which replaced SFAS 123 and supersedes APB 25. Under the fair value recognitionprovisions of this statement, stock-based compensation cost is measured at thegrant date based on the fair value of the award and is recognized as expense ona straight-line basis over the requisite service period, which is the vestingperiod. The valuation provisions of SFAS 123R apply to new grants and to grantsthat were outstanding as of the effective date and are subsequently modified.All of our stock options were vested as of December 31, 2005, and we havenot issued stock options during the periods presented.

 

***Stock Based Compensation –Restricted Stock Units***

 

We issue restricted stock units (“RSUs”) asstock based compensation to members of our Board of Directors andemployees.  We record non-cashcompensation expense over the requisite service period of the RSUs determinedby the number of units granted multiplied by the fair market value at the dateof grant less an estimate for pre-vesting forfeitures. Compensation expense forRSUs issued is classified on the statement of operations as operating expense.During the six months ended June 30, 2008 and 2007, werecorded $620 thousand and $170 thousand respectively, in stock compensationexpense for RSUs.

 

*****Basicand Diluted Income (Loss) Per Share*****

 

We apply the provisions of SFAS No. 128,*Earnings Per Share*. Basic income (loss)per share is computed by dividing net income (loss) by the weighted-averagenumber of common shares outstanding during the period. Diluted income (loss)per share is computed by dividing net income (loss), as adjusted by the impactof potentially dilutive securities, by the combination of the weighted averagenumber of common shares outstanding and all potentially dilutive common sharesoutstanding during the period using the treasury stock method unless theinclusion of such shares is anti-dilutive. Our potentially dilutive securitiesprimarily consist of convertible debentures, stock warrants, restricted stockunits, and stock options. For the six months ended June 30, 2008 and2007, all potentially dilutive common shares totaling 38,194,463 and32,311,503, respectively, were excluded from the computation of diluted lossper share because inclusion of such shares would have had an anti-dilutiveeffect on diluted loss per share.

 

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***Reclassifications***

 

Certainreclassifications have been made to the prior year financial statements toconform to the current year presentation. The most significant was the reclassification of depreciation expense of$381 thousand and $762 thousand, respectively, related to production equipmentto cost of revenue from depreciation and amortization expense for the three andsix months ended June 30, 2007.  Thereclassification had no impact on the reported net loss for either period.

 

***New Accounting Pronouncements***

 

***New Accounting Standards***

 

InDecember, 2007, the FASB issued SFAS No. 141 (Revised 2007), *Business Combinations*. SFAS No.  141Rwill significantly change the accounting for business combinations. UnderSFAS No. 141R, an acquiring entity will be required to recognize allthe assets acquired and liabilities assumed in a transaction at theacquisition-date fair value with limited exceptions. SFAS No. 141Rwill change the accounting treatment for certain specific items, including:

 
| · | Acquisition  costs will be generally expensed as incurred;                                                                                                                                                                               |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Noncontrolling  interests (formerly known as “minority interests” — see SFAS No. 160  discussion below) will be valued at fair value at the acquisition date;                                                        |
| · | Acquired  contingent liabilities will be recorded at fair value at the acquisition date  and subsequently measured at either the higher of such amount or the amount  determined under existing guidance for non-acquired contingencies; |
| · | In-process  research and development will be recorded at fair value as an  indefinite-lived intangible asset at the acquisition date;                                                                                                    |
| · | Restructuring  costs associated with a business combination will be generally expensed  subsequent to the acquisition date; and                                                                                                          |
| · | Changes  in deferred tax asset valuation allowances and income tax uncertainties after  the acquisition date generally will affect income tax expense.                                                                                   |

 

SFAS No. 141Ralso includes a substantial number of new disclosure requirements.  The statement applies prospectively tobusiness combinations for which the acquisition date is on or after January 1,2009.

 

InDecember, 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements - An Amendment of ARB No. 51.*SFAS No. 160 establishes new accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary. SFAS No. 160 requires the recognition of a noncontrollinginterest (minority interest) as equity in the consolidated financial statementsand separate from the parent’s equity. The amount of net income attributable tothe noncontrolling interest will be included in consolidated net income on theface of the income statement. SFAS No. 160 clarifies that changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest. In addition, SFAS No. 160 requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.Such gain or loss will be measured using the fair value of the noncontrollingequity investment on the deconsolidation date. SFAS No. 160 also includesexpanded disclosure requirements regarding the interests of the parent and itsnoncontrolling interest.   The statementis effective for us during the first quarter of 2009.  We currently do not have noncontrolling interests.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities - an Amendment of FASBStatement 133*. SFAS 161 enhances required disclosures regardingderivatives and hedging activities, including enhanced disclosures regardinghow: (a) an entity uses derivative instruments; (b) derivativeinstruments and related hedged items are accounted for under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities; and (c) derivativeinstruments and related hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS 161 is effective for us during the firstquarter of 2009.  We are currentlyevaluating the impact of the adoption of the enhanced disclosures requirementsof SFAS 161 and currently do not expect the adoption to have a material impacton its consolidated financial statements.

 

InMarch 2008, the FASB affirmed the consensus of FASB Staff Position (“FSP”)APB 14-a,  *Accounting for Convertible Debt Instruments That May Be Settled inCash upon Conversion (Including Partial Cash Settlement**)*, which applies to all convertible debt instruments thathave a ‘‘net settlement feature’’; which means that such convertible debtinstruments, by their terms, may be settled either wholly or partially in cashupon conversion. FSP APB 14-a requires issuers of convertible debt instrumentsthat may be settled wholly or partially in cash upon conversion to separatelyaccount for the liability and equity components in a manner reflective of theissuer’s 

 

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nonconvertibledebt borrowing rate. Previous guidance provided for accounting for this type ofconvertible debt instrument entirely as debt. FSP APB 14-a is effectivefor us during the first quarter of 2009. We are currently evaluating the impactthe adoption of FSP APB 14-a may have on our consolidated financial statements.

 

InApril 2008, the FASB issued FSP FAS 142-3, *Determination of the Useful Life of Intangible Assets.* ThisFSP amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FASB Statement No. 142, *Goodwill and Other Intangible Assets.* The intent of this FSPis to improve the consistency between the useful life of a recognizedintangible asset under SFAS 142 and the period of expected cash flows used tomeasure the fair value of the asset under FASB Statement No. 141R, andother U.S. generally accepted accounting principles. This FSP is effective forus during the first quarter of 2009.  Weare currently evaluating the impact the adoption of FSP FAS 142-3-a may have onour consolidated financial statements.

 

***Recently Adopted Accounting Standards***

 

InSeptember 2006, the FASB issued SFAS No. 157 *Fair Value Measurement*, which defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosure requirements about fair valuemeasurements. SFAS 157 applies to other accounting pronouncements that requireor permit fair value measurements. Measurement of financial assets andfinancial liabilities was effective for us beginning in fiscal year2008.  Two FSPs on this Statement were subsequentlyissued.  On February 12, 2008, FSP No. 157-2 delayed theeffective date of this Statement for nonfinancial assets and nonfinancialliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis. This FSP is effective for us in fiscalyear 2009. On February 14, 2008, FSP No. 157-1 excluded SFAS No. 13,*Accounting for Leases,*and otheraccounting pronouncements that address fair value measurements for purposes oflease classification or measurement under SFAS No. 13*.*However, this scope exception does notapply to assets acquired and liabilities assumed in a business combination thatare required to be measured at fair value under SFAS Statement No. 141, *Business Combinations* or SFAS No. 141(R),*Business Combinations*,* *regardless of whether those assetsand liabilities are related to leases.  This FSP was effective uponour initial adoption of SFAS No. 157. The adoption of SFAS No. 157relating to financial assets and financial liabilities did not have a materialimpact on our financial position or results of operations.  We do not expect the impact of SFAS No. 157related to nonfinancial assets and nonfinancial liabilities will have amaterial impact on our financial position or results of operations.  See Note 6 – “Derivative Warrant Liabilitiesand Convertible Debentures – Fair Value Measurements” for disclosures regardingour fair value measurements.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities - Including an Amendment of FASB Statement 115*.SFAS No. 159 permits companies to choose to measure certain financialinstruments and certain other items at fair value, which are not currentlyrequired to be measured at fair value. The standard requires that unrealizedgains and losses on items for which the fair value option has been elected bereported in earnings at each subsequent reporting date. SFAS No. 159 waseffective for us beginning in the first quarter of fiscal year 2008.   We adopted SFAS No. 159 as of January 1,2008 and elected not to measure any additional financial instruments or otheritems at fair value.

 

**NOTE 4.   ACCRUED WARRANTIES**

 

We accrue for warranty liabilities at the time of the sale forestimated costs that may be incurred under the basic limited warranty.  Changes in our aggregate accrued warranty arepresented in the following table.

 
| *(In thousands)* |   |
|------------------|--------|

 
| ** **                                       | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **June 30,**              | ** ** |
| ** **                                       | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Accrued warranties at beginning of the  period   |       | $                              | 41,191     |   | $ | 4,347 |   |
| Cost accrued for new warranties                  |       | 7,714                          |       | 399 |   |
| Service obligation honored                       |       | (14,598                        | )          | (484 | ) |
| Accretion of interest under purchase  accounting |       | 477                            |       | 39 |   |
| Accrued warranties at end of the period          |       | $                              | 34,784     |   | $ | 4,301 |   |

 

**NOTE 5.    DEFERRED REVENUE**

 

We offer our customers an option of extended orenhanced warranties.  Deferred revenueresults from amounts billed to or received from customers for which thewarranty revenue is deferred and recognized as the related 

 

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services are provided, which generally rangefrom 3-5 years.  Deferred revenue alsoincludes deferred software maintenance revenues that are recognized over theterm of the contract, which is generally one year.  A schedule of our deferred revenue, includingchanges in deferred revenue from extended and enhanced warranties is asfollows:

* *

*(In thousands)*

 
| ** **                                                                      | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**              | ** ** |
| ** **                                                                      | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Deferred revenue for extended and enhanced  warranties, beginning of the period |       | $                              | 48,173     |   | $ | 32,408 |   |
| Additions to deferred revenue for new  extended and enhanced warranties sold    |       | 17,234                         |       | 5,625 |   |
| Revenue recognized for extended and  enhanced warranties                        |       | (13,720                        | )          | (4,988 | ) |
| Deferred revenue for extended and enhanced  warranties, end of the period       |       | 51,687                         |       | 33,045 |   |
| Deferred software maintenance revenue, end  of the period                       |       | 9,094                          |       | 7,460 |   |
| Total deferred revenue                                                          |       | $                              | 60,781     |   | $ | 40,505 |   |

 

**NOTE 6.   NOTES PAYABLE AND DEBT**

** **
| *(In thousands)* |   |
|------------------|--------|

 
| ** **                               | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Wells Fargo Receivables Advance Facility |       | $                           | 52,215     |                            | $          | 59,914 |   |
| Payable to Flextronics                   |       | 3,588                       |       | —                          |       |
| Payable to Wacom Technology Corporation  |       | 390                         |       | 874                             |       |
| Convertible Bridge Loans                 |       | 300                         |       | 300                             |       |
| Debt Incurred in Acquisition             |       | 105                         |       | 279                             |       |
| Payable to TPV                           |       | —                      |       | 1,176                           |       |
| Note Payable to Gateway                  |       | —                      |       | 862                             |       |
| Payable to Lessor                        |       | —                      |       | 844                             |       |
| Total Notes Payable and Debt             |       | $                           | 56,598     |                            | $          | 64,249 |   |

 

***Wells Fargo Receivables Advance Facility***

 

OnNovember 16, 2006, MPC Computers entered into an agreement with WellsFargo Business Credit, Inc. (“Wells Fargo”) for an accounts receivableassignment and advance facility (“Receivables Advance Facility”). Under thefacility, as amended in February 2007, MPC Computers may assign to WellsFargo, and Wells Fargo may purchase, Accounts (as defined in the ReceivablesAdvance Facility). Wells Fargo will advance 90% of the value of the purchasedAccounts. Wells Fargo may adjust the advancement percentage at any time in itscommercially reasonable discretion upon prior notice to us.  Wells Fargowill advance an additional 7.5% of the face amount of currently outstandingAccounts assigned to Wells Fargo, provided that the total advance does notexceed 97.5% of the face amount of any Account (the “Temporary Advance”), andincrease the advance rate on new Accounts assigned to Wells Fargo to 98% of theamount of the Accounts for a period of eight weeks (the “Special FacilityPeriod”). MPC Computers must repay the difference between the Advance and theTemporary Advance within four weeks after termination of the Special FacilityPeriod. Failure to repay amounts advanced under the Special Facility wouldconstitute an event of default under the Agreements. At any time when theTemporary Advance has been paid in full for a minimum of 60 days, MPC Computersmay request that the Special Facility be reinstated for another eight weekperiod with repayment to be made within four weeks.

 

OnOctober 1, 2007, MPC-Pro and GCI (which was acquired by MPC-Pro inconnection with the acquisition of the Professional Business), each enteredinto an Account Purchase Agreement with Wells Fargo.  Under theseagreements, MPC-Pro and GCI may assign to Wells Fargo, and Wells Fargo maypurchase from MPC-Pro and GCI, Accounts (as defined in the Agreements). WellsFargo will advance to MPC-Pro and GCI 90% of the value of the purchasedAccounts. Wells Fargo may adjust the advancement percentage at any time in itscommercially reasonable discretion upon prior notice to MPC-Pro and GCI. Inaddition, MPC-Pro, Gateway, GCI and Wells Fargo entered into an IntercreditorAgreement (the “Intercreditor Agreement”). The Intercreditor Agreement providesGateway with a junior security interest in accounts receivable generated on orafter the October 1, 2007 acquisition of the Professional Business,inventory, and all other property of MPC-Pro and GCI as specified in theagreement to secure the payment of obligations owing to Gateway under theTransition Services Agreement (the “TSA Obligations”). Wells Fargo and MPC-Proagreed to set aside certain accounts receivable for the payment of the TSAObligations (the “Gateway Blocked Accounts”). On May 29, 2008 the Intercreditor Agreement was amended to providethat there will be Gateway Blocked Accounts in up to the following amounts: (i) therewill be no Gateway Blocked Accounts through August 31, 2008; and (ii) onor after September 15, 2008, a face amount equal to the obligations owingto Gateway under the Transition Agreement for the applicable week (the “GatewayWeekly Payoff Amounts”) minus $10.0 million. The amendment also provides that,if, after November 15, 2008, there is a 

 

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remainingpositive balance of the Gateway Weekly Payoff Amounts, Gateway may provide astatement to MPC-Pro indicating the positive balance, and Wells Fargo will holdbut not purchase Gateway Blocked Accounts submitted to it by MPC-Pro and GCI ina face amount equal to the remaining positive balance.

 

Wepay fees equal to the Wells Fargo Prime Rate (as defined in the ReceivablesAdvance Facility), plus 0.75% per annum (the “Wells Fargo Discount”) multipliedby the total amount of Accounts purchased and not yet paid by our customers,computed daily. The effective rate at June 30, 2008 was 6%. The minimummonthly fee to be paid in aggregate by MPC Corporation affiliates to WellsFargo is determined by multiplying the Wells Fargo Discount, by $2.5 million.

 

WellsFargo has the right to require that we re-purchase the Accounts in the eventour customer does not pay the receivable within a timeframe specified under theReceivables Advance Facility, if a material customer dispute arises or in theevent of a default under the Receivables Advance Facility. The ReceivablesAdvance Facility is subject to customary default provisions. Wells Fargo hasdiscretion under the Receivables Advance Facility as to the Accounts purchasedand the percentage advanced after submission of the Account for approval. WellsFargo is not obligated to buy any Account from us that Wells Fargo does notdeem acceptable in its sole discretion. There is no minimum amount of Accountsto be purchased by Wells Fargo under the Receivables Advance Facility. Thefacility is secured by substantially all of our assets. The Receivables AdvanceFacility is for a term of three (3) years terminating November 14,2009. Early termination fees apply if the Receivables Advance Facility isterminated before the end of its term.  The Receivables Advance Facilityalso provides for a $3.6 million collateral account for the benefit of WellsFargo for repayment of any obligations arising under the Receivables AdvanceFacility.

 

OnApril 1, 2008, Wells Fargo provided an advance to MPC-Pro in the amount of$3.5 million (the “MPC-Pro Advance”). The MPC-Pro Advance was repaid on May 27,2008, and was in addition to other amounts provided to us by Wells Fargo underthe terms of our Account Purchase Agreements with Wells Fargo.

 

OnApril 10, 2008, MPC-Pro, GCI, and Gateway delivered to Wells Fargo aninstruction letter that modified certain terms of the Intercreditor Agreement.The letter confirmed that a requirement under the Intercreditor Agreement tomaintain a controlled collateral account in the amount of $1.5 millioneliminated. Additionally, the letter confirmed that Wells Fargo is not requiredto hold certain Gateway funds in trust as previously required under the IntercreditorAgreement.  The impact of the instructionletter was to release approximately $1.0 million to us that was held in thecontrolled collateral account.

 

OnJune 24, 2008, Wells Fargo provided an advance to MPC-Pro in the amount of$3 million (the “MPC-Pro Advance”). The MPC-Pro Advance is to be repaid by September 24,2008 and is in addition to other amounts provided to us by Wells Fargo underthe terms of our Receivables Advance Facility with Wells Fargo. Interest on theMPC-Pro Advance is at prime plus 1.75%. We agreed to pay to Wells Fargo anadvance fee in the amount of $25 thousand for the MPC-Pro Advance. As acondition of the MPC–Pro Advance, we will use the service of a strategicconsultant chosen by us and approved of by Wells Fargo.

 

OnJuly 11, 2008, MPC Computers and MPC-Pro and Wells Fargo, entered into aMaster Purchase Order Assignment Agreement. See Note 11 “Subsequent Events.”

 

***Payableto Flextronics***

 

OnMay 8, 2008, we entered into a Flextronics Inventory Purchase Agreement(the “IPA”) with Flextronics. Under the IPA, Flextronics may purchase certaininventory currently located at our Nashville facility which we expect to thenrepurchase from Flextronics over the 90 day period following the agreement datefor production at our Nashville facility. Any remaining inventory after the 90day period must be repurchased by us. A monthly interest cost of 1.5% per monthis charged by Flextronics on the outstanding inventory not repurchased by us inaddition to a monthly management fee. Amounts outstanding under the IPA to be repurchased by us are accountedfor as a financing arrangement and payable to Flextronics.

 

***Payable to Wacom Technology Corporation***

 

In August 2007, we settled a case with WacomTechnology Corporation (“Wacom”). Weagreed to pay Wacom $1.2 million in payments of $100 thousand per monthbeginning September, 2007 plus interest of 5%.

 

***Convertible Bridge Loans***

 

ConvertibleBridge Loans were issued prior to our IPO. The outstanding amount was due April 2006,including any 

 

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unpaidinterest which is accrued at 12% per annum. The holder has the right, at anytime prior to repayment, to convert all or any part of the then outstandingbalance of principal and interest under these notes into shares of common stockat the conversion price of $3.50 per share. The notes include detachablewarrants for purchase of common stock. The value of the warrants was recordedas interest expense in 2004. All of our assets at MPC Corporation collateralizethe notes. These notes have registration rights. In May 2006, we repaidprincipal and interest to one note holder. There are two remaining note holderswho have not yet been repaid. We are in default of the repayment terms on thesenotes, and the default interest provision of 18% has been accruing on thesenotes since April 15, 2006. We have been in discussions with these noteholders about an extension to repay the amounts due. There is no assurance thatwe will be successful in renegotiating the terms of these notes.

 

Warrantsand convertible debt issued in connection with financing activities are subjectto the provisions of Emerging Issues Task Force (“EITF”) Issue 00-19 *Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock.* EITF 00-19 providesthat derivatives should be classified as either equity or a liability. If thederivative is determined to be a liability, the liability is fair valued eachreporting period with the changes recorded to the consolidated balance sheetand consolidated statement of operations. In regard to the convertible debt setout above, we determined that the embedded conversion option qualified asequity under EITF 00-19 and would not be subject to bifurcation from the hostinstrument.

 

***Debt Incurred in Acquisition***

 

Debtincurred in connection with the acquisition of MPC Computers of $370 thousandwas due July 25, 2006, including any unpaid interest, which is accrued at5% per annum.  There is no assurance thatwe will be successful in renegotiating the terms of these notes. The holdershave the right, at any time prior to payment, to convert all or any part of thethen outstanding balance of principal and interest under these notes intoshares of common stock at the conversion price of $3.00 per share, which wasdetermined at the date of issuance. The common stock underlying these notes iscovered by a registration rights agreement.  We filed the registrationstatement with the SEC on November 8, 2006 and it was declared effectiveon June 28, 2007.  During the yearended December 31, 2007, we repaid and settled $91 thousand of the debtand related interest and recognized a gain of $52 thousand as we settled forless than the amounts due.  During thefirst six months of 2008, we made further payments and settlements with theholders.  As of June 30, 2008, $105thousand remains outstanding to one holder who is the Chief Financial Officerof MPC Corporation.

 

***Payable to TPV***

 

OnJune 30, 2007, we entered into a settlement agreement with TPVInternational (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd(collectively “TPV”).  Under the agreement we agreed to pay TPV $2.1 millionover a period of twelve months with interest at 8%.  The agreementprovides for monthly payments of $120 thousand for six months and $254 thousandthereafter. The settlement amount had been previously recorded as accountspayable.  The payable to TPV was fullyrepaid on February 1, 2008.

 

***Note Payable to Gateway***

 

OnDecember 6, 2007, MPC-Pro entered into an unsecured promissory notepayable to Gateway (the “Promissory Note”) in the amount of $1.3 million aspart of the consideration for the acquisition of the ProfessionalBusiness.  The Promissory Note wasexecuted pursuant to the Asset Purchase Agreement which contemplated theparties executing the Promissory Note at a point in the future when theprincipal amount had been determined. The Promissory Note is dated effective October 1,2007, which was the closing date of the transaction under the Asset PurchaseAgreement. The principal amount of the Promissory Note was calculated pursuantto terms set forth in the Asset Purchase Agreement.  The principal amount was due in three equalbi-monthly installments plus interest at 8% per annum beginning December 1,2007 and ending on April 1, 2008. The note payable was fully paid on April 1,2008.

 

***Payable to Lessor***

 

MPCComputers is a party to a commercial lease with Micron Technology dated April 30,2001 (as amended, the “Lease”) under which we lease our primary manufacturingfacility in Nampa, Idaho. A Fifth Amendment to the Lease deferred our rentpayment 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 otheramounts (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 hadpaid only $500 thousand of the Extended Rent by May 31, 2007.

 

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OnJuly 2, 2007, MPC Computers entered into a Sixth Amendment to the Lease ofthis manufacturing facility. The Sixth Amendment to the Lease providedthat MPC Computers pay the balance of the Extended Rent Obligation in twelveequal monthly installments in the amount of $174 thousand, including interestat the annual rate of 12%.  The extendedRent Obligation was fully paid on June 1, 2008.

 

**NOTE 7.    DERIVATIVEWARRANT LIABILITIES AND CONVERTIBLE DEBENTURES**

 

Derivativewarrant liabilities and convertible debentures consist of the following:

* *
| ** **                              | ** ** | **June 30, 2008**  | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Derivative Warrants** | ** ** | **Convertible Debentures** | ** ** |
| **(In thousands)**                 | ** ** | **Fair Value**          | ** ** | **Fair Value** | ** ** | **Face Value** | ** ** |
|                                    |       |                         |       |   |   |   |   |
| New Convertible Debentures and Warrants |       | $                            | 1          |   | $ | 50 |   | $ | — |   |
| September 29, 2006 Financing       |       | 296                          |       | 1,448 |   | 1,353 |   |
|                                    |       | $                            | 297        |   | $ | 1,498 |   | $ | 1,353 |   |

 
| ** **                              | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Derivative Warrants**    | ** ** | **Convertible Debentures** | ** ** |
| **(In thousands)**                 | ** ** | **Fair Value**             | ** ** | **Fair Value** | ** ** | **Face Value** | ** ** |
|                                    |       |                            |       |   |   |   |   |
| New Convertible Debentures and Warrants |       | $                               | 1          |   | $ | 42 |   | $ | — |   |
| September 29, 2006 Financing       |       | 633                             |       | 1,548 |   | 1,353 |   |
|                                    |       | $                               | 634        |   | $ | 1,590 |   | $ | 1,353 |   |

 

***NewConvertible Debentures and Warrants***

 

OnSeptember 6, 2006, we entered into a securities purchase agreement withcertain existing investors and new investors pursuant to which we soldconvertible debentures for an aggregate of $4.6 million. Additionally, theinvestors of April 24, 2006 Bridge Loan exchanged $5.0 million face valueof their convertible debentures plus $226 thousand of accrued interest thereoninto the New Convertible Debentures and the existing and new investors received4,924,500 warrants. The debentures become convertible into shares ofcommon stock at a conversion price of $0.75 per share. The warrants allowthe purchase of our common stock for $1.10 per share and are for a term of 5years. The debentures accrue interest at 8% per annum after shareholderapproval was obtained in December 2006.  The aggregate principalamount becomes due and payable September 6, 2009. In the event thatthe debentures are not repaid on the maturity date, we will be in default andthe debentures will begin to accrue interest at a rate of 22% per annum or themaximum amount permitted by law, whichever is less. The debentures containvarious customary events of default as well as negative covenants that, amongother things, prohibit us from incurring additional debt.

 

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

 

Boththe debentures and the warrants contain provisions limiting conversion andexercise, or issuance of shares in lieu of interest, as the case may be, in theevent that the holder’s beneficial ownership of our common stock would exceed9.99%.  We concurrently entered into a registration rights agreement withthe investors that required us to register all of the common stock issued andunderlying the securities sold to investors. The registration rightsagreement contains customary indemnification and contributionprovisions. We filed the registration statement with the SEC on November 8,2006 and it was declared effective on June 28, 2007. Not all of thecommon stock underlying the debentures and warrants were registered under theregistration statement due to blocker provisions imposed by certain investorson their registrable shares and from a reduction in the number of shares asrequired by the SEC. We believe we have substantially fulfilled ourobligation under the registration rights agreement and may register theremaining unregistered shares when the blocker provisions are waived by theinvestors and when allowed by the SEC.

 

OnMarch 5, 2007, we obtained amendments and waivers to the registrationrights agreement and the debentures. Pursuant to a letter agreement, themajority of the investors, including Crestview Capital Master, LLC (“Crestview”)and Toibb Investment LLC (“Toibb”) agreed to waive the penalty provisions fornot yet having an effective registration statement, and to extend the dates forfiling a registration statement and all related deadlines, including 

 

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thedate by which the initial registration statement must be declared effective bythe SEC, by 120 days. The investors in this offering also agreed that no Eventof Default is presently deemed to have occurred under the debentures. The120-day extension period lapsed, and the registration statement was notdeclared effective until June 28, 2007.

 

OnOctober 1, 2007, we entered into an Amendment No. 1 to theConvertible Debenture with each of Crestview and Toibb pursuant to which theirrespective Convertible Debentures were converted into Series A PreferredStock.

 

TheNew Convertible Debentures are hybrid financial instruments that embody certainfeatures that met the definition of derivative financial instruments andrequired bifurcation under SFAS No. 133.  Embedded derivatives thatrequire bifurcation are required to be combined into one compound derivativefinancial instrument and carried at fair value as derivative liabilities. The4,924,500 of detachable warrants, and related anti-dilution protection featureswere evaluated as freestanding derivative financial instruments under EITF00-19, which provides the guidelines for equity classification. The warrantsdid not possess all of the conditions for equity classification due to theregistration rights that require the delivery of registered shares, and did notprovide for a mechanism for settlement should we be unable to deliver registeredshares; in these instances, net-cash settlement is presumed. As such, thedetachable warrants were required to be carried as liabilities at fair value.The warrants issued to the placement agent possessed all of the conditions forequity classification and were therefore classified as equity.

 

Weapplied the provisions of SFAS 155 for the New Convertible Debentures andWarrants as a hybrid instrument that contains an embedded derivative that wouldotherwise have to be bifurcated. The entire hybrid instrument was thereforeinitially recorded at fair value and subsequent changes in fair value wererecognized in earnings.

 

During the year ended December 31, 2007, we issued 8,798,986shares of common stock and 626,546 shares of Series A Professional Stockupon conversion of $9.8 million face value of New Convertible Debentures plusaccrued interest and penalties, and the exercise of 6,652,227 warrants.  See Note 9-”Series A Preferred Stock.”

 

In determining the fair value of our freestanding derivative financial instrumentswe assumed an expiration term of 3.19 years, a volatility of 110.98% andinterest rate of 3.34%. The estimated fair value of these derivativeinstruments at June 30, 2008 and December 31, 2007 are as follows:

 
| ** **              | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------|------------|----------------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|                    |       |                |       |                 |       |       |       |
| June 30, 2008      |       | $                   | 50         |                 | $          | 1          |       | $ | 51 |   |
|                    |       |                |       |                 |       |       |       |
| December 31, 2007  |       | $                   | 42         |                 | $          | 1          |       | $ | 43 |   |

 

***September 29,2006 Financing***

 

OnSeptember 29, 2006 we entered into a securities purchase agreement withcertain existing investors and new investors pursuant to which we agreed tosell convertible debentures for an aggregate of $4.9 million. The majority ofthe transaction closed October 4, 2006.  The investors also receivedan aggregate of 2,468,125 warrants to purchase our common stock. The debenturesbecome convertible into shares of common stock at a conversion price of $0.75per share. The warrants allow the purchase of our common stock for $1.10 pershare and are for a term of 5 years. The debentures accrue interest at 8% perannum after shareholder approval was obtained in December 2006 and theaggregate principal amount becomes due and payable September 29,2009. In the event that the debentures are not repaid on the maturitydate, we will be in default and the debentures will begin to accrue interest ata rate of 22% per annum or the maximum amount permitted by law, whichever isless. The debentures contain various customary events of default as well asnegative covenants that, among other things, prohibit us from incurringadditional debt.

 

Boththe debentures and the warrants contain provisions limiting conversion andexercise, or issuance of shares in lieu of interest, as the case may be, in theevent that the holder’s beneficial ownership of our common stock would exceed9.99%. We concurrently entered into a registration rights agreement with theinvestors that requires us to register all of the common stock issued andunderlying the securities sold to the investors. The registration rightsagreement contains customary indemnification and contribution provisions. Theterms, conditions, features and accounting treatment of these debentures andwarrants are substantially identical to the New Convertible Debentures andWarrants.

 

Wefiled the registration statement with the SEC on November 8, 2006, and itwas declared effective on June 28, 2007.

 

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Notall of the common stock underlying the debentures and warrants was registeredunder this registration statement due to the large number of shares of commonstock to be registered relative to the number of shares of our common stockthen outstanding.  In order to register the shares on a Form S-3, theSEC required that we reduce in the number of shares being registered. Webelieve we have substantially fulfilled our obligations under the registrationrights agreement and will register the remaining unregistered shares as requiredby the registration rights agreement and as allowed by the SEC.

 

Wedid not obtain any amendments or waivers from these investors and as a result,as of February 1, 2007, we began incurring liquidated damages under theregistration rights agreement at the rate of 1.5% of the aggregate amountinvested per month until the registration statement was declared effective on June 28,2007. These liquidated damages must be paid in cash, and they accrueinterest at a rate of 18% per annum. We notified the investors that we areunable to pay the interest and will accrue the interest if unpaid to theiraccount. There is no assurance that they will allow us to defer payment ofthe liquidated damages. Since we have not paid all of the interest or penaltiesdue under the debentures or the registration rights agreement, a holder coulddeclare the debentures to be in default and accelerate the debt due under thedebentures.  If this were to happen, the debentures would accrue interestat the rate of 22% per annum. We may be required to pay interest or otherrequired payments in cash rather than stock and could be forced to use ourlimited cash to redeem all or a portion of the outstanding debentures.

 

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

 

Duringthe year ended December 31, 2007, we issued 6,314,927 shares of commonstock upon conversion of $3.6 million in face value of debentures from the September 29,2006 Financing plus accrued interest and penalties and exercise of 893,125warrants.

 

Indetermining the fair value of our freestanding derivative financial instrumentswe assumed an expiration term of 3.27 years, a volatility of 110.23% and aninterest rate of 3.34%.   In thedetermination of the fair value of the convertible debentures, we assumed anequivalent volatility of 98.63%, interest rate of 9.86% and yield rate of30.54%.    The estimated probability of adilutive financing transaction occurring is based on management’s estimate ofsuch a transaction in the future. The estimated fair value of thesederivative instruments at June 30, 2008 and December 31, 2007 are asfollows:

 
| ** **              | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------|------------|----------------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|                    |       |                |       |                 |       |       |       |
| June 30, 2008      |       | $                   | 1,448      |                 | $          | 296        |       | $ | 1,744 |   |
|                    |       |                |       |                 |       |       |       |
| December 31, 2007  |       | $                   | 1,548      |                 | $          | 633        |       | $ | 2,181 |   |

 

***Fair Value Measurements***

 

OnJanuary 1, 2008, we adopted SFAS No. 157, *Fair ValueMeasurements* which defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles and expandsdisclosures about fair-value measurements. SFAS No. 157 does not require any new fair value measurements, butrather applies to all other accounting pronouncements that require or permitfair value measurements. Although the adoption of SFAS 157 did not materiallyimpact our financial condition, results of operations or cash flows, we arerequired to provide additional disclosures within our condensed consolidatedfinancial statements regarding our derivative warrant liabilities andconvertible debenture liabilities.

 

SFASNo. 157 emphasizes that fair value is a market-based measurement, not anentity-specific measurement and should be determined based on the assumptionsthat market participants would use in pricing the asset or liability. As abasis for considering market participant assumptions in fair valuemeasurements, SFAS No. 157 establishes a fair value hierarchy thatdistinguishes between market participant assumptions based on market dataobtained from sources independent of the reporting entity (observable inputsthat are classified within levels one and two of the hierarchy) and thereporting entity’s own assumptions about market participant assumptions(unobservable inputs classified within level three of the hierarchy).

 

·                  Levelone inputs utilize unadjusted quoted prices in active markets for identicalassets or liabilities that we have the ability to access.

·                  Leveltwo inputs are inputs other than quoted prices included in level one that areobservable for the asset 

 

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orliability, either directly or indirectly. Level two inputs may include quotedprices for similar assets and liabilities in active markets, as well as inputsthat are observable for the asset or liability, other than quoted prices, suchas interest rates, foreign exchange rates and yield curves that are observableat commonly quoted intervals.

·                  Levelthree inputs are unobservable inputs for the asset or liability, which aretypically based on an entity’s own assumptions, as there is little, if any,related market activity.

 

Ininstances where the determination of the fair value measurement is based oninputs from different levels of the fair value hierarchy, the level in the fairvalue hierarchy within which the entire fair value measurement falls is basedon the lowest level input that is significant to the fair value measurement inits entirety. For example, a Level 3 fair value measurement may include inputsthat are observable, (Levels 1 and 2), and unobservable (Level 3).  Our assessment of the significance of aparticular input to the fair value measurement in its entirety requiresjudgment, and considers factors specific to the asset or liability.

 

Thevaluation of our derivative warrant liabilities is determined using Level 3inputs, using a Black-Scholes Merton (BSM) model.  The BSM model considers (i) time value, (ii) risk-freeinterest rates, (iii) volatility factors, and (iv) current market andcontractual prices.  The valuation of ourembedded conversion features is determined using Level 3 inputs, using theFlexible Monte-Carlo (FMC) model. The FMC model considers (i) time value, (ii) risk-adjustedinterest inputs, (iii) credit-risk inputs, (iv) volatility factors,and (v) current market and contractual prices for the underlying amounts.

 

Asof June 30, 2008, we had no other financial instruments requiring fairvalue measurement.

 

**NOTE 8.    SERIES B PREFERRED STOCK**

 

Inconnection with the acquisition of the Professional Business, we issued5,602,454 shares of MPC Corporation common stock totaling approximately 19.9%of our outstanding common stock as of the Closing Date, and 249,171 shares ofMPC Corporation Series B Preferred Stock convertible into 4,983,416 sharesof our common stock. All MPC Corporation Series B Preferred Stock issuedto Gateway converts to MPC Corporation common stock upon (i) shareholderapproval by a majority of the MPC Corporation common shareholders and (ii) atsuch time as the shares may be converted without causing Gateway’s ownership ofour common stock to exceed 19.9% (the “Series B Automatic Conversion Event”).  The MPC Corporation Series B PreferredStock is participating, non-voting, and has a liquidation preference equal to$.00000001 per share.

 

Inaccounting and valuing for the Series B Preferred Stock, we considered theguidance of EITF D-98 *Classification andMeasurement of Redeemable Securities.* In accordance with EITF D-98,the Series B Preferred Stock was recorded and carried at its fair value atinitial date of issue.  The MPCCorporation Common shares and MPC Corporation Series B Preferred Stockissued to Gateway were valued at $7.1 million and $6.3 million, respectively,based on volume-weighted average of MPC Corporation’s closing common stockprice of $1.2657 per share over a six business day period, from August 30,2007 through September 7, 2007. Such period included two business daysprior to the date of the Asset Purchase Agreement on September 4, 2007 andtwo business days after our September 5, 2007 announcement of thetransaction. The MPC Corporation Series B Preferred Stock was valued basedon the common-equivalent number of shares that would be issued following the Series BAutomatic Conversion Event.

 

UnderEITF-D-98 the Series B Preferred Stock was classified outside of permanentequity under EITF-D-98 due to the possible cash redemption of the stock in theevent the Series B Automatic Conversion Event was not approved by ourshareholders.  On July 25, 2008 ourshareholders approved the Series B Automatic Conversion Event and thereforethe Series B Preferred Stock has subsequently been reclassified topermanent equity.

 

**NOTE 9.    SERIES A PREFERRED STOCK**

 

Asa condition to close under the Asset Purchase Agreement for the acquisition ofthe Professional Business, MPC Corporation was to have raised at least $9.0million in additional cash and cash equivalents through the conversion ofoutstanding convertible securities, the exercise of warrants or the sale ofadditional equity securities, as measured relative to our cash and cashequivalents as of the September 4, 2007 date of the Asset PurchaseAgreement.  This condition was modified to raising at least $8.0 millionunder a Letter Agreement dated October 1, 2007 (the “Letter Agreement”)among the parties to the Asset Purchase Agreement.  In satisfaction ofthis condition, on October 1, 2007 we raised $8.3 million from theexercise for cash of $1.10 warrants issued in connection with two privateplacement financings in September 2006 that included the issuance ofconvertible debentures.

 

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Inconnection with the obligation under the Letter Agreement, two MPC Corporationinvestors, Crestview and Toibb, intended to exercise their warrants andconvertible debentures, but because of their large holdings, their beneficialownership of our common stock, as defined in Rule 13d-3 as promulgatedunder the Securities Exchange Act of 1934, as amended, could have exceeded9.99%.  As such, on October 1, 2007, we entered into an Amendment No. 1to Convertible Debenture with each of Crestview and Toibb (the “DebentureAmendments”), pursuant to which their respective Convertible Debentures due on September 6,2009 were amended such that the debentures were convertible into shares of Series APreferred Stock.  Additionally, MPC Corporation and both Crestview andToibb agreed that, upon the exercise of their warrants prior to the Closing, wewould issue (i) common stock only to the extent that their beneficialownership reaches 9.99% and (ii) the number of shares of MPC Corporation Series APreferred Stock that will convert into a number of shares of MPC Corporationcommon stock equal to the difference between the number of shares of commonstock such holder would receive if all of such holder’s warrants were exercisedfor our common stock and the number of shares of our common stock such holderactually received in order to avoid exceeding 9.99% beneficial ownership.Additionally, on October 1, 2007, we entered into an amendment to theRegistration Rights Agreement dated as of September 6, 2006 with Crestviewand Toibb such that the registration and other rights applicable to shares ofcommon stock issuable upon conversion of their debentures apply equally to theshares of common stock issuable on conversion of the Series A PreferredStock issued pursuant to the Debenture Amendments.

 

Inconjunction with the exercise of the $1.10 warrants and our obligations underthe Letter Agreement, on October 1, 2007, 7,545,352 warrants wereexercised, $11.0 million in face value of convertible debentures were convertedplus accrued interest and penalties thereon, and we issued 12,912,166 shares ofMPC Corporation common stock and 626,546 shares of MPC Corporation Series APreferred Stock. The MPC Corporation Series A Preferred Stock is convertibleinto 12,530,925 shares of MPC Corporation common stock.  The MPC Corporation Series A PreferredStock is participating, non-voting, and has a liquidation preference equal to$.00000001 per share. Each share of MPC Corporation Series A PreferredStock will automatically convert to MPC Corporation common stock at such timethe conversion would not cause the beneficial ownership to exceed 9.99%beneficial ownership.

 

**NOTE 10.   **RELATED PARTY TRANSACTIONS

** **

Inconnection with the acquisition of the Professional Business, on October 1,2007 MPC-Pro entered into a Transition Services Agreement (the “TSA”) withGateway.  During the six months ended June 30, 2008, MPC-Propaid Gateway $1.3 million for accounting, human resource, manufacturing,procurement, marketing, information technology, and other specified servicesunder the terms of the TSA.   Under the TSA, Gateway also undertookcertain buy/sell activities related to components on behalf of MPC, whichincludes procuring components from component suppliers, selling of suchcomponents to original design manufacturers (“ODMs”) for manufacture offinished goods that are ordered from ODMs by Gateway, and the subsequentselling of such finished goods to MPC-Pro (the “Buy/Sell Activity”).  Inaddition to the Buy/Sell activity under the TSA, MPC-Proacquired certain additional component inventory from Gateway.  Duringthe six months ended June 30, 2008, payments to Gateway under the Buy/SellActivity and purchases of such component inventory totaled $22.0 million.  At June 30, 2008 we had accounts payableto Gateway totaling $14.1 million, related to the Buy/Sell activity andpurchases of inventory and related services. Under Amendment No. 5 of the TSA, we are obligated to makescheduled payments to Gateway, with the balance fully repaid in November,2008.  At June 30, 2008 we weredelinquent on $ 0.5 million of the scheduled payments to Gateway.  We also did not make a $0.5 million paymentdue on July 15, 2008.  A scheduledpayment of $3.0 million is due on August 15, 2008, which we do not expectto pay.  We are expecting to renegotiatethe TSA in August 2008, to further defer payments of the payable toGateway.

 

Inconnection with the acquisition of the Professional Business, MPC-Proissued to Gateway a promissory note in the amount of $1.3 million(the “Promissory Note”).  During the six months ended June 30,2008, MPC-Pro paid to Gateway $17 thousand of interest and $862 thousandof principal in full payment of the Promissory Note.  See Note 6 “Notes Payable and Debt-NotePayable to Gateway.”

 

Duringthe six months ended June 30, 2008, MPC-Pro provided certain manufacturingservices to Gateway, and charged Gateway $1.8 million for suchservices.  At June 30, 2008, thereceivable from Gateway for such services was $0.5 million.

 

MPC-Proleases from Gateway 45,552 square feet of office space in North Sioux City,South Dakota.  During the six monthsended June 30, 2008, MPC-Pro paid Gateway lease payments totaling $283thousand.

 

Weare indebted to Curtis Akey, our chief financial officer, under the terms of apromissory note dated April 13, 2007 for services provided prior to hisemployment with us.  As of June 30, 2008, the outstanding balanceunder the 

 

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promissorynote was $105 thousand plus $18 thousand of accrued interest which amount iscurrently due and payable.  See Note 5 “NotesPayable and Debt-Debt Incurred in Acquisition.”

 

**NOTE 11.    COMMITMENTS AND CONTINGENCIES**

 

***Lettersof Credit***

*** ***

We hadoutstanding letters of credit totaling $5.5 million and $6.3 million on June 30,2008 and December 31, 2007, respectively. The letters of credit were fully collateralized with cash on deposit atthe issuing bank.

 

***Litigation***

*** ***

***Phillip Adams & Associates, LLC***

 

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

 

***Other Matters***

 

On December 17,2007, the General Services Administration (GSA) served MPC Computers with asubpoena to provide records regarding sales under our GSA Multiple AwardSchedule contract.  The subpoena relatesto an industry-wide investigation into alleged non-compliance with the TradeAgreements Act.  We are currentlyinvestigating the matter and responding to the subpoena.  The matter is in the preliminary stages andwe cannot predict an outcome at this time. Our non-compliance could lead toimposition of penalties and termination of the contract.  The termination of the contract could lead toloss of substantial revenues from the federal government.

 

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

 

**NOTE 12.    SUBSEQUENTEVENTS**

 

***Master Purchase Order Assignment Agreement***

 

On July 11,2008, MPC Computers and MPC-Pro and Wells Fargo, entered into a Master PurchaseOrder Assignment Agreement (the “Assignment Agreement”). Under the AssignmentAgreement, MPC Computers and MPC-Pro will assign customer purchase orders toWells Fargo and request Wells Fargo to accept such purchase orders and purchasethe required materials to fulfill the purchase orders. On such assignedpurchase orders, Wells Fargo will retain MPC Computers and MPC-Pro tomanufacture, process, and ship ordered goods and will pay us for our servicesupon payment by the customer to Wells Fargo for the goods. Accepted purchaseorders will be reassigned to us at such time Wells Fargo has received paymentin full on account of a purchase order invoice. Accepted purchase orders becomedelinquent if a purchase order price is not paid to Wells Fargo by the earliestof (i) the due date for payment of the purchase order invoice, (ii) forty-five45 days following the Funding Date by Wells Fargo, as defined, (iii) thedate the purchase order is cancelled, or (iv) the date of occurrence of anevent of default as defined. Wells Fargo has the right to require us topromptly purchase any Delinquent Purchase Order as defined, (and inventory ofproducts in the case of a Canceled Purchase Order, as defined) for an amountequal to the full amount outstanding under the purchase order invoice (or thepurchase order price in the case of a Canceled Purchase Order). The AssignmentAgreement provides for limitations of funding of individual accepted purchaseorders by Wells Fargo and the maximum aggregate outstanding funding shall notexceed $5 million.

 

Wells Fargo isto be paid a transaction initiation and set-up fee of 1.0% of the face amountof letters of credit and funds advanced by Wells Fargo with respect to eachaccepted purchase order, plus a daily maintenance fee in a sum equal to 0.067%of the aggregate of the face amount of all letters of credit and funds advancedby Wells Fargo which remain outstanding for more than fifteen (15) days. Inaddition, a Product advance fee will be paid to Wells Fargo equal to the J.P.Morgan prime rate plus 2%, divided by 360, multiplied by the aggregate amountsoutstanding on all letters of credit and all funds advanced by Wells Fargo inconnection the accepted purchase orders. In the event of a Delinquent PurchaseOrder, a late payment fee is to be paid in a sum equal to 0.067% of theoutstanding 

 

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portion of thepurchase order price multiplied by the number of days from the date an acceptedpurchase order becomes a delinquent purchase order to and including the dateWells Fargo has received full payment of amounts due. The Assignment Agreementprovides for a commitment fee of $100 thousand to be paid to Wells Fargo on theearlier of twelve months following July 11, 2008 or the date oftermination of the Assignment Agreement and be paid for each one or more twelvemonth renewal terms if the agreement is renewed. The commitment fee will bewaived in whole if the Product Volume for a term equals or exceeds the MinimumVolume of $10 million, or in part if the Product Volume for a term is less thanthe Minimum Volume based on the aggregate volume of funds advanced by WellsFargo in connection with accepted purchase orders as a percentage of theMinimum Volume.

 

OnJuly 11, 2008, in connection with the Assignment Agreement, MPC Computers,MPC-Pro and Wells Fargo entered into a Security Agreement and Financing Statement(the “Security Agreement”). Under the Security Agreement, MPC Computers andMPC-Pro grants Wells Fargo a first priority security interest in substantiallyall merchandise, inventory, goods and supplies in connection with acceptedpurchase orders under the Assignment Agreement for all payments and otherobligations due Wells Fargo there under (the “Primary Collateral”). Inaddition, the Security Agreement provides Wells Fargo a subordinated securityinterest in substantially all other assets of MPC Computers and MPC-Pro pledgedto a Senior Lender, as defined. Under an Intercreditor Agreement with Gateway,MPC-Pro has granted to Gateway a security interest in all or part of itsassets, which is subordinate to a security interest granted by MPC-Pro to WellsFargo under certain Account Purchase Agreements. On July 11, 2008, inconnection with the Assignment Agreement, Gateway and MPC-Pro entered into aTransaction Subordination Agreement with Wells Fargo. Under the TransactionSubordination Agreement, Gateway agrees to further subordinate its interest inthe assets of MPC-Pro to Wells Fargo.

 

**ITEM2.    MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Management’s discussion andanalysis of the results of operations and financial condition should be read inconjunction with the financial statements and related notes included in Item 1of this report and with our Annual Report in Form 10-K for the year ended December 31,2007.*

 

**OVERVIEWAND EXECUTIVE SUMMARY**

 

Wewere formed as HyperSpace Communications, Inc. in 2001 as a Colorado-basedcompany, and completed an initial public offering in October 2004. InJuly 2005, we acquired MPC Computers, an enterprise IT hardware businessproviding products and services to customers in mid-sized businesses,government agencies and education organizations.  In January 2007, we changed our name toMPC Corporation.  On October 1,2007, we purchased, through our wholly-owned subsidiary MPC-Pro, from Gatewayand Gateway Technologies, its Professional Division, the portion of theConsumer Direct Division that markets business-related products to targetbusinesses with less than 100 employees, and the portion of the Customer Care &Support department that provides technical services to customers of theProfessional and Consumer Direct Divisions (collectively, the “ProfessionalBusiness”).  This acquisitionsignificantly increased the scale of our business as Gateway’s ProfessionalBusiness had reported revenue of $895 million in 2006 as compared to ourrevenue of $285 million in 2006.  We believe that the increased scale willenable us to better compete with our larger competitors including Dell, HP andLenovo.

 

Weacquired the entire catalog of products and services from the ProfessionalBusiness as well as a portion of Gateway’s Consumer Direct business.  We now make the complete product lineavailable to both MPC Computers and former Gateway customers.  We alsoassumed operation of Gateway’s final assembly facility in Nashville, TN. Withthe completion of the acquisition, we have operations in Idaho, South Dakotaand Tennessee. The Professional Business is operated under MPC-Pro.

 

Whileour business has expanded significantly with the acquisition of theProfessional Business, on a combined basis both MPC Computers’ revenues and theProfessional Business’ revenues have declined in each of the years from 2005 to2007.  We expect this declining trend inrevenue to continue through 2008, driven largely by lower unit volumes anddeclining prices.

 

***Current Business***

* *

Ourprimary business is providing PC-based products and services to mid-sizedbusinesses, government agencies and education organizations.  We use a build-to-order manufacturing processand a direct sales model that we believe is an efficient means to providecustomized computing solutions to our customers. We manufacture and marketClientPro® desktop PCs, TransPort® notebook PCs, NetFRAME® servers andDataFRAMETM storage products.  Inaddition, we manufacture and market the “E-series” of desktops, notebooks,servers and storage 

 

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productsunder an eighteen month limited license agreement with Gateway. We also providehardware-related support services such as installation, technical support,parts replacement, and recycling. We believe that the quality of our serviceand support differentiates us from our competitors. In addition to PCs,servers, and storage products, we also fulfill our customers’ requirements forthird party products produced by other vendors, including peripherals andsoftware.

 

***Recent Agreements with Flextronics***

 

OnApril 14, 2008, we entered into a Manufacturing Services Agreement (the “MSA”)with Flextronics Computing Mauritius Limited (“Flextronics”).  Under the MSA, Flextronics will performprocurement, supply chain management, manufacturing, assembly and testing forMPC Corporation at the Flextronics manufacturing facility in Juarez,Mexico.  Transition of operations fromour Nashville, Tennessee manufacturing facilities to Juarez is expected to becompleted by December 31, 2008 with transition of other manufacturing tooccur on such schedules as may be determined by MPC Corporation andFlextronics.  The MSA provides forFlextronics to achieve certain cost reduction targets, during the first twelvemonths following August 31, 2008 that are expected to provide cost savingsto MPC Corporation.  If the costreduction targets are not achieved, our sole remedy is to terminate the MSA ifFlextronics fails to cure the default.

 

Inaddition, on a one-time basis, Flextronics will purchase certain materials andinventory at the Nashville facility.  IfFlextronics does not use the materials and inventory within a 12 month period,we must buy back the materials. Additionally, a division of Flextronics alsoagreed to acquire certain of our manufacturing equipment for a cash payment of$1 million subject to our possible retention of the manufacture of a computingplatform.

 

We anticipatethe outsourcing of our manufacturing operations to Flextronics could result inpotential manufacturing and overhead cost savings.  Flextronics has a much larger scale ofoperations than ours that may provide a greater ability to procure products andcomponents at lower prices and with lower labor costs.  After the first twelve months of the MSA,Flextronics will continue to seek to reduce cost of manufacturing products bymethods such as elimination of materials, material price reductions,redefinition of specifications and re-design of assembly or test methods.  We will continue to evaluate additional meansof reducing costs and improving productivity in connection with our operationsand under the MSA with Flextronics. There is no guaranty, however, that any such cost savings will beachieved.  The transfer of operations toFlextronics will allow MPC to focus on its, sales, marketing, productdevelopment and service and support functions, with reduced remaining manufacturingoperations.

 

Weare responsible for applicable Nashville facility closure and relatedcosts.  We currently estimate a reductionin workforce of approximately 145 personnel from the Nashville facility.

 

OnMay 8, 2008, MPC-Pro entered into an Inventory Purchase Agreement (the “IPA”)with Flextronics.  Under the IPA,Flextronics purchased approximately $12.0 million of certain inventorycurrently located at our Nashville facility which we expect MPC-Pro will thenrepurchase from Flextronics over the 90 day period following the agreement datefor production at our Nashville facility. Any remaining inventory after the 90 day period must be repurchased byMPC-Pro.  Flextronics will charge amonthly interest cost of 1.5% per month on the outstanding inventory notrepurchased by MPC-Pro in addition to a monthly management fee.

 

***Professional Business and Flextronics Transition Issues***

 

During the transition ofthe Professional Business IT and manufacturing systems from Gateway to MPCComputers’ existing systems in February, 2008, we experienced material delaysin manufacturing and customer deliveries, which resulted in much lower thanexpected shipment volumes and revenues in the first quarter of 2008 as comparedto the fourth quarter of 2007.  We alsoexperienced delays in deliveries of parts needed for service andsupport-related matters.  Ourmanufacturing delays limited and stopped production at times over approximatelya three week period at our Nashville manufacturing facility.  The delays were caused by a number of issues,including but not limited to, inaccurate bills of materials for ourmanufacturing processes, inadequate inventory procurement, routing problemswhich resulted in parts shortages, and order entry errors by our newest salesprofessionals from the Professional Business that caused some orders to bedelayed in getting to our manufacturing floor. As part of the transition, wemoved the manufacture of portable personal computers that had historically beenmanufactured in China to our Nashville facility, causing the transition-relatedissues we encountered to have a more pronounced effect on our operations.

 

Our delays inmanufacturing and customer deliveries, combined with service and support issueswe have encountered, have caused our inventory and accounts payable to growmaterially during the transition and throughout the first six months of2008.  Prior to the commencement of thetransition, we did not expect a 

 

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significant slowing ofour manufacturing process and shipments, and as a result, we procured anincreased amount of raw material inventory to support our anticipated increasedproduction than the amount we actually needed to fulfill actual customerorders.  As a result, our raw materialsinventory increased from $46.6 million as of December 31, 2007 to $72.8million as of June 30, 2008. The issues which slowed and stoppedproduction in our Nashville manufacturing facility also impacted ourprocurement of peripheral product, such as monitors, speakers, and key boards,from third party vendors.  Inaccuraciesin our bills of materials, parts shortages and order entry errors resulted attimes in systems being built in our Nashville facility for which we could notinvoice our customers because certain peripheral products from third partyvendors had not been properly procured and shipped to our customers.  As a result, our finished goods inventoryincreased from $15.4 million as of December 31, 2007 to $24.2 million asof June 30, 2008.  In addition,during the first quarter of 2008, a change in policy by certain of our vendorscaused us to procure and carry additional inventory stock that we had notneeded to carry in the prior quarter. Previously, these vendors had stocked andmanaged inventory near our Nashville manufacturing plant, allowing us toprocure that inventory as needed to manufacture our products. These vendorseliminated their inventory stocks near our plant during the first quarter of2008.  Previously, they had been willingto provide inventory to Gateway in this manner, but were unwilling to continueproviding inventory under this policy with us. Also, during the transition we experienced system issues and partdelivery delays in our customer service and support area, causing us to procureadditional parts to support customer relationships, and resulting in somereplacement parts not reaching our customers in a timely manner.

 

The operational issues weencountered in the first quarter of 2008 resulted in further extensions ofpayments to our suppliers during the second quarter of 2008. Consequently, anumber of suppliers, including Intel, began reducing our credit line orrestricting shipments of component inventory to us, causing additional delaysin our manufacturing process and in shipments of finished goods to ourcustomers.  During the quarter we fundedpayments to certain vendors through sales a portion of our component inventoryto Flextronics, which helped reduce our vendor payables and release componentinventory shipments to us.  However, oursales during the second quarter were nearly the same as in the first quarter,resulting in continued losses during the quarter and in the growth of ourworking capital deficit.

 

In connection with theoutsourcing of the Nashville manufacturing operations to Flextronics under theMSA, we anticipated that the majority of the Professional Business productlines would be transitioned to Flextronics by August 2008, with thetransition of all lines to be completed by December 2008. To date, theramp up of the manufacturing operations by Flextronics has proceeded slowerthan planned and there has been a very limited amount of finished products producedfor us by Flextronics.  In addition, wehave shut down our Nashville operations and a substantial portion of ourinventory has either been moved to, or is in transit to, the Flextronics Juarezfacility.  We have not yet reachedagreement with Flextronics on the amount of inventory Flextronics willultimately purchase from us under the MSA, the timing of receipt of funds fromsuch sales, and so far have received $6.9 million from the sale of inventory.If Flextronics is not able to achieve acceptable production levels, we wouldhave difficulties in returning manufacturing to our facilities or findingalternatives.

 

These transition issueshave materially impacted our liquidity, and caused a material deterioration inour working capital from December 31, 2007 through June 30, 2008 andinto the third quarter of 2008.  Inaddition, the delay in reaching an agreement with Flextronics on an acceptableamount of sales of inventory and delay in the ramp up production at the Juarezfacility has further adversely impacted our cash flow and liquidity in July andAugust of 2008.  The decline in thecombined revenues of MPC Computers and the Professional Business and ourliquidity issues have made it difficult to cover our fixed costs and warrantyobligations.  Additionally, because ofthe delays in production, we have experienced cancellations of some of ourorders in backlog and a decline in sales to date during the third quarter.  We continue to extend payment to a number ofour vendors well beyond normal payment terms and the amount of the extendedpayments increased during the second quarter and into the third quarter of2008.  Certain of our vendors havelowered their existing credit lines to us, restricted component productshipments to us, or have requested letters of credit to secure creditlines.  Working with lower credit lines,continuing to provide letters of credit or other credit enhancement to vendorsconstrains our liquidity as we are required to use more of our cash, cashcollateralize letters of credit or otherwise incur costs to provide creditenhancement and there can be no assurance that we will be successful inobtaining sufficient vendor credit in the future.  Any inability tomaintain adequate liquidity in the future or inability to integrate our ITsystems on a timely basis may do significant harm to vendor relationships, andcould cause us to experience credit holds, require that we pre-pay forproducts, and/or cause suppliers to refuse to deliver components or terminatesupply arrangements, any of which could have a material adverse effect on ourfinancial condition and results of operations.

 

As a result of the issueswe encountered during the transition and in the second quarter of 2008, we havelost some Professional Business customer relationships we had hoped to retain,and it is probable that we will lose additional Professional Business customersin the near future.  Our inability toretain customers of the Professional Business 

 

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will likely result inlower than anticipated revenues for the combined company during 2008. TheProfessional Business customers may choose to buy products from our competitorsrather than us if they perceive that our competitors provide better deliverytimes, higher quality products, better service, have greater financial strengthor other determining factors.

 

Our liquidity is highlydependent upon our sales and the advance of cash to us by Wells Fargo on theresulting accounts receivable from those sales. As described above, the delaysin our manufacturing operations during the transition significantly reduced ourshipments and sales to our customers during the first and second quarters of2008.   As a result, the advance of cashfrom our Wells Fargo financing facility significantly declined during thetransition and during the second quarter, requiring us to fund a significantportion of our operations from our operating cash flow and limited existingcash reserves. Delays in our manufacturing operations and service and supportfulfillment have caused us to prepay for production and service parts, or payto have production and service parts expedited to our plants and depots toalleviate these shortages.  We have alsodelayed payments to certain vendors, which has impacted, and may continue toimpact, our ability to obtain or maintain vendor credit on terms beneficial tous.  To the extent we are unable topurchase production and serice parts and components on a timely basis in thefuture, we may lose orders in backlog and related customers, which could have afurther adverse and materially negative effect on our sales and liquidity.

 

We may need to raise asignificant amount of additional funds to satisfy vendor payment obligationsand fund our business if we do not generate sufficient cash flows fromoperations and losses continue. There can be no assurance that we will be ableto secure additional sources of financing on terms acceptable to us or at all.Even if we do obtain additional funding, the amount of such funding may not besufficient to fully address all of our liquidity constraints. Continuingliquidity constraints could negatively and materially impact our business andresults of operations, or could result in bankruptcy.

 

***AMEX Notification***

* *

OnJune 27, 2008, the American Stock Exchange (“AMEX”) notified us that,although we remain out of compliance with certain of continued listingstandards, AMEX has accepted our plan for regaining compliance. AMEX hasgranted us an extension until November 9, 2009, to regain compliance withits continued listing standards.

 

Previously,on May 8, 2008, the AMEX notified us that we failed to satisfy a continuedlisting rule. Specifically, the notice from AMEX stated that we are not incompliance with Section 1003(a) (i) of the AMEX Company Guide inthat we have stockholder’s equity of less than $2 million and have sustainedlosses from continuing operations or net losses in two of our three most recentfiscal years. We were afforded the opportunity to submit a plan of compliance.We submitted the plan on June 9, 2008.

 

Wewill be subject to periodic review by the AMEX staff during the extensionperiod. Failure to make progress consistent with the plan or regain compliancewith the continued listing standards by the end of the extension period couldresult in our being delisted from the AMEX. There is no assurance that we willmake progress consistent with the Plan accepted by AMEX, or that we will beable to regain compliance and retain its listing.

 

***Strategic Plans and Other Initiatives***

 

Withthe purchase of the Professional Business we have expanded our enterprise IThardware business of providing products and services to customers in mid-sizedbusinesses, government agencies and education organizations.  Thisacquisition has expanded our business in the education and state/localgovernment markets in particular, resulting in a more balanced product mix thatis less reliant on the federal government business.  The acquisition hasalso enhanced our product line offering, including providing us with a morecompetitive line of notebook PCs and convertible tablet PCs.  To successfully combine our existingoperations with the newly acquired Professional Business, we have set forth thefollowing key initiatives:

 
| · | Transitioning  our Nashville manufacturing operations to the Flextronics facility in Juarez,  Mexico. The transition to Flextronics is intended to improve working capital  and cash flow by lowering manufacturing, overhead, and component costs, and  reducing component inventory; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                   |
| · | Successfully  integrate the new Professional Business with our existing operations,  including:                                                                                                                                                                                        |

 
| · | Transitioning  from Gateway branded products to MPC branded products;                        |
|--------|----------------------------------------------------------------------------------------------|
|   |                                                                                         |
| · | Consolidating  our product lines and continuing ongoing research and development activities; |
|   |                                                                                         |
| · | Completing  the integration of our customer care and support functions;                      |

 

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| · | Integrating  our administrative and financial functions, including the combining of our  various licensing and royalty functions; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

 
| · | Satisfy  and retain Professional Business customers;                                                                                                                     |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                     |
| · | Carefully  manage our liquidity to maximize our use of funds;                                                                                                            |
|   |                                                                                                                                                                     |
| · | Focus  on supplier relationships, reduce procurement costs due to our larger scale,  and improve the utilization of vendor credit;                                       |
|   |                                                                                                                                                                     |
| · | Utilize  the Gateway brand name until our license to use the name expires in  March 2009, while enhancing the MPC Computers brand name in our various  markets; and |
|   |                                                                                                                                                                     |
| · | Institute  lower cost operating methodologies and practices in our overall operations.                                                                                   |

 

Inaddition to integrating and maximizing the return from our acquisition of theProfessional Business, we continue to focus on the following:

 
| · | Gross  margin improvement initiatives, including the reduction of product returns,  freight costs, manufacturing costs, and costs associated with customer  evaluation units; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                          |
| · | Increasing  the liquidity in our business and improving our financial position;                                                                                               |
|   |                                                                                                                                                                          |
| · | Continuing  to make our operations more cost efficient;                                                                                                                       |
|   |                                                                                                                                                                          |
| · | Seeking  ways to sell and distribute our products more effectively;                                                                                                           |
|   |                                                                                                                                                                          |
| · | Penetrating  segments of the U.S. federal government where we have historically not made  significant sales;                                                                  |
|   |                                                                                                                                                                          |
| · | Continuing  to focus on higher margin business such as servers and storage devices; and                                                                                       |
|   |                                                                                                                                                                          |
| · | Working  with our vendors to maintain current credit terms and obtain further credit  extensions or larger lines of credit.                                                   |

 

Wecannot give assurance that these initiatives will achieve the intendedresults.  Our failure to achieve theseinitiatives and others could have a material adverse effect on our business andfinancial condition.

 

**MPC CORPORATION**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

***(In millions)***

 
| ** **                                                          | ** ** | **Three Months ended** | ** ** | ** **        | ** ** | **Six Months ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                                          | ** ** | **June 30,**                | ** ** | **%**             | ** ** | **June 30,**              | ** ** | **%**      | ** ** |
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007 (1)** | ** ** | ** Change**               | ** ** | **2008**   | ** ** | **2007 (1)** | ** ** | ** Change** | ** ** |
| * *                                                            | * *   | * *                         | * *   | * *          | * *   | * *                       | * *   | * *   | * *   | * * | * * | * * | * * |
| Revenue                                                             |       | $                                | 125.5      |              | $          | 53.6                           | * *   | *134.0*    | %          | $ | 249.2 |   | $ | 110.4 | * * | *125.8* | *%* |
| * *                                                            | * *   | * *                         | * *   | * *          | * *   | * *                       | * *   | * *   | * *   | * * | * * | * * | * * |
| Cost of revenue                                                     |       | 108.9                            |       | 47.0              | * *   | *131.9*                        | %          | 217.6      |       | 97.6 | * * | *123.0* | *%* |
| * *                                                            | * *   | * *                         | * *   | * *          | * *   | * *                       | * *   | * *   | * *   | * * | * * | * * | * * |
| Gross margin                                                        |       | 16.6                             |       | 6.6               | * *   | *149.5*                        | %          | 31.6       |       | 12.8 | * * | *146.0* | *%* |
| *Gross margin %*                                                    | * *   | *13.2*                           | *%*        | *12.4*            | *%*        | * *                       | * *   | *12.7*     | *%*        | *11.6* | *%* | * * | * * |
| Operating expenses                                                  | * *   | * *                         | * *   | * *          | * *   | * *                       | * *   | * *   | * *   | * * | * * | * * | * * |
| Research and development expense                                    |       | 1.3                              |       | 0.5               | * *   | *144.3*                        | %          | 2.4        |       | 1.1 | * * | *118.2* | *%* |
| Selling, general and administrative expense                         |       | 22.1                             |       | 8.8               | * *   | *150.3*                        | %          | 46.2       |       | 18.6 | * * | *147.7* | *%* |
| Depreciation and amortization                                       |       | 4.3                              |       | 0.8               | * *   | *458.8*                        | %          | 7.3        |       | 1.5 | * * | *371.0* | *%* |
| Total operating expenses                                            |       | 27.7                             |       | 10.1              | * *   | *173.5*                        | %          | 55.9       |       | 21.2 | * * | *163.7* | *%* |
| *Operating expenses as a % of revenue*                              | * *   | *22.1*                           | *%*        | *18.9*            | *%*        | * *                       | * *   | *22.4*     | *%*        | *19.2* | *%* | * * | * * |
| Operating loss                                                      |       | (11.1                            | )          | (3.5              | )          | *219.3*                        | %          | (24.3      | )          | (8.4 | ) | *189.3* | *%* |
| *Operating loss as a % of revenue*                                  | * *   | *-8.9*                           | *%*        | *-6.5*            | *%*        | * *                       | * *   | *-9.7*     | *%*        | *-7.6* | % |   |   |
| Other (income) expense                                              |       |                             |       |              |       |                           |       |       |       |   |   |   |   |
| Interest expense, net                                               |       | 1.5                              |       | 1.4               |       |                           |       | 2.6        |       | 3.0 |   |   |   |
| Change in estimated fair value of  derivative financial instruments |       | —                           |       | 20.6              |       |                           |       | (0.4       | )          | 19.3 |   |   |   |
| Gain on vendor settlements                                          |       | —                           |       | (0.2              | )          |                           |       | —     |       | (0.2 | ) |   |   |
| Total other (income) expense, net                                   |       | 1.5                              |       | 21.8              |       |                           |       | 2.2        |       | 22.1 |   |   |   |
|                                                                |       |                             |       |              |       |                           |       |       |       |   |   |   |   |
| Net loss                                                            |       | $                                | (12.6      | )                 | $          | (25.3                          | )          |       |       | $ | (26.5 | ) | $ | (30.5 | ) |   |   |

 

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| (1) |   | The  results of the Professional Business have been consolidated effective  October 1, 2007, the date the acquisition by MPC Corporation became  effective, and therefore the results of the Professional Business are not  included for periods prior to October 1, 2007. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**OPERATING RESULTS**

 

*Theresults of the Professional Business have been consolidated effective October 1,2007, the date the acquisition by MPC Corporation became effective, andtherefore the results of the Professional Business are not included for periodsprior to October 1, 2007.*

 

***Revenue***

 

Revenuefor the three and six months ended June 30, 2008 was $125.5 million, and $249.2 million, respectively, an increase of $71.9 million and $138.8 million or134.0% and 125.8%, respectively compared to the same periods in 2007.  The increase was due to additional revenue of$83.3 million and $161.0 million for the three and six months ended June 30,2008, respectively, from the results of operations of the Professional Businesswhich was acquired October 1, 2007. The increase in revenue for 2008 was partially offset by a decline inrevenue by MPC Computers of $11.4 million and $22.2 million for the three andsix months ended June 30, 2008, respectively, due in part to lower unitsales and declining sales prices because of competitive pressures.  In addition, our revenue for the firstquarter was impacted by transition issues of the Professional Business IT and manufacturingsystems from Gateway to MPC Computers’ existing systems during February 2008.The transition issues limited and stopped production at times over a three-weekperiod at our Nashville manufacturing facility. The delays were caused by anumber of issues, including but not limited to, inaccurate bills of materialsfor our manufacturing processes, inadequate inventory procurement, routingproblems that resulted in parts shortages, and order entry errors that causedsome orders to be delayed in getting to our manufacturing floor. Inaccuraciesin our bills of materials, parts shortages and order entry errors resulted attimes in systems being built in our Nashville facility which we then could notinvoice because core peripheral product from third party vendors had not beenproperly procured and shipped to our customers. During the first and second quarters of 2008, transition issues causedcredit related issues with suppliers and extension of lead times for shipmentsto customers.  As a result, we wereunable to capitalize on the buying season of our education market to the extentwe had hoped, and revenues in the quarter remained relatively flat to the firstquarter of 2008.

 

Historically,revenue for MPC Computers and the Professional Business has been the lowestduring the first quarter increases during the second and third quarters of theyear due to the buying seasons of the education, federal, state, and localgovernments in those quarters, and declines in the fourth quarter.  However, the Professional Business transitionissues have materially impacted our revenue during the first and secondquarters of 2008 and it is probable that the delays we are presentlyexperiencing with the transition of our Nashville operations to Flextronicswill impact our revenue during the third quarter.  Our revenue backlog at June 30, 2008 andDecember 31, 2007 was $104.5 million and $47.7 million, respectively.

 

Revenuefrom MPC Computers has declined from 2005 to 2007 and in the first and secondquarters of 2008.  Revenue from the Professional Business has also beendeclining during the same periods.  Forthe six months ended June 30, 2007, Gateway reported revenue of $328.4million for the Professional Division. Economies of scale play an important role in the PC industry.  Ourmajor competitors have significantly larger operations and stronger brandrecognition than we do, and generally have stronger financial positions. We believe that our acquisition of the Professional Business will help us toaddress our disadvantages in economies of scale, but there can be no assurancethat our downward revenue trend will be reversed.  Based on current trends, revenue for thecombined business will be lower in 2008 than 2007 on a pro forma basis.

 

***Gross Margin***

 

Ourgross margin as a percent of revenue for the three and six months ended June 30,2008 was 13.2% and 12.7%, respectively, as compared to 12.4% and 11.6% for thesame periods in 2007. The increase in gross margin was primarily due to anincrease in revenue and gross margin from the Professional Business wherein thegreater volume reduced the impact of our fixed costs of manufacturing. Ourmargins were negatively impacted from the transition issues of the ProfessionalBusiness, as we provided a higher than expected level of discounts to retainsome of our customers, along with increased procurement expenses for expeditedoverseas raw materials shipments and interruptions to our supply chain.

 

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***Research and Development Expense***

 

Research,development and engineering expense for the three and six months ended June 30,2008 totaled $1.3 million and $2.4 million, respectively, an increase of $0.8million and $1.3 million, respectively, from the same periods in 2007.  This increase is due primarily to an increasein the research and development activities as a result of the acquisition ofthe Professional Business.

 

***Selling, General and Administrative Expense(SG&A)***

 

Forthe three and six months ended June 30, 2008, SG&A expense was $22.1million and $46.2 million, respectively, an increase of $13.3 million and $27.6million or 150.3% and 147.7%, respectively from the same periods in 2007.  The increase was due to additional SG&Aexpense as a result of the acquisition and integration of the ProfessionalBusiness.

 

***Depreciation and Amortization***

 

Depreciationand amortization consists of depreciation of property and equipment and thenon-cash amortization of acquired intangibles from our acquisition of MPCComputers in July 2005 and the Professional Business in October 2007.  For the three and six months ended June 30,2008, depreciation and amortization expense was $4.3 million and $7.3 million,respectively, a $3.5 million and $5.8 million increase from the comparableperiods in 2007.  The increase is dueprimarily to the amortization of intangibles and depreciation of property andequipment acquired in connection with the acquisition of the ProfessionalBusiness. During the three and six months ended June 30, 2008,depreciation and amortization expense increased $1.3 million due to theoutsourcing of the manufacturing of our Nashville facility to Flextronics andthe resulting reduction of the estimated useful lives of equipment, leaseholdimprovements and software at the facility. We anticipate an increase in depreciation and amortization expense of$1.0 million during the remainder of 2008.

 

***Interest expense, net***

 

Interestexpense for the three and six months ended June 30, 2008 was $1.5 millionand $2.6 million, respectively, an increase of $0.1 million and a decline of$0.4 million, respectively, from the comparable periods in 2007.  The decline for the six months ended June 30,2008, was principally due to a reduction in the effective interest rate onoutstanding advances under our Wells Fargo Receivables Advance Facility.

 

***Change in Estimated Fair Value ofDerivative Financial Instruments***

 

Our convertibledebentures and warrants are derivative financial instruments that are carriedat fair value as derivative liabilities. See Note 6 – “Derivative WarrantLiabilities and Convertible Debentures” in Notes to Interim CondensedConsolidated Financial Statements in Item 1 of this report for more informationregarding these financial instruments. During the three months ended June 30, 2008, we had $15 thousand ofnon-cash expense, and during the six months ended June 30, 2008 werecognized non-cash income of $0.4 million, primarily related to an decrease inthe fair value of these derivative financial instruments as a result of andecrease in the market price of our stock during the first and second quartersof 2008.  In addition, during the year ended December 31, 2007approximately 91% and 83%, respectively of outstanding debentures and warrantswere converted or exercised which significantly reduced the impact of thechanges of the remaining outstanding derivatives upon our results of operationsin 2008.

 

Significant estimates and assumptions areused in the determination of the fair values of these derivative financialinstruments. The fair values are determined in part by, and will fluctuatewith, the market value of our stock. If the market price of our stock increasesduring a period, the fair value of the derivatives is expected to increase andwill adversely affect our earnings. A decline in the market price of our stockwill cause a decrease in fair value of the derivatives and have a positiveimpact to earnings. The change in the fair value of these derivative financialinstruments has no impact on our cash flows.

 

***Income taxes***

 

We make no provision forincome taxes because, since inception, we have not been profitable. We have anet operating loss carry-forward available to offset future federal and stateincome tax expenses to an amount that approximates our accumulated deficits.Our net operating loss carry-forward will expire in varying amounts from 2022to 2027. The utilization of the net operating loss carry-forward as an offsetto future taxable income is subject to the limitations under US federal incometax 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**

 

Wehave no off balance sheet arrangements.

 

**GUARANTEES**

 

During our normal courseof business, we have made certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certain transactions.These include (i) intellectual property indemnities to customers andlicensees in connection with the use, sale and/or license of our products, (ii) indemnitiesto lessors in connection with our facility leases for certain claims arisingfrom such facilities or leases, (iii) indemnities to vendors and serviceproviders pertaining to claims based on our negligence or willful misconduct, (iv) indemnitiesinvolving the accuracy of representations in certain contracts, and (v) guaranteesto certain vendors and creditors for balances owed. The duration of theseindemnities and commitments in certain cases may be indefinite. The majority ofthese indemnities and commitments do not provide for any limitation of themaximum potential for future payments we could be obligated to make. We havenot recorded any liability for these indemnities and commitments in theaccompanying consolidated financial statements.

 

**NEW AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS**

 

Thefollowing is a discussion of the significant new accounting standards that havebeen issued that may have an impact to our consolidated financial statements ordisclosures upon adoption.  To the extentpossible, we have evaluated and have formed a conclusion regarding thepotential impact of each of these standards. In addition, we adopted two accounting standards during the firstquarter of 2008.  The impact of theadoption of each of these standards is discussed below.

 

***New Accounting Standards***

 

InDecember, 2007, the FASB issued SFAS No. 141 (Revised 2007), *Business Combinations*. SFAS No. 141R will significantly change the accounting for business combinations. UnderSFAS No. 141R, an acquiring entity will be required to recognize allthe assets acquired and liabilities assumed in a transaction at theacquisition-date fair value with limited exceptions. SFAS No. 141Rwill change the accounting treatment for certain specific items, including:

 
| · |   | Acquisition  costs will be generally expensed as incurred;                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Noncontrolling  interests (formerly known as “minority interests” — see SFAS No. 160  discussion below) will be valued at fair value at the acquisition date;                                                        |
| · |   | Acquired  contingent liabilities will be recorded at fair value at the acquisition date  and subsequently measured at either the higher of such amount or the amount  determined under existing guidance for non-acquired contingencies; |
| · |   | In-process  research and development will be recorded at fair value as an  indefinite-lived intangible asset at the acquisition date;                                                                                                    |
| · |   | Restructuring  costs associated with a business combination will be generally expensed  subsequent to the acquisition date; and                                                                                                          |
| · |   | Changes  in deferred tax asset valuation allowances and income tax uncertainties after  the acquisition date generally will affect income tax expense.                                                                                   |

 

SFAS No. 141Ralso includes a substantial number of new disclosure requirements.  The statement applies prospectively tobusiness combinations for which the acquisition date is on or after January 1,2009.

 

InDecember, 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements - An Amendment of ARB No. 51.*SFAS No. 160 establishes new accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary. SFAS No. 160 requires the recognition of a noncontrollinginterest (minority interest) as equity in the consolidated financial statementsand separate from the parent’s equity. The amount of net income attributable tothe noncontrolling interest will be included in consolidated net income on theface of the income statement. SFAS No. 160 clarifies that changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest. In addition, SFAS No. 160 requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.Such gain or loss will be measured using the fair value of the noncontrollingequity investment on the deconsolidation date. SFAS No. 160 also includesexpanded disclosure requirements regarding the interests of the parent and itsnoncontrolling interest.   The statementis effective for us during the first quarter of 2009.  We currently do not have noncontrollinginterests.

 

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In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities - anAmendment of FASB Statement 133*. SFAS 161 enhances requireddisclosures regarding derivatives and hedging activities, including enhanceddisclosures regarding how: (a) an entity uses derivative instruments; (b) derivativeinstruments and related hedged items are accounted for under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities; and (c) derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. SFAS 161 is effective for us during thefirst quarter of 2009.  We are currentlyevaluating the impact of the adoption of the enhanced disclosures requirementsof SFAS 161 and currently do not expect the adoption to have a material impacton its consolidated financial statements.

 

InMarch 2008, the FASB affirmed the consensus of FASB Staff Position (“FSP”)APB 14-a,  *Accounting for Convertible Debt Instruments That May Be Settled inCash upon Conversion (Including Partial Cash Settlement**)*, which applies to all convertible debt instruments thathave a ‘‘net settlement feature,’’ which means that such convertible debtinstruments, by their terms, may be settled either wholly or partially in cashupon conversion. FSP APB 14-a requires issuers of convertible debt instrumentsthat may be settled wholly or partially in cash upon conversion to separatelyaccount for the liability and equity components in a manner reflective of theissuer’s nonconvertible debt borrowing rate. Previous guidance provided foraccounting for this type of convertible debt instrument entirely as debt.FSP APB 14-a is effective for us during the first quarter of 2009. We arecurrently evaluating the impact the adoption of FSP APB 14-a may have on ourconsolidated financial statements.

 

InApril 2008, the FASB issued FSP FAS 142-3, *Determination of the Useful Life of Intangible Assets.* ThisFSP amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FASB Statement No. 142, *Goodwill and Other Intangible Assets.* The intent of this FSPis to improve the consistency between the useful life of a recognizedintangible asset under SFAS 142 and the period of expected cash flows used tomeasure the fair value of the asset under FASB Statement No. 141R, andother U.S. generally accepted accounting principles. This FSP is effective forus during the first quarter of 2009.  Weare currently evaluating the impact the adoption of FSP FAS 142-3 may have onour consolidated financial statements.

 

***Recently Adopted Accounting Standards***

 

InSeptember 2006, the FASB issued SFAS No. 157 *Fair Value Measurement*, which defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosure requirements about fairvalue measurements. SFAS 157 applies to other accounting pronouncements thatrequire or permit fair value measurements. Measurement of financial assets andfinancial liabilities was effective for us beginning in fiscal year2008.  Two FSPs on this Statement were subsequentlyissued.  On February 12, 2008, FSP No. 157-2 delayed theeffective date of this Statement for nonfinancial assets and nonfinancialliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis. This FSP is effective for us in fiscalyear 2009. On February 14, 2008, FSP No. 157-1 excluded SFAS No. 13,*Accounting for Leases,*and otheraccounting pronouncements that address fair value measurements for purposes oflease classification or measurement under SFAS No. 13*.*However, this scope exception does notapply to assets acquired and liabilities assumed in a business combination thatare required to be measured at fair value under SFAS Statement No. 141, *Business Combinations* or SFAS No. 141(R),*Business Combinations*,* *regardless of whether those assetsand liabilities are related to leases.  This FSP was effective uponour initial adoption of SFAS No. 157. The adoption of SFAS No. 157relating to financial assets and financial liabilities did not have a materialimpact on our financial position or results of operations.  We do not expect the impact of SFAS No. 157related to nonfinancial assets and non financial liabilities will have amaterial impact on our financial position or results of operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities - Including an Amendment of FASB Statement 115*.SFAS No. 159 permits companies to choose to measure certain financial instrumentsand certain other items at fair value, which are not currently required to bemeasured at fair value. The standard requires that unrealized gains and losseson items for which the fair value option has been elected be reported inearnings at each subsequent reporting date. SFAS No. 159 was effective forus beginning in the first quarter of fiscal year 2008.   We adopted SFAS No. 159 as of January 1,2008 and elected not to measure any additional financial instruments or otheritems at fair value.

 

**CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES**

 

Weprepare our financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“GAAP”). The preparation ofGAAP financial statements requires certain estimates, assumptions, andjudgments to be made that may affect our consolidated statement of financialposition and results of operations. Critical accounting estimates are thosethat are most important and material to our financial condition 

 

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andresults of operations and require management’s most difficult, subjective, orcomplex judgments, often as a result of the need to estimate matters that areinherently uncertain. We believe our most critical accounting policies andestimates relate to revenue recognition, including reserves needed for possiblefuture returns and discounts; the carrying value and usefulness of inventoryand related inventory reserves; the timing and amount of future warrantyobligations; accounting for derivative financial instruments; and theimpairment of acquired intangible assets. We have discussed the development,selection, and disclosure of our critical accounting policies and use ofestimates with the Audit Committee of our Board of Directors. These criticalaccounting policies and our other accounting policies are described inNote 3 of “Notes to Interim Condensed Consolidated Financial Statements”included in “Item 1 — Financial Statements.”

 

***Revenue Recognition***

 

Wefrequently enter into sales arrangements with customers that contain multipleelements or deliverables such as hardware, software, peripherals, and services.Judgments and estimates are critical to ensure compliance with GAAP. Thesejudgments relate to the allocation of the proceeds received from an arrangementto the multiple elements, the determination of whether any undelivered elementsare essential to the functionality of the delivered elements, and theappropriate timing of revenue recognition. We offer extended warranty andservice contracts to customers that extend and/or enhance the technicalsupport, parts, and labor coverage offered as part of the base warrantyincluded with the product. Revenue from separately priced extended warranty andservice contracts, for which we are obligated to perform, is recorded asdeferred revenue and subsequently recognized over the term of the contract. Theamount recognized on a periodic basis within this term is based on management’sbest estimate of how it will perform its obligations in future periods.  This is based on past historic trends andother factors likely to have a future impact on warranty claims.  The actual rate of warranty claims coulddiffer materially from management’s estimates.

 

Werecord reductions in revenue in the current period for estimated future productreturns related to current period sales. Management analyzes historicalreturns, current trends, changes in customer demand and acceptance of ourproducts when evaluating the adequacy of the sales returns allowances in anyaccounting period. If actual returns exceed estimated returns, we would berequired to record additional reductions to revenue which would affect earningsin the period the adjustments are made.

 

***Inventory Valuation***

 

Weoperate in a business environment subject to rapid changes in technology andcustomer demand. We record write-downs for components and products which havebecome 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 lifecycle (including end of life product) and development plans, component costtrends, product pricing and quality issues. Based on this analysis, we recordan adjustment for excess and obsolete inventory. We may be required to recordadditional write-downs if actual demand, component costs or product life cyclesdiffer from estimates, which would affect earnings in the period thewrite-downs are made.

 

***Warranty Liabilities***

 

Werecord warranty liabilities at the time of sale for the estimated costs thatmay be incurred under our standard limited warranty. The specific warrantyterms and conditions vary depending upon the product sold but generally includetechnical support, parts, and labor over a period ranging from 90 days tothree years. Factors that affect our warranty liability include the number ofinstalled units currently under warranty, historical and anticipated rates ofwarranty claims on those units, and the average cost of claims on our installedbase to satisfy our warranty obligation. The anticipated rate of warrantyclaims is the primary factor impacting our estimated warranty obligation. Theother factors are less significant due to the fact that the average remainingaggregate warranty period of the covered installed base is approximately 12months, repair parts are generally already in stock or available atpre-determined prices, and labor rates which are fairly predictable andhistorically have not fluctuated significantly from period to period.   Warranty claims are relatively predictablebased on historical experience of failure rates. If actual results differ fromour estimates, we revise our estimated warranty liabilities to reflect suchchanges. Each quarter, we reevaluate our estimates to assess the adequacy ofthe recorded warranty liabilities and adjust the amounts as necessary.

 

***Derivative Financial Instruments***

 

Theaccounting for convertible debt with derivative features is highly complex,subject to a number of accounting 

 

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pronouncementsand subject to broad interpretations. Determination of the treatment of these convertible debt instruments isbased on current interpretation of the facts, treatment by other companies anddiscussion with industry experts. Management is also required to make highly subjective estimates offuture share price volatility, the probability of future events and effectivediscount rates.  Changes in the fairvalue of our derivative financial instruments have had a material impact in ourresults of operations.  Among otherfactors, the fair value of our derivative financial instruments is affected bythe market value of our common stock. Increases in the market price of our common stock will adversely impactour financial results.   Declines in themarket value of our common stock will have a positive impact.  The changes in the fair value of thesederivatives have no impact on our cash flows. A substantial portion of our convertible debt and warrants wereconverted and exercised during 2007.  Weexpect that the reduction in the remaining outstanding derivative financialinvestments will have less of an impact upon our results of operations in 2008and in future periods.

 

***Valuation of AcquiredIntangible Assets***

 

The estimates used by management in determiningthe impairment of acquired intangible assets is a critical accounting estimatesusceptible to change from period to period. It requires management to makeassumptions about future cash flows over future years and utilize an estimateddiscount rate.  Management’s assumptionsabout future cash flows involve significant judgment because actual operatinglevels have fluctuated in the past and may continue to do so in the future andeconomic conditions may change.  Also,the adoption of any new strategic plan inherently involves uncertainty.  A significant adverse change in our businesscould result in a future impairment of the value of our acquired intangibleassets.

 

***BusinessCombinations***

 

We account for business combinations under thepurchase accounting method. The cost of an acquired company is assigned to thetangible and intangible assets purchased and the liabilities assumed on thebasis of their fair values at the date of acquisition. The determination offair values of assets and liabilities acquired requires us to make estimatesand use valuation techniques when market value is not readily available. Anyexcess of purchase price over the fair value of the tangible and net intangibleassets acquired is allocated to goodwill.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We have two principalsources of liquidity: (i) existing cash and cash equivalents and (ii) ourWells Fargo Receivables Advance Facility. As of June 30, 2008, we had unrestricted cash and cash equivalentsof $0.7 million and an additional $9.8 million of restricted cash consisting of$4.3 million held as collateral under our receivables advance facility and $5.5million held as collateral for outstanding letters of credit.

 

We face considerableconstraints with respect to our liquidity and working capital that havematerially impacted our business and may continue to impact our business. As of June 30, 2008, we had current assets of $177.1 million and currentliabilities (exclusive of deferred revenue which is not yet earned) totaling$202.5 million. At June 30, 2008 our shareholder’s deficit was $25.8million. Our operations have not generated positive annual cash flows since ourinitial public offering in 2004.

 

***Background***

 

We have had insufficientrevenues and gross margins to sustain our operations, incurred ongoingoperating losses and interest expense on our debt, and have expended cash tosupport financing initiatives.  Sinceinception, we have financed our operations through the private placements ofequity securities, convertible debt, loans from our founder and other membersof our Board of Directors, short-term loans, a line of credit and net proceedsof $7.1 million from our IPO. From December 2005 to February 2006, weraised approximately $12.6 million, prior to expenses and commissions, throughwarrant exercises.  In conjunction withthe acquisition of the Professional Business from Gateway, we raised $8.3million from the exercise for cash of $1.10 warrants issued in connection withtwo private placement financings in September 2006 that included theissuance of convertible debentures.

 

Our financing under theReceivables Advance Facility is dependent upon our sales volume and relatedreceivables to assign to Wells Fargo. Historically, our sales volume hasbeen lower during the first two quarters of the year and increases during thethird and fourth quarters due to the federal-buying season.  Additionally, the Professional Businesstransition issues discussed above have impeded our sales to ProfessionalBusiness customers.  Periods of lower revenue volume and lower relatedreceivables reduce our assignment of receivables, borrowing capacity, and ourability to cover our operating expenses.

 

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Because our liquidity hasbeen constrained, we have managed our cash position by extending payments tosuppliers, some of whom have placed us on credit hold, reduced credit lines orplaced us on a pre-pay position for their products. On many occasions this hasdelayed delivery of components to our manufacturing facility until paymentswere made. We have also received notices of default, threatened litigation andlitigation from numerous suppliers, but have generally cured the defaults orsettled the amount owed or otherwise managed the supplier relationship.

 
| **Liquidity**   | ** ** |
|-----------------|------------|
| *(In millions)* | ** ** |

 
| ** **                | ** ** | **June 30** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2008**         | ** ** | **2007**              | ** ** |
| Cash and cash equivalents |       | $                | 0.7        |                  | $          | 9.0 |   |
| Restricted cash           |       | 9.8              |       | 9.8                   |       |
| Total                     |       | $                | 10.5       |                  | $          | 18.8 |   |

 
| **Cash Flow Activity** |       |   |   |
|------------------------|------------|--------|--------|
| *(In millions)*        | ** ** |

 
| ** **                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|--------------------------------|------------|
| ** **                   | ** ** | **June 30,**              | ** ** |
| ** **                   | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Net cash provided (used) by: |       |                           |       |   |   |
| Operating activities         |       | $                              | (4.8       | ) | $ | 5.0 |   |
| Investing activities         |       | (1.2                           | )          | (0.1 | ) |
| Financing activities         |       | (2.3                           | )          | (7.9 | ) |
| Increase (decrease) in cash  |       | $                              | (8.3       | ) | $ | (3.0 | ) |

 

·                  ***Operating Activities***

 

During the six monthsended June 30, 2008, we used $4.8 million from operating activitiesconsisting of a net loss of $16.2 million as adjusted for $10.3 million ofnon-cash items including depreciation and amortization expense, income from theincrease in fair value of derivative financial instruments and other non-cashitems. In addition, operating activities provided $11.4 million from a decreasein working capital, primarily from a $25.9 million decline in accountsreceivable, a $25.8 million increase in accounts payable offset by a $35.7million increase in inventory and a $6.4 million decrease in accruedwarranties.  The decline in accountsreceivable was principally the result of a consecutive decline in quarterlysales during 2008 from the fourth quarter of 2007 and collections on the 2007year end receivables.  The increase ininventory was due to the Professional Business Transaction issues and theprocurement of more raw material inventory to support our anticipatedproduction than the amount actually needed to fulfill customer orders.

 

During the six monthsended June 30, 2007, we generated $5.0 million from operating activitiesconsisting of a net loss of $(8.4) million as adjusted for $22.1 million ofnon-cash items including depreciation and amortization expense, income from theincrease in fair value of derivative financial instruments and other non-cashitems. In addition, operating activities provided $13.4 million from a decreasein working capital, primarily from a decrease in accounts receivable offset byan increase in inventory and a decrease in accounts payable and accruedexpenses.

 

·                  ***Investing Activities***

 

Investing activities forthe six months ended June 30, 2008 included $1.2 million in purchase ofequipment.

 

We had no significantinvesting activities during the six months ended June 30, 2007.

 

·                  ***Financing Activities***

 

During the six monthsended June 30, 2008, financing activities used $2.3 million consisting ofa $7.7 million reduction in net borrowings under the Wells Fargo ReceivablesAdvance Facility and $3.4 million in payments on notes payable.  In addition, we received $8.7 million fromFlextronics under the Flextronics Inventory Purchase Agreement.

 

During the six monthsended June 30, 2007, financing activities used net cash of $7.9million.  Our net borrowings under the WellsFargo Receivable Advance Facility declined $7.9 million and we had $0.5 inpayments on notes payables.  In addition,restricted cash related to collateralized letters of credit and the ReceivableAdvance Facility declined $0.5 million.

 

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***Liquidityand cash flows for 2008***

 

As previously discussedunder “Professional Business Transition Issues” of this Item, during thetransition of the Professional Business IT and manufacturing systems fromGateway to MPC Computers’ existing systems in February, 2008, we experiencedmaterial delays in manufacturing and customer deliveries, which resulted inlower than expected shipment volumes and revenues in the first and secondquarters of 2008 as compared to the fourth quarter of 2007. These issues havematerially impacted our liquidity, and caused a material deterioration in ourworking capital from December 31, 2007 through June 30, 2008.  We continue to extend payment to a number ofour vendors well beyond normal payment terms and the amount of the extendedpayments increased the second quarter of 2008. Certain of these vendors, and existing vendors, have lowered our existingcredit line, restricted component product shipments to us, or have requestedletters of credit to secure credit lines. In April 2008, we entered into the Flextronics agreement andanticipate an increase in liquidity from the sale of our inventory to Flextronicsand have received an increase in our credit line with Flextronics from $15million to $20 million.  However, at August 11,2008, we had $9.5 million past due to Flextronics.  Working with lower credit lines, continuingto provide letters of credit or other credit enhancement to vendors constrainsour liquidity as we are required to use more of our cash, cash collateralizeletters of credit or otherwise incur costs to provide credit enhancement andthere can be no assurance that we will be successful in obtaining sufficientvendor credit in the future.  Any inability to maintain adequateliquidity in the future or inability to integrate our IT systems on a timelybasis may do significant harm to vendor relationships, and could cause us toexperience credit holds, require that we pre-pay for products, and/or causesuppliers to refuse to deliver components or terminate supply arrangements, anyof which could have a material adverse effect on our financial condition andresults of operations.

 

 Other specificissues which are relevant to understanding 2008 cash flows include:

 

·                  ***Financingactivities***

 

We expect to fullyutilize available financing under our Wells Fargo Receivables Advance Facilityto the extent possible in 2008.  Inconnection with the Professional Business transition issues in the firstquarter of 2008, we encountered liquidity issues requiring additionalfinancing.  We amended our IntercreditorAgreement to temporarily remove restrictions on our Receivables AdvanceFacility. The restrictions were previously reserved for payment of amounts dueto Gateway, and provided approximately $15 million in funding from theReceivables Advance Facility.  Inaddition, on April 1, 2008, Wells Fargo provided an advance to MPC-Pro inthe amount of $3.5 million (the “MPC-Pro Advance”). The MPC-Pro Advance wasrepaid May 27, 2008.  On June 24,2008, Wells Fargo provided an additional advance to MPC-Pro in the amount of$3.0 million which is to be repaid by September 24, 2008 and is inaddition to other amounts provided to us by Wells Fargo under the terms of ourReceivables Advance Facility with Wells Fargo. We also amended the Transition Services Agreement with Gateway to extendthe payments due on approximately $14.1 million of accounts payable to Gatewaythrough November, 2008.

 

On May 8, 2008, weentered into a Flextronics Inventory Purchase Agreement (the “IPA”) withFlextronics. Under the IPA, Flextronics purchased certain inventory currentlylocated at our Nashville facility which we expect to then repurchase fromFlextronics over the 90 day period following the agreement date for productionat our Nashville facility. Any remaining inventory after the 90 day period mustbe repurchased by us. During the three months ended June 30, 2008, wereceived $8.7 million from Flextronics under this arrangement.  We do not anticipate further financings fromFlextronics under the IPA due to the transition of the operations of ourNashville facility to the Flextronics Juarez, Mexico facility under theMSA.  In conjunction with the MSA,Flextronics will purchase from us certain materials and inventory at theNashville facility to utilize in the initial operations at Juarez.  We expect to use the proceeds from the saleof the materials and inventory to reduce our vendor payables and fund currentoperations and improve our liquidity in the near term.

 

Our sales are seasonaland we expected our sales to increase during our second and third quarters of2008.  Our sales for the second quarterof 2008 were impacted by Professional business transition issues and it islikely that our third quarter will be impacted by the delay in ramp up of theFlextronics manufacturing facility in Juarez, Mexico.  Any increase in our sales we will experiencesubsequent to the completion of the ramp up will require additional workingcapital which we intend to obtain through Temporary Advances under theReceivables Advance Facility allowing us to borrow up to approximately 98% ofour purchased accounts.   The TemporaryAdvances are of limited duration which may require us to seek other sources ofcash.  We are looking at opportunities tosell assets, such as certain types of inventory and machinery and equipment andexpand or enhance vendor credit where possible. We launched initiatives tofurther improve our margins beginning in 

 

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January 2008. We arefocusing on material costs, returns, freight costs, manufacturing productivityand costs as areas of opportunity to improve our gross margin and operatingmargin, including through our recent agreement signed with Flextronics in April 2008.We continue to be active in cost management and continue to seek ways to runour business more cost effectively.

 

We do not anticipateproceeds from the exercise of warrants, unless there is a significant increasein the market price of our common stock. We expect some conversions of our Series A Preferred Stock and our Series BPreferred Stock to MPC Corporation Common Stock during 2008.  The conversions have no cash flow impact.

 

As more fully describedunder “Capital Resources” of this Item, on July 11, 2008 we entered into aMaster Purchase Order Assignment Agreement (the “assignment agreement”) withWells Fargo.  Under the assignmentagreement we expect additional limited liquidity through the factoring ofpurchase orders we receive from our customers that are accepted by Wells Fargo.

 

·                  ***Capital expenditures***

 

Historically, we have nothad material capital expenditures and do not currently anticipate significantcapital expenditures in 2008.

 

·                  ***Income taxes***

 

From our inceptionthrough December 31, 2007, we have generated losses for both financialreporting and tax purposes. As a result, for income tax return, we may utilizeapproximately $36.9 million of net operating loss carryforwards, which begin toexpire in 2022 and are available as late as 2027.  We believe these net operating losscarryforwards are subject to an annual limitation on their use of $967 thousandpursuant to IRC Section 382.  However,we have not yet completed our analysis of additional limitations, if any,resulting from the acquisition of the Professional Business and the conversionof debentures and exercise of warrants in 2007. For the year ended December 31, 2008, in addition to our losscarryforward limitation, taxable income may be reduced by all losses incurredin 2007 after the October 1, 2007 acquisition of the ProfessionalBusiness.

 

We may need to raise aconsiderable amount of additional funds to satisfy vendor payment obligationsand fund our business if we do not generate sufficient cash flows fromoperations and losses continue. There can be no assurance that we will be ableto secure additional sources of financing on terms acceptable to us or at all.Even if we do obtain additional funding, the amount of such funding may not besufficient to fully address all of our liquidity constraints. Continuingliquidity constraints could negatively and materially impact our business andresults of operations.

 

**Capital Resources**

 

***WellsFargo Receivables Advance Facility***

 

OnNovember 16, 2006, we entered into an agreement with Wells Fargo BusinessCredit, Inc. (“Wells Fargo”) for an accounts receivable assignment andadvance facility (“Receivables Advance Facility”) that replaced our prior lineof credit with Wachovia Capital Finance Corporation (Western).  Under thenew facility, as amended in February 2007, we may assign to Wells Fargo,and Wells Fargo may purchase from us, Accounts (as defined in the ReceivablesAdvance Facility). Wells Fargo will advance 90% of the value of the purchasedAccounts. Wells Fargo may adjust the advancement percentage at any time in itscommercially reasonable discretion upon prior notice to us.  Wells Fargowill advance an additional 7.5% of the face amount of currently outstandingAccounts assigned to Wells Fargo, provided that the total advance does notexceed 97.5% of the face amount of any Account (the “Temporary Advance”), andincrease the advance rate on new Accounts assigned to Wells Fargo to 98% of theamount of the Accounts for a period of eight weeks (the “Special FacilityPeriod”). We must repay the difference between the Advance and the TemporaryAdvance within four weeks after termination of the Special Facility Period.Failure to repay amounts advanced under the Special Facility would constitutean event of default under the Agreements. At any time when the TemporaryAdvance has been paid in full for a minimum of 60 days, we may request that theSpecial Facility be reinstated for another eight week period with repayment tobe made within four weeks.

 

OnOctober 1, 2007, MPC-Pro and Gateway Companies Inc (“GCI”) (which wasacquired by MPC-Pro in connection with the acquisition of the ProfessionalBusiness), each entered into an Account Purchase Agreement 

 

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withWells Fargo.  Under these agreements, MPC-Pro and GCI may assign to WellsFargo, and Wells Fargo may purchase from MPC-Pro and GCI, Accounts (as definedin the Agreements). Wells Fargo will advance to MPC-Pro and GCI 90% of thevalue of the purchased Accounts. Wells Fargo may adjust the advancementpercentage at any time in its commercially reasonable discretion upon priornotice to MPC-Pro and GCI.  In addition,MPC-Pro, Gateway, GCI, and Wells Fargo entered into an Intercreditor Agreement(the “Intercreditor Agreement”). The Intercreditor Agreement provides Gatewaywith a junior security interest in accounts receivable generated on or afterthe October 1, 2007 acquisition of the Professional Business, inventory,and all other property of MPC-Pro and GCI as specified in the agreement tosecure the payment of obligations owing to Gateway under the TransitionServices Agreement (the “TSA Obligations”). Wells Fargo and MPC-Pro agreed toset aside certain accounts receivable for the payment of the TSA Obligations(the “Gateway Blocked Accounts”).  On May 29,2008 the Intercreditor Agreement was amended to provide Gateway BlockedAccounts up to the following amounts: (i) there will be no Gateway BlockedAccounts through August 31, 2008; and (ii) on or after September 15,2008, a face amount equal to the obligations owing to Gateway under the TransitionAgreement for the applicable week (the “Gateway Weekly Payoff Amounts”) minus$10.0 million.  The amendment alsoprovides that, if, after November 15, 2008, there is a remaining positivebalance of the Gateway Weekly Payoff Amounts, Gateway may provide a statementto MPC-Pro indicating the positive balance, and Wells Fargo will hold but notpurchase Gateway Blocked Accounts submitted to it by MPC-Pro and GCI in a faceamount equal to the remaining positive balance.

 

Wewill pay fees equal to the Wells Fargo Prime Rate (as defined in theReceivables Advance Facility), plus 0.75% per annum (the “Wells Fargo Discount”)multiplied by the total amount of Accounts purchased and not yet paid by ourcustomers, computed daily. The effective rate at June 30, 2008 was 6%. Theminimum monthly fee to be paid in aggregate by MPC Computers affiliates toWells Fargo is determined by multiplying the Wells Fargo Discount, by $2.5million.

 

Wells Fargo has the right to require that we re-purchase the Accountsin the event our customer does not pay the receivable within a timeframespecified under the Receivables Advance Facility, if a material customerdispute arises or in the event of a default under the Receivables AdvanceFacility. The Receivables Advance Facility is subject to customary defaultprovisions. Wells Fargo has discretion under the Receivables Advance Facilityas to the Accounts purchased and the percentage advanced after submission ofthe Account for approval. Wells Fargo is not obligated to buy any Account fromus that Wells Fargo does not deem acceptable in its sole discretion. There isno minimum amount of Accounts to be purchased by Wells Fargo under theReceivables Advance Facility. The facility is secured by substantially all ofour assets. The Receivables Advance Facility is for a term of three (3) yearsterminating November 14, 2009. Early termination fees apply if theReceivables Advance Facility is terminated before the end of its term. The Receivables Advance Facility also provides for a $3.5 million collateralaccount for the benefit of Wells Fargo for repayment of any obligations arisingunder the Receivables Advance Facility

 

OnApril 1, 2008, Wells Fargo provided an advance to MPC-Pro in the amount of$3.5 million (the “MPC-Pro Advance”). The MPC-Pro Advance is to be repaid by May 31,2008, and is in addition to other amounts provided to us by Wells Fargo underthe terms of our Account Purchase Agreements with Wells Fargo.  Interest on the MPC-Pro Advance will be atWells Fargo Prime Rate plus 1.25%.

 

OnApril 10, 2008, MPC-Pro, GCI, and Gateway delivered to Wells Fargo aninstruction letter that modified certain terms of the Intercreditor Agreement.The letter confirmed that a requirement under the Intercreditor Agreement tomaintain a controlled collateral account in the amount of $1.5 millioneliminated. Additionally, the letter confirmed that Wells Fargo is not requiredto hold certain Gateway funds in trust as previously required under theIntercreditor Agreement.  The impact ofthe instruction letter was to release approximately $1.0 million to us that washeld in the controlled collateral account.

 

***Master Purchase Order Assignment Agreement***

 

On July 11,2008, MPC Computers and MPC-Pro and Wells Fargo, entered into a Master PurchaseOrder Assignment Agreement (the “Assignment Agreement”). Under the AssignmentAgreement, MPC Computers and MPC-Pro will assign customer purchase orders toWells Fargo and request Wells Fargo to accept such purchase orders and purchasethe required materials to fulfill the purchase orders. On such assignedpurchase orders, Wells Fargo will retain MPC Computers and MPC-Pro tomanufacture, process, and ship ordered goods and will pay us for our servicesupon payment by the customer to Wells Fargo for the goods. Accepted purchaseorders will be reassigned to us at such time Wells Fargo has received paymentin full on account of a purchase order invoice. Accepted purchase orders becomedelinquent if a purchase order price is not paid to Wells Fargo by the earliestof (i) the due date for payment of the purchase order invoice, (ii) forty-five45 days following the Funding Date by Wells Fargo, as defined, (iii) thedate the purchase order is cancelled, or (iv) the date of occurrence of anevent of default as defined. Wells Fargo has the right to require us topromptly purchase any Delinquent Purchase Order as 

 

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defined, (andinventory of products in the case of a Canceled Purchase Order, as defined) foran amount equal to the full amount outstanding under the purchase order invoice(or the purchase order price in the case of a Canceled Purchase Order). TheAssignment Agreement provides for limitations of funding of individual acceptedpurchase orders by Wells Fargo and the maximum aggregate outstanding fundingshall not exceed $5 million.

 

Wells Fargo isto be paid a transaction initiation and set-up fee of 1.0% of the face amountof letters of credit and funds advanced by Wells Fargo with respect to eachaccepted purchase order, plus a daily maintenance fee in a sum equal to 0.067%of the aggregate of the face amount of all letters of credit and funds advancedby Wells Fargo which remain outstanding for more than fifteen (15) days. Inaddition, a Product advance fee will be paid to Wells Fargo equal to the J.P.Morgan prime rate plus 2%, divided by 360, multiplied by the aggregate amountsoutstanding on all letters of credit and all funds advanced by Wells Fargo inconnection the accepted purchase orders. In the event of a Delinquent PurchaseOrder, a late payment fee is to be paid in a sum equal to 0.067% of theoutstanding portion of the purchase order price multiplied by the number ofdays from the date an accepted purchase order becomes a delinquent purchaseorder to and including the date Wells Fargo has received full payment ofamounts due. The Assignment Agreement provides for a commitment fee of $100thousand to be paid to Wells Fargo on the earlier of twelve months following July 11,2008 or the date of termination of the Assignment Agreement and be paid foreach one or more twelve month renewal terms if the agreement is renewed. Thecommitment fee will be waived in whole if the Product Volume for a term equalsor exceeds the Minimum Volume of $10 million, or in part if the Product Volumefor a term is less than the Minimum Volume based on the aggregate volume offunds advanced by Wells Fargo in connection with accepted purchase orders as apercentage of the Minimum Volume.

 

On July 11, 2008, in connection with the Assignment Agreement, MPCComputers, MPC-Pro and Wells Fargo entered into a Security Agreement andFinancing Statement (the “Security Agreement”). Under the Security Agreement,MPC Computers and MPC-Pro grants Wells Fargo a first priority security interestin substantially all merchandise, inventory, goods and supplies in connectionwith accepted purchase orders under the Assignment Agreement for all paymentsand other obligations due Wells Fargo there under (the “Primary Collateral”).In addition, the Security Agreement provides Wells Fargo a subordinatedsecurity interest in substantially all other assets of MPC Computers andMPC-Pro pledged to a Senior Lender, as defined. Under an IntercreditorAgreement with Gateway, MPC-Pro has granted to Gateway a security interest inall or part of its assets, which is subordinate to a security interest grantedby MPC-Pro to Wells Fargo under certain Account Purchase Agreements. On July 11,2008, in connection with the Assignment Agreement, Gateway and MPC-Pro enteredinto a Transaction Subordination Agreement with Wells Fargo. Under theTransaction Subordination Agreement, Gateway agrees to further subordinate itsinterest in the assets of MPC-Pro to Wells Fargo.

 

***New Convertible Debentures and Warrants***

 

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

 

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

 

Boththe debentures and the warrants contain provisions limiting conversion andexercise, or issuance of shares in lieu of interest, as the case may be, in theevent that the holder’s beneficial ownership of our common stock would exceed9.99%.  We concurrently entered into a registration rights agreement withthe investors that required us to register all of the common stock issued andunderlying the securities sold to investors. The registration rightsagreement contains customary indemnification and contributionprovisions. We filed the registration statement with the SEC on November 8,2006 and it was declared effective on June 28, 2007. Not all of thecommon stock underlying the debentures and warrants were registered under theregistration statement due to blocker provisions 

 

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imposedby certain investors on their registrable shares and from a reduction in thenumber of shares as required by the SEC. We believe we have substantiallyfulfilled our obligation under the registration rights agreement and willregister the remaining unregistered shares when the blocker provisions arewaived by the investors and when allowed by the SEC.

 

OnMarch 5, 2007, we obtained amendments and waivers to the registrationrights agreement and the debentures. Pursuant to a letter agreement, themajority of the investors, including Crestview Capital Master, LLC and ToibbInvestment LLC agreed to waive the penalty provisions for not yet having aneffective registration statement, and to extend the dates for filing aregistration statement and all related deadlines, including the date by whichthe initial registration statement must be declared effective by the SEC, by120 days. The investors in this offering also agreed that no Event of Defaultis presently deemed to have occurred under the debentures. The 120-dayextension period lapsed, and the registration statement was not declaredeffective until June 28, 2007. For the year ended December 31,2007, we incurred liquidated damages of $346 thousand under the registrationrights agreement related to the delay in the effectiveness of our registrationstatement.

 

Duringthe year ended December 31, 2007, we issued 8,798,986 shares of commonstock and 626,546 shares of Series A Preferred Stock upon conversion of$9.8 million face value of New Convertible Debentures plus accrued interest andpenalties and the exercise of 6,652,227 warrants.  See “Series A Preferred Stock” below.

 

***September 29, 2006 Financing***

 

OnSeptember 29, 2006 we entered into a securities purchase agreement withcertain existing investors and new investors pursuant to which we agreed tosell convertible debentures for an aggregate of $4.9 million. The majority ofthe transaction closed October 4, 2006.  The investors also receivedan aggregate of 2,468,125 warrants to purchase our common stock. The debenturesbecome convertible into shares of common stock at a conversion price of $0.75per share. The warrants allow the purchase of our common stock for $1.10 pershare and are for a term of 5 years. The debentures accrue interest at 8% perannum after shareholder approval was obtained in December 2006 and theaggregate principal amount becomes due and payable September 29,2009. In the event that the debentures are not repaid on the maturitydate, we will be in default and the debentures will begin to accrue interest ata rate of 22% per annum or the maximum amount permitted by law, whichever isless. The debentures contain various customary events of default as well asnegative covenants that, among other things, prohibit us from incurringadditional debt.

 

Boththe debentures and the warrants contain provisions limiting conversion andexercise, or issuance of shares in lieu of interest, as the case may be, in theevent that the holder’s beneficial ownership of our common stock would exceed9.99%. We concurrently entered into a registration rights agreement with theinvestors that requires us to register all of the common stock issued andunderlying the securities sold to the investors. The registration rightsagreement contains customary indemnification and contribution provisions. Theterms, conditions, features and accounting treatment of these debentures andwarrants are substantially identical to the New Convertible Debentures andWarrants.

 

Wefiled the registration statement with the SEC on November 8, 2006, and itwas declared effective on June 28, 2007. Not all of the common stockunderlying the debentures and warrants was registered under this registrationstatement due to the large number of shares of common stock to be registeredrelative to the number of shares of our common stock then outstanding.  Inorder to register the shares on a Form S-3, the SEC required that wereduce in the number of shares being registered. We believe we havesubstantially fulfilled our obligations under the registration rights agreementand will register the remaining unregistered shares as required by theregistration rights agreement and as allowed by the SEC.

 

Wedid not obtain any amendments or waivers from these investors and as a result,as of February 1, 2007 we began incurring liquidated damages under theregistration rights agreement at the rate of 1.5% of the aggregate amountinvested per month until the registration statement was declared effective on June 28,2007. These liquidated damages must be paid in cash, and they accrueinterest at a rate of 18% per annum. We notified the investors that we areunable to pay the interest and will accrue the interest if unpaid to theiraccount. There is no assurance that they will allow us to defer payment ofthe liquidated damages.  Since we have not paid all of the interest orpenalties due under the debentures or the registration rights agreement, aholder could declare the debentures to be in default and accelerate the debtdue under the debentures.  If this were to happen, the debentures wouldaccrue interest at the rate of 22% per annum. We may be required to payinterest or other required payments in cash rather than stock and could beforced to use our limited cash to redeem all or a portion of the outstandingdebentures.

 

Inconnection with this financing, we issued 499,867 warrants with a 5-year termto the placement agent to purchase 

 

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ourcommon stock for $1.10 per share.

 

Duringthe year ended December 31, 2007, we issued 6,314,927 shares of commonstock upon conversion of $3.6 million in face value of debentures from the September 29,2006 Financing plus accrued interest and penalties and the exercise of 893,125warrants.

 

***Series APreferred Stock***

 

Asa condition to close under the Asset Purchase Agreement for the acquisition ofthe Professional Business, we were required to have raised at least $9.0million in additional cash and cash equivalents through the conversion ofoutstanding convertible securities, the exercise of warrants or the sale ofadditional equity securities, as measured relative to our cash and cashequivalents as of the September 4, 2007 date of the Asset PurchaseAgreement.  This condition was modified to raising at least $8.0 millionunder a Letter Agreement dated October 1, 2007 (the “Letter Agreement”)among the parties to the Asset Purchase Agreement.  In satisfaction ofthis condition, on October 1, 2007 we raised $8.3 million from theexercise for cash of $1.10 warrants issued in connection with two privateplacement financings in September 2006 that included the issuance ofconvertible debentures.

 

Inconnection with the obligation under the Letter Agreement, two MPC Corporationinvestors, Crestview Capital Master LLC (“Crestview”) and Toibb Investment LLC(“Toibb”), intended to exercise their warrants and convertible debentures, butbecause of their large holdings, their beneficial ownership of our commonstock, as defined in Rule 13d-3 as promulgated under the SecuritiesExchange Act of 1934, as amended, could have exceeded 9.99%.  As such, on October 1,2007, we entered into an Amendment No. 1 to Convertible Debenture witheach of Crestview and Toibb (the “Debenture Amendments”), pursuant to whichtheir respective Convertible Debentures due on September 6, 2009 wereamended such that the debentures were convertible into shares of Series APreferred Stock.  Additionally, MPC Corporation and both Crestview andToibb agreed that, upon the exercise of their warrants prior to the Closing, wewould issue (i) common stock only to the extent that their beneficialownership reaches 9.99% and (ii) the number of shares of MPC Corporation Series APreferred Stock that will convert into a number of shares of MPC Corporation commonstock equal to the difference between the number of shares of common stock suchholder would receive if all of such holder’s warrants were exercised for ourcommon stock and the number of shares of our common stock such holder actuallyreceived in order to avoid exceeding 9.99% beneficial ownership. Additionally,on October 1, 2007, we entered into an amendment to the RegistrationRights Agreement dated as of September 6, 2006 with Crestview and Toibbsuch that the registration and other rights applicable to shares of commonstock issuable upon conversion of the their debentures apply equally to theshares of common stock issuable on conversion of the Series A PreferredStock issued pursuant to the Debenture Amendments.

 

Inconjunction with the exercise of the $1.10 warrants and our obligations underthe Letter Agreement, on October 1, 2007, 7,545,352 warrants wereexercised, $12.1 million in face value of convertible debentures were convertedplus accrued interest and penalties thereon, and we issued 12,912,166 shares ofMPC Corporation common stock and 626,546 shares of MPC Corporation Series APreferred Stock. The MPC Corporation Series A Preferred Stock isconvertible into 12,530,925 shares of MPC Corporation common stock.  The MPC Corporation Series A PreferredStock is participating, non-voting, and has a liquidation preference equal to$.00000001 per share. Each share of MPC Corporation Series A PreferredStock will automatically convert to MPC Corporation common stock at such timethe conversion would not cause the beneficial ownership to exceed 9.99%beneficial ownership.

 

***Series B Preferred Stock***

 

Inconnection with the acquisition of the Professional Business, we issued5,602,454 shares of MPC Corporation common stock totaling approximately 19.9%of our outstanding common stock as of the Closing Date, and 249,171 shares ofMPC Corporation Series B Preferred Stock convertible into 4,983,416 sharesof our common stock. All MPC Corporation Series B Preferred Stock issuedto Gateway converts to MPC Corporation common stock upon (i) shareholderapproval by a majority of the MPC Corporation common shareholders and (ii) atsuch time as the shares may be converted without causing Gateway’s ownership ofour common stock to exceed 19.9% (the “Series B Automatic Conversion Event”).  Gateway agreed to vote in favor of the Series BAutomatic Conversion Event. In the event the Series B Automatic ConversionEvent does not occur within one year from the Closing Date, all outstandingshares of Series B Preferred Stock shares are to be redeemed by us at 1.5times the closing price times the number of shares of common stock into whichthe Series B Preferred Stock is then convertible. The MPC Corporation Series BPreferred Stock is participating, non-voting, and has a liquidation preferenceequal to $.00000001 per share.

 

Onthe October 1, 2007 Closing Date, we entered into a Lock-up Agreement andRegistration Rights Agreement 

 

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withGateway.  Under the Lock-Up Agreement,Gateway has agreed that it will not offer, sell, contract to sell, short,pledge or otherwise dispose of any MPC Corporation common stock beneficiallyowned, held or thereafter acquired by Gateway or its affiliates for a period of12 months (the “Restriction Period”), except for Permitted Transfers as definedby the agreement.  The RegistrationRights Agreement provides that following the Restriction Period as set forth inthe Lock-Up Agreement and upon receipt of a demand request from Gateway, MPCCorporation shall file a registration statement with respect to the RegistrableSecurities, as defined by the agreement, which include the MPC CorporationShares issued in connection with the transaction. The Registration RightsAgreement grants Gateway customary and piggyback rights. The RegistrationRights Agreement is subject to any limitations and conditions set forth in anyprior registration rights agreements entered into by MPC Corporation.

 

***Other outstanding warrants***

 

In connection with our2004 initial public offering, we issued 3.6 million warrants. These warrantswere exercisable at $5.50 per share, but have subsequently been adjusted to$3.77 per share in August 2007 due to anti-dilution provisions triggeredfrom convertible debentures and warrants issued by us in September 2006with conversion features at below then current market prices. The warrantsare 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 beenexercised, and we do not anticipate that a material amount of the warrants willbe exercised unless we are able to exercise our call right, which would requireour stock trading price to close at a price of at least $9.50 for 20consecutive trading days. Our stock has never traded above $9.50 per share.

 

**CONTRACTUAL OBLIGATIONS**

 

During the six monthsended June 30, 2008 our estimated purchase obligations increased by $28.8million and outstanding notes payable and debt declined by $7.7 million from December 31,2007.  There were no other materialchanges to our contractual obligations and commitments during the six monthsended June 30, 2008.

 

**ITEM 3.    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Weare subject to interest rate risk on our Wells Fargo Receivable AssignmentFacility. The interest rate is a floating rate based on the prime rateplus 0.75% per annum.  Effective June 30,2008 the rate was 6%.  If interest rates continue to rise we will besubject to higher interest payments if outstanding balances remain unchanged.

 

Wehave convertible debentures and warrants that are derivative financialinstruments and are carried at fair value as derivatives liabilities. Thefair values are determined in part by, and fluctuate with, the market value ofour stock. If the market price of our stock increases during a period, thefair value of the derivatives is expected to increase and will adversely affectour earnings.  A decline in the market price of our stock is expected tocause a decrease in fair value of the derivatives and have a positive impact toearnings.

 

Currently,most of our sales are in the United States. All of our foreign sales and purchasesof product are denominated in U.S. dollars, minimizing our foreign currencyrisk. All of our international suppliers, mostly from Asia, denominatecontracts in U.S. dollars thereby eliminating foreign currency risk. In thefuture we may not be successful in negotiating most of our international supplyagreements in U.S. dollars, thereby increasing our foreign currency risk.Amounts we pay for components from international suppliers could be affected bya continued weakening of the U.S. dollar as compared with other foreigncurrencies. We currently have no foreign exchange contracts, option contractsor other foreign currency hedging arrangements.

 

**ITEM 4T.    CONTROLSAND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Our management, including our CEO and our CFO,as of June 30, 2008, the end of the period covered by this QuarterlyReport on Form 10-Q, evaluated the effectiveness of our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the ExchangeAct)).   Based on their evaluation, our CEO and CFO have concludedthat our disclosure controls and procedures (excluding the acquired ProfessionBusiness as discussed more fully below) are effective to provide reasonableassurance that information required to be disclosed by us in reports that wefile or submit under the Exchange Act is (i) recorded, processed,summarized, and reported within the time periods specified in SEC rules andforms, and (ii) accumulated and communicated to management, including ourCEO and CFO, as appropriate to allow timely decisions regarding requireddisclosure.

 

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** **

**Changes in Internal Control overFinancial Reporting**

 

As reported in ourAnnual Report on Form 10-K for our fiscal year ended December 31,2007, our managementassessed our internal control over financial reporting as of December 31,2007.   In reliance on the guidance setforth in Question 3 of a “Frequently Asked Questions” interpretive releaseissued by the staff of the Securities and Exchange Commission’s Office of theChief Accountant and the Division of Corporation Finance in June 2004 (andrevised on October 6, 2004), management determined that it would excludethe Professional Business, which was acquired from Gateway, Inc. on October 1,2007, from the scope of its assessment of internal control over financialreporting as of December 31, 2007.  The reason for its exclusion isthat the Professional Business was acquired by the company in a purchasebusiness combination that was completed on October 1, 2007, and it was notpossible for management to conduct an assessment of the Professional Businessunit’s internal control over financial reporting in the period between the datethe combination was completed and the date of management’s assessment. Based on this assessment, management concluded that our internal control overfinancial reporting, excluding the Professional Business, was effective as of December 31,2007. During its assessment, management did not identify any material weaknessin our internal control over financial reporting.

 

However,in connection with the Professional Business, the process of extractinginformation necessary to prepare financial statements was highly manual,complex, and time consuming due to the integration of four distinct reportingsystems. In addition, certain key accounts were not reconciled at year end,which lead to a current material weakness with respect to theProfessional Business.   During the first quarter of2008, we commenced a number of efforts to remediate the materialweakness with respect to the Professional Business so that our combinedbusiness will have adequate internal controls over financialreporting.  These efforts included the completion of the migration of dataand processes from the four Gateway systems to the MPC Corporation financialreporting system.  In addition, we beganother remediation steps including redeployment of staff to the key areasimpacted by the material weakness, initiated enhanced training of theconsolidation and account reconciliation processes, and established reviewprocedures in these areas.  During thequarter ended June 30, 2008, we completed all of our remediation steps,however our testing of the remediation has not yet been completed.

 

Except for the completion of our remediationsteps to address the material weakness with respect to the ProfessionalBusiness noted above, there were no changes in our internal control overfinancial reporting during the quarter ended June 30, 2008 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II.    OTHERINFORMATION**

 

**ITEM 1.    LEGALPROCEEDINGS**

 

***Phillip Adams & Associates, LLC***

 

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

 

**Other Matters**

 

We are involved in various other legal proceedingsfrom time to time in the ordinary course of our business. We are not currentlysubject to any other legal proceedings that we believe will have a materialimpact on our business. However, due to the inherent uncertainties of thejudicial process, we are unable to predict the ultimate outcome or financialexposure, if any, with respect to these matters.

 

**ITEM1A.    RISK FACTORS**

 

*Investing in our securities involves a high degree of risk.You should carefully consider the following risk factors, and other informationincluded in or incorporated by reference into this report, including ourfinancial statements and the related notes thereto. You should also carefullyreview and consider all of the risk factors set forth in “Item 1A, Risk Factors”in our Form 10-K for the period ending December 31, 2007 filedwith the Securities and Exchange Commission on April 14, 2008. Additionalrisks and uncertainties that we do not presently know about, or have not yetidentified, may also adversely affect our business. Our business, operatingresults and financial*

 

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*condition could be seriously harmed and you could lose yourentire investment by the occurrence of any of these risks, or by unforeseenrisks not listed below.*

 

**RisksRelated to Our Liquidity**

 

***Our liquidity and working capital constraints grew duringthe first six months of 2008, and could have a material adverse effect on ourfinancial position and results of operations, or could result in bankruptcy.***

 

During the first sixmonths of 2008, we experienced issues in the transition of the ProfessionalBusiness IT and manufacturing systems from Gateway to MPC Computers existingsystems in February 2008, causing delays in manufacturing and customerdeliveries which resulted in lower than expected revenues in the first quarterof 2008.  We are also currentlyexperiencing delays in the transition of substantial portion of our U.S. basedoperations to Flextronics at its Juarez, Mexico manufacturing facility.  These transition issues have materiallyimpacted our liquidity.  Our near termliquidity is highly dependant on the timely and successful resolution of theramp up issues and the Flextronics manufacturing facility.

 

Our liquidity constraintsmake it difficult for us to execute on our business plan and continueoperations without additional funding or concessions from our creditors, whichthey may not be willing to provide.   As ofJune 30, 2008, we had current assets of $177.1 million and currentliabilities (exclusive of deferred revenue which is not yet earned) totaling$202.5 million.  As a result, our networking capital deficit was $25.4 million as of June 30, 2008.  As ofDecember 31, 2007, we had current assets of $178.8 million and currentliabilities (exclusive of deferred revenue which is not yet earned) totaling$183.6 million, resulting in a net working capital deficit of $4.8million.  Consequently, our workingcapital deficit grew materially during the first and second quarters of2008.  In addition, through the firstfour weeks of the third quarter, we have not yet experienced a materialincrease in our weekly shipped revenue from our average weekly shipped revenuewe experienced in the first and second quarters of 2008.

 

The decline in thecombined revenues of MPC Computers and the Professional Business and ourliquidity issues have made it difficult to cover our fixed costs and warrantyobligations.  We continue to extendpayment terms to a number of our suppliers well beyond our normal paymentterms, and the amount of the extended payments increased in the second quarterof 2008.  Our liquidity constraints andworking capital deficit could have a material adverse effect on our businessand results of operations if we are not able to raise additional funds, orreduce our net working capital deficit through increased revenue and cash flowfrom operations, and could impact our ability to continue operations, or couldresult in bankruptcy.

 

**Risks Related to the Flextronics Transaction**

 

***If we are unable to fulfill our backlog of orders within areasonable timeframe, we may receive cancellations on some of our orders inbacklog and lose future business from these customers.***

 

In connection with theissues we have encountered with transitioning our manufacturing operations tothe Flextronics facility, we have experienced an increase in our customerbacklog orders.  If we are unable tofulfill these backlog orders within a reasonable timeframe, we are at risk ofhaving the backlog orders cancelled by these customers.  In addition, we may lose future business fromthese customers which would have a material, negative impact on our business.

 

***The cost savings associated with the outsourcing initiativemay not be realized.***

 

We anticipate that theoutsourcing of manufacturing operations to Flextronics will result in savingsin manufacturing and materials procurement costs. However, such cost savingsare not guaranteed, and it is possible that we will not achieve savings or thatthe savings will be less than presently anticipated. Furthermore, any savingsin manufacturing and materials procurement costs could be offset, in whole orpart, by factory closure and related costs. Our business plans are substantiallydependent on achieving the anticipated savings, and the failure to achieve suchsavings would have a material adverse impact on our business.

 

***We will be dependent on Flextronics to perform a substantialportion of our manufacturing.***

 

Flextronics will performa substantial portion of the manufacturing operations previously performed byus at our U.S. based manufacturing facilities. The outsourcing of manufacturing operations to Flextronics involves anumber of risks. We are currently impacted by delays in the ramp up andproduction at Flextronics’ Juarez, Mexico facility. It is possible that that wewill experience quality issues at a higher rate than we have experienced in thepast. Our ability to timely deliver product could be impacted by shippingissues to or from the Flextronics facility.

 

***If we experience difficulties with Flextronics, we facechallenges to return to manufacturing our own products and we may not be ableto find an alternative outsource partner.***

 

We are currentlyexperiencing delays in the ramp up and operations of the Flextronicsfacility.  In addition, we expect thatpart of the anticipated cost savings provided by the Manufacturing ServicesAgreement (“MSA”) will be the result of closing our U.S. based manufacturingcapacity. As a result, we may face significant challenges to return tomanufacturing our own products if the transfer of operations is not successfulor we experience other difficulties 

 

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with Flextronics.Additionally, we do not have contracts with other potential outsource partnersand, if required, we may not be able to find alternative outsource partners onterms acceptable to us or at all.

 

***We are substantially dependent on Flextronics willingness tocontinue to extend credit terms at levels sufficient to support our business.***

 

Under the MSA,Flextronics will acquire, on our behalf, a substantial portion of the componentsnecessary to produce our products. Flextronics has agreed to provide to us aline of credit in connection with such procurement activity. However, the lineof credit will be reviewed on a monthly basis and is subject to change.  As of August 11, 2008, we had $9.5million in past due amounts Payable to Flextronics.  If the Flextronics line of credit werereduced or not utilized to the extent anticipated, it would have a substantialnegative impact on our liquidity and our business.

 

***We are experiencing difficulties in transferring informationtechnology and manufacturing systems to Flextronics.  We may experience other unexpecteddifficulties transitioning manufacturing operations to the Flextronicsfacility.***

 

In connection withtransitioning manufacturing operations to the Flextronics facility, we areexperiencing difficulties with information technology and manufacturingsystems. Such difficulties could lead to delays in processing orders  and fulfilling shipments. Flextronics willneed to train its workforce concerning the manufacture of our products, and wemay experience transitional delays or other issues until the workforce is fullytrained.

 

***Flextronics will acquire components for our products basedon forecasts provided by us, and if our forecasts are incorrect, we may berequired to repurchase the components.***

 

Under the MSA, we arerequired to provide Flextronics with forecasts and, based on the forecasts,Flextronics will acquire components. If Flextronics is holding inventory for usfor which there is not adequate demand, we may be required to repurchaseinventory. Additionally, we may be required to pay Flextronics inventory carryfees on inventory in excess of demand and to repurchase inventory that is onhand for timeframes specified in the MSA. If our forecasts are incorrect, theserepurchase requirements and charges could materially impact our cash flows,liquidity and business operations.

 

***Customer response to our outsourcing initiative isuncertain.***

 

Customer response to ouroutsourcing initiative is uncertain. A number of significant competitors in thecomputer industry have outsourced all or a significant portion of theirmanufacturing operations. However, it is possible that some customers,including U.S. government customers, may prefer product directly produced bythe vendor or product that is produced in the U.S.

 

**Risk related to Our Securities**

 

***If weare unable to continue our listing on the AMEX, the value of your investmentcould be reduced.***

 

On June 27, 2008,the AMEX notified us that, although we remain out of compliance with certain ofcontinued listing standards, AMEX has accepted our plan for regainingcompliance. AMEX has granted us an extension until November 9, 2009, toregain compliance with its continued listing standards.

 

Previously, on May 8,2008, the American Stock Exchange (“AMEX”) notified us that we failed tosatisfy a continued listing rule. Specifically, the notice from AMEX statedthat we are not in compliance with Section 1003(a) (i) of theAMEX Company Guide in that we have stockholder’s equity of less than $2 millionand have 

 

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sustained losses fromcontinuing operations or net losses in two of our three most recent fiscalyears. We were afforded the opportunity to submit a plan of compliance. Wesubmitted the plan on June 9, 2008.

 

We will be subject toperiodic review by the AMEX staff during the extension period. Failure to makeprogress consistent with the plan or regain compliance with the continuedlisting standards by the end of the extension period could result in our beingdelisted from the AMEX. There is no assurance that we will make progressconsistent with the Plan accepted by AMEX, or that we will be able to regaincompliance and retain its listing.  If we are unable to continue ourlisting on the AMEX, the value of your investment could be reduced.

 

**ITEM 6.    EXHIBITS**

 

**EXHIBIT** **INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                      |
| 3.1         |       | Amended and Restated  Articles of Incorporation of the Registrant, as amended (1)                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                      |
| 3.2         |       | Amended and Restated  Bylaws of the Registrant, as amended (2)                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                      |
| 10.1        |       | Letter from MPC-Pro,  LLC, Gateway Companies, Inc. and Gateway, Inc. to Wells Fargo Bank  dated April 10, 2008 (3)                                                                                                         |
|        |       |                                                                                                                                                                                                                                      |
| 10.2        |       | Flextronics  Manufacturing Services Agreement dated April 14, 2008 by and between MPC  Corporation and Flextronics Computing Mauritius Limited (4)                                                                                   |
|        |       |                                                                                                                                                                                                                                      |
| 10.3        |       | Flextronics Inventory  Purchase Agreement dated May 8, 2008 by and between Gateway Pro  Partners, LLC and Flextronics Computing Mauritius Limited (5)                                                                                |
|        |       |                                                                                                                                                                                                                                      |
| 10.4        |       | Amendment 1 to Limited  License of Gateway’s Rights dated June 29, 2008 between MPC Corporation  and Gateway,  Inc. (6)                                                                                                         |
|        |       |                                                                                                                                                                                                                                      |
| 10.5        |       | Amendment No. 5 to  Transition Services Agreement dated May 29, 2008 among MPC-Pro, LLC and  Gateway, Inc. (7)                                                                                                             |
|        |       |                                                                                                                                                                                                                                      |
| 10.6        |       | Third Agreement  Amendment dated as of May 29, 2008 by and among Wells Fargo, National  Association, Gateway, Inc., Gateway Companies, Inc., and MPC-Pro,  LLC. (7)                                                        |
|        |       |                                                                                                                                                                                                                                      |
| 10.7        |       | Master Purchase Order  Assignment Agreement dated July 11, 2008 by and between Wells Fargo  Bank, National Association, MPC Computers, LLC, MPC Solution Sales, LLC,  MPC-G, LLC, MPC-Pro, LLC, and Gateway Companies, Inc. (8) |
|        |       |                                                                                                                                                                                                                                      |
| 10.8        |       | Security and Financing  Agreement dated July 11, 2008 between Wells Fargo Bank, National  Association, MPC Computers, LLC, MPC Solution Sales, LLC, MPC-G, LLC,  MPC-Pro, LLC, and Gateway Companies, Inc. (8)                  |
|        |       |                                                                                                                                                                                                                                      |
| 10.9        |       | Transaction  Subordination Agreement dated July 11, 2008 among Gateway, Inc.,  Gateway Companies, Inc., MPC-Pro, LLC, and Wells Fargo Bank, National  Association (8)                                                      |
|        |       |                                                                                                                                                                                                                                      |
| 31.1*       |       | Certification of the 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 2002                                                                                                         |
|        |       |                                                                                                                                                                                                                                      |
| 32.1**      |       | Certification of the Chairman and Chief  Executive Officer of MPC Corporation, furnished pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                  |
|        |       |                                                                                                                                                                                                                                      |
| 32.2**      |       | Certification of the  Chief Financial Officer of MPC Corporation, furnished pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                               |

 

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*Filed herewith.

 

**Furnished herewith.

 

(1) Incorporated byreference to Exhibit 3.1 on Registrant’s Quarterly Report onForm 10-Q filed with the Securities and Exchange Commission onNovember 14, 2007.

 

(2) Incorporated byreference to Exhibit 3.1 on Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on March 29, 2007.

 

(3)  Incorporated by reference toExhibit 99.1 on Form 8-K filed with the Securities and ExchangeCommission on April 16, 2008.

 

(4)  Incorporated by reference toExhibit 10.6 on Form 10-Q filed with the Securities and ExchangeCommission on May 15, 2008.

 

(5)  Incorporated by reference toExhibit 99.1 on Form 8-K filed with the Securities and ExchangeCommission on May 14, 2008.

 

(6)  Incorporated by reference toExhibit 99.1 on Form 8-K filed with the Securities and ExchangeCommission on July 3, 2008.

 

(7)  Incorporated by reference toExhibit 99.1 and 99.2, respectively, on Form 8-K filed with theSecurities and Exchange Commission on June 3, 2008.

 

(8)  Incorporated by reference toExhibit 99.1, 99.2 and 99.3, respectively, on Form 8-K filed with theSecurities and Exchange Commission on July 17, 2008.

 

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* *

***SIGNATURES***

 

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

 

 
|                        | MPC Corporation                      |
|-----------------------------|--------------------------------------|
|                        |                                 |
|                        |                                 |
| Date: August 14,  2008 |   /s/: John  P. Yeros      |
|                        |   John P.  Yeros           |
|                        |   Chairman  and CEO        |
|                        |                                 |
|                        |                                 |
| Date: August 14,  2008 |   /s/:  Curtis M. Akey     |
|                        |   Curtis M.  Akey          |
|                        |   Chief  Financial Officer |

 

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**EXHIBIT** **INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                      |
| 3.1         |       | Amended and Restated  Articles of Incorporation of the Registrant, as amended (1)                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                      |
| 3.2         |       | Amended and Restated  Bylaws of the Registrant, as amended (2)                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                      |
| 10.1        |       | Letter from MPC-Pro,  LLC, Gateway Companies, Inc. and Gateway, Inc. to Wells Fargo Bank  dated April 10, 2008 (3)                                                                                                         |
|        |       |                                                                                                                                                                                                                                      |
| 10.2        |       | Flextronics  Manufacturing Services Agreement dated April 14, 2008 by and between MPC  Corporation and Flextronics Computing Mauritius Limited (4)                                                                                   |
|        |       |                                                                                                                                                                                                                                      |
| 10.3        |       | Flextronics Inventory  Purchase Agreement dated May 8, 2008 by and between Gateway Pro  Partners, LLC and Flextronics Computing Mauritius Limited (5)                                                                                |
|        |       |                                                                                                                                                                                                                                      |
| 10.4        |       | Amendment 1 to Limited  License of Gateway’s Rights dated June 29, 2008 between MPC Corporation  and Gateway,   Inc. (6)                                                                                                   |
|        |       |                                                                                                                                                                                                                                      |
| 10.5        |       | Amendment No. 5 to  Transition Services Agreement dated May 29, 2008 among MPC-Pro, LLC and  Gateway, Inc. (7)                                                                                                             |
|        |       |                                                                                                                                                                                                                                      |
| 10.6        |       | Third Agreement  Amendment dated as of May 29, 2008 by and among Wells Fargo, National  Association, Gateway, Inc., Gateway Companies, Inc., and MPC-Pro,  LLC. (7)                                                        |
|        |       |                                                                                                                                                                                                                                      |
| 10.7        |       | Master Purchase Order  Assignment Agreement dated July 11, 2008 by and between Wells Fargo  Bank, National Association, MPC Computers, LLC, MPC Solution Sales, LLC,  MPC-G, LLC, MPC-Pro, LLC, and Gateway Companies, Inc. (8) |
|        |       |                                                                                                                                                                                                                                      |
| 10.8        |       | Security and Financing  Agreement dated July 11, 2008 between Wells Fargo Bank, National  Association, MPC Computers, LLC, MPC Solution Sales, LLC, MPC-G, LLC,  MPC-Pro, LLC, and Gateway Companies, Inc. (8)                  |
|        |       |                                                                                                                                                                                                                                      |
| 10.9        |       | Transaction  Subordination Agreement dated July 11, 2008 among Gateway, Inc.,  Gateway Companies, Inc., MPC-Pro, LLC, and Wells Fargo Bank, National  Association (8)                                                      |
|        |       |                                                                                                                                                                                                                                      |
| 31.1*       |       | Certification of the 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 2002                                                                                                         |
|        |       |                                                                                                                                                                                                                                      |
| 32.1**      |       | Certification of the Chairman and Chief  Executive Officer of MPC Corporation, furnished pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                  |
|        |       |                                                                                                                                                                                                                                      |
| 32.2**      |       | Certification of the  Chief Financial Officer of MPC Corporation, furnished pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                               |

 

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*Filed herewith.

 

**Furnished herewith.

 

(1) Incorporated byreference to Exhibit 3.1 on Registrant’s Quarterly Report on Form 10-Qfiled with the Securities and Exchange Commission on November 14, 2007.

 

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(2) Incorporated byreference to Exhibit 3.1 on Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on March 29, 2007.

 

(3)  Incorporated by reference to Exhibit 99.1 on Form 8-K filedwith the Securities and Exchange Commission on April 16, 2008.

 

(4)  Incorporated by reference to Exhibit 10.6 on Form 10-Q filedwith the Securities and Exchange Commission on May 15, 2008.

 

(5)  Incorporated by reference to Exhibit 99.1 on Form 8-K filedwith the Securities and Exchange Commission on May 14, 2008.

 

(6)  Incorporated by reference to Exhibit 99.1 on Form 8-K filedwith the Securities and Exchange Commission on July 3, 2008.

 

(7)  Incorporated by reference to Exhibit 99.1 and 99.2, respectively,on Form 8-K filed with the Securities and Exchange Commission on June 3,2008.

 

(8)  Incorporated by reference to Exhibit 99.1, 99.2 and 99.3,respectively, on Form 8-K filed with the Securities and ExchangeCommission on July 17, 2008.

 

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