**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****                             ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31,2008**

 

**o****                                ****TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom                to                **

 

**Commission file number 0-115404**

 

**MPC CORPORATION**

(Name of registrant as specified in its charter)

 

| **COLORADO**                                                    | ** ** | **84-1577562**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation  or organization) |       | (IRS Employer identification No.) |

 

**906 E. Karcher Rd., Nampa, ID83687**

(Address of principal executive offices)

 

**(208) 893-3434**

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such 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 definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b–2 of the Exchange Act).

 

Yes  o   No  x

 

As of April 30, 2008 there were 34,195,510shares of the issuer’s no par value Common Stock outstanding.

 

 

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**INDEX**

 
| ** ** | ** ** | ** **                                                                                                          | ** ** | **Page No.** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|
|       |       |                                                                                                                |       |              |
|       |       | PART I  – FINANCIAL INFORMATION                                                                           |       | 3                 |
|       |       |                                                                                                                |       |              |
| ITEM  1    |       | FINANCIAL  STATEMENTS                                                                                               |       | 3                 |
|       |       | Condensed  Consolidated Balance Sheets                                                                              |       | 3                 |
|       |       | Unaudited  Condensed Consolidated Statements of Operations for the Three Months Ended  March 31, 2008 and 2007 |       | 4                 |
|       |       | Unaudited  Condensed Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2008 and 2007 |       | 5                 |
|       |       | Notes to Interim Condensed Consolidated Financial  Statements (unaudited)                                           |       | 6                 |
|       |       |                                                                                                                |       |              |
| ITEM 2     |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |       | 22                |
|       |       |                                                                                                                |       |              |
| ITEM 3     |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                                         |       | 38                |
|       |       |                                                                                                                |       |              |
| ITEM 4T    |       | CONTROLS AND PROCEDURES                                                                                             |       | 39                |
|       |       |                                                                                                                |       |              |
|       |       | PART II – OTHER INFORMATION                                                                               |       | 40                |
|       |       |                                                                                                                |       |              |
| ITEM 1     |       | LEGAL PROCEEDINGS                                                                                                   |       | 40                |
|       |       |                                                                                                                |       |              |
| ITEM 1A    |       | RISK FACTORS                                                                                                        |       | 40                |
|       |       |                                                                                                                |       |              |
| ITEM 6     |       | EXHIBITS                                                                                                            |       | 42                |

 

1

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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 currentcircumstances. Except as required by law, we are not obligated to releasepublicly any revisions to these forward-looking statements that might reflectevents or circumstances occurring after the date of this report or those thatmight reflect the occurrence of unanticipated events.

 

2

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**PART I – FINANCIAL INFORMATION**

 

**ITEM1: FINANCIAL STATEMENTS**

 

**MPC CORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

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

** **
| ** **                                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                          | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                          | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                              |       |               |       |                  |       |
| Current Assets                                                                                                                                      |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                           |       | $                  | 3,817      |                  | $          | 9,009 |   |
| Restricted cash                                                                                                                                     |       | 9,898              |       | 9,852                 |       |
| Accounts receivable, net                                                                                                                            |       | 53,381             |       | 86,056                |       |
| Inventories, net                                                                                                                                    |       | 71,688             |       | 62,050                |       |
| Prepaid maintenance and warranty costs                                                                                                              |       | 9,063              |       | 10,699                |       |
| Other current assets                                                                                                                                |       | 1,188              |       | 1,146                 |       |
| Total Current Assets                                                                                                                                |       | 149,035            |       | 178,812               |       |
|                                                                                                                                                |       |               |       |                  |       |
| Non-Current Assets                                                                                                                                  |       |               |       |                  |       |
| Property and equipment, net                                                                                                                         |       | 10,112             |       | 10,697                |       |
| Goodwill                                                                                                                                            |       | 45,255             |       | 45,255                |       |
| Acquired intangibles, net                                                                                                                           |       | 26,134             |       | 28,455                |       |
| Long-term portion of prepaid maintenance  and warranty costs                                                                                        |       | 1,577              |       | 1,388                 |       |
| Other assets                                                                                                                                        |       | 2,582              |       | 1,668                 |       |
| Total Non-Current Assets                                                                                                                            |       | 85,660             |       | 87,463                |       |
| TOTAL ASSETS                                                                                                                                        |       | $                  | 234,695    |                  | $          | 266,275 |   |
|                                                                                                                                                |       |               |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                           |       |               |       |                  |       |
| Current Liabilities                                                                                                                                 |       |               |       |                  |       |
| Accounts payable                                                                                                                                    |       | $                  | 74,001     |                  | $          | 61,079 |   |
| Accrued expenses                                                                                                                                    |       | 20,121             |       | 26,928                |       |
| Accrued licenses and royalties                                                                                                                      |       | 6,291              |       | 5,084                 |       |
| Current portion of accrued warranties                                                                                                               |       | 24,108             |       | 24,700                |       |
| Current portion of deferred revenue                                                                                                                 |       | 31,634             |       | 33,357                |       |
| Notes payable and debt                                                                                                                              |       | 42,485             |       | 64,249                |       |
| Derivative financial instruments at  estimated fair value                                                                                           |       | 1,478              |       | 1,590                 |       |
| Total Current Liabilities                                                                                                                           |       | 200,118            |       | 216,987               |       |
|                                                                                                                                                |       |               |       |                  |       |
| Long Term Liabilities                                                                                                                               |       |               |       |                  |       |
| Non-current portion of accrued warranties                                                                                                           |       | 14,204             |       | 16,491                |       |
| Non-current portion of deferred revenue                                                                                                             |       | 27,317             |       | 25,848                |       |
| Derivative warrant liability                                                                                                                        |       | 303                |       | 634                   |       |
| Total Long Term Liabilities                                                                                                                         |       | 41,824             |       | 42,973                |       |
| TOTAL LIABILITIES                                                                                                                                   |       | 241,942            |       | 259,960               |       |
|                                                                                                                                                |       |               |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                       |       |               |       |                  |       |
|                                                                                                                                                |       |               |       |                  |       |
| PREFERRED STOCK, Series B, 260,000  shares authorized, 249,171 issued and outstanding at 2008 and 2007                                         |       | 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 at 2008 and 2007                                         |       | 9,008              |       | 9,008                 |       |
| Common Stock, no par value, 100,000,000  shares authorized; 34,175,866 and 33,948,489 shares issued and outstanding at  2008 and 2007, respectively |       | 85,444             |       | 85,029                |       |
| Accumulated Deficit                                                                                                                                 |       | (108,007           | )          | (94,030               | )          |
| Total Shareholders’ Equity (Deficit)                                                                                                           |       | (13,555            | )          | 7                     |       |
| TOTAL LIABILITIES AND EQUITY                                                                                                                        |       | $                  | 234,695    |                  | $          | 266,275 |   |

 

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

 

3

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**MPCCORPORATION**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

** **
| ** **                                                          | ** ** | **Three Months ended  March 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                         | ** ** | **2007 (1)** | ** ** |
|                                                                |       |                                             |       |   |   |
| Revenue                                                             |       | $                                                | 123,707    |   | $ | 56,751 |   |
|                                                                |       |                                             |       |   |   |
| Cost of revenue                                                     |       | 108,715                                          |       | 50,561 |   |
|                                                                |       |                                             |       |   |   |
| Gross margin                                                        |       | 14,992                                           |       | 6,190 |   |
|                                                                |       |                                             |       |   |   |
| Operating expenses                                                  |       |                                             |       |   |   |
| Research and development expense                                    |       | 1,071                                            |       | 497 |   |
| Selling, general and administrative expense                         |       | 24,126                                           |       | 9,831 |   |
| Depreciation and amortization                                       |       | 2,949                                            |       | 770 |   |
| Total operating expenses                                            |       | 28,146                                           |       | 11,098 |   |
|                                                                |       |                                             |       |   |   |
| Operating loss                                                      |       | (13,154                                          | )          | (4,908 | ) |
|                                                                |       |                                             |       |   |   |
| Other (income) expense                                              |       |                                             |       |   |   |
| Interest expense, net                                               |       | 1,266                                            |       | 1,519 |   |
| Change in estimated fair value of  derivative financial instruments |       | (443                                             | )          | (1,246 | ) |
| Total other (income) expense, net                                   |       | 823                                              |       | 273 |   |
|                                                                |       |                                             |       |   |   |
| Net loss                                                            |       | $                                                | (13,977    | ) | $ | (5,181 | ) |
|                                                                |       |                                             |       |   |   |
| Loss per common share:                                              |       |                                             |       |   |   |
| Basic                                                               |       | $                                                | (0.41      | ) | $ | (0.41 | ) |
| Diluted                                                             |       | $                                                | (0.41      | ) | $ | (0.41 | ) |
|                                                                |       |                                             |       |   |   |
| Common shares used to compute net loss per  share:                  |       |                                             |       |   |   |
| Basic                                                               |       | 34,067,054                                       |       | 12,694,606 |   |
| Diluted                                                             |       | 34,067,054                                       |       | 12,694,606 |   |

 

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(1) The resultsof 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 anintegral part of the condensed consolidated financial statements.*

 

4

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**MPC CORPORATION**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

***(In thousands)***

 
| ** **                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                         | ** ** | **2007 (1)** | ** ** |
| OPERATING ACTIVITIES                                                        |       |                                             |       |   |   |
| Net loss                                                                    |       | $                                                | (13,977    | ) | $ | (5,181 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |       |                                             |       |   |   |
| Depreciation                                                                |       | 1,411                                            |       | 698 |   |
| Amortization of acquired intangibles                                        |       | 2,320                                            |       | 453 |   |
| Amortization of deferred loan costs                                         |       | —                                           |       | 243 |   |
| Change in estimated fair value of  derivative financial instruments         |       | (443                                             | )          | (1,246 | ) |
| Stock compensation on vesting of RSUs                                       |       | 322                                              |       | 61 |   |
| Provision for bad debt                                                      |       | 752                                              |       | (19 | ) |
| Other                                                                       |       | 2                                                |       | — |   |
| Changes in assets and liabilities                                           |       |                                             |       |   |   |
| Accounts receivable                                                         |       | 31,923                                           |       | 12,114 |   |
| Inventory                                                                   |       | (9,638                                           | )          | (2,722 | ) |
| Prepaid maintenance & warranties                                   |       | 1,447                                            |       | (1,606 | ) |
| Other current assets                                                        |       | (42                                              | )          | 220 |   |
| Other non-current assets                                                    |       | (914                                             | )          | — |   |
| Accounts payable and accrued liabilities                                    |       | 6,127                                            |       | (2,360 | ) |
| Accrued licenses and royalties                                              |       | 1,207                                            |       | 654 |   |
| Accrued warranties                                                          |       | (2,879                                           | )          | (96 | ) |
| Deferred revenue                                                            |       | (254                                             | )          | 2,013 |   |
| Net cash provided by operating activities                                   |       | 17,364                                           |       | 3,226 |   |
|                                                                        |       |                                             |       |   |   |
| INVESTING ACTIVITIES                                                        |       |                                             |       |   |   |
| Purchase of property and equipment                                          |       | (834                                             | )          | (75 | ) |
| Proceeds from the sale of fixed assets                                      |       | 6                                                |       | — |   |
| Net cash used in investing activities                                       |       | (828                                             | )          | (75 | ) |
|                                                                        |       |                                             |       |   |   |
| FINANCING ACTIVITIES                                                        |       |                                             |       |   |   |
| Net activity under financing facility                                       |       | (19,193                                          | )          | (6,679 | ) |
| Restricted cash related to letters of  credit and financing facility        |       | (46                                              | )          | 208 |   |
| Payment of notes payable                                                    |       | (2,489                                           | )          | — |   |
| Net cash used in financing activities                                       |       | (21,728                                          | )          | (6,471 | ) |
|                                                                        |       |                                             |       |   |   |
| Net cash decrease for period                                                |       | (5,192                                           | )          | (3,320 | ) |
|                                                                        |       |                                             |       |   |   |
| Cash at beginning of period                                                 |       | 9,009                                            |       | 4,839 |   |
|                                                                        |       |                                             |       |   |   |
| Cash at end of period                                                       |       | $                                                | 3,817      |   | $ | 1,519 |   |
|                                                                        |       |                                             |       |   |   |
| ***Supplemental  disclosure of cash flow information:***                    |       |                                             |       |   |   |
| Interest paid                                                               |       | $                                                | 1,386      |   | $ | 896 |   |
| Income taxes paid                                                           |       | 0                                                |       | 0 |   |

 

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(1) The resultsof 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*

 

5

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**MPC CORPORATION**

**NOTES TO INTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

***(Unaudited*)**

 

*Theterms “we” “us” and “out” 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 OF BUSINESS AND BASISOF PRESENTATION**

 

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 educationorganizations. In January 2007, we changed our name to MPCCorporation.  On October 1, 2007, MPC Corporation, through ourwholly-owned subsidiary MPC-Pro, purchased from Gateway Inc. (“Gateway”) andGateway Technologies Inc., Gateway’s Professional Division, the portion ofGateway’s Consumer Direct Division that markets business-related products, anda portion of the Customer Care & Support department that providestechnical services to customers of the Professional and Consumer DirectDivisions (collectively, the “Professional Business”).  The ProfessionalBusiness is primarily engaged in the sale, resale and marketing of desktopcomputer systems, laptops, servers, networking gear and other peripherals, andreplacement parts to educational institutions, government entities (federal,state and local), value-added resellers and certain other resellers, and smallbusiness sales generated by Gateway’s Internet website and phone centers. The purchase has substantially increased 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 one-year limited license agreement with Gateway.  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.

 

The accompanying consolidated financial statements consolidate theaccounts of MPC Corporation and its wholly owned subsidiaries.  Allintercompany accounts and transactions have been eliminated in consolidation. References to a fiscal year refer to the calendar year in which such fiscalyear commences. The fiscal year of MPC Computers and MPC-Pro ends on theSaturday closest to December 31. The floating fiscal year-end typicallyresults in a 52-week fiscal year, but will occasionally give rise to anadditional week resulting in a 53-week fiscal year.

 

**NOTE 2.   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 not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States of America (“GAAP”) for completefinancial statements. These financial statements include the accounts of MPCCorporation and all of its wholly-owned subsidiaries. All significantintercompany transactions and accounts have been eliminated in consolidation.

 

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.

 

6

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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.

 

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 March 31, 2008 and December 31,2007.

 

***Restricted cash***

 

Restricted cash at March 31, 2008 and December 31, 2007includes $3.6 million and $3.5 million respectively held as collateral under ourreceivables financing facility, and $6.3 million held as collateral foroutstanding 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 $3.5 million and $2.7 million respectively, as of March 31,2008 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 March 31, 2008 and December 31,2007, our inventory valuation allowance totaled $13.9 million and $12.3 millionand was recorded as a reduction of inventory in the consolidated balancesheets. Inventory balances, net of valuation allowances, at March 31, 2008and December 31, 2007 are:

 

7

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| ** **              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In thousands)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Raw Materials           |       | $                  | 43,019     |                  | $          | 46,569 |   |
| Work in Process         |       | 476                |       | 100                   |       |
| Finished Goods          |       | 28,193             |       | 15,381                |       |
|                    |       |               |       |                  |       |
| Total Inventory         |       | $                  | 71,688     |                  | $          | 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 estimates and use valuation techniques when marketvalue is not readily available. Any excess of purchase price over the fairvalue of the tangible and net intangible assets acquired is allocated togoodwill.  During the three months ended March 31,2008, we had no changes to the preliminary purchase price allocation of our October 1,2007 acquisition 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.

 

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 aresubject to a degree of uncertainty and are based on management’s estimate offuture performance. Additionally, in conjunction with the review forimpairment, the remaining estimated lives of certain of our long-lived assetsare assessed.

 

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***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, but generallyinclude technical support, repair parts, labor over a period ranging from90 days to five years. Factors that affect the warranty liability includethe number of installed units currently under warranty, historical andanticipated rates of warranty claims on those units, and cost per claim tosatisfy warranty obligations. We regularly evaluate our estimate to assess theadequacy of our recorded warranty liabilities and adjust the amounts asnecessary. If circumstances change, or a dramatic change in the failure rateswere to occur, the estimate of the warranty 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 23% of trade receivables asof March 31, 2008 and were either agencies of, or resellers to, thefederal 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 manner willbe adversely affected. In cases where alternative suppliers are available, theestablishment and procurement from these alternative suppliers will result indelays and losses of sales, which will have an adverse effect on our operatingresults.

 

***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 the agreement.  Service revenue from software maintenance andsupport are recognized ratably over the maintenance term, which in most casesis one year. Term licenses are recognized ratably over the term of the relatedarrangement.

 

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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 certainpatented technology. Royalty costs are accrued and included in cost of revenuewhen the related revenue is recognized or amortized over the period of benefitwhen the license terms are not specifically 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 headcountrelated costs, contractor fees, infrastructure costs, and administrativeexpenses directly related 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 avaluation allowance when it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. We make no provision for incometaxes because, since inception, we have not been profitable. We have a netoperating loss carry forward available to offset future federal and stateincome taxes.

 

***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 weceased using stock options as a compensation tool.

 

***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 three months ended March 31, 2008 and 2007, we recorded $322thousand and $61 thousand respectively, in stock compensation expense for RSUs.

 

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*****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 three months ended March 31, 2008 and2007, all potentially dilutive common shares totaling 37,593,047 and40,173,165, 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.

 

***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 related to production equipment to cost of revenue fromdepreciation and amortization expense. The reclassification had no impact on the reported net loss for thethree months ended March 31, 2007.

 

***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:

 

·                  Acquisitioncosts will be generally expensed as incurred; 

·                  Noncontrollinginterests (formerly known as “minority interests” — see SFAS No. 160discussion below) will be valued at fair value at the acquisition date; 

·                  Acquiredcontingent liabilities will be recorded at fair value at the acquisition dateand subsequently measured at either the higher of such amount or the amountdetermined under existing guidance for non-acquired contingencies; 

·                  In-processresearch and development will be recorded at fair value as an indefinite-livedintangible asset at the acquisition date; 

·                  Restructuringcosts associated with a business combination will be generally expensedsubsequent to the acquisition date; and 

·                  Changesin deferred tax asset valuation allowances and income tax uncertainties afterthe 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 statement iseffective for us during the first quarter of 2009.  We currently do not have noncontrollinginterests.

 

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 

 

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Instrumentsand Hedging Activities; and (c) derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS 161 is effective for us during the first quarter of 2009.  We are currently evaluating the impact of theadoption of the enhanced disclosures requirements of SFAS 161 and currently donot expect the adoption to have a material impact on its consolidated financialstatements.

 

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-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 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 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 3   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.

 

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| ** **                                       | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                          | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Accrued warranties at beginning of the  period   |       | $                                                | 41,191     |   | $ | 4,347 |   |
| Cost accrued for new warranties                  |       | 4,232                                            |       | 191 |   |
| Service obligation honored                       |       | (7,009                                           | )          | (326 | ) |
| Accretion of interest under purchase  accounting |       | (102                                             | )          | 39 |   |
| Accrued warranties at end of the period          |       | $                                                | 38,312     |   | $ | 4,251 |   |

 

**NOTE 4.    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 services areprovided, which generally range from 3-5 years. Deferred revenue also includes deferred software maintenance revenuesthat are recognized over the term of the contract, which is generally oneyear.  A schedule of our deferredrevenue, including changes in deferred revenue from extended and enhancedwarranties is as follows:

 
| ** **                                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                                         | ** ** | **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    |       | 8,236                                            |       | 3,099 |   |
| Revenue recognized for extended and  enhanced warranties                        |       | (7,060                                           | )          | (2,317 | ) |
| Deferred revenue for extended and enhanced  warranties, end of the period       |       | 49,349                                           |       | 33,190 |   |
| Deferred software maintenance revenue, end  of the period                       |       | 9,602                                            |       | 7,410 |   |
| Total deferred revenue                                                          |       | $                                                | 58,951     |   | $ | 40,600 |   |

 

**NOTE 5   NOTES PAYABLE AND DEBT**

** **
| ** **                               | ** ** | ** **                   | ** ** | ** **                      | ** ** |
|------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(In thousands)**                  | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| Wells Fargo Receivables Advance Facility |       | $                            | 40,721     |                            | $          | 59,914 |   |
| Debt Incurred in Acquisition             |       | 105                          |       | 279                             |       |
| Convertible Bridge Loans                 |       | 300                          |       | 300                             |       |
| Payable to Gateway                       |       | 431                          |       | 862                             |       |
| Payable to Lessor                        |       | 343                          |       | 844                             |       |
| Payable to TPV                           |       | —                       |       | 1,176                           |       |
| Payable to Wacom Technology Corporation  |       | 585                          |       | 874                             |       |
| Total Notes Payable and Debt             |       | $                            | 42,485     |                            | $          | 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”), and increasethe advance rate on new Accounts assigned to Wells Fargo to 98% of the amountof the Accounts for a period of eight weeks (the “Special Facility Period”).MPC Computers 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, MPC Computers mayrequest that the Special Facility be reinstated for another eight week periodwith 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 these 

 

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agreements,MPC-Pro and GCI may assign to Wells Fargo, and Wells Fargo may purchase fromMPC-Pro and GCI, Accounts (as defined in the Agreements). Wells Fargo willadvance to MPC-Pro and GCI 90% of the value of the purchased Accounts. WellsFargo may adjust the advancement percentage at any time in its commerciallyreasonable discretion upon prior notice 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 March 27,2008 the Intercreditor Agreement was amended to provide that there will beGateway Blocked Accounts in up to the following amounts: (i) there will beno Gateway Blocked Accounts through April 17, 2008; (ii) on or after April 18,2008, a face amount equal to the obligations owing to Gateway under theTransition Agreement for the applicable week (the “Gateway Weekly PayoffAmounts”) minus $10.0 million; and (iii) on or after May 27, 2008, aface amount equal to the Gateway Weekly Payoff Amounts for the applicable weekminus $5.0 million. The amendment also provides that, if, after June 30,2008, there is a remaining positive balance of the Gateway Weekly PayoffAmounts, Gateway may provide a statement to MPC-Pro indicating the positivebalance, and Wells Fargo will hold but not purchase Gateway Blocked Accountssubmitted to it by MPC-Pro and GCI in a face amount equal to the remainingpositive 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 March 31, 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 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. We agreed to payto Wells Fargo an advance fee in the amount of $15 thousand for the MPC-ProAdvance. Interest on the MPC-Pro Advance will be at Wells Fargo Prime Rate plus1.25%.

 

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.

 

InApril 2008, we were informed by Wells Fargo that Wells Fargo had overadvanced approximately $1.4 million to us as a result of an oversight in theapplication of cash receipts received against several relatively small invoicesoutstanding since late 2007.  We haveagreed with Wells Fargo to repay the $1.4 million over advance in four equalweekly payments starting June 6, 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 

 

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PromissoryNote is dated effective October 1, 2007, which was the closing date of thetransaction under the Asset Purchase Agreement. The principal amount of thePromissory Note was calculated pursuant to terms set forth in the AssetPurchase Agreement.  The principal amountwas due in three equal bi-monthly installments plus interest at 8% per annumbeginning December 1, 2007 and ending on April 1, 2008. The notepayable was fully paid on April 1, 2008.

 

***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 quarter of 2008, we made further payments and settlements with theholders.  As of March 31, 2008, $105thousand remains outstanding to one holder who is the Chief Financial Officerof MPC Corporation.

 

***Convertible Bridge Loans***

 

ConvertibleBridge Loans were issued prior to our IPO. The outstanding amount was due April 2006,including any unpaid interest which is accrued at 12% per annum. The holder hasthe right, at any time prior to repayment, 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 $3.50 per share. Thenotes include detachable warrants for purchase of common stock. The value ofthe warrants was recorded as interest expense in 2004. All of our assets at MPCCorporation collateralize the notes. These notes have registration rights. In May 2006,we repaid principal and interest to one note holder. There are two remainingnote holders who have not yet been repaid. We are in default of the repaymentterms on these notes, and the default interest provision of 18% has beenaccruing on these notes since April 15, 2006. We have been in discussionswith these note holders about an extension to repay the amounts due. There isno assurance that we will be successful in renegotiating the terms of thesenotes.

 

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.

 

***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.

 

OnJuly 2, 2007, MPC Computers entered into a Sixth Amendment to the Lease ofthis manufacturing facility. The Sixth Amendment to Lease provides thatMPC Computers will 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%. If any installment is not made, MPC Computers willincur a late charge of 5% of the amount of such installment, and interest shallincrease to an annual default rate of 18%. The Sixth Amendment also providesthat MPC Computers will pay the full amount of the Extended Rent Obligation inthe event equity investment funds are received in an amount that exceeds $12.0million. Additionally, if MPC Computers unrestricted cash and cash equivalentsbalance, combined with available lines of credit, exceeds $5.0 million at anytime after January 1, 2008, the monthly installment amount increases to$348 thousand until the total Extended Rent Obligation is paid in full. Inaddition to making the Extended Rent Obligation payments, MPC Computers isobligated to pay current rent and all other 

 

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Leaseobligations as they become due and payable, including property taxes per theterms of the Lease.

 

***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 $2.1million over 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.

 

***Payable to Wacom***

 

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%.

 

**NOTE 6    DERIVATIVEWARRANT LIABILITIES AND CONVERTIBLE DEBENTURES**

 

Derivativewarrant liabilities and convertible debentures consist of the following:

* *
| ** **                              | ** ** | **March 31, 2008** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Derivative Warrants** | ** ** | **Convertible Debentures** | ** ** |
| **(In thousands)**                 | ** ** | **Fair Value**          | ** ** | **Fair Value** | ** ** | **Face Value** | ** ** |
|                                    |       |                         |       |   |   |   |   |
| New Convertible Debentures and Warrants |       | $                            | 1          |   | $ | 43 |   | $ | — |   |
| September 29, 2006 Financing       |       | 302                          |       | 1,435 |   | 1,353 |   |
|                                    |       | $                            | 303        |   | $ | 1,478 |   | $ | 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 

 

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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 (“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 the dateby which the initial registration statement must be declared effective by theSEC, by 120 days. The investors in this offering also agreed that no Event ofDefault 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 deliverregistered shares; in these instances, net-cash settlement is presumed. Assuch, the detachable warrants were required to be carried as liabilities atfair value. The warrants issued to the placement agent possessed all of theconditions for equity 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.

 

In determining the fair value of our freestanding derivative financialinstruments we assumed an expiration term of 3.44 years, a volatility of 75.23%and interest rate of 2.46%. The estimated fair value of these derivativeinstruments at March 31, 2008 and December 31, 2007 are as follows:

 
| ** **              | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------|------------|----------------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|                    |       |                |       |                 |       |       |       |
| March 31, 2008     |       | $                   | 43         |                 | $          | 1          |       | $ | 44 |   |
|                    |       |                |       |                 |       |       |       |
| 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 rights 

 

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agreementcontains customary indemnification and contribution provisions. The terms,conditions, features and accounting treatment of these debentures and warrantsare substantially identical to the New Convertible Debentures and Warrants.

 

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 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 the debentures. If this were to happen, the debentures would accrue interest at the rate of 22%per annum. We may be required to pay interest or other required paymentsin cash rather than stock and could be forced to use our limited cash to redeemall 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.

 

Indetermining the fair value of our freestanding derivative financial instrumentswe assumed an expiration term of 3.52 years, a volatility of 76.76% and aninterest rate of 2.46%.   In thedetermination of the fair value of the convertible debentures, we assumed anequivalent volatility of 99.24%, interest rate of 9.67% and yield rate of28.16%.    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 March 31, 2008 and December 31, 2007 are asfollows:

 
| ** **              | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------|------------|----------------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|                    |       |                |       |                 |       |       |       |
| March 31, 2008     |       | $                   | 1,435      |                 | $          | 302        |       | $ | 1,737 |   |
|                    |       |                |       |                 |       |       |       |
| 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, resultsof operations or cash flows, we are required to provide additional disclosureswithin our condensed consolidated financial statements regarding our derivativewarrant liabilities and convertible 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 value measurements,SFAS No. 157 establishes a fair value hierarchy that distinguishes betweenmarket participant assumptions based on market data obtained from sourcesindependent of the reporting entity (observable inputs that are classifiedwithin levels one and two of the hierarchy) and the reporting entity’s ownassumptions about market participant assumptions (unobservable inputsclassified within level three of the hierarchy).

 

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

 

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·                  Leveltwo inputs are inputs other than quoted prices included in level one that areobservable for the asset or liability, either directly or indirectly. Level twoinputs may include quoted prices for similar assets and liabilities in activemarkets, as well as inputs that are observable for the asset or liability,other than quoted prices, such as interest rates, foreign exchange rates andyield curves that are observable at 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 2inputs, 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 2 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 March 31, 2008, we had no other financial instruments requiring fairvalue measurement.

 

**NOTE 7    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 shareholder approval is not obtained,all outstanding shares of Series B Preferred Stock shares are to beredeemed by MPC Corporation at 1.5 times the closing price times the number ofshares of our common stock into which the Series B Preferred Stock is thenconvertible. The MPC Corporation Series B Preferred Stock isparticipating, non-voting, and has a liquidation preference equal to $.00000001per share.

 

Inaccounting and valuing for the Series B Preferred Stock, we considered theguidance of EITF D-98 *Classification andMeasurement of Redeemable Securities.* Under the terms of the AssetPurchase Agreement, Gateway has agreed to vote in favor of the conversion ofthe Series B Preferred Stock. In addition, our management will vote infavor of the conversion and believes that, based on discussions with oursignificant investors, they will also vote in favor of the conversion.Management also believes that the cash redemption of the Series BPreferred Stock would be a significant financial strain to our company and bedetrimental to our shareholders’ investment. Based on these factors, we believeit is very unlikely that shareholder approval of the conversion of the Series BPreferred Stock to common stock will not be obtained and shares redeemed incash. Other features of the Series B Preferred Stock, such as theliquidation preference, were considered de minimis in the assessment of thevalue of the stock.  Therefore, inaccordance with EITF D-98, the Series B Preferred Stock is recorded andcarried at its fair value at initial date of issue.  In the event the Series B ConversionEvent is not approved and it becomes probable that the Series B PreferredStock will be redeemed in cash, we will recognize changes in redemption valueimmediately as they occur and adjust the carrying value of the Series BPreferred Stock to equal the redemption value at the end of each reportingperiod.

 

TheMPC Corporation 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.

 

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**NOTE 8   SERIES A PREFERRED STOCK**

 

As a condition to close under the AssetPurchase Agreement for the acquisition of the Professional Business, MPCCorporation was to have raised at least $9.0 million in additional cash andcash equivalents through the conversion of outstanding convertible securities,the exercise of warrants or the sale of additional equity securities, asmeasured relative to our cash and cash equivalents as of the September 4,2007 date of the Asset Purchase Agreement.  This condition was modified toraising at least $8.0 million under a Letter Agreement dated October 1,2007 (the “Letter Agreement”) among the parties to the Asset PurchaseAgreement.  In satisfaction of this condition, on October 1, 2007 weraised $8.3 million from the exercise for cash of $1.10 warrants issued inconnection with two private placement financings in September 2006 thatincluded the issuance of convertible debentures.

 

In connection with the obligation underthe Letter Agreement, two MPC Corporation investors, Crestview and Toibb,intended to exercise their warrants and convertible debentures, but because oftheir large holdings, their beneficial ownership of our common stock, asdefined in Rule 13d-3 as promulgated under the Securities Exchange Act of1934, 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 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.

 

In conjunction with the exercise of the$1.10 warrants and our obligations under the Letter Agreement, on October 1,2007, 7,545,352 warrants were exercised, $11.0 million in face value ofconvertible debentures were converted plus accrued interest and penaltiesthereon, and we issued 12,912,166 shares of MPC Corporation common stock and626,546 shares of MPC Corporation Series A Preferred Stock. The MPCCorporation Series A Preferred Stock is convertible into 12,530,925 sharesof MPC Corporation common stock.  The MPCCorporation Series A Preferred Stock is participating, non-voting, and hasa liquidation preference equal to $.00000001 per share. Each share of MPCCorporation Series A Preferred Stock will automatically convert to MPCCorporation common stock at such time the conversion would not cause thebeneficial ownership to exceed 9.99% beneficial ownership.

 

**NOTE9   **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 three months ended March 31, 2008, MPC-Propaid Gateway $1.1 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 three months ended March 31, 2008, payments to Gateway under theBuy/Sell Activity and purchases of such component inventory totaled $21.3million.  At March 31, 2008 we hadaccounts payable to Gateway totaling $13.1 million, related to the Buy/Sellactivity and purchases of inventory and related services.

 

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 three months ended March 31,2008, MPC-Pro paid to Gateway $12 thousand of interest and $431 thousandof principal under the Promissory Note. The payable to Gateway was $431 thousand at March 31, 2008.  See Note 5 “Notes Payable and Debt-NotePayable to Gateway”.

 

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Duringthe three months ended March 31, 2008, MPC-Pro provided certainmanufacturing services to Gateway, and charged Gateway $1.8 million forsuch services.  At March 31, 2008,the receivable 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 three monthsended, MPC-Pro paid Gateway lease payments totaling $170 thousand.

 

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 March 31, 2008, the outstanding balanceunder the promissory note was $105 thousand plus $16 thousand of accruedinterest which amount is currently due and payable.  See Note 5 “Notes Payable and Debt-DebtIncurred in Acquisition.”

 

**NOTE 10    COMMITMENTS AND CONTINGENCIES**

 

***Letters of Credit***

*** ***

On March 31,2008 and December 31, 2007, we had outstanding letters of credit totaling$6.3 million. The letters of credit were fully collateralized with cash ondeposit at the 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 a subpoenato provide records regarding sales under our GSA Multiple Award Schedulecontract.  The subpoena relates to anindustry-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 areinvolved in various other legal proceedings from time to time in the ordinarycourse of our business. We are not currently subject to any other legalproceedings that we believe will have a material impact on our business.However, due to the inherent uncertainties of the judicial process, we areunable to predict the ultimate outcome or financial exposure, if any, withrespect to these matters.

 

**NOTE11    SUBSEQUENT EVENTS**

 

***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.  TheMSA provides for Flextronics to achieve certain cost reduction targets, duringthe first twelve months following August 31, 2008 that are expected toprovide cost savings to MPC Corporation. If the cost reduction targets are not achieved, our sole remedy is toterminate the MSA if Flextronics 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 MPC Corporation’s possible retention of the manufactureof a computing platform.

 

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Weare responsible for applicable Nashville facility closure and related costs. Itis presently anticipated that the employment of approximately 145 personnelfrom the Nashville facility will be terminated.

 

OnMay 8, 2008, MPC-Pro entered into an Inventory Purchase Agreement (the “IPA”)with Flextronics.  Under the IPA,Flextronics will purchase approximately $8.7 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.

 

***AMEX Notification***

 

On May 8, 2008, the American StockExchange (“AMEX”) notified us that we have failed to satisfy a continued listingrule. Specifically, the notice from AMEX states that we are not in compliancewith Section 1003(a) (i) of the AMEX Company Guide in that wehave stockholder’s equity of less than $2 million and have sustained lossesfrom continuing operations or net losses in two of its three most recent fiscalyears.

 

The AMEX notice requires that by June 9,2008, we submit a plan (the “Plan”) advising AMEX of action we have taken, orwill take, that would bring us into compliance with the listing standards by November 9,2009 (the “Plan Period”).  The Plan isrequired to include specific milestones, quarterly financial projections, anddetails related to any strategic initiatives that we plan to complete.  AMEX will evaluate the Plan and make adetermination as to whether we have made a reasonable demonstration of anability to regain compliance with the continued listing standards withinspecified timeframes, in which case the Plan will be accepted.  If the Plan is accepted, we may be able tocontinue listing during the Plan Period, during which time we will be subjectto periodic review to determine whether we are making progress consistent withthe Plan.  If the Plan is not accepted orif we do not make progress consistent with the Plan during the Plan Period,AMEX will initiate delisting procedures as appropriate.

 

Previously, we resolved a continuedlisting deficiency initially identified in an AMEX notice received in April 2006.  As reported in our Form 8-K filed October 29,2007, we are subject to the provisions of Section 1009(h) for aperiod of twelve months from such date, which provides for the method ofevaluation and appropriate action by AMEX staff should we fall below thecontinued listing standards during that period. Depending on the circumstances, such action includes truncatingprocedures related to compliance with the continued listing standards orimmediately initiating delisting proceedings.

 

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

 

*Management’s discussionand analysis of the results of operations and financial condition should beread in conjunction with the financial statements and related notes included inItem 1 of this report and with our Annual Report in Form 10-K for the yearended 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.

 

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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.

 

***Professional Business Transition Issues***

 

Duringthe transition 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 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 by our newest sales professionalsfrom the Professional Business that caused some orders to be delayed in gettingto our manufacturing floor. As part of the transition, we moved the manufactureof portable personal computers that had historically been manufactured in Chinato our Nashville facility, causing the transition-related issues we encounteredto have a more pronounced effect on our operations.

 

Ourdelays in manufacturing and customer deliveries, and service and support issueswe have encountered, have caused our inventory and accounts payable to growmaterially during the transition and throughout the quarter, as well.  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 product, such as monitors, speakers, and keyboards, from third party vendors. Inaccuracies in our bills of materials, parts shortages and order entryerrors resulted at times in systems being built in our Nashville facility forwhich we could not invoice our customers because certain peripheral productfrom third party vendors had not been properly procured and shipped to ourcustomers.  As a result, our finishedgoods inventory increased dramatically from $15.4 million as of December 31,2007 to $28.2 million as of March 31, 2008.  In addition, during the quarter, a change inpolicy by certain of our vendors caused us to procure and carry additionalinventory stock that we had not needed to carry in the prior quarter.Previously, these vendors had stocked and managed inventory near our Nashvillemanufacturing plant, allowing us to procure that inventory as needed tomanufacture our products. These vendors eliminated their inventory stocks nearour plant during the first quarter.  Theyhad been willing to provide inventory to Gateway in this manner, but areunwilling to continue providing inventory under this policy with us.  Also, during the transition we experiencedsystem issues and part delivery delays in our customer service and support area,causing us to procure additional parts to support customer relationships, andresulting in some replacement parts not reaching our customers in a timelymanner.

 

Asa result of the issues we encountered during the transition, we have lost someProfessional Business customer relationships we had hoped to retain, and it isprobable that we will lose additional Professional Business customers.  Our inability to retain customers of theProfessional Business will likely result in lower than anticipated revenues forthe combined company during 2008. The Professional Business customers maychoose to buy products from our competitors rather than us if they perceivethat our competitors provide better delivery times, higher quality, betterservice, greater financial strength or other factors.

 

Ourliquidity is highly dependent upon our sales and the advance of cash to us byWells Fargo on the accounts receivable from those sales. The delays in ourmanufacturing during the transition significantly impacted our shipments andsales to our customers.   As a result,the advance of cash from our Wells Fargo financing facility significantlydeclined during the transition, requiring us to fund a significant portion ofour operations from our operations and limited existing cash reserves. Delaysin our manufacturing or service and support fulfillment have caused us toprepay for production and service parts at times, or pay to have partsexpedited to our plants and depots to alleviate these shortages.  We also delayed payments to certain vendors,,which may 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.

 

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***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 from our Nashville,Tennessee manufacturing facilities to Juarez is expected to be completed by December 31,2008.  The MSA provides for Flextronicsto achieve certain cost reduction targets, during the first twelve monthsfollowing August 31, 2008 that are expected to provide cost savings to MPCCorporation.  If the cost reductiontargets 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 MPC Corporation’s possible retention of the manufactureof a computing platform.

 

Weare responsible for applicable Nashville facility closure and related costs. Itis presently anticipated that approximately 145 personnel from the Nashvillefacility will be terminated.

 

OnMay 8, 2008, MPC-Pro entered into an Inventory Purchase Agreement (the “IPA”)with Flextronics.  Under the IPA,Flextronics will purchase approximately $8.7 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.

 

***AMEX Notification***

* *

On May 8, 2008, the American StockExchange (“AMEX”) notified us that we have failed to satisfy a continuedlisting rule. Specifically, the notice from AMEX states 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 its three most recentfiscal years.

 

The AMEX notice requires that by June 9,2008, we submit a plan (the “Plan”) advising AMEX of action we have taken, orwill take, that would bring us into compliance with the listing standards by November 9,2009 (the “Plan Period”).  The Plan isrequired to include specific milestones, quarterly financial projections, anddetails related to any strategic initiatives that we plan to complete.  AMEX will evaluate the Plan and make adetermination as to whether we have made a reasonable demonstration of anability to regain compliance with the continued listing standards withinspecified timeframes, in which case the Plan will be accepted.  If the Plan is accepted, we may be able tocontinue listing during the Plan Period, during which time we will be subjectto periodic review to determine whether we are making progress consistent withthe Plan.  If the Plan is not accepted orif we do not make progress consistent with the Plan during the Plan Period,AMEX will initiate delisting procedures as appropriate.

 

Previously, we resolved a continuedlisting deficiency initially identified in an AMEX notice received in April 2006.  As reported in our Form 8-K filed October 29,2007, we are subject to the provisions of Section 1009(h) for aperiod of twelve months from such date, which provides for the method ofevaluation and appropriate action by AMEX staff should we fall below the continuedlisting standards during that period. Depending on the circumstances, such action includes truncatingprocedures related to compliance with the continued listing standards orimmediately initiating delisting proceedings.

 

***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 provide customizedcomputing solutions to our customers. We manufacture and market ClientPro®desktop PCs, TransPort® notebook PCs, NetFRAME® servers and DataFRAMETM storageproducts.  In addition, we manufactureand market the “E-series” of desktops, notebooks, servers and storage productsunder a one-year 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.

 

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***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 expanded our product line, including a more competitive line of notebookPCs and convertible tablet PCs.  Tosuccessfully combine our existing operations with the newly acquiredProfessional Business, we have set forth the following key initiatives:

 

·                  Successfully integrate the new ProfessionalBusiness with our existing operations, including:

 

·                  Transitioning from Gateway branded productsto MPC branded products;

·                  Consolidating our product lines andcontinuing ongoing research and development activities;

·                  Completing the integration of our customercare and support functions;

·                  Integrating our administrative and financialfunctions, including the combining of our various licensing and royaltyfunctions;

 

·                  Satisfy and retain Professional Business customers;

·                  Carefully manage our liquidity to maximizeour use of funds;

·                  Focus on supplier relationships, reduceprocurement costs due to our larger scale, and improve the utilization ofvendor credit;

·                  Utilize the Gateway brand name until ourlicense to use the name expires in September 2008, while enhancing the MPCComputers  brand name in our variousmarkets; and

·                  Institute lower cost operating methodologiesand 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 andimproving our financial position;

·                  Continuing to make our operations more costefficient;

·                  Seeking ways to sell and distribute ourproducts more effectively;

·                  Penetrating segments of the U.S. federalgovernment where we have historically not made significant sales;

·                  Continuing to focus on higher margin businesssuch as servers and storage devices; and

·                  Working with our vendors to maintain currentcredit 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.

 

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| **RESULTS OF OPERATIONS (unaudited)  (In millions)** | ** ** | **Three Months ended  March 31,** | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------|------------|
| ** **                                                               | ** ** | **2008**                                         | ** ** | **2007 (1)** | ** ** | **% Change** | ** ** |
| Revenue                                                                  |       | $                                                | 123.7      |              | $          | 56.8 | * * | *117.8* | *%* |
| * *                                                                 | * *   | * *                                         | * *   | * *          | * *   | * * | * * |
| Cost of revenue                                                          |       | 108.7                                            |       | 50.6              | * *   | *114.8* | *%* |
| * *                                                                 | * *   | * *                                         | * *   | * *          | * *   | * * | * * |
| Gross margin                                                             |       | 15.0                                             |       | 6.2               | * *   | *141.9* | *%* |
| *Gross  margin %*                                                        | * *   | *12.1*                                           | *%*        | *10.9*            | *%*        | * * | * * |
| Operating expenses                                                       | * *   | * *                                         | * *   | * *          | * *   | * * | * * |
| Research and development expense                                         |       | 1.1                                              |       | 0.5               | * *   | *120.0* | *%* |
| Selling, general and administrative expense                              |       | 24.1                                             |       | 9.8               | * *   | *145.9* | *%* |
| Depreciation and amortization                                            |       | 3.0                                              |       | 0.8               | * *   | *275.0* | *%* |
| Total operating expenses                                                 |       | 28.2                                             |       | 11.1              | * *   | *154.1* | *%* |
| *Operating  expenses as a % of revenue*                                  | * *   | *22.8*                                           | *%*        | *19.5*            | *%*        | * * | * * |
| Operating loss                                                           |       | (13.2                                            | )          | (4.9              | *)*        | *169.4* | *%* |
| *Operating  loss as a % of revenue*                                      | * *   | *-10.7*                                          | *%*        | *-8.6*            | *%*        | * * | * * |
| Other (income) expense                                                   |       |                                             |       |              |       |   |   |
| Interest expense, net                                                    |       | 1.2                                              |       | 1.5               |       |   |   |
| Change in estimated fair value of  derivative financial instruments      |       | (0.4                                             | )          | (1.2              | )          |   |   |
| Total other expense                                                      |       | 0.8                                              |       | 0.3               |       |   |   |
|                                                                     |       |                                             |       |              |       |   |   |
| Net loss                                                                 |       | $                                                | (14.0      | )                 | $          | (5.2 | ) |   |   |

 

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(1)          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.

 

**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 months ended March 31, 2008 was $123.7 million, an increaseof $66.9 million or 117.8% compared to the same period in 2007.  The increase was due to additional revenue of$77.7 million from the results of operations of the Professional Business whichwas acquired October 1, 2007.  Theincrease in revenue for 2008 was partially offset by a decline in revenue byMPC Computers of $10.8 million due in part to lower unit sales and decliningsales prices because of competitive pressures. In addition, our revenue for the first quarter was impacted bytransition issues of the Professional Business IT and manufacturing systemsfrom Gateway to MPC Computers’ existing systems during February 2008. Thetransition 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, routing problemsthat resulted in parts shortages, and order entry errors that caused someorders to be delayed in getting to our manufacturing floor. Inaccuracies in ourbills of materials, parts shortages and order entry errors resulted at times insystems being built in our Nashville facility which we then could not invoicebecause core peripheral product from third party vendors had not been properlyprocured and shipped to our customers.

 

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Historically,revenue for MPC Computers and the Professional Business has been the lowestduring the first quarter and increases during the remaining quarters of theyear due to the buying seasons of the education, federal, state, and localgovernments in those quarters.  We expectthis trend to continue and our revenue to increase over the remaining quartersof 2008.  Our revenue backlog at March 31,2008 and December 31, 2007 was $48.2 million and $47.7 millionrespectively.

 

Revenuefrom MPC Computers has declined from 2005 to 2007 and in the first quarter of2008.  Revenue from the Professional Business has also been decliningduring the same periods.  For the threemonths ended March 31, 2007, Gateway reported revenue of $155.7 millionfor the Professional Division.  Economiesof scale play an important role in the PC industry.  Our major competitorshave significantly larger operations and stronger brand recognition than we do,and generally have stronger financial positions.  We believe that ouracquisition of the Professional Business will help us to address ourdisadvantages in economies of scale, but there can be no assurance that ourdownward revenue trend will be reversed. Based on current trends, revenue for the combined business will be lowerin 2008 than 2007 on a pro forma basis.

 

***Gross Margin***

 

Ourgross margin as a percent of revenue for the three months ended March 31,2008 was 12.1% as compared to 10.9% for the same period in 2007. The increasein gross margin was primarily due to an increase in revenue and gross marginfrom the Professional Business wherein the greater volume reduced the impact ofour fixed costs of manufacturing. Overall, our margins were negatively impactedfrom the transition issues of the Professional Business, as we provided ahigher than expected level of discounts to retain some of our customers, alongwith increased procurement expenses for expedited overseas raw materialsshipments and interruptions to our supply chain.

 

***Research and Development Expense***

 

Research,development and engineering expense for the three months ended March 31,2008 totaled $1.1 million, an increase of $0.6 million from the same period in2007.  This increase is due primarily toan increase in the research and development activities as a result of theacquisition of the Professional Business.

 

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

 

Forthe three months ended March 31, 2008, SG&A expense was $24.1 million,an increase of $14.3 million or 145.9% from the same period 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 months ended March 31,2008, depreciation and amortization expense was $3.0 million, a $2.2 millionincrease from the comparable period in 2007. The increase is due primarily to the amortization of intangibles anddepreciation of property and equipment acquired in connection with theacquisition of the Professional Business. We anticipate an increase indepreciation and amortization expense during the remainder of 2008 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 have not yet completed ouranalysis of the impact of the increased depreciation and amortization on thefuture results of operations for 2008.

 

***Interest expense, net***

 

Interestexpense for the three months ended March 31, 2008 was $1.2 million, adecline of $0.3 million from the comparable period in 2007.  The decline was principally due to areduction in the effective interest rate on outstanding advances under ourWells Fargo Receivables Advance Facility.

 

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

 

Ourconvertible debentures and warrants are derivative financial instruments thatare carried at fair value as derivative liabilities. See Note 6 – “DerivativeWarrant Liabilities and Convertible Debentures” in Notes to Interim CondensedConsolidated Financial Statements in Item 1 of this report for more informationregarding these financial 

 

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instruments. Duringthe three months ended March 31, 2008 and 2007, we recognized non-cashincome of $0.4 million and $1.2 million, respectively, primarily related to adecline in the fair value of these derivative financial instruments as a resultof a decrease in the market price of our stock during the first quarter of2008.  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 positive impactto earnings. The change in the fair value of these derivative financialinstruments has no impact on our cash flows.

 

***Income taxes***

 

Wemake no provision for income taxes because, since inception, we have not beenprofitable. We have a net operating loss carry-forward available to offsetfuture federal and state income tax expenses to an amount that approximates ouraccumulated deficits. Our net operating loss carry-forward will expire invarying amounts from 2022 to 2027. The utilization of the net operating losscarry-forward as an offset to future taxable income is subject to thelimitations under US federal income tax laws. One such limitation is imposedwhere there is a greater than 50% change in ownership of our company.

 

**OFF BALANCE SHEET ARRANGEMENTS**

 

Wehave no off the balance sheet arrangements.

 

**GUARANTEES**

 

Duringour normal course of business, we have made certain indemnities, commitmentsand guarantees under which we may be required to make payments in relation tocertain transactions. These include (i) intellectual property indemnitiesto customers and licensees in connection with the use, sale and/or license ofour products, (ii) indemnities to lessors in connection with our facilityleases for certain claims arising from such facilities or leases, (iii) indemnitiesto vendors and service providers pertaining to claims based on our negligenceor willful misconduct, (iv) indemnities involving the accuracy ofrepresentations in certain contracts, and (v) guarantees to certainvendors and creditors for balances owed. The duration of these indemnities andcommitments in certain cases may be indefinite. The majority of theseindemnities and commitments do not provide for any limitation of the maximumpotential for future payments we could be obligated to make. We have notrecorded 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 the potentialimpact of each of these standards.  Inaddition, we adopted two accounting standards during the first quarter of2008.  The impact of the adoption of eachof these standards is discussed below.

 

***New Accounting Standards***

 

In December, 2007, the FASB issued SFAS No. 141(Revised 2007), *Business Combinations*.SFAS No.  141R will significantly change the accounting for businesscombinations. Under SFAS No. 141R, an acquiring entity will berequired to recognize all the assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions.SFAS No. 141R will change the accounting treatment for certainspecific items, including:

 

·                  Acquisitioncosts will be generally expensed as incurred; 

·                  Noncontrollinginterests (formerly known as “minority interests” — see SFAS No. 160discussion below) will be valued at fair value at the acquisition date; 

·                  Acquiredcontingent liabilities will be recorded at fair value at the acquisition dateand subsequently measured at either the higher of such amount or the amountdetermined under existing guidance for non-acquired 

 

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contingencies; 

·                  In-processresearch and development will be recorded at fair value as an indefinite-livedintangible asset at the acquisition date; 

·                  Restructuringcosts associated with a business combination will be generally expensedsubsequent to the acquisition date; and 

·                  Changesin deferred tax asset valuation allowances and income tax uncertainties afterthe acquisition date generally will affect income tax expense. 

 

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

 

In December, 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements - An Amendment of ARB No. 51.*SFAS No. 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. SFAS No. 160 clarifies that changes in a parent’s ownershipinterest in a subsidiary that do not result in deconsolidation are equitytransactions if the parent retains its controlling financial interest. Inaddition, SFAS No. 160 requires that a parent recognize a gain or loss innet income when a subsidiary is deconsolidated. Such gain or loss will bemeasured using the fair value of the noncontrolling equity investment on thedeconsolidation date. SFAS No. 160 also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterest.   The statement is effectivefor 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,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 debt instruments,by their terms, may be settled either wholly or partially in cash uponconversion. FSP APB 14-a requires issuers of convertible debt instruments thatmay 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 

 

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recognizedor disclosed at fair value in the financial statements on a nonrecurringbasis. This FSP is effective for us in fiscal year 2009. On February 14,2008, FSP No. 157-1 excluded SFAS No. 13, *Accounting for Leases,*and other accounting pronouncementsthat address fair value measurements for purposes of lease classification ormeasurement under SFAS No. 13*.*However,this scope exception does not apply to assets acquired and liabilities assumedin a business combination that are required to be measured at fair value underSFAS Statement No. 141, *BusinessCombinations* or SFAS No. 141(R), *Business Combinations*,* *regardlessof whether those assets and liabilities are related to leases.  ThisFSP was effective upon our initial adoption of SFAS No. 157. The adoptionof SFAS No. 157 relating to financial assets and financial liabilities didnot have a material impact on our financial position or results ofoperations.  We do not expect the impactof SFAS No. 157 related to nonfinancial assets and non financialliabilities will have a material impact on our financial position or results ofoperations.

 

In February 2007, the FASB issuedSFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities - Including an Amendment of FASBStatement 115*. SFAS No. 159 permits companies to choose tomeasure certain financial instruments and certain other items at fair value,which are not currently required to be measured at fair value. The standardrequires that unrealized gains and losses on items for which the fair valueoption has been elected be reported in earnings at each subsequent reportingdate. SFAS No. 159 was effective for us beginning in the first quarter offiscal year 2008.   We adopted SFAS No. 159as of January 1, 2008 and elected not to measure any additional financialinstruments or other items at fair value.

 

**CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES**

 

We prepare our financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”). The preparation of GAAP financial statements requirescertain estimates, assumptions, and judgments to be made that may affect ourconsolidated statement of financial position and results of operations.Critical accounting estimates are those that are most important and material toour financial condition and results of operations and require management’s mostdifficult, subjective, or complex judgments, often as a result of the need toestimate matters that are inherently uncertain. We believe our most criticalaccounting policies and estimates relate to revenue recognition, includingreserves needed for possible future returns and discounts; the carrying valueand usefulness of inventory and related inventory reserves; the timing andamount of future warranty obligations; accounting for derivative financialinstruments; and the impairment of acquired intangible assets. We havediscussed the development, selection, and disclosure of our critical accountingpolicies and use of estimates with the Audit Committee of our Board ofDirectors. These critical accounting policies and our other accounting policiesare described in Note 2 of “Notes to Interim Condensed ConsolidatedFinancial Statements” included in “Item 1 — Financial Statements.”

 

***Revenue Recognition***

 

We frequently enter into salesarrangements with customers that contain multiple elements or deliverables suchas hardware, software, peripherals, and services. Judgments and estimates arecritical to ensure compliance with GAAP. These judgments relate to theallocation of the proceeds received from an arrangement to the multipleelements, the determination of whether any undelivered elements are essentialto the functionality of the delivered elements, and the appropriate timing ofrevenue recognition. We offer extended warranty and service contracts tocustomers that extend and/or enhance the technical support, parts, and laborcoverage offered as part of the base warranty included with the product.Revenue from separately priced extended warranty and service contracts, forwhich we are obligated to perform, is recorded as deferred revenue andsubsequently recognized over the term of the contract. The amount recognized ona periodic basis within this term is based on management’s best estimate of howit 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.

 

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

 

***Inventory Valuation***

 

We operate in a business environmentsubject to rapid changes in technology and customer demand. We recordwrite-downs for components and products which have become obsolete or are inexcess of anticipated demand or net realizable value. Historically, thesewrite-downs have primarily related to warranty inventory. We perform an 

 

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assessment of inventory each quarter,which includes a review of, among other factors, inventory on hand and forecastrequirements, product life cycle (including end of life product) and developmentplans, component cost trends, product pricing and quality issues. Based on thisanalysis, we record an adjustment for excess and obsolete inventory. We may berequired to record additional write-downs if actual demand, component costs orproduct life cycles differ from estimates, which would affect earnings in theperiod the write-downs are made.

 

***Warranty Liabilities***

 

We record warranty liabilities at thetime of sale for the estimated costs that may be incurred under our standardlimited warranty. The specific warranty terms and conditions vary dependingupon the product sold but generally include technical support, parts, and laborover a period ranging from 90 days to three years. Factors that affect ourwarranty liability include the number of installed units currently underwarranty, historical and anticipated rates of warranty claims on those units,and the average cost of claims on our installed base to satisfy our warrantyobligation. The anticipated rate of warranty claims is the primary factor impactingour estimated warranty obligation. The other factors are less significant dueto the fact that the average remaining aggregate warranty period of the coveredinstalled base is approximately 12 months, repair parts are generally alreadyin stock or available at pre-determined prices, and labor rates which arefairly predictable and historically have not fluctuated significantly fromperiod to period.   Warranty claims arerelatively predictable based on historical experience of failure rates. If actualresults differ from our estimates, we revise our estimated warranty liabilitiesto reflect such changes. Each quarter, we reevaluate our estimates to assessthe adequacy of the recorded warranty liabilities and adjust the amounts asnecessary.

 

***Derivative Financial Instruments***

 

The accounting for convertible debt withderivative features is highly complex, subject to a number of accountingpronouncements and subject to broad interpretations.  Determination of the treatment of theseconvertible debt instruments is based on current interpretation of the facts,treatment by other companies and discussion with industry experts.  Management is also required to make highlysubjective estimates of future share price volatility, the probability offuture events and effective discount rates. Changes in the fair value of our derivative financial instruments havehad a material impact in our results of operations.  Among other factors, the fair value of ourderivative financial instruments is affected by the market value of our commonstock.  Increases in the market price ofour common stock will adversely impact our financial results.   Declines in the market value of our commonstock will have a positive impact.  Thechanges in the fair value of these derivatives have no impact on our cashflows.

 

***Valuation of AcquiredIntangible Assets***

 

The estimatesused by management in determining the impairment of acquired intangible assetsis a critical accounting estimate susceptible to change from period to period.It requires management to make assumptions about future cash flows over futureyears and utilize an estimated discount rate. Management’s assumptions about future cash flows involve significantjudgment because actual operating levels have fluctuated in the past and maycontinue to do so in the future and economic conditions may change.  Also, the adoption of any new strategic planinherently involves uncertainty.  Asignificant adverse change in our business could result in a future impairmentof the value of our acquired intangible assets.

 

***BusinessCombinations***

 

We account forbusiness combinations under the purchase accounting method. The cost of anacquired company is assigned to the tangible and intangible assets purchasedand the liabilities 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 estimates and use valuation techniques when marketvalue is not readily available. Any excess of purchase price over the fairvalue of the tangible and net intangible assets acquired is allocated togoodwill.

 

**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 March 31, 2008, we had unrestricted cash and cash equivalentsof $3.8 million and an additional $9.9 million of restricted cash consisting of$3.6 million held as collateral under our receivables advance facility and $6.3million 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 March 31, 2008, we had current assets of $149.0 million 

 

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and current liabilities(exclusive of deferred revenue which is not yet earned) totaling $168.5million. At March 31, 2008 our shareholder’s deficit was $13.6million. 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 members ofour Board of Directors, short-term loans, a line of credit and net proceeds of$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.

 

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)*

 
| ** **                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Cash and cash equivalents |       | $                  | 3.8        |                  | $          | 9.0 |   |
| Restricted cash           |       | 9.9                |       | 9.8                   |       |
| Total                     |       | $                  | 13.7       |                  | $          | 18.8 |   |

 

**Cash Flow Activity**

*(In millions)*

* *
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net cash provided (used) by: |       |                                             |       |   |   |
| Operating activities         |       | $                                                | 17.3       |   | $ | 3.2 |   |
| Investing activities         |       | (0.8                                             | )          | (0.1 | ) |
| Financing activities         |       | (21.7                                            | )          | (6.4 | ) |
| Increase (decrease) in cash  |       | $                                                | (5.2       | ) | $ | (3.3 | ) |

 

·                  ***Operating Activities***

 

During the three monthsended March 31, 2008, we generated $17.3 million from operating activitiesconsisting of a net loss of $9.5 million as adjusted for $4.5 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 $27.0 million from a decreasein working capital, primarily from a $31.9 million decline in accountsreceivable, a $6.1 million increase in accounts payable offset by a $9.6million increase in inventory and a $2.9 million decrease in accruedwarranties.  The decline in accountsreceivable was principally the result of a consecutive decline in sales fromthe fourth quarter of 2007 and the first quarter of 2008 and collections on the2007 year end receivables.  The increasein inventory 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 three monthsended March 31, 2007, we generated $3.2 million from operating activitiesconsisting of a net loss of $5.0 million as adjusted for $0.2 million ofnon-cash items including depreciation and amortization expense, income from theincrease in fair value of derivative financial instruments and other non-

 

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cash items. In addition,operating activities provided $8.2 million from a decrease in working capital,primarily from a decrease in accounts receivable offset by an increase ininventory and a decrease in accounts payable and accrued expenses.

 

·                  ***Investing Activities***

 

Investing activities forthe three months ended March 31, 2008 included $0.8 million in purchase ofequipment.

 

We had no significantinvesting activities during the three months ended March 31, 2007.

 

·                  ***Financing Activities***

 

During the three monthsended March 31, 2008, financing activities used $21.7 million consistingof a $19.2 million reduction in net borrowings under the Wells FargoReceivables Advance Facility and $2.5 million in payments on notes payable.

 

During the three monthsended March 31, 2007, financing activities used net cash of $6.4million.  Our net borrowings under theWells Fargo Receivable Advance Facility declined $6.6 million.  In addition, restricted cash related tocollateralized letters of credit and the Receivable Advance Facility declined$0.2 million.

 

***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 quarter of 2008as compared to the fourth quarter of 2007. These issues have materiallyimpacted our liquidity, and caused a material deterioration in our workingcapital from December 31, 2007 through March 31, 2008.  We are currently seeking to expand creditlines with many of our current vendors, and to obtain credit lines from vendorswith whom we have not previously done business as a means to continue to fundour operations in the near term.  Yet wecontinue to extend payment to a number of our vendors well beyond normalpayment terms.  Certain of these vendors,and existing vendors, have requested letters of credit to secure creditlines.  We are currently negotiating withother vendors, and anticipate providing additional letters of credit or otherforms of credit enhancement to secure our credit lines with certainvendors.  In April 2008, we enteredinto the Flextronics agreement and anticipate an increase in liquidity from thesale of our inventory to Flextronics and have received an increase in ourcredit line with Flextronics.  Continuingto provide letters of credit or other credit enhancement to vendors constrainsour liquidity as we are required to cash collateralize the letters of credit orotherwise incur costs to provide credit enhancement and there can be noassurance that we will be successful in obtaining sufficient vendor credit inthe future.  Any inability to maintain adequate liquidity in thefuture or inability to integrate our IT systems on a timely basis may dosignificant harm to vendor relationships, and could cause us to experiencecredit holds, require that we pre-pay for products, and/or cause suppliers torefuse to deliver components or terminate supply arrangements, any of whichcould have a material adverse effect on our financial condition and results ofoperations.

 

Other specific issueswhich 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 is tobe repaid by May 31, 2008, and is in addition to other amounts provided tous by Wells Fargo under the terms of our Account Purchase Agreement. We alsoamended the Transition Services Agreement with Gateway to extend the paymentsdue on the payable to Gateway through June, 2008.

 

In addition, we wererecently informed by Wells Fargo that Wells Fargo had over advancedapproximately $1.4 million to us as a result of an oversight in the applicationof cash receipts received against several 

 

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relatively small invoicesoutstanding since late 2007.  We haveresearched Wells Fargo’s claim, and determined that in fact Wells Fargo hadover funded us by $1.4 million.  We haveagreed with Wells Fargo to repay the $1.4 million over advance in four equalweekly payments starting June 6, 2008.

 

Our sales are seasonaland typically increase during our second, third and fourth quarters.  We anticipate an increase in sales willrequire additional working capital which we will obtain through TemporaryAdvances under the Receivables Advance Facility allowing us to borrow up toapproximately 98% of our purchased accounts.  The Temporary Advances are of limited duration which may require us toseek other sources of cash.  We arelooking at opportunities to sell assets, such as certain types of inventory andmachinery and equipment and expand or enhance vendor credit where possible. Welaunched initiatives to further improve our margins beginning in January 2008.We are focusing on material costs, returns, freight costs, manufacturingproductivity and costs as areas of opportunity to improve our gross margin andoperating margin, including through our recent agreement signed withFlextronics in April 2008. We continue to be active in cost management andcontinuing seek ways to run our 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 upon shareholderapproval.  The conversions have no cashflow impact.

 

·                  ***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 additionallimitations, if any, resulting from the acquisition of the ProfessionalBusiness and the conversion of debentures and exercise of warrants in 2007.  For the year ended December 31, 2008, inaddition to our loss carryforward limitation, taxable income may be reduced byall losses incurred in 2007 after the October 1, 2007 acquisition of theProfessional Business.

 

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***

 

On November 16, 2006, we enteredinto an agreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”)for an accounts receivable assignment and advance facility (“ReceivablesAdvance Facility”) that replaced our prior line of credit with Wachovia CapitalFinance Corporation (Western).  Under the new facility, as amended in February 2007,we may assign to Wells Fargo, and Wells Fargo may purchase from us, Accounts(as defined in the Receivables Advance Facility). Wells Fargo will advance 90%of the value of the purchased Accounts. Wells Fargo may adjust the advancementpercentage at any time in its commercially reasonable discretion upon priornotice to us.  Wells Fargo will advance an additional 7.5% of the faceamount of currently outstanding Accounts assigned to Wells Fargo, provided thatthe total advance does not exceed 97.5% of the face amount of any Account (the “TemporaryAdvance”), and increase the advance rate on new Accounts assigned to WellsFargo to 98% of the amount of the Accounts for a period of eight weeks (the “SpecialFacility Period”). We 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, we may 

 

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request that the Special Facility bereinstated for another eight week period with repayment to be made within fourweeks.

 

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 with WellsFargo.  Under these agreements, MPC-Pro and GCI may assign to Wells Fargo,and Wells Fargo may purchase from MPC-Pro and GCI, Accounts (as defined in theAgreements). Wells Fargo will advance to MPC-Pro and GCI 90% of the value ofthe purchased Accounts. Wells Fargo may adjust the advancement percentage atany time in its commercially reasonable discretion upon prior notice to MPC-Proand GCI.  In addition, MPC-Pro, Gateway,GCI, and Wells Fargo entered into an Intercreditor Agreement (the “IntercreditorAgreement”). The Intercreditor Agreement provides Gateway with a juniorsecurity interest in accounts receivable generated on or after the October 1,2007 acquisition of the Professional Business, inventory, and all otherproperty of MPC-Pro and GCI as specified in the agreement to secure the paymentof obligations owing to Gateway under the Transition Services Agreement (the “TSAObligations”). Wells Fargo and MPC-Pro agreed to set aside certain accountsreceivable for the payment of the TSA Obligations (the “Gateway BlockedAccounts”).  On March 27, 2008 theIntercreditor Agreement was amended to provide Gateway Blocked Accounts up tothe following amounts: (i) there will be no Gateway Blocked Accountsthrough April 17, 2008; (ii) on or after April 18, 2008, a faceamount equal to the obligations owing to Gateway under the Transition Agreementfor the applicable week (the “Gateway Weekly Payoff Amounts”) minus $10.0million; and (iii) on or after May 27, 2008, a face amount equal tothe Gateway Weekly Payoff Amounts for the applicable week minus $5.0 million.The amendment also provides that, if, after June 30, 2008, there is aremaining positive balance of the Gateway Weekly Payoff Amounts, Gateway mayprovide a statement to MPC-Pro indicating the positive balance, and Wells Fargowill hold but not purchase Gateway Blocked Accounts submitted to it by MPC-Proand GCI in a face amount equal to the remaining positive balance.

 

We will pay fees equal to the Wells FargoPrime Rate (as defined in the Receivables Advance Facility), plus 0.75% perannum (the “Wells Fargo Discount”) multiplied by the total amount of Accountspurchased and not yet paid by our customers, computed daily. The effective rateat March 31, 2008 was 6%. The minimum monthly fee to be paid in aggregateby MPC Computers affiliates to Wells Fargo is determined by multiplying theWells Fargo Discount, by $2.5 million.

 

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. We agreed to payto Wells Fargo an advance fee in the amount of $15 thousand for the MPC-ProAdvance. Interest on the MPC-Pro Advance will be at Wells Fargo Prime Rate plus1.25%.

 

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.

 

InApril 2008, we were informed by Wells Fargo that Wells Fargo had overadvanced approximately $1.4 million to us as a result of an oversight in theapplication of cash receipts received against several relatively small invoicesoutstanding since late 2007.  We haveagreed with Wells Fargo to repay the $1.4 million over advance in four equalweekly payments starting June 6, 2008.

 

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***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. Thedebentures accrue interest at 8% per annum after shareholder approval wasobtained in December 2006 and the aggregate principle amount becomes dueand payable September 6, 2009. In the event that the debentures arenot repaid on the maturity date, we will be in default and the debentures willbegin to accrue interest at a rate of 22% per annum or the maximum amountpermitted by law, whichever is less. The debentures contain various customaryevents of default as well as negative covenants that, among other 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 contribution provisions. 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 were registered under the registrationstatement due to blocker provisions imposed by certain investors on theirregistrable shares and from a reduction in the number of shares as required bythe SEC. We believe we have substantially fulfilled our obligation underthe registration rights agreement and will register the remaining unregisteredshares when the blocker provisions are waived by the investors and when allowedby the SEC.

 

OnMarch 5, 2007, we obtained amendments and waivers to the registrationrights agreement and the debentures. Pursuant to a letter agreement, the majorityof the investors, including Crestview Capital Master, LLC and Toibb InvestmentLLC agreed to waive the penalty provisions for not yet having an effectiveregistration statement, and to extend the dates for filing a registrationstatement and all related deadlines, including the date by which the initialregistration statement must be declared effective by the SEC, by 120 days. Theinvestors in this offering also agreed that no Event of Default is presentlydeemed to have occurred under the debentures. The 120-day extension periodlapsed, and the registration statement was not declared effective until June 28,2007. For the year ended December 31, 2007, we incurred liquidateddamages of $346 thousand under the registration rights agreement related to thedelay in the effectiveness of our registration statement.

 

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% per annumafter shareholder approval was obtained in December 2006 and the aggregateprincipal amount becomes due and payable September 29, 2009. In theevent that the debentures are not repaid on the maturity date, we will be indefault and the debentures will begin to accrue interest at a rate of 22% perannum or the maximum amount permitted by law, whichever is less. The debenturescontain various customary events of default as well as negative covenants that,among other things, prohibit us from incurring additional 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 

 

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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 and Warrants.

 

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 be forcedto 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 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 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 Securities ExchangeAct 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 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 the their debentures apply equally tothe shares of common stock issuable on conversion of the Series APreferred Stock issued pursuant to the Debenture Amendments.

 

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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 with Gateway. Under the Lock-Up Agreement, Gateway has agreed that it will not offer,sell, contract to sell, short, pledge or otherwise dispose of any MPCCorporation common stock beneficially owned, held or thereafter acquired byGateway or its affiliates for a period of 12 months (the “Restriction Period”),except for Permitted Transfers as defined by the agreement.  The Registration Rights Agreement providesthat following the Restriction Period as set forth in the Lock-Up Agreement andupon receipt of a demand request from Gateway, MPC Corporation shall file aregistration statement with respect to the Registrable Securities, as definedby the agreement, which include the MPC Corporation Shares issued in connectionwith the transaction. The Registration Rights Agreement grants Gatewaycustomary and piggyback rights. The Registration Rights Agreement is subject toany limitations and conditions set forth in any prior registration rightsagreements 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 three monthsended March 31, 2008 our estimated purchase obligations increased by $40.8million and outstanding notes payable and debt declined by $21.8 million from December 31,2007.  There were no other materialchanges to our contractual obligations and commitments as of March 31,2008.

 

**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 March 31,2008 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 

 

38

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themarket price of our stock increases during a period, the fair value of thederivatives is expected to increase and will adversely affect ourearnings.  A decline in the market price of our stock as expected cause adecrease 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 andpurchases of product are denominated in U.S. dollars, minimizing our foreigncurrency risk. 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. We continue to evaluate ourrisk position on an ongoing basis to determine whether foreign exchange hedgingstrategies may need to be employed.

 

**ITEM 4T.    CONTROLSAND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Our management, including our CEO and our CFO,as of March 31, 2008, the end of the period covered by this QuarterlyReport on Form 10-Q, evaluated the effectiveness of our disclosurecontrols and 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.

 

**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 financial reporting. These efforts included the completion of the migration of data and processesfrom the four Gateway systems to the MPC Corporation financial reportingsystem.  In addition, we began otherremediation steps including redeployment of staff to the key areas impacted bythe material weakness, initiated enhanced training of the consolidation andaccount reconciliation processes, and established review procedures in theseareas.  However, as of March 31,2008, we did not complete all of these remediation steps.

 

Except for  the changes on whichwe are working to address the material weakness  with respect tothe Professional Business noted above, there were no changes in ourinternal control over financial reporting during the quarter ended March 31,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**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 an adverseresult in the matter.

 

**Other Matters**

 

We are involved in various other legalproceedings from time to time in the ordinary course of our business. We arenot currently subject to any other legal proceedings that we believe will havea material impact on our business. However, due to the inherent uncertaintiesof the judicial process, we are unable to predict the ultimate outcome orfinancial exposure, if any, with respect to these matters.

 

**ITEM 1A.    RISKFACTORS**

 

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

 

**Risks Related to Our Liquidity**

 

***Our liquidity and working capitalconstraints grew during the first quarter of 2008, and could have a materialadverse effect on our financial position and results of operations.***

 

Ourliquidity constraints make it difficult for us to execute on our business planand continue operations without additional funding or concessions from ourcreditors, which they may not be willing to provide.   As of March 31, 2008, we had currentassets of $149.0 million and current liabilities (exclusive of deferred revenuewhich is not yet earned) totaling $168.5 million.  As a result, our net working capital deficitwas $19.5 million as of March 31, 2008.  As of December 31,2007, we had current assets of $178.8 million and current liabilities(exclusive of deferred revenue which is not yet earned) totaling $183.6million, resulting in a net working capital deficit of $4.8 million.  Consequently, our working capital deficitgrew materially during the first quarter of 2008.  In addition, through the first five weeks ofthe second quarter, we have not yet experienced the material increase in ourweekly shipped revenue from our average weekly shipped revenue we experiencedin the first quarter of 2008.

 

Wecontinue to extend payment terms to a number of our suppliers well beyond ournormal payment terms.  Our workingcapital deficit could have a material adverse effect on our financial positionand results of operations if we are not able to raise additional funds, or reduceour net working capital deficit through increased revenue and cash flow fromoperations in the second quarter.

 

**Risk related to Our Securities**

 

***Wehave been notified by AMEX of our failure to satisfy continued listingstandards, and if we are delisted the value and liquidity of your investmentmay be reduced.***

 

OnMay 8, 2008, the American Stock Exchange (“AMEX”) notified us that we havefailed to satisfy a continued listing rule. Specifically, the notice from AMEXstates 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 its three most recent fiscal years.

 

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TheAMEX notice requires that by June 9, 2008, we submit a plan (the “Plan”)advising AMEX of action we have taken, or will take, that would bring us intocompliance with the listing standards by November 9, 2009 (the “PlanPeriod”).  The Plan is required toinclude specific milestones, quarterly financial projections, and detailsrelated to any strategic initiatives that we plan to complete.  AMEX will evaluate the Plan and make adetermination as to whether we have made a reasonable demonstration of anability to regain compliance with the continued listing standards withinspecified timeframes, in which case the Plan will be accepted.  If the Plan is accepted, we may be able tocontinue listing during the Plan Period, during which time we will be subjectto periodic review to determine whether we are making progress consistent withthe Plan.  If the Plan is not accepted orif we do not make progress consistent with the Plan during the Plan Period, AMEXwill initiate delisting procedures as appropriate.

 

Previously,we resolved a continued listing deficiency initially identified in an AMEXnotice received in April 2006.  Asreported in our Form 8-K filed October 29, 2007, we are subject tothe provisions of Section 1009(h) for a period of twelve months fromsuch date, which provides for the method of evaluation and appropriate actionby AMEX staff should we fall below the continued listing standards during thatperiod.  Depending on the circumstances,such action includes truncating procedures related to compliance with thecontinued listing standards or immediately initiating delisting proceedings.

 

**Risks Related to the Flextronics Transaction**

 

***The cost savings associated with theoutsourcing initiative may not be realized.***

 

Weanticipate that the outsourcing of manufacturing operations to Flextronics willresult in savings in manufacturing and materials procurement costs. However,such cost savings are not guaranteed, and it is possible that we will notachieve savings or that the savings will be less than presently anticipated.Furthermore, any savings in manufacturing and materials procurement costs couldbe offset, in whole or part, by factory closure and related costs. Our businessplans are substantially dependent on achieving the anticipated savings, and thefailure to achieve such savings would have a material adverse impact on ourbusiness.

 

***We will be dependent on Flextronics toperform a substantial portion of our manufacturing.***

 

Flextronicswill perform a substantial portion of the manufacturing operations previouslyperformed by us. The outsourcing of manufacturing operations to Flextronicsinvolves a number of risks. For example, we could be impacted by any delays inproduction associated with Flextronics’ Juarez, Mexico facility. It is possiblethat that we will experience quality issues at a higher rate than we haveexperienced in the past. Our ability to timely deliver product could beimpacted by shipping issues to or from the Flextronics facility.

 

***If we experience difficulties withFlextronics, we face challenges to return to manufacturing our own products andwe may not be able to find an alternative outsource partner.***

 

Weexpect that part of the anticipated cost savings provided by the ManufacturingServices Agreement (“MSA”) will be the result of closing current manufacturingcapacity. As a result, we may face significant challenges to return tomanufacturing our own products if we experience difficulties 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 onFlextronics willingness to continue to extend credit terms at levels sufficientto support our business.***

 

Underthe MSA, Flextronics will acquire, on our behalf, a substantial portion of thecomponents necessary to produce our products. Flextronics has agreed to provideto us a line of credit in connection with such procurement activity. However,the line of credit will be reviewed on a monthly basis and is subject tochange. If the Flextronics line of credit were reduced, it could have asubstantial impact on our liquidity and our business.

 

***We may experience unexpected difficultiestransitioning manufacturing operations to the Flextronics facility.***

 

Inconnection with transitioning manufacturing operations to the Flextronicsfacility, we may experience difficulties with information technology andmanufacturing systems. Such difficulties could lead to delays in shipments.Flextronics will need to train its workforce concerning the manufacture of ourproducts, and we may experience transitional delays or other issues until theworkforce is fully trained.

 

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***Flextronics will acquire components for ourproducts based on forecasts provided by us, and if our forecasts are incorrect,we may be required to repurchase the components.***

 

Underthe MSA, we are required to provide Flextronics with forecasts and, based onthe forecasts, Flextronics will acquire components. If Flextronics is holdinginventory for us for which there is not adequate demand, we may be required torepurchase inventory. Additionally, we may be required to pay inventory carry feeson inventory in excess of demand and to repurchase inventory that is on handfor timeframes specified in the MSA. If our forecasts are incorrect, theserepurchase requirements and charges could materially impact our cash flows.

 

***Customer response to our outsourcinginitiative is uncertain.***

 

Customerresponse to our outsourcing initiative is uncertain. A number of significantcompetitors in the computer industry have outsourced all or a significantportion of their manufacturing operations. However, it is possible that somecustomers, including U.S. government customers, may prefer product directlyproduced by the vendor or product that is produced in the U.S.

 

**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        |       | Amendment  No. 3 to Transition Services Agreement dated as of February 20,  2008 among MPC Pro LLC and Gateway, Inc. (4)                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                        |
| 10.3        |       | Agreement  Amendment dated February 20, 2008 by and among Wells Fargo Bank,  National Association, acting through its Wells Fargo Business Credit  Operating Division, Gateway, Inc., Gateway Companies, Inc., and  MPC-Pro LLC (4)          |
|        |       |                                                                                                                                                                                                                                                        |
| 10.4        |       | Amendment  No. 4 to Transition Services Agreement dated as of March 27, 2008  among MPC Pro, LLC and Gateway, Inc. (5)                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                        |
| 10.5        |       | Second  Agreement Amendment dated March 27, 2008 by and among Wells Fargo Bank,  National Association, acting through its Wells Fargo Business Credit  Operating Division, Gateway, Inc., Gateway Companies, Inc., and  MPC-Pro LLC (5) |
|        |       |                                                                                                                                                                                                                                                        |
| 10.6***     |       | Flextronics  Manufacturing Services Agreement dated April 14, 2008 by and between MPC  Corporation and Flextronics Computing Mauritius Limited                                                                                                         |
|        |       |                                                                                                                                                                                                                                                        |
| 10.7        |       | Flextronics  Inventory Purchase Agreement dated May 8, 2008 by and between Gateway  Pro Partners, LLC and Flextronics Computing Mauritius Limited (6)                                                                                                  |
|        |       |                                                                                                                                                                                                                                                        |
| 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                                                                                                    |

 

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| 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.

 

***   Filed herewith and containsmaterial that has been omitted pursuant to a request for confidential treatmentand such material has been filed separately with the Commission.

 

(1)   Incorporated by reference to Exhibit 3.1on Registrant’s Quarterly Report on Form 10-Q filed with the Securitiesand Exchange Commission on November 14, 2007.

 

(2)   Incorporated by reference to Exhibit 3.1on Registrant’s Current Report on Form 8-K filed with the Securities andExchange Commission on March 29, 2007.

 

(3)   Incorporated byreference to Exhibit 99.1 on Form 8-K filed with the Securities andExchange Commission on April 16, 2008.

 

(4)   Incorporated byreference to Exhibits 99.1 and 99.2, respectively, on Form 8-K filed withthe Securities and Exchange Commission on February 26, 2008.

 

(5)   Incorporated byreference to Exhibits 99.1 and 99.2, respectively, on Form 8-K filed withthe Securities and Exchange Commission on April 2, 2008.

 

(6)   Incorporated byreference to Exhibit 99.1 on Form 8-K filed with the Securities andExchange Commission on May 14, 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: May 15,  2008 | /s/ John P. Yeros        |
|                     | John P. Yeros            |
|                     | Chairman and CEO         |
| .                        |                     |
|                     |                     |
| Date: May 15,  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        |       | Amendment  No. 3 to Transition Services Agreement dated as of February 20,  2008 among MPC Pro LLC and Gateway, Inc. (4)                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                        |
| 10.3        |       | Agreement  Amendment dated February 20, 2008 by and among Wells Fargo Bank, National  Association, acting through its Wells Fargo Business Credit Operating  Division, Gateway, Inc., Gateway Companies, Inc., and MPC-Pro LLC  (4)          |
|        |       |                                                                                                                                                                                                                                                        |
| 10.4        |       | Amendment  No. 4 to Transition Services Agreement dated as of March 27, 2008  among MPC Pro, LLC and Gateway, Inc. (5)                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                        |
| 10.5        |       | Second  Agreement Amendment dated March 27, 2008 by and among Wells Fargo Bank,  National Association, acting through its Wells Fargo Business Credit  Operating Division, Gateway, Inc., Gateway Companies, Inc., and  MPC-Pro LLC (5) |
|        |       |                                                                                                                                                                                                                                                        |
| 10.6***     |       | Flextronics  Manufacturing Services Agreement dated April 14, 2008 by and between MPC  Corporation and Flextronics Computing Mauritius Limited                                                                                                         |
|        |       |                                                                                                                                                                                                                                                        |
| 10.7        |       | Flextronics  Inventory Purchase Agreement dated May 8, 2008 by and between Gateway  Pro Partners, LLC and Flextronics Computing Mauritius Limited (6)                                                                                                  |
|        |       |                                                                                                                                                                                                                                                        |
| 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                                                                                                                 |

 

----

* Filed herewith.

 

** Furnished herewith.

 

***   Filed herewith and containsmaterial that has been omitted pursuant to a request for confidential treatmentand such material has been filed separately with the Commission.

 

(1)   Incorporated by reference to Exhibit 3.1on Registrant’s Quarterly Report on Form 10-Q filed with the Securitiesand Exchange Commission on November 14, 2007.

 

(2)   Incorporated by reference to Exhibit 3.1on Registrant’s Current Report on Form 8-K filed with the Securities and

 

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ExchangeCommission on March 29, 2007.

 

(3)   Incorporated byreference to Exhibit 99.1 on Form 8-K filed with the Securities andExchange Commission on April 16, 2008.

 

(4)   Incorporated byreference to Exhibits 99.1 and 99.2, respectively, on Form 8-K filed withthe Securities and Exchange Commission on February 26, 2008.

 

(5)   Incorporated byreference to Exhibits 99.1 and 99.2, respectively, on Form 8-K filed withthe Securities and Exchange Commission on April 2, 2008.

 

(6)   Incorporated byreference to Exhibit 99.1 on Form 8-K filed with the Securities andExchange Commission on May 14, 2008.

 

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