**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30, 2007**

 

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

 

**For the transition periodfrom                to                **

 

**Commission file number 0-115404**

 

**MPC CORPORATION**

(Nameof registrant as specified in its charter)

 

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

 

**906 E. Karcher Rd., Nampa, ID 83687**

(Addressof principal executive offices)

 

**(208) 893-3434**

(Registrant’stelephone number)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes  x   No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.

 

Largeaccelerated filer  o   Acceleratedfiler  o   Non-acceleratedfiler  x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b—2 of the Exchange Act).

 

Yes  o   No  x

 

Asof October 31, 2007 there were 33,927,005 shares of the issuer’s no par valueCommon Stock outstanding.

 

 

----

 

**INDEX**

 
| PART I – FINANCIAL  INFORMATION |                                                                                                                       |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                       |   |
| ITEM 1                               | FINANCIAL  STATEMENTS                                                                                                      | 3 |
|                                 | Condensed Consolidated Balance Sheets                                                                                      | 3 |
|                                 | Unaudited Condensed Consolidated Statements of Operations for the  Three and Nine Months Ended September 30, 2007 and 2006 | 4 |
|                                 | Unaudited Condensed Consolidated Statements of Cash Flows for the  Nine Months Ended September 30, 2007 and 2006           | 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                                                                | 36 |
|                                 |                                                                                                                       |   |
| ITEM 4T                              | CONTROLS AND PROCEDURES                                                                                                    | 37 |
|                                 |                                                                                                                       |   |
| PART II – OTHER INFORMATION     |                                                                                                                       |
|                                 |                                                                                                                       |   |
| ITEM 1                               | LEGAL PROCEEDINGS                                                                                                          | 37 |
|                                 |                                                                                                                       |   |
| ITEM 1A                              | RISK FACTORS                                                                                                               | 38 |
|                                 |                                                                                                                       |   |
| ITEM 6                               | EXHIBITS                                                                                                                   | 42 |

 

1

----

 

**A NOTE ABOUTFORWARD-LOOKING STATEMENTS**

 

The statements, other than statements ofhistorical fact, included in this report are forward-looking statements.Forward-looking statements generally can be identified by the use offorward-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 Form10-KSB/A for the year ended December 31, 2006 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-KSB/A, 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

----

 

**PART I – FINANCIAL INFORMATION**

 

**ITEM1: FINANCIAL STATEMENTS**

 

**MPC CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

***(Inthousands except share data)***

 
| ** **                                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                          | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ** **                                                                                                                                          | ** ** | **(Unaudited)**   | ** ** | ** **       | ** ** |
| ASSETS                                                                                                                                              |       |              |       |             |       |
| Current Assets                                                                                                                                      |       |              |       |             |       |
| Cash and cash equivalents                                                                                                                           |       | $                 | 1,077      |             | $          | 4,839 |   |
| Restricted cash                                                                                                                                     |       | 4,033             |       | 4,585            |       |
| Accounts receivable, net                                                                                                                            |       | 24,908            |       | 45,643           |       |
| Inventories, net                                                                                                                                    |       | 28,151            |       | 18,189           |       |
| Prepaid maintenance and warranty costs                                                                                                              |       | 9,679             |       | 6,391            |       |
| Other current assets                                                                                                                                |       | 733               |       | 935              |       |
| Total Current Assets                                                                                                                                |       | 68,581            |       | 80,582           |       |
|                                                                                                                                                |       |              |       |             |       |
| Non-Current Assets                                                                                                                                  |       |              |       |             |       |
| Property and equipment, net                                                                                                                         |       | 2,898             |       | 4,914            |       |
| Goodwill                                                                                                                                            |       | 22,197            |       | 22,197           |       |
| Acquired intangibles, net                                                                                                                           |       | 8,750             |       | 10,108           |       |
| Long-term portion of prepaid maintenance  and warranty costs                                                                                        |       | 1,419             |       | 844              |       |
| Other assets                                                                                                                                        |       | 2,966             |       | 3,792            |       |
| Total Non-Current Assets                                                                                                                            |       | 38,230            |       | 41,855           |       |
| TOTAL ASSETS                                                                                                                                        |       | $                 | 106,811    |             | $          | 122,437 |   |
|                                                                                                                                                |       |              |       |             |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                           |       |              |       |             |       |
| Current Liabilities                                                                                                                                 |       |              |       |             |       |
| Accounts payable                                                                                                                                    |       | $                 | 28,691     |             | $          | 32,536 |   |
| Accrued expenses                                                                                                                                    |       | 4,906             |       | 4,354            |       |
| Accrued licenses and royalties                                                                                                                      |       | 1,262             |       | 1,540            |       |
| Current portion of accrued warranties                                                                                                               |       | 2,384             |       | 2,220            |       |
| Current portion of deferred revenue                                                                                                                 |       | 23,789            |       | 15,607           |       |
| Notes payable and debt                                                                                                                              |       | 30,685            |       | 34,834           |       |
| Total Current Liabilities                                                                                                                           |       | 91,717            |       | 91,091           |       |
|                                                                                                                                                |       |              |       |             |       |
| Long Term Liabilities                                                                                                                               |       |              |       |             |       |
| Non-current portion of accrued warranties                                                                                                           |       | 1,756             |       | 2,127            |       |
| Non-current portion of deferred revenue                                                                                                             |       | 20,269            |       | 22,979           |       |
| Derivative warrant liability                                                                                                                        |       | 3,939             |       | 6,129            |       |
| Derivative financial instruments at  estimated fair value                                                                                           |       | 13,428            |       | 21,234           |       |
| Total Long Term Liabilities                                                                                                                         |       | 39,392            |       | 52,469           |       |
| TOTAL LIABILITIES                                                                                                                                   |       | 131,109           |       | 143,560          |       |
|                                                                                                                                                |       |              |       |             |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                       |       |              |       |             |       |
|                                                                                                                                                |       |              |       |             |       |
| Shareholders’ Equity                                                                                                                           |       |              |       |             |       |
| Preferred Stock, no par value; 1,000,000  shares authorized; no shares issued and outstanding at 2007 and 2006                                      |       | —            |       | —           |       |
| Common Stock, no par value, 100,000,000  shares authorized; 15,270,020 and 12,147,438 shares issued and outstanding at  2007 and 2006, respectively |       | 64,803            |       | 61,454           |       |
| Accumulated Deficit                                                                                                                                 |       | (89,101           | )          | (82,577          | )          |
| Total Shareholders’ Equity (Deficit)                                                                                                           |       | (24,298           | )          | (21,123          | )          |
|                                                                                                                                                |       |              |       |             |       |
| TOTAL LIABILITIES AND EQUITY                                                                                                                        |       | $                 | 106,811    |             | $          | 122,437 |   |

 

*The accompanying notes are anintegral part of the condensed consolidated financial statements.*

 

3

----

 

**MPC CORPORATION**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ** **                                                          | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Revenue                                                             |       | $                      | 57,934     |                  | $          | 76,647 |   | $ | 168,298 |   | $ | 211,640 |   |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Cost of revenue                                                     |       | 48,194                 |       | 67,826                |       | 144,965 |   | 186,264 |   |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Gross margin                                                        |       | 9,740                  |       | 8,821                 |       | 23,333 |   | 25,376 |   |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Operating expenses                                                  |       |                   |       |                  |       |   |   |   |   |
| Research and development expense                                    |       | 584                    |       | 769                   |       | 1,623 |   | 2,904 |   |
| Selling, general and administrative expense                         |       | 9,243                  |       | 10,310                |       | 28,011 |   | 31,408 |   |
| Depreciation and amortization                                       |       | 1,098                  |       | 1,182                 |       | 3,402 |   | 5,222 |   |
| Impairment of acquired intangibles                                  |       | —                 |       | —                |       | — |   | 19,484 |   |
| Total operating expenses                                            |       | 10,925                 |       | 12,261                |       | 33,036 |   | 59,018 |   |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Operating loss                                                      |       | (1,185                 | )          | (3,440                | )          | (9,703 | ) | (33,642 | ) |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Other (income) expense                                              |       |                   |       |                  |       |   |   |   |   |
| Interest expense, net                                               |       | 1,381                  |       | 901                   |       | 4,402 |   | 3,545 |   |
| Gain on vendor settlements                                          |       | (255                   | )          | (734                  | )          | (480 | ) | (1,577 | ) |
| Change in estimated fair value of  derivative financial instruments |       | (26,324                | )          | 24,931                |       | (7,011 | ) | 25,840 |   |
| Loss on debt extinguishment                                         |       | —                 |       | 10,511                |       | — |   | 10,511 |   |
| Merger related stock compensation expense                           |       | —                 |       | 1,261                 |       | — |   | 1,261 |   |
| Other (income) expense                                              |       | 35                     |       | (4                    | )          | (90 | ) | (53 | ) |
| Total other (income) expense, net                                   |       | (25,163                | )          | 36,866                |       | (3,179 | ) | 39,527 |   |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Net income (loss)                                                   |       | $                      | 23,978     |                  | $          | (40,306 | ) | $ | (6,524 | ) | $ | (73,169 | ) |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Income (loss) per common share:                                     |       |                   |       |                  |       |   |   |   |   |
| Basic                                                               |       | $                      | 1.68       |                  | $          | (3.33 | ) | $ | (0.49 | ) | $ | (6.18 | ) |
| Diluted                                                             |       | $                      | (0.04      | )                     | $          | (3.33 | ) | $ | (0.49 | ) | $ | (6.18 | ) |
|                                                                |       |                   |       |                  |       |   |   |   |   |
| Common shares used to compute net income  (loss) per share:         |       |                   |       |                  |       |   |   |   |   |
| Basic                                                               |       | 14,289,579             |       | 12,103,583            |       | 13,420,695 |   | 11,833,338 |   |
| Diluted                                                             |       | 39,242,797             |       | 12,103,583            |       | 13,420,695 |   | 11,833,338 |   |

 

*Theaccompanying notes are an integral part of the condensed consolidated financialstatements.*

 

4

----

 

**MPC CORPORATION**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

***(In thousands)***

 
| ** **                                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| OPERATING ACTIVITIES                                                        |       |                                |       |   |   |
| Net Loss                                                                    |       | $                                   | (6,524     | ) | $ | (73,169 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities |       |                                |       |   |   |
| Depreciation                                                                |       | 2,044                               |       | 2,244 |   |
| Amortization of intangibles                                                 |       | 1,358                               |       | 2,978 |   |
| Impairment of intangibles                                                   |       | —                              |       | 19,484 |   |
| Amortization of deferred loan costs                                         |       | 837                                 |       | 523 |   |
| Common stock issued as legal settlement                                     |       | —                              |       | 29 |   |
| Warrants issued for advisory services                                       |       | —                              |       | 68 |   |
| Change in estimated fair value of derivative  financial instruments         |       | (7,011                              | )          | 25,840 |   |
| Loss on debt extinguishment                                                 |       | —                              |       | 10,511 |   |
| Stock compensation expense from vesting of  restricted stock units          |       | 333                                 |       | 1,531 |   |
| Gain on vendor settlements                                                  |       | (480                                | )          | (1,577 | ) |
| Valuation of warrant exchange                                               |       | —                              |       | 767 |   |
| Loss on disposal of assets                                                  |       | 48                                  |       | 43 |   |
| Accrued interest included in notes payable                                  |       | 100                                 |       | 45 |   |
| Provision for bad debt                                                      |       | 49                                  |       | (29 | ) |
| Changes in Assets and Liabilities                                           |       | —                              |       | — |   |
| Accounts receivable                                                         |       | 20,685                              |       | (3,497 | ) |
| Inventory                                                                   |       | (9,962                              | )          | 1,165 |   |
| Prepaid maintenance and warranties                                          |       | (3,862                              | )          | 10,662 |   |
| Other current assets                                                        |       | 200                                 |       | 547 |   |
| Other non-current assets                                                    |       | 465                                 |       | (943 | ) |
| Accounts payable and accrued expenses                                       |       | 2,664                               |       | (1,180 | ) |
| Accrued licenses and royalties                                              |       | (144                                | )          | (629 | ) |
| Accrued warranties                                                          |       | (206                                | )          | (460 | ) |
| Deferred revenue                                                            |       | 5,471                               |       | (5,679 | ) |
| Net cash provided (used) by operating  activities                           |       | 6,065                               |       | (10,726 | ) |
|                                                                        |       |                                |       |   |   |
| INVESTING ACTIVITIES                                                        |       |                                |       |   |   |
| Purchase of property and equipment                                          |       | (76                                 | )          | (116 | ) |
| Proceeds from the sale of fixed assets                                      |       | —                              |       | 2 |   |
| Acquisition costs                                                           |       | (476                                | )          |   |   |
| Net cash used by investing activities                                       |       | (552                                | )          | (114 | ) |
|                                                                        |       |                                |       |   |   |
| FINANCING ACTIVITIES                                                        |       |                                |       |   |   |
| Net activity on line of credit                                              |       | (8,455                              | )          | (2,938 | ) |
| Net proceeds from notes payable                                             |       | —                              |       | 9,295 |   |
| Restricted cash related to letters of  credit and financing facility        |       | 551                                 |       |   |   |
| Payment of notes payable                                                    |       | (1,405                              | )          | (128 | ) |
| Payments on capital leases                                                  |       | —                              |       | (185 | ) |
| Net proceeds from the exercise of stock  options                            |       | 34                                  |       | 27 |   |
| Proceeds from the exercise of warrants                                      |       | —                              |       | 3,104 |   |
| Payment of stock issuance costs                                             |       | —                              |       | (155 | ) |
| Net cash provided (used) by financing  activities                           |       | (9,275                              | )          | 9,020 |   |
|                                                                        |       |                                |       |   |   |
| Net cash decrease for period                                                |       | (3,762                              | )          | (1,820 | ) |
|                                                                        |       |                                |       |   |   |
| Cash at beginning of period                                                 |       | 4,839                               |       | 3,897 |   |
|                                                                        |       |                                |       |   |   |
| Cash at end of period                                                       |       | $                                   | 1,077      |   | $ | 2,077 |   |

 

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

 

5

----

 

***Supplemental disclosure of cash flowinformation:***

*(In thousands)*

 

Cash paid for interest for thenine months ended September 30, 2007 and 2006 was $2,281 and $1,555,respectively.

 

No cash was paid for incometaxes for the nine months ended September 30, 2007 and 2006.

 

**MPC CORPORATION**

**NOTES TO INTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

***(Unaudited*)**

***(In thousands except sharedata)***

 

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

 

**NOTE 1.    DESCRIPTIONOF BUSINESS AND BASIS OF PRESENTATION**

 

We were formed in 2001 as a Colorado-based company named HyperSpaceCommunications, Inc. and completed an initial public offering (“IPO”) inOctober 2004. In July 2005, we acquired MPC Computers, LLC, or MPC, whichis now a wholly owned subsidiary.  We arean enterprise IT hardware business providing products and services to customersin mid-sized businesses, government agencies and education organizations. InJanuary 2007, we changed our name to MPC Corporation.  On October 1, 2007, MPC Corporation, throughour wholly-owned subsidiary MPC-PRO, purchased from Gateway Inc. (“Gateway”)and Gateway 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 provides technicalservices to customers of the Professional and Consumer Direct Divisions(collectively, the “Professional Business”). The Professional Business is primarily engaged in the sale, resale andmarketing of desktop computer systems, laptops, servers, networking gear andother peripherals, and replacement parts to educational institutions,government entities (federal, state and local), value-added resellers andcertain other resellers, and small business sales generated by Gateway’s weband phone centers.  The purchase hassubstantially increased the size of our business.   The acquisition of the Professional Businessis more fully described in Note 9 “Subsequent Events”.

 

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. We also providehardware-related support services such as installation, technical support,parts replacement, and recycling. In addition to PCs, servers, and storageproducts, we also fulfill our customers’ requirements for third party productsproduced by other vendors including printers, monitors and software.

 

We serve the federal government, state/localgovernment & education (“SLE”), and mid-size enterprise markets. This focusenables us to tailor our operating model to better support the needs of ourcustomers for customized products, services and programs. We sell directly toour customers and use a build-to-order manufacturing process that we believe isan efficient means to provide customized computing solutions.

 

The accompanying consolidated financial statements consolidatethe accounts of MPC Corporation and its wholly owned subsidiaries.  All intercompany accounts and transactionshave been eliminated in consolidation. References to a fiscal year refer to the calendar year in which suchfiscal year commences. MPC’s fiscal year ends on the Saturday closest toDecember 31. MPC’s floating fiscal year-end typically results in a 52-weekfiscal year, but will occasionally give rise to an additional week resulting ina 53-week fiscal year.

 

**NOTE2.    GOING CONCERN**

 

The accompanying consolidated financial statements have been preparedon a going-concern basis, which contemplates the realization of assets andliquidation of liabilities in the ordinary course of business. However, therecan be no assurance that we will be able to continue in the ordinary course ofbusiness due to our significant liquidity constraints, unprofitable operationsand negative operating cash flows.

 

6

----

 

Management’s plans to continue operations in the ordinary course assumeadequate financing initiatives along with vendor support through continued,extended or increased credit lines, minimal cancellations of our backlog andsuccessful implementation of previously announced cost cutting initiatives thatare expected to be adequate to fund our operations for at least the next twelvemonths.  There can be no assurance thatwe will be successful in our efforts to achieve future profitable operations orgenerate sufficient cash from operations, or obtain additional funding in theevent that our financial resources become insufficient. The accompanyingcondensed consolidated financial statements do not include any adjustments thatmight result from any outcome of this uncertainty.

 

Inconjunction with the acquisition of the Professional Business, on October 1,2007, 7,545,352 of our outstanding $1.10 warrants were exercised for which weraised approximately $8,300. Although we have raised additional funds as aresult of the acquisition of the Professional Business, we are currentlyseeking to expand credit lines with many of our current vendors, and obtaincredit lines from vendors we have not previously done business with. Certain ofthese vendors have required letters of credit to secure credit lines, and sinceSeptember 30, 2007 we have put letters of credit in place with three vendors,totaling $3,300. We are currently negotiating with other vendors, andanticipate providing additional letters of credit to secure credit lines withcertain vendors. Continuing to provide letters of credit to vendors constrainsour liquidity as we are required to cash collateralize the letters of credit,and there can be no assurance that we will be successful in obtainingsufficient vendor credit in the future. In addition, any inability to maintainadequate liquidity in the future may do significant harm to vendorrelationships which we are able to secure, and could cause us to experience creditholds, requirements that we pre-pay for products, and/or a refusal to delivercomponents or termination of supply arrangements, any of which could have amaterial adverse effect on our financial condition and results of operations.

 

Weface liquidity constraints.  Since theacquisition of MPC, we have raised a limited amount of additional funds tooperate the business. We have raised $12,139 of equity from the exercise ofwarrants and $14,486 from the sale of convertible debentures since theacquisition and through September 30, 2007. As noted in Note 5 “Notes Payableand Debt”, we replaced our prior credit facility with Wachovia Capital FinanceCorporation (Western) with a new receivables sales financing facility withWells Fargo Business Credit, Inc. in November 2006, and further amended thefacility in February 2007, which has provided us additional limitedliquidity.  The shortfall in fundingprior to September 30, 2007 had been financed by vendors and other creditorswho allowed us to fall behind on our payment obligations or who had settledamounts due to them at amounts less than the original obligation.

 

Wemay need to raise a significant amount of additional funds to satisfy vendorpayment obligations and to fund our business if our losses continue. There canbe no assurance that we will be able to secure additional sources of financing.Even if we do obtain additional funding, the amount of such funding may not besufficient to fully address all of our liquidity constraints, which couldnegatively and materially impact our business and results of operations.

 

OnOctober 25, 2007, American Stock Exchange (“AMEX”) notified us that it hasresolved the continued listing deficiencies based on a review by the AMEX ofpublicly available information, including the our press release dated October1, 2007 regarding the acquisition of the Gateway Professional Business, ourSecurities and Exchange Commission filings, and other correspondence we haveprovided to the AMEX. Previously, the AMEX issued a notice dated April 13, 2006that we had failed to satisfy the continued listing standards of Section1003(a)(iv) of the AMEX Company Guide because we had sustained losses whichwere so substantial in relation to its overall operations or its existingfinancial resources, or our financial condition had become so impaired that itappeared questionable, in the opinion of AMEX, as to whether the Company wouldbe able to continue operations and/or meet its obligations as they mature. TheOctober 25, 2007 notice from the AMEX has indicated that the Company is subjectto provisions of Section 1009(h) of the AMEX Company Guide for a period oftwelve months which provides for the method of evaluation and appropriateaction by the AMEX staff should the Company fall below the continued listingstandards during that period. Depending on the circumstances, such actionincludes truncating procedures related to compliance with the continued listingstandards or immediately initiating delisting proceedings.

 

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

 

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

 

The accompanying unaudited interim condensed consolidated financialstatements and related notes have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States of America (“GAAP”) for complete

 

7

----

 

financial statements. These financial statements include the accountsof MPC Corporation and all of its wholly-owned subsidiaries. All significantintercompany transactions and accounts have been eliminated in consolidation.

 

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

 

In our opinion, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments of a recurring nature that are necessary for a fair presentation ofthe financial position, results of operations and cash flows for the interimperiods presented. The results of operations for the interim periods presentedin these unaudited interim condensed consolidated financial statements are notnecessarily indicative of results to be expected for the full year.

 

The preparation of ourcondensed consolidated financial statements in conformity with GAAP necessarilyrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of assets and liabilities at thebalance sheet dates, and the reported amounts of revenues and costs during thereporting periods. Actual results could differ from those estimates. On anongoing basis, we review our estimates based on information that is currentlyavailable. Changes in facts and circumstances may cause us to revise estimates.

 

Our significant estimatesinclude the collectibility of receivables and corresponding allowance fordoubtful accounts, the reserve needed for possible future returns and discountswhich may be granted, the carrying value and usefulness of inventory and therelated inventory reserves, long-lived asset useful lives and impairment,estimated future volatility in our stock price, the timing and amount of futurewarranty and other product obligation expenses, the recognition of warrantyrevenue and the cost and settlement of current litigation or items in dispute.

 

***Cash and CashEquivalents***

 

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 September 30, 2007 and December 31, 2006.

 

***Restricted cash***

 

Restricted cash at September30, 2007 and December 31, 2006 includes $1,500held as collateral under our receivable financing facility, and $2,533 and$3,085 respectively, held as collateral for outstanding letters of credit.

 

***Accounts Receivable***

 

Accounts receivable are recorded at the invoiced amount and do not 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 on receivables.Overdue accounts are reviewed, and an additional allowance is recorded whendetermined necessary to state receivables at an estimated realizable value. Injudging the adequacy of the allowance for doubtful accounts, we considermultiple factors including historical bad debt experience, the general economicenvironment, the aging of our receivables, and the financial condition of thecustomer.  A considerable amount ofjudgment is required when assessing the realization of receivables, includingassessing the probability of collection and the current creditworthiness ofeach customer. The allowance for doubtful accounts totaled $1,780 and $1,830,respectively, as of September 30, 2007 and December 31, 2006.

 

***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 September 30, 2007 andDecember 31, 2006, our inventory valuation allowance totaled $5,251 and $5,185,respectively and was recorded as a reduction of inventory in the consolidated balancesheets. Inventory balances, net of valuation allowances, at September 30, 2007and December 31, 2006 are:

 

8

----

 
| **(In thousands)** | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------|------------|-------------------------|------------|------------------------|------------|
|               |       |                    |       |                   |       |
| Raw materials      |       | $                       | 17,004     |                   | $          | 16,092 |   |
| Work in process    |       | 758                     |       | 236                    |       |
| Finished goods     |       | 10,389                  |       | 1,861                  |       |
|               |       |                    |       |                   |       |
| Total inventory    |       | $                       | 28,151     |                   | $          | 18,189 |   |

 

***Goodwill***

 

We account for Goodwill in accordance withStatement of Accounting Standards (“SFAS”) 142, *Goodwill and Other Intangible Assets*. SFAS 142 requires thatgoodwill no longer be amortized and that goodwill be tested annually forimpairment or more frequently if events and circumstances warrant.

 

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

 

***Acquired Intangibles, net***

 

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

 

***Long-Lived Assets***

 

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

 

We assess the recoverability ofour long-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.

 

***Deferred Revenue***

 

Deferred revenue includes amounts billed toor received from customers for which revenue has not been recognized. Thisgenerally results from deferred software maintenance revenues that arerecognized over the term of the contract, which generally range from1-4 years. Also included in deferred revenue is revenue from the sale ofenhanced and extended warranties, which are recognized as the related servicesare provided, which generally range from 3-5 years. Theseenhanced/extended warranties are deferred based on guidance provided inTechnical 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.

 

***Prepaid Maintenance and Warranty Costs***

 

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

 

9

----

 

***Accrued Warranties***

 

We record warranty liabilities at the time ofsale 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, repair parts,labor and a period ranging from 90 days to five years. Factors that affectthe warranty liability include the number of installed units currently underwarranty, historical and anticipated rates of warranty claims on those units,and cost per claim to satisfy warranty obligations. We regularly reevaluate ourestimate to assess the adequacy of our recorded warranty liabilities and adjustthe amounts as necessary. If circumstances change, or a dramatic change in thefailure rates were to occur, the estimate of the warranty accrual could changesignificantly.

 

***Concentrations***

 

A concentration of credit risk may exist withrespect to trade receivables, particularly customers within the US federalgovernment. We perform ongoing credit evaluations on a significant number of ourcustomers and collateral from our customers is generally not required. Sixcustomers accounted for approximately 48% of trade receivables as of September 30, 2007 and were either agencies of, or resellers to,the federal government.

 

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

 

***Revenue Recognition***

 

****We recognizerevenue on hardware and peripherals, net of an allowance for estimated returns,when persuasive evidence of an arrangement exists, delivery has occurred, thesales price is fixed and determinable, and collectibility is reasonablyassured. Delivery is not considered to have occurred until both title and riskof loss transfer to the customer, provided that no significant obligationsremain. The timing of revenue recognition is dependent on shipping terms. ForFOB destination agreements, which include all sales to the federal government andsome sales to state, local and education customers, we defer the cost ofproduct revenue for in-transit shipments until the goods are delivered.In-transit product shipments to customers are included in inventory.****

 

****Net revenueincludes sales of hardware, software and peripherals, and services (includingextended service contracts and professional services). These products andservices are sold either separately or as part of a multiple-elementarrangement. We allocate revenue from multiple-element arrangements to theelements based on the relative fair value of each element, which is generallybased on the relative sales price of each element when sold separately. Theallocation of fair value for a multiple-element software arrangement is basedon vendor specific objective evidence (“VSOE”).****Revenue associated withundelivered elements is deferred and recorded when delivery occurs. The value of maintenance services on softwaresales is determined based on stated renewal rates and a comparison of thestated price of maintenance to software sold in a related transaction. Tothe extent we do not have VSOE from separate post contract support sales, wedefer the software and the maintenance over the term of theagreement. Service revenue from software maintenance and support arerecognized ratably over the maintenance term, which in most cases is one year.Term licenses are recognized ratably over the term of the related arrangement.

 

Revenue from extended warrantyand service contracts, for which we are obligated to perform, is recorded asdeferred revenue and subsequently recognized over the term of the contract orwhen the service is completed. In multiple element arrangements that includeextended warranty and service contracts, we use the separation guidance provisionsof Technical Bulletin 90-1 *Accounting forSeparately Priced Extended Warranty and Product Maintenance Contracts*todetermine 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.

 

***ShippingCosts***

 

Shippingand handling costs are included in cost of revenue in the accompanyingconsolidated statementof operations for all periods presented.

 

10

----

 

***Royalties***

 

Wehave royalty-bearing license agreements allowing us to sell certain hardwareand software products and to use certain patented technology. Royalty costs areaccrued and included in cost of revenue when the related revenue is recognized.

 

***Research******,Development, and Engineering Costs***

 

Research,development, and engineering costs are expensed as incurred, in accordance withSFAS No. 2, *Accounting forResearch and Development Costs.* Research, development, andengineering expenses primarily include payroll and headcount related costs,contractor fees, infrastructure costs, and administrative expenses directlyrelated to research and development support.

 

***Income Taxes***

 

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

 

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

 

Duringthe first quarter of fiscal 2006, we adopted the provisions of and accountedfor stock-based compensation in accordance with SFAS 123R, *Share-Based Payments*, which replaced SFAS123 and supersedes APB 25. Under the fair value recognition provisions of thisstatement, stock-based compensation cost is measured at the grant date based onthe fair value of the award and is recognized as expense on a straight-linebasis over the requisite service period, which is the vesting period. Thevaluation provisions of SFAS 123R applies to new grants and to grants that wereoutstanding as of the effective date and are subsequently modified. Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model. All options are granted at fair marketvalue on the date of approval of the grant. Under the provisions of ourincentive option plans, employees with vested options who leave our employment,are required to exercise or forfeit their options within 90 days after leavingemployment regardless of the exercise period of the initial grant unless theterms of their departure from us allow for such longer time for exercise basedon approval of the administrator. All of our stock options were vested as ofDecember 31, 2005, and we ceased using stock options as a compensation tool.

 

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

 

Subsequent to the acquisitionof MPC, we began issuing Restricted Stock Units (“RSUs”) as stock basedcompensation to members of our Board of Directors and employees. We recorda non-cash compensation expense over the vesting life of the RSUs determined bythe number of units granted multiplied by the fair market value at the date ofgrant. Compensation expense for RSUs issued after the acquisition is classifiedon the statement of operations as operating expense. During the nine monthsended September 30, 2007 and 2006, we recorded $333 and $233respectively, in stock compensation expense for RSUs issued subsequent to theacquisition.  As part of the mergeragreement, and pursuant to agreements signed with certain MPC officers andcertain key employees, we issued RSUs, which are classified on the statement ofoperations as “Other Income/Expense” because they relate to the mergertransaction.  During the three and ninemonths ended September 30, 2006, $1,261 was recorded for stock compensationexpense for RSUs related to the merger.  We record a non-cash compensation expense over the period therestricted stock units vest.

 

*****Basic andDiluted 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 September 30, 2007,1,592,970 potentially dilutive common shares consisting of restricted stockunits and stock options were excluded because they had an anti-dilutive effecton diluted loss per share. For the nine months ended September 30, 2007, andthe three and nine months ended September 30, 2006, all potentially dilutivecommon shares were excluded from the computation of diluted loss per sharebecause inclusion would have had an anti-dilutive effect. For the nine monthsended September 30, 2007, the number of such anti-dilutive securities totaled21,455,720.

 
| ** **                                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| **(In thousands, except share and  per share data)** | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                    |       | $                      | 23,978     |                  | $          | (40,306 | ) | $ | (6,524 | ) | $ | (73,169 | ) |
| Income from derivative convertible  debentures       |       | (17,833                | )          | —                |       | — |   | — |   |
| Income from derivative warrant liabilities           |       | (7,828                 | )          | —                |       | — |   | — |   |
| Net income (loss) - diluted                          |       | $                      | (1,683     | )                     | $          | (40,306 | ) | $ | (6,524 | ) | $ | (73,169 | ) |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Basic weighted average shares outstanding            |       | 14,289,579             |       | 12,103,583            |       | 13,420,695 |   | 11,833,338 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Weighted average potential common shares:            |       |                   |       |                  |       |   |   |   |   |
| Convertible debentures                               |       | 23,430,037             |       | —                |       | — |   | — |   |
| Stock warrants                                       |       | 1,523,181              |       | —                |       | — |   | — |   |
| Diluted weighted average shares outstanding          |       | 39,242,797             |       | 12,103,583            |       | 13,420,695 |   | 11,833,338 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Diluted loss per share                               |       | $                      | (0.04      | )                     | $          | (3.33 | ) | $ | (0.49 | ) | $ | (6.18 | ) |

 

11

----

 

***NewAccounting Pronouncements***

 

***New Accounting Standards***

 

In February 2007, theFASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities - Including anAmendment of FASB Statement 115*. SFAS No. 159 permits companiesto choose to measure certain financial instruments and certain other items atfair value. The standard requires that unrealized gains and losses on items forwhich the fair value option has been elected be reported in earnings at eachsubsequent reporting date. SFAS No. 159 is effective for us beginning inthe first quarter of fiscal year 2008, although earlier adoption is permitted.We are currently evaluating the impact that SFAS No. 159 will have on ourconsolidated financial statements.

 

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

 

***Recently Adopted Accounting Standards***

 

In June 2006, the FASBissued FIN No. 48, *Accounting forUncertainty in Income Taxes — An Interpretation of FASB Statement No. 109*.FIN No. 48 clarifies the criteria for the measurement, recognition andderecognition of income taxes under FASB Statement No. 109, *Accounting for Income Taxes*. It alsorequires additional financial statement disclosures about uncertain taxpositions including classification, interest and penalties. FIN 48 is effectiveJanuary 2007. Because we have not been profitable since our initial publicoffering, and the uncertainty as a going concern, we have not realized anydeferred tax assets. FIN No. 48 did not have a material impact on our financialposition or results of operations. If our tax status were to change in thefuture, we would have to reevaluate the impact of FIN No. 48 on our financialposition and results of operations at that time.

 

**NOTE 4  ACCRUEDWARRANTY**

 

We accrue for warrantyliabilities at the time of the sale for estimated costs that may be incurredunder the basic limited warranty.  Changesin our aggregate accrued warranty are presented in the following table.

 

12

----

 
| ** **                                       | ** ** | **Nine months ended** | ** **  |
|--------------------------------------------------|------------|-----------------------|-------------|
| ** **                                       | ** ** | **September 30,**     | ** **  |
| **(In thousands)**                               | ** ** | **2007**              | ** **  | **2006** | ** ** |
| Accrued warranties at beginning of the  period   |       | $                     |  4,347 |   | $ |  4,775 |   |
| Cost accrued for new warranties                  |       | 2,101                 |        | 1,899 |   |
| Service obligation honored                       |       | (2,348                | )           | (2,505 | ) |
| Accretion of interest under purchase  accounting |       | 40                    |        | 145 |   |
| Accrued warranties at end of the period          |       | $                     |  4,140 |   | $ |  4,314 |   |

 

 

**NOTE 5  NOTESPAYABLE AND DEBT**

 
| **(In thousands)**                       | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| Wells Fargo Receivables Advance Facility |       | $                      | 25,709     |                  | $          | 34,164 |   |
| Debt Incurred in Acquisition             |       | 370                    |       | 370                   |       |
| Convertible Bridge Loans                 |       | 300                    |       | 300                   |       |
| Payable to Lessor                        |       | 1,331                  |       | —                |       |
| Payable to TPV                           |       | 1,815                  |       | —                |       |
| Payable to Wacom Technology Corporation  |       | 1,160                  |       |                  |       |
| Total Notes Payable and Debt             |       | $                      | 30,685     |                  | $          | 34,834 |   |

 

***Wells Fargo Receivables Advance Facility***

 

On November 16, 2006, we entered into an agreementwith Wells Fargo Business Credit, Inc. (“Wells Fargo”) for an accountsreceivable assignment and advance facility (“Receivables Advance Facility”)that replaced our prior line of credit with Wachovia Capital FinanceCorporation (Western).  Under the newfacility, we may assign to Wells Fargo, and Wells Fargo may purchase from us,Accounts (as defined in the Receivables Advance Facility). Wells Fargo willadvance 90% of the value of the purchased Accounts. Wells Fargo may adjust theadvancement percentage at any time in its commercially reasonable discretionupon prior notice to us. We will pay fees equal to the Wells Fargo Prime Rate(as defined in the Receivables Advance Facility), plus 1.75% per annummultiplied by the total amount of Accounts purchased and not yet paid by ourcustomers, computed daily. The effective rate at September30, 2007 was9.5%.  Wells Fargo has the right to require that we re-purchase theAccounts in the event our customer does not pay the receivable within atimeframe specified under the Receivables Advance Facility, if a materialcustomer dispute arises or in the event of a default under the ReceivablesAdvance Facility. The Receivables Advance Facility is subject to customarydefault provisions. Wells Fargo has discretion under the Receivables AdvanceFacility as to the Accounts purchased and the percentage advanced aftersubmission of the Account for approval. Wells Fargo is not obligated to buy anyAccount from us that Wells Fargo does not deem acceptable in its solediscretion. There is no minimum amount of Accounts to be purchased by WellsFargo under the Receivables Advance Facility. The facility is secured bysubstantially all of our assets. The Receivables Advance Facility is for a termof three (3) years. Early termination fees apply if the Receivables AdvanceFacility is terminated before the end of its term. The Receivables AdvanceFacility also provides for a $1,500 collateral account for the benefit of WellsFargo for repayment of any obligations arising under the Receivables AdvanceFacility.

 

In February 2007, we entered into an amendment of the Receivables AdvanceFacility under which Wells Fargo agreed to advance an additional 7.5% of theface amount of currently outstanding Accounts assigned to Wells Fargo, providedthat the total advance does not exceed 97.5% of the face amount of any Account(the “Temporary Advance”), and increase the advance rate on new Accountsassigned to Wells Fargo to 98% of the amount of the Accounts for a period ofeight weeks (the “Special Facility Period”). We must repay the differencebetween the Advance and the Temporary Advance within four weeks aftertermination of the Special Facility Period. Failure to repay amounts advancedunder the Special Facility would constitute an event of default under theAgreements. At any time when the Temporary Advance has been paid in full for aminimum of 60 days, we may request that the Special Facility be reinstated foranother eight week period with repayment to be made within four weeks.

 

On October 1, 2007, weentered into an amendment to the Receivables Advance Facility and additionalagreements.  See Note 9 “SubsequentEvents – “Account Purchase Agreements” and “Amended Account PurchaseAgreements”.

 

13

----

 

***Debt Incurred in Acquisition***

 

Debt incurred inconnection with the acquisition of MPC of $370 was due July 25, 2006, includingany unpaid interest, which is accrued at 5% per annum. We were unable to repaythis amount due to our liquidity constraints. We have held discussions withthese note holders about an extension to repay the amounts due. There is noassurance that we will be successful in renegotiating the terms of these notes.The holders have the right, at any time prior to payment, to convert all or anypart of the then outstanding balance of principal and interest under thesenotes into shares of common stock at the conversion price of $3.00 per share,which was determined at the date of issuance. The common stock underlying thesenotes are covered by a registration rights agreement.  We filed the registration statement with theSEC on November 8, 2006 and it was declared effective on June 28, 2007.

 

***Convertible Bridge Loans***

 

Convertible Bridge Loanswere 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. InMay 2006, we repaid principal and interest to one note holder. There are tworemaining note holders who have not yet been repaid. We are in default of therepayment terms on these notes, and the default interest provision of 18% hasbeen accruing 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. 

 

Warrants and convertibledebt issued in connection with financing activities are subject to theprovisions of Emerging Issues Task Force (“EITF”) Issue 00-19: *Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock.*EITF00-19 provides that derivatives should be classified as either equity or aliability. If the derivative is determined to be a liability, the liability isfair valued each reporting period with the changes recorded to the consolidatedbalance sheet and consolidated statement of operations. In regard to theconvertible debt set out above, we determined that the embedded conversionoption qualified as equity under EITF 00-19 and would not be subject tobifurcation from the host instrument.

 

***Payable to Lessor***

 

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

 

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

 

***Payable to TPV***

 

OnJune 30, 2007, we entered into a settlement agreement with TPV International(USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd (collectively“TPV”).  See Note 8, “Commitments andContingencies.”  Under the agreement weagreed to pay TPV $2,145 over a period of twelve months with interest at8%.  The agreement provides for monthlypayments of $120 for six months and $254 thereafter. The settlement amount hadbeen previously recorded as accounts payable.

 

14

----

 

***Payable to Wacom Technology Corporation***

 

On August 31, 2007, weentered into a settlement agreement with Wacom Technology Corporation(Wacom).  See Note 8, “Commitments andContingencies.”  The agreement providesfor monthly principal payments of $100 to Wacom beginning September 2007, withinterest accruing at 5%.  The settlementamount of $1,207 had previously been recorded as accounts payable.

 

**NOTE 6  DERIVATIVE WARRANT LIABILITES AND CONVERTIBLEDEBENTURES**

 

Derivative warrantliabilities and convertible debentures consist of the following:

* *
| ** **                              | ** ** | **September 30, 2007**  | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **Derivative Warrants** | ** ** | **Convertible Debentures** | ** ** |
| **(In thousands)**                      | ** ** | **Fair Value**          | ** ** | **Fair Value** | ** ** | **Face Value** | ** ** |
|                                    |       |                    |       |   |   |   |   |
| New Convertible Debentures and Warrants |       | $                       | 2,657      |   | $ | 9,520 |   | $ | 8,699 |   |
| September 29, 2006 Financing            |       | 1,282                   |       | 3,908 |   | 3,657 |   |
|                                    |       | $                       | 3,939      |   | $ | 13,428 |   | $ | 12,356 |   |

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

 

***Bridge Loan***

 

On April 24, 2006, we enteredinto a Securities Purchase Agreement with certain existing investors pursuantto which we sold convertible debentures for an aggregate of $5,000. Theinvestors also received an aggregate of 1,370,000 5-year warrants to purchaseour no par value common stock for $3.12 per share, the fair market value of ourcommon stock on the day the transaction closed. In connection with theBridge Loan we issued 64,103 shares of common stock as payment of anorigination fee to the investors.

 

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

 

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

 

These convertible notes werehybrid financial instruments that embody certain features that meet thedefinition of derivative financial instruments and require bifurcation under SFASNo. 133 *Accounting for Derivative FinancialInstruments*. These embedded derivatives were required to be combinedinto one compound derivative financial instrument and carried at fair value asderivative liabilities.

 

We early adopted and appliedthe provisions of SFAS 155 *Accounting forCertain Hybrid Instruments*which permits fair value remeasurementfor any hybrid instrument (on an instrument-by-instrument basis) that containsan embedded derivative that would otherwise have to be bifurcated. Under SFAS155, the entire hybrid instrument was initially recorded at fair value andsubsequent changes in fair value were recognized in earnings. As noted below,the debentures were rolled into a new financing for New Convertible Debenturesand Warrants on September 6, 2006.

 

15

----

 

***NewConvertible Debentures and Warrants***

 

OnSeptember 6, 2006, we entered into a securities purchase agreement with certainexisting investors and new investors pursuant to which we sold convertibledebentures for an aggregate of $4,550. Additionally, the investors of the April24, 2006 Bridge Loan exchanged $5,000 face value of their convertibledebentures plus $226 of accrued interest thereon into the New ConvertibleDebentures and the existing and new investors received 4,924,500warrants. 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.  The aggregateprincipal amount becomes due and payable September 6, 2009. In the eventthat the debentures are not repaid on the maturity date, we will be in defaultand the debentures will begin to accrue interest at a rate of 22% per annum orthe maximum amount permitted by law, whichever is less. The debentures containvarious customary events of default as well as negative covenants that, among otherthings, prohibit us from incurring additional debt.

 

Becausethe conversion price for the debentures and the exercise price for the warrantswas below market value at the time of issuance and below the exercise and/orconversion price for certain previously issued warrants and convertiblesecurities, anti-dilution rights of various security holders were triggered andresulted in the downward adjustment of the exercise and/or conversion price forvarious security holders, including the holders of our publicly tradedwarrants. See Note 7 – “Shareholders’ Equity.”

 

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 aregistration rights agreement with the investors that requires us to registerall of the common stock issued and underlying the securities sold toinvestors. The registration rights agreement contains customaryindemnification and contribution provisions. We filed the registrationstatement with the SEC on November 8, 2006 and it was declared effective onJune 28, 2007. Not all of the common stock underlying the debentures andwarrants were registered under the registration statement due to blockerprovisions imposed by certain investors on their registerable shares and from areduction in the number of shares as required by the SEC. We believe wehave substantially fulfilled our obligation under the registration rightsagreement and will register the remaining unregistered shares when the blockerprovisions are waived by the investors and when allowed by the SEC.

 

On March 5, 2007, we obtainedamendments and waivers to the registration rights agreement and the debentures.Pursuant to a letter agreement, the majority of the investors, includingCrestview Capital Master, LLC and Toibb Investment LLC agreed to waive thepenalty provisions for not yet having an effective registration statement, andto extend the dates for filing a registration statement and all relateddeadlines, including the date by which the initial registration statement mustbe declared effective by the SEC, by 120 days. The investors in this offeringalso agreed that no Event of Default is presently deemed to have occurred underthe debentures. The 120-day extension period lapsed, and the registrationstatement was not declared effective until June 28, 2007. For the ninemonths ended September 30, 2007, we incurred liquidated damages of $346 underthe registration rights agreement related to the delay in the effectiveness ofour registration statement.

 

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

 

The New Convertible Debenturesare hybrid financial instruments that embody certain features that met thedefinition of derivative financial instruments and required bifurcation underSFAS 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.

 

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

 

16

----

 

In determining the fair valueof our freestanding derivative financial instruments we assumed an expirationterm of 3.92 years, a volatility of 90.94% and interest rate of 4.23%. Theestimated fair value of these derivative instruments at September 30, 2007 andDecember 31, 2006 are as follows:

 
| ** **         | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|--------------------|------------|----------------|------------|-----------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|               |       |           |       |            |       |       |       |
| September 30, 2007 |       | $              | 9,520      |            | $          | 2,657      |       | $ | 12,177 |   |
|               |       |           |       |            |       |       |       |
| December 31, 2006  |       | $              | 14,114     |            | $          | 3,123      |       | $ | 17,237 |   |

 

During the nine months ended September30, 2007, we issued 1,533,333 shares of common stock upon conversion of $1,150face value of New Convertible Debentures plus accrued interest and penalties.

 

***September 29, 2006 Financing***

 

On September 29, 2006 weentered into a securities purchase agreement with certain existing investorsand new investors pursuant to which we agreed to sell convertible debenturesfor an aggregate of $4,936. The majority of the transaction closed October 4,2006.  The investors also received anaggregate 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. Inthe event that the debentures are not repaid on the maturity date, we will bein default and the debentures will begin to accrue interest at a rate of 22%per annum or the maximum amount permitted by law, whichever is less. Thedebentures contain various customary events of default as well as negativecovenants that, among other things, prohibit us from incurring additional debt.

 

Both the debentures and thewarrants contain provisions limiting conversion and exercise, or issuance ofshares in lieu of interest, as the case may be, in the event that the holder’sbeneficial ownership of our common stock would exceed 9.99%. We concurrentlyentered into a registration rights agreement with the investors that requiresus to register all of the common stock issued and underlying the securitiessold to the investors. The registration rights agreement contains customaryindemnification and contribution provisions. The terms, conditions, featuresand accounting treatment of these debentures and warrants are substantiallyidentical to the New Convertible Debentures and Warrants.

 

We filed the registrationstatement with the SEC on November 8, 2006, and it was declared effective onJune 28, 2007. Not all of the common stock underlying the debentures andwarrants was registered under this registration statement due to the largenumber of shares of common stock to be registered relative to the number ofshares of our common stock then outstanding. In order 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.

 

We did not obtain anyamendments or waivers from these investors and as a result, as of February 1,2007 we began incurring liquidated damages under the registration rightsagreement at the rate of 1.5% of the aggregate amount invested per month untilthe registration statement was declared effective on June 28, 2007. Theseliquidated damages must be paid in cash, and they accrue interest at a rate of18% per annum. We notified the investors that we are unable to pay theinterest and will accrue the interest if unpaid to their account. There isno assurance that they will allow us to defer payment of the liquidateddamages. We accrued $383 in liquidated damages under the registration rightsagreement during the nine months ended September 30, 2007.  Since we have not paid 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 wereto happen, the debentures would accrue interest at the rate of 22% perannum. We may be required to pay interest or other required payments incash rather than stock and could be forced to use our limited cash to redeemall or a portion of the outstanding debentures. As noted in Note 9 – “Subsequent Events” on October 1, 2007 $11,004 inface value of the debentures related to the New Convertible Debentures andWarrants and the September 29, 2006 Financing were converted to common stockand Series A Preferred Stock.

 

During the nine months endedSeptember 30, 2007, we issued 1,705,333 shares of common stock upon conversionof $1,279 in face value of debentures from the September 29, 2006 Financingplus accrued interest and penalties.

 

17

----

 

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

 

In determining the fair valueof our freestanding derivative financial instruments we assumed an expirationterm of 4.0 years, a volatility of 90.94% and an interest rate of 4.23%.  The estimated probability of a dilutivefinancing transaction occurring is based on management’s estimate of such atransaction in the future. The estimated fair value of these derivativeinstruments at September 30, 2007 and December 31, 2006 are as follows:

 
| ** **         | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|--------------------|------------|----------------|------------|-----------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|               |       |           |       |            |       |       |       |
| September 30, 2007 |       | $              | 3,908      |            | $          | 1,282      |       | $ | 5,189 |   |
|               |       |           |       |            |       |       |       |
| December 31, 2006  |       | $              | 7,120      |            | $          | 3,006      |       | $ | 10,126 |   |

 

**NOTE7  SHAREHOLDERS’ EQUITY**

 

During the nine months endedSeptember 30, 2007, we issued 3,238,666 shares of common stock uponconversion of $2,429 face value of convertible debentures plus accrued interestand penalties with a fair value of $2,984. We also issued 1,201,292 sharesof common stock upon the vesting of restricted stock units.

 

***Warrant ExercisePrice Adjustments***

 

In August 2007, we announced an adjustment to the exercise price of ourpublicly traded warrants (AMEX:MPZ.WS). As stated in our September 30, 2004Prospectus, the exercise price of each warrant was originally $5.50 per shareof common stock. Effective August 7, 2007, the exercise price for each warrantwas adjusted to $3.77 per share of common stock. A total of 3,600,000 publiclytraded warrants were outstanding as of the date of this report. Additionally,the exercise price of certain warrants issued in connection with ouracquisition of MPC Computers, LLC in July 2005 were also adjusted. A total of2,678,238 such warrants initially issued at an exercise price of $5.50 pershare of common stock were adjusted to an exercise price of $3.77 per share. Atotal of 75,008 warrants initially issued at an exercise price of $3.00 pershare of common stock were adjusted to an exercise price of $2.06 per share.The adjustments to the respective warrants were made in accordance with theanti-dilution provisions of the warrant agreements. All other terms and conditionsof the warrants remain unchanged.

 

***Amendments toArticles of Incorporation***

 

On September 28, 2007, we amended our amended and restated articles ofincorporation with the State of Colorado to designate MPC Corporation Series Aand Series B Preferred Stock and authorize the issuance of 615,000 and 240,000shares respectively.  Both the MPCCorporation Series A and Series B Preferred Stock are participating, non-votingand have a liquidation preference equal to $.00000001 per share.  Each share of Series A Preferred Stock willautomatically convert into shares of our common stock at such time theconversion would not cause the beneficial ownership of the holder to exceed9.99% beneficial ownership, as such term is defined in Rule 13d-3 as promulgatedunder the Security and Exchange Act of 1934, as amended.   All Series B Preferred Stock converts intoshares of our common stock upon shareholder approval by a majority of ourcommon shareholders (the “Series B Automatic Conversion Event”), which we will seekat our next annual meeting of shareholders. Gateway, Inc. agreed to vote in favor of the Series B AutomaticConversion Event.  See Note 9 “SubsequentEvents — Acquisition of Gateway Professional Business.” In the eventshareholder approval is not obtained within one year of the date of issuance,all outstanding shares of Series B Preferred Stock must be redeemed by us at1.5 times the closing price times the number of shares of common stock intowhich the Series B Preferred Stock is then convertible.

 

Effective October 5, 2007, we further amended our amended and restatedarticles of incorporation with the State of Colorado to authorize the issuanceof 640,000 shares of Series A Preferred Stock and 260,000 shares of Series BPreferred Stock.

 

**NOTE 8   COMMITMENTS ANDCONTINGENCIES**

 

***Letters of Credit***

 

18

----

 

On September 30, 2007, we had outstandingletters of credit totaling $2,500. The letters of credit were fullycollateralized with cash on deposit 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 ofUtah. We have tendered indemnification demands to certain of our componentsuppliers. Because the case is still in the discovery phase, we are notable to determine the financial impact, if any, arising from an adverse resultin the matter.

 

***Bingham McCutchen,LLP***

 

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

 

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

 

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

 

***Wacom TechnologyCorporation***

 

We are a defendant in a lawsuit filed byWacom Technology Corporation. This suit was filed on March 6, 2007 in theU.S. District Court, District of Idaho alleging that we have failed to payinvoices for computer equipment in the amount of a $1,207.  In August 2007, we settled the case byagreeing to pay the full $1,207 in monthly payments of $100 per month beginningSeptember 2007 plus interest accruing at 5%.

 

***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.

 

**NOTE 9  SUBSEQUENT EVENTS**

 

***Acquisition ofGateway Professional Business***

 

On October 1, 2007 (“Closing Date”), 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 provides technicalservices to customers of the Professional and Consumer Direct Divisions(collectively, the “Professional Business”). The Professional Business is primarily engaged in the sale, resale andmarketing of desktop computer systems, laptops, servers, networking gear andother peripherals, and replacement parts to educational institutions,government entities (federal, state and local), value-added resellers andcertain other resellers, and small business sales generated by Gateway’s weband phone centers.

 

The purchase included specified inventory currently valued atapproximately $26,000, customer lists and customer relationships, and thesales, marketing, service and administrative functions supporting theProfessional Business.   The acquisitionincluded the purchase of all of the capital stock of Gateway Companies Inc.(“GCI”), and the membership interests of Gateway Professional, LLC (“GP”) andGateway Pro Partners, LLC (“GCC”).

 

19

----

 

As consideration, MPC-PRO assumed certain warranty obligations andother obligations currently estimated at $70,000 and will issue to Gateway apromissory note currently estimated to be $2,000. The amount of the promissorynote is subject to adjustment based on the Final Net Inventory/LiabilityStatement as defined in the Asset Purchase Agreement. The promissory note willbear interest at a rate of 8% and is repayable by April 1, 2008 in equalbi-monthly installments.   The promissorynote will be executed within 5 days after the receipt of the Final Net Inventory/LiabilityStatement provided by Gateway, Inc.  Inaddition, we issued 5,602,454 shares of MPC Corporation common stock totalingapproximately 19.9% of our outstanding common stock as of the Closing Date (the“MPC Common Shares”), and 249,171 shares of MPC Corporation Series B PreferredStock convertible into 4,983,416 shares of our common stock (following approvalby our shareholders permitting such conversion) representing the differencebetween (a) 19.9% of our outstanding common stock as of the Closing Date on afully-diluted basis (excluding securities issued to our employees under ourcurrent employee equity plans) and (b) the number of shares of the MPC CommonShares (the “MPC Preferred Shares” and, together with the MPC Common Shares,the “MPC Shares.”)  In the eventshareholder approval is not obtained within one year following closing, alloutstanding shares of MPC Corporation Series B Preferred Stock must be redeemedby us at 1.5 times the closing price times the number of shares of our commonstock into which the MPC Corporation Series B Preferred Stock is thenconvertible.

 

Inconnection with the transaction, we entered into several material agreements onthe Closing Date that were conditions to closing the transaction: (1) a Lock-UpAgreement between us and Gateway with respect to the MPC Shares (the “Lock-UpAgreement”); (2) a Registration Rights Agreement with Gateway with respect tothe MPC Corporation common stock, no par value, and MPC Corporation Series BPreferred Stock issued as consideration to the transaction (the “RegistrationRights Agreement”), (3) a Transition Services Agreement between MPC-PRO andGateway (the “TSA”); and (4) an Intercreditor Agreement between MPC-PRO,Gateway, GCI, and Wells Fargo (the “Intercreditor Agreement”). Additionally, inconnection with the transactions contemplated by the Asset Purchase Agreement,MPC Corporation and/or our affiliates entered into the following agreements:(1) Account Purchase Agreements between Wells Fargo and each of MPC-PRO and GCI(the “Account Purchase Agreements”); (2) Second Amendments to the Wells FargoReceivables Advance Facility between Wells Fargo and each of MPC Computers,LLC, MPC-G, LLC and MPC Solutions Sales LLC (the “Amended Account PurchaseAgreements”); (3) Lease Agreement between MPC-PRO and Gateway (the “LeaseAgreement”); and (4) Letter Agreement between MPC, MPC-PRO, Gateway and GatewayTechnologies.  Each of the foregoingagreements is described in more detail below.

 

***Lock up and Registration Rights Agreement***s

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 provides that following theRestriction Period as set forth in the Lock-Up Agreement and upon receipt of ademand request from Gateway, we will file a registration statement with respectto the Registrable Securities, as defined by the agreement, which include theMPC Shares issued in connection with the transaction.  The Registration Rights Agreement grantsGateway customary and piggyback rights.

 

***Transition Services Agreement***

 

Under the TSA (as amended on October 26, 2007), Gateway will provideaccounting, human resource, manufacturing, procurement, marketing, informationtechnology, and other specified services (collectively, “the Services”).Additionally, Gateway will provide buy/sell services for components fromsuppliers and will procure systems from Original Distribution Manufacturers(ODM’s).  We will pay Gateway atotal fee of $6,500, payable as follows: (1) one payment of $724 due on thesecond Friday after the Closing Date, (ii) one payment of $806 due on thefourth Friday after the Closing Date, (iii) six bi-weekly installments of $765due on the sixth, eighth, tenth, fourteen and sixteenth Friday after theClosing Date and (iv) one payment of $382 due on the seventeenth Friday afterthe Closing Date. In addition, the Agreement provides that if any ExtendedServices are provided by Gateway after the Expiration Date (as defined by theagreement), we will pay Gateway $627 for each week or part thereof, payable onthe Friday of every week such Extended Services are performed. We mustreimburse Gateway for all components purchased by Gateway, plus a percentagemarkup of (i) one-half percent during the first eight-week period followingclose, (ii) one percent during the second eight-week period, and (iii) twopercent thereafter.  We will alsoreimburse Gateway for all software license fees paid in the course of providingthe Services and expenses incurred in the Buy/Sell Activity at the ratesspecified in the TSA.  The TSA willcontinue in effect from October 1, 2007 until the latest expiration datespecified by the Agreement for the Services, generally for 17 weeks, unless theTSA or any Service provided thereunder is earlier terminated by us.

 

20

----

 

***Intercreditor Agreement***

 

Under of MPC’s agreement with Wells Fargo, we have granted a seniorsecurity position on the assets of MPC Corporation and our affiliates. TheIntercreditor Agreement provides Gateway with a junior security interest inaccounts receivable generated on or after the Closing Date, inventory, and allother property of MPC-PRO and GCI as specified in the agreement (the “WellsFargo Collateral”) to secure the payment of obligations owing to Gatewayunder the Transition Services Agreement (the “TSA Obligations”).  WellsFargo and MPC-PRO agreed to set aside certain accounts receivable forthe payment of the TSA Obligations.

 

***Account Purchase Agreements***

 

On October 1, 2007, MPC-PRO and GCI (which was acquired by MPC-PRO inconnection with the Professional Business, each entered into an AccountPurchase Agreement with Wells Fargo.  Under these agreements, MPC-PRO and GCI mayassign to Wells Fargo,and Wells Fargo may purchasefrom MPC-PRO and GCI, Accounts (as defined in the Agreements). Wells Fargo will advance to MPC-PROand GCI 90% of the value of the purchased Accounts. Wells Fargo may adjust the advancement percentage at any time inits commercially reasonable discretion upon prior notice to MPC-PRO and GCI. MPC-PROand GCI will pay fees equal to the Wells Fargo Prime Rate (as defined in theAgreements), plus 0.75% per annum (the “WellsFargo Discount”) multiplied by the total amount of Accounts purchasedand not yet paid by MPC-PRO and GCI customers, computed daily. Wells Fargo has the right to requirethat MPC-PRO re-purchase the Accounts in the event customers of MPC-PRO and GCIdo not pay the receivable within a timeframe specified in the Account PurchaseAgreements, if a material customer dispute arises or in the event of a defaultunder the Account Purchase Agreements. The Account Purchase Agreements aresubject to customary default provisions. WellsFargo has discretion under the Account Purchase Agreements as to theaccounts purchased and the percentage advanced after submission of the Accountsfor approval. Wells Fargo is notobligated to buy any Account from MPC-PRO and GCI that Wells Fargo does not deem acceptable in its sole discretion.There is no minimum amount of Accounts to be purchased by Wells Fargo under the Account PurchaseAgreements. The facilities are secured by the assets of MPC-PRO and GCI. TheAccount Purchase Agreements are for a term of three (3) years from November 14,2006. There is an initial annual combined fee for all MPC Corporation entitiesof $100 and an annual fee of $200 thereafter in addition to a minimum fee.Early termination fees apply if the Account Purchase Agreements are terminatedbefore the end of their term.  Anorigination fee of $150 was paid at closing.

 

***Amended Account Purchase Agreements***

 

On October 1, 2007, MPC and its subsidiaries MPC-G, LLC and MPCSolutions Sales LLC (MPC Computers, LLC and its subsidiaries being referred tocollectively herein as “MPC LLC”) entered into separate Second Amendments toAccount Purchase Agreements with Wells Fargo. The Amended Account PurchaseAgreements modify the Wells Fargo Receivables Advance Facilityagreements dated November 14, 2006, as amended, primarily as to minimum feesand Wells Fargo Prime Rate as defined in the Amended Account PurchaseAgreements.  The minimum monthly fee tobe paid in aggregate by MPC affiliates to Wells Fargo is determined by multiplying the Wells FargoDiscount, times $30,000 times 30 divided by 360.  In addition, the Amended Account PurchaseAgreements increased the collateral account for the benefit of Wells Fargo to$3,500 from $1,500 under the Receivables Advance Facility.

 

***Lease Agreement***

 

MPC-PRO entered into a Lease Agreement with Gateway to lease a portionof a manufacturing facility in North Sioux City, South Dakota, for a term of 5years from the Lease Commencement Date, as defined in the Lease Agreement, withtwo 5-year renewal options. Under the Lease Agreement, the monthly initial baserent is $36 per month with annual escalation in base rent as specified in theLease Agreement.

 

***Letter Agreement***

 

As a condition to close under the Asset Purchase Agreement, MPCCorporation was to have raised at least $9,000 in additional cash and cashequivalents through the conversion of outstanding convertible securities, theexercise of warrants or the sale of additional equity securities, as measuredrelative to MPC’s cash and cash equivalents as of the September 4, 2007 date ofthe Asset Purchase Agreement.  Thiscondition was modified to raising at least $8,000 under a letter agreementdated October 1, 2007 among the parties to the Asset Purchase Agreement.  In satisfaction of this condition, we raised$8,300 from the exercise for cash of $1.10 warrants issued in connection withtwo private placement financings in September 2006 that included the issuanceof convertible debentures.  As of theOctober 1, 2007 closing, $13,433 of face value of the convertible debentureshave been converted into MPC Corporation common stock and Series A PreferredStock since original issuance.

 

In connection with the obligation under the Letter Agreement, two MPCCorporation investors, Crestview Capital Master LLC (“Crestview”) and ToibbInvestment LLC (“Toibb”), intended to exercise their warrants and convertibledebentures, but because of their large holdings, their beneficial ownership ofour common stock, as defined in Rule 13d-3 as promulgated under the SecuritiesExchange Act of 1934, as amended, could have exceeded 9.99%.  As

 

21

----

 

such, on October 1, 2007, we entered into an Amendment No. 1 toConvertible Debenture with each of Crestview and Toibb (the “DebentureAmendments”), pursuant to which their respective Convertible Debentures due onSeptember 6, 2009 were amended such that the debentures were convertible intoshares of Series A Preferred Stock. Additionally, MPC and both Crestview and Toibb agreed that, upon theexercise of their warrants prior to the Closing, we would issue (i) commonstock only to the extent that their beneficial ownership reaches 9.99% and (ii)the number of shares of MPC Corporation Series A Preferred Stock that willconvert into a number of shares of MPC Corporation common stock equal to thedifference between the number of shares of common stock such holder wouldreceive if all of such holder’s warrants were exercised for our common stockand the number of shares of our common stock such holder actually received inorder 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 Crestview andToibb 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 A PreferredStock issued pursuant to the Debenture Amendments.

 

***License Agreement***

 

On the Closing Date, MPC Corporation and Gateway entered into a LimitedLicense Agreement to grant us a non-exclusive, royalty-free, one-year use ofGateway Licensed Marks on Licensed Products, as defined, subject to the termsand conditions of the agreement.  Gatewaymay, in its sole discretion, terminate the Limited License Agreement in theevent of a change of control of MPC Corporation.

 

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

***(In Dollars)***

 

*Management’sdiscussion and analysis of the results of operations and financial conditionshould be read in conjunction with the financial statements and related notesincluded in Item 1 of this report and with the Company’s Annual Report in Form10-KSB/A for the year ended December 31, 2006.*

 

**OVERVIEW AND EXECUTIVE SUMMARY**

 

We were formed in 2001 as aColorado-based company called HyperSpace Communications, Inc., and completed anIPO in October 2004. In July 2005, we acquired MPC, which is now ourwholly owned subsidiary and our sole operating business.  On October 1,2007, we completed the acquisition of the Gateway Professional Business.  See “October 1, 2007 Acquisition of GatewayProfessional Business” further under this Item 2.  This acquisition significantly increases thescale of our business as the Professional Business had reported revenue of $895million in 2006 as compared to our revenue of $285 million in 2006.  We anticipate that the increased scale willenable us to better compete with our larger competitors including Dell, HP andLenovo.  As part of the acquisition, weacquired substantially all the employees supporting, and assets of, theProfessional Business.

 

In addition, we obtainedaccess to the entire catalog of products and services from the ProfessionalBusiness and now make them available to both MPC and Gateway Professional customers.  We also acquired Gateway’s leased finalassembly facility in Nashville, TN and the portion of Gateway’s Consumer Directbusiness that targets business with less than 100 employees. With thecompletion of the acquisition, we have operations in Idaho, South Dakota,Tennessee and Colorado.

 

Under the terms of thetransaction, we assumed warranty and other specified obligations of theProfessional Business.  Gateway acquiredour common stock and Series B Preferred stock constituting an approximate 19.9%equity interest in us.  We will issue toGateway a promissory note in the approximate amount of $2 million, subject toadjustments described in the Asset Purchase Agreement.  There can be no assurance that theacquisition and future operations of the Gateway Professional Business will besuccessful.

* *

***Current Business***

* *

Our primary business is providing PC-basedproducts and services to mid-sized businesses, government agencies andeducation organizations. We manufacture and market ClientPro® desktop PCs, TransPort®notebook PCs, NetFRAME® servers and DataFRAMETM storage products, along with the“E-series” of desktops, notebooks, servers and storage that we recentlyacquired from Gateway under a one-year license agreement. We also providehardware-related support services such as installation, technical support,parts replacement, and recycling. In

 

22

----

 

addition to PCs, servers, and storageproducts, we also fulfill our customers’ requirements for third party productsproduced by other vendors, including printers, monitors and software.

 

We will continue to focus primarily on threemarkets: federal government, state/local government & education (“SLE”),and mid-size enterprise. This focus enables us to tailor our operating model tobetter support the needs of these customers for customized products, servicesand programs. We sell directly to customers in each of our markets.

 

We use a build-to-order manufacturing processthat we believe is an efficient means to provide customized computingsolutions.

 

***Strategic Plans and Initiatives***

 

With the purchase of the Professional Business wehave expanded our enterprise IT hardware business of providing products andservices to customers in mid-sized businesses, government agencies andeducation organizations.  Thisacquisition has expanded our business in the education and state/localgovernment markets in particular, resulting in a more balanced product mix lessreliant on the federal government business. In addition, the acquisition has expanded our product line to includenew products, including a more competitive line of notebook PCs and convertibletablet PCs.

 

***Professional Business Initiatives***

 

To successfully combine our existing operationswith the newly acquired Professional Business, we have set forth the followingkey initiatives:

 
| •      Effectively  integrate/combine the new Professional Business management teams;                                                                           |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •      Successfully  transfer the financial, human resource, procurement, and other data from the  Professional Business into our IT Systems ;                  |
| •      Carefully  manage our liquidity to maximize our use of funds;                                                                                            |
| •      Focus  on supplier relationships, reduce procurement costs due to our larger scale,  and improve the utilization of vendor credit;                       |
| •      Successfully  integrate our sales efforts between our existing and new Professional  Business sales teams;                                               |
| •      Integrate  our product lines and continue ongoing research and development activities;                                                                   |
| •      Fully  integrate our warranty obligations;                                                                                                               |
| •      Successfully  integrate our administrative and financial functions, including the combining  of our various licensing and royalty functions;             |
| •      Retain  Professional Business customers;                                                                                                                 |
| •      Utilize  the Gateway brand name until our license to use the name expires in September  2008, while enhancing the MPC brand name in our various markets; |
| •      Integrate  into our overall operations, our lower cost operating methodologies and  practices.                                                           |

 

We cannot give assurance that these initiatives will achieve theintended results, and that our failure to achieve these initiatives and otherscould have a material adverse effect on our business and financialcondition.  See Risk Factors in Part II,Item 1A of this report.

 

***Gross Margin Initiatives***

 

We continue to focus ongross margin improvement initiatives including the reduction of productreturns, freight costs, manufacturing costs, and costs associated with customerevaluation units.  In addition, we arefocusing on sales of higher margin products such as servers and storage devices.We continue to be active in cost management and constantly seek ways to run ourbusiness more cost effectively.  There can be no assurance thatimprovements can be achieved.

 

We continue to focus on:

 
| •      Increasing  the liquidity in our business and improving our balance sheet;                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|
| •      Continuing  to make our operations more cost efficient;                                                      |
| •      Seeking  ways to sell and distribute our products more effectively;                                          |
| •      Penetrating  segments of the U.S. federal government where we have historically not made  significant sales; |

 

23

----

 
| •      Continuing  to focus on higher margin business such as servers and storage devices; and     |
|----------------------------------------------------------------------------------------------------------------------------------|
| •      Working  with our vendors to negotiate further credit extensions or larger lines of  credit |

 

**RESULTS OFOPERATIONS**

 

**RESULTS OFOPERATIONS**

***(In millions)***

 
| ** **                                                          | ** ** | **Three months ended  September 30,** | *** *** | *** *** | ** **   | **Nine months ended  September 30,** | *** *** | *** *** | *** *** |
|---------------------------------------------------------------------|------------|---------------------------------------|--------------|--------------|--------------|--------------------------------------|--------------|--------------|--------------|
| ** **                                                          | ** ** | **2007**                              | ** **   | **2006**     | *** *** | ***% Change***                       | ** **   | **2007**     | ** **   | **2006** | *** *** | ***% Change*** | *** *** |
|                                                                |       |                                  |         |         |         |                                 |         |         |         |   |   |   |   |
| Revenue                                                             |       | $                                     | 57.9         |         | $            | 76.6                                 | * *     | *-24.4*      | %            | $ | 168.3 |   | $ | 211.6 | * * | *-20.5* | *%* |
|                                                                |       |                                  |         |         |         |                                 |         |         |         |   |   |   |   |
| Cost of revenue                                                     |       | 48.2                                  |         | 67.8         | * *     | *-28.9*                              | %            | 145.0        |         | 186.2 | * * | *-22.1* | *%* |
|                                                                |       |                                  |         |         |         |                                 |         |         |         |   |   |   |   |
| Gross margin                                                        |       | 9.7                                   |         | 8.8          | * *     | *10.2*                               | %            | 23.3         |         | 25.4 | * * | *-8.3* | *%* |
| Gross margin %                                                      | * *   | *16.8*                                | *%*          | *11.5*       | *%*          | *13.8*                               | *%*          | *12.0*       | *%*          | * * | * * | * * | * * |
| * *                                                            | * *   | * *                              | * *     | * *     | * *     | * *                             | * *     | * *     | * *     | * * | * * | * * | * * |
| Operating expenses                                                  |       |                                  |         |         |         |                                 |         |         |         |   |   |   |   |
| Research and development expense                                    |       | 0.6                                   |         | 0.7          | * *     | *-14.3*                              | %            | 1.6          |         | 2.9 | * * | *-44.8* | *%* |
| Selling, general and administrative expense                         |       | 9.2                                   |         | 10.3         | * *     | *-10.7*                              | %            | 28.0         |         | 31.4 | * * | *-10.8* | *%* |
| Depreciation and amortization                                       |       | 1.1                                   |         | 1.2          | * *     | *-8.3*                               | %            | 3.4          |         | 5.2 | * * | *-34.6* | *%* |
| Impairment of acquired intangibles                                  |       | —                                |         | —       |         | —                               |         | —       |         | 19.5 | * * | *-100.0* | *%* |
| Total operating expenses                                            |       | 10.9                                  |         | 12.2         | * *     | *-10.7*                              | %            | 33.0         |         | 59.0 | * * | *-44.1* | *%* |
| *Operating expenses as a % of revenue*                              | * *   | *18.8*                                | *%*          | *15.9*       | *%*          | * *                             | * *     | *19.6*       | *%*          | *27.9* | *%* | * * | * * |
| * *                                                            | * *   | * *                              | * *     | * *     | * *     | * *                             | * *     | * *     | * *     | * * | * * | * * | * * |
| Operating loss                                                      |       | $                                     | (1.2         | )            | $            | (3.4                                 | *)*          | *-64.7*      | %            | $ | (9.7 | ) | $ | (33.6 | *)* | *-71.1* | *%* |
| *Operating loss as a % of revenue*                                  | * *   | *-2.1*                                | *%*          | *-4.4*       | *%*          | * *                             | * *     | *-5.8*       | *%*          | *-15.9* | *%* | * * | * * |
|                                                                |       |                                  |         |         |         |                                 |         |         |         |   |   |   |   |
| Other (income) expense                                              |       |                                  |         |         |         |                                 |         |         |         |   |   |   |   |
| Interest expense, net                                               |       | 1.4                                   |         | 0.9          |         |                                 |         | 4.4          |         | 3.5 |   |   |   |
| Gain on vendor settlements                                          |       | (0.3                                  | )            | (0.7         | )            |                                 |         | (0.5         | )            | (1.6 | ) |   |   |
| Change in estimated fair value of  derivative financial instruments |       | (26.3                                 | )            | 24.9         |         |                                 |         | (7.0         | )            | 25.9 |   |   |   |
| Loss on debt extinguishment                                         |       | —                                |         | 10.5         |         |                                 |         | —       |         | 10.5 |   |   |   |
| Merger related stock compensation expense                           |       | —                                |         | 1.3          |         |                                 |         | —       |         | 1.3 |   |   |   |
| Other income                                                        |       | —                                |         | —       |         |                                 |         | (0.1         | )            | (0.1 | ) |   |   |
| Total other (income) expense, net                                   |       | (25.2                                 | )            | 36.9         |         |                                 |         | (3.2         | )            | 39.5 |   |   |   |
|                                                                |       |                                  |         |         |         |                                 |         |         |         |   |   |   |   |
| Net income (loss)                                                   |       | $                                     | 24.0         |         | $            | (40.3                                | )            |         |         | $ | (6.5 | ) | $ | (73.1 | ) |   |   |

 

**OPERATING RESULTS**

 

***Revenue***

 

Revenue for the three months endedSeptember 30, 2007 was $57.9 million, a decline of $18.7 million or 24.4%from the comparable period in 2006. Revenue for the nine months endedSeptember 30, 2007 was $168.3 million, a decline of $43.3 million or 20.5% fromthe same period in 2006. The decrease in revenue for the three and nine monthsended September 30, 2007 was due to lower sales to our commercial, state/localgovernment, and education customers.  Due to our cash constraints in thesecond half of 2006, many of these customers’ orders were delayed and theytherefore placed fewer orders with us during the first half of 2007. Lower revenues from commercial, state/local government, and education customerswere partially offset by higher revenues from federal governmentcustomers.  Our orders in backlog increased from approximately $28 millionat the end of 2006 to approximately $48 million at the end of the third quarter2007.

 

Our revenues have declined from 2005 to2006, and to date in 2007 compared to 2006. While we have recently

 

24

----

 

experienced moderate increases in salesto federal government customers, it is not certain this improvement in federalgovernment sales will continue or whether sales to commercial, state/localgovernment and education customers will decline further.  Economies of scale play an important role inthe PC industry.  Our major competitorshave significantly larger operations and stronger brand recognition than we do,and generally have stronger financial positions.  Our acquisition of the Professional Businesswill help us to address our disadvantages in economies of scale, but there canbe no assurance that our downward revenue trend will be reversed.

 

***Gross Margin***

 

Asa percentage of net sales, gross margin increased to 16.8% for the three monthsended September 30, 2007 from 11.5% for the same period in 2006, and increasedto 13.8% from 12% for the nine months ended September 30, 2007 compared to thesame period in 2006. The improvements in gross margin for the periods are dueprincipally to sales of higher margin products, coupled with lower costs forcertain raw materials purchased during the preceding six months.  We are currently experiencing anamortization of higher levels of deferred revenues related to 4-year and 5-yearwarranties whose terms are now coming due. As a result, during the three and nine months ended September 30, 2007,we recognized a greater amount of the deferred revenue associated with extendedwarranty services than in previous periods, which had a favorable impact on ourgross margin percentage.  We do not anticipate that these higher thanhistorical margins will continue in future periods.

 

***Research and Development Expense***

 

Research and development expensesdecreased $0.1 million and $1.3 million for the three and nine months endedSeptember 30, 2007, respectively from the same periods in 2006, primarily dueto our cost cutting initiatives initiated in 2006.

 

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

 

Our SG&A expense for the three andnine months ended September 30, 2007 decreased $1.1 million and $3.4 million,or 10.7% and 10.8%, respectively, compared to the same periods in2006. Our ongoing cost reduction efforts initiated in 2006 and lower salescommissions from lower sales are the primary factors contributing to the decline.

 

***Depreciation and Amortization***

 

Deprecation and amortization consists ofdepreciation of purchased fixed assets and the non-cash amortization ofacquired intangibles at the time of our acquisition of MPC in July2005. Depreciation and amortization declined $0.1 million for the threemonths ended September 30, 2007 and declined $1.8 million for the nine monthsended September 30, 2007 from the comparable periods of 2006, primarily due tothe $19.5 million impairment of acquired intangibles during the second quarterof 2006. The impairment resulted in a lower remaining balance of acquiredintangibles and therefore a reduction of future amortization expense.

 

***Impairment of Acquired Intangibles***

 

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

 

***Gain on Vendor Settlements***

 

We entered into settlement agreementswith vendors whereby we made cash payments at less than the full amounts due tosettle the accounts.  For the three andnine months ended September 30, 2007, the gain on vendor settlements decreased$0.4 million and $1.1 million compared to the same periods in 2006.

 

***Change in Estimated Fair Value of Derivative FinancialInstruments***

 

On April 24, 2006, we sold convertibledebentures (the Bridge Loan) for an aggregate of $5.0 million and issued 1.37million 5-year warrants to purchase, our common stock for $3.12 per share, thefair value of our common stock

 

25

----

 

on the date of the close of thetransaction. These debentures plus accrued interest thereon were rolled into anew financing (New Convertible Debentures) on September 6, 2006 for which wereceived an additional $4.55 million in cash. In addition, we issued 4.9million 5-year warrants to purchase our common stock for $1.10 per share, whichwas below the then current market value per share of our common stock on thatdate. As a result of anti-dilution provisions, the conversion price of theBridge Loan warrants was reduced to $1.10. We entered into another financing(September 29, 2006 Financing) in which we sold $4.9 million ofconvertible debentures and issued 2.5 million 5-year warrants to purchase ourcommon stock for $1.10 per share, which was below the market value of ourcommon stock on that date. We did not close on most of the funds received inthe September 29, 2006 financing until October 4, 2006. Additional warrantswere issued in connection with these transactions.

 

These convertible debentures and warrantsare derivative financial instruments that are carried at fair value asderivative liabilities. See Note 6 – “Derivative Warrant Liabilities andConvertible Debentures” in Notes to Interim Condensed Consolidated FinancialStatements in Item 1 of this report for more information regarding thesefinancial instruments. During the three and nine months ended September30, 2007, we recognized non-cash income of $26.3 million and $7 million,respectively, primarily related to a decline in the fair value of thesederivative financial instruments as a result of a decrease in the market priceof our stock during the third quarter of 2007.  For the three months andnine months ended September 30, 2006, we recognized expense of $24.9 and $25.9million, respectively, related to the initial recognition of the Bridge Loanand the associated change in the fair value of the underlying derivativesduring that quarter.  The significant sizeof the expense was primarily the result of conversion features of thesecurities issued at below market prices and the mandatory put option affordedthe investors in the event of default.

 

Significant estimates and assumptions are used in the determination ofthe fair values of these derivative financial instruments. The fair values aredetermined in part by, and will fluctuate with, the market value of our stock.If the market price of our stock increases during a period, the fair value ofthe derivatives is expected to increase and will adversely affect our earnings.A decline in the market price of our stock will cause a decrease in fair valueof the derivatives and have a positive impact to earnings. The change in thefair value of these derivative financial instruments has no impact on our cashflows.

 

During the nine months ended September 30, 2007, we issued 3,238,666shares of common stock upon conversion of $2.4 million, respectively, in facevalue of convertible debentures plus accrued interest and penalties.  On October 1, 2007, $12.4 million in facevalue of convertible debentures were converted to common stock and Series Apreferred stock. In addition, 7,545,352 million warrants were exercised.  We anticipate that the conversion of thedebentures and the exercise of the warrants will reduce the impact of changesin the estimated fair value of remaining derivative financial instruments onour results of operations in future periods.

 

***Loss on Extinguishment of Debt***

 

During the three and nine months ended September 30, 2006, we recognizeda loss of $10.5 million related to the extinguishment of the Bridge Loan duringthe September 6, 2006 financing. The loss was due to the fair value of theconsideration received by the investors in exchange for the rollover of theBridge Loan into the New Convertible Debentures and Warrants. The loss onextinguishment had no effect on our cash flow. There were no such losses for the comparable periods in 2007.

 

***Merger Related Stock Compensation Expense***

 

Merger related stockcompensation expense for the three and nine months ended September 30, 2006 was$1.3 million related to the restricted stock units that had been issued toseveral MPC officers and certain key employees in connection with the mergerwith MPC.  All related restricted stockunits were fully vested in 2006, therefore no such merger related compensationexpense was incurred in 2007.

 

***Income taxes***

 

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

 

26

----

 

**OFF BALANCE SHEETARRANGEMENTS**

 

We have no off the balance sheetarrangements.

 

**GUARANTEES**

 

During our normal course of business, wehave made certain indemnities, commitments and guarantees under which we may berequired to make payments in relation to certain transactions. These include(i) intellectual property indemnities to customers and licensees inconnection with the use, sale and/or license of our products,(ii) indemnities to lessors in connection with our facility leases forcertain 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 certain vendors andcreditors for balances owed. The duration of these indemnities and commitmentsin certain cases may be indefinite. The majority of these indemnities andcommitments do not provide for any limitation of the maximum potential forfuture payments we could be obligated to make. We have not recorded anyliability for these indemnities and commitments in the accompanyingconsolidated financial statements.

 

**NEW AND RECENTLY ADOPTEDACCOUNTING PRONOUNCEMENTS**

 

***New Accounting Standards***

In February 2007, the FASB issued SFASNo. 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.The standard requires that unrealized gains and losses on items for which thefair value option has been elected be reported in earnings at each subsequentreporting date. SFAS No. 159 is effective for us beginning in the first quarterof fiscal year 2008, although earlier adoption is permitted. We are currentlyevaluating the impact that SFAS No. 159 will have on our consolidatedfinancial statements.

 

In September 2006, the FASB issuedSFAS No. 157, *Fair ValueMeasurements*. This Statement defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements. This statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the FASB having previously concludedin those accounting pronouncements that fair value is the relevant measurementattribute. Accordingly, this statement does not require any new fair valuemeasurements. We will adopt this standard January 1, 2008. We do not expect itto have a material impact on our financial position or results of operations.

 

***Recently Adapted Accounting Standards***

 

In June 2006, the FASB issued FIN No. 48*, Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109.* FIN No. 48 clarifies thecriteria for the measurement, recognition and derecognition of income taxesunder FASB Statement No. 109, *Accounting forIncome Taxes*. It also requires additional financial statementdisclosures about uncertain tax positions including classification, interestand penalties. FIN 48 is effective January 2007. Because we have not beenprofitable since our initial public offering and the uncertainty as a goingconcern, we have not realized any deferred tax assets. FIN No. 48 did not havea material impact on our financial position or results of operations. If ourtax status were to change in the future, we would have to reevaluate the impactof FIN No. 48 on our financial position and results of operations at that time.

 

**CRITICAL ACCOUNTINGPOLICIES AND USE OF ESTIMATES**

 

We prepare our financialstatements in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”). The preparation of GAAP financial statementsrequires certain estimates, assumptions, and judgments to be made that mayaffect our consolidated statement of financial position and results ofoperations. Critical accounting estimates are those that are most important andmaterial to our financial condition and results of operations and require management’smost difficult, subjective, or complex judgments, often as a result of the needto estimate 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 1 of “Notes to Interim Consolidated FinancialStatements” included in “Item 1 – Financial Statements.”

 

27

----

 

***Revenue Recognition***

 

We frequently enter intosales arrangements with customers that contain multiple elements ordeliverables such as hardware, software, peripherals, and services. Judgmentsand estimates are critical to ensure compliance with GAAP. These judgmentsrelate to the allocation of the proceeds received from an arrangement to themultiple elements, the determination of whether any undelivered elements areessential to the functionality of the delivered elements, and the appropriatetiming of revenue recognition. We offer extended warranty and service contractsto customers 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 pasthistoric trends and other factors likely to have a future impact on warrantyclaims. The actual rate of warranty claims could differ materially frommanagement’s estimates.

 

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

 

***Inventory Valuation***

 

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

 

***Warranty Liabilities***

 

We record warrantyliabilities at the time of sale for the estimated costs that may be incurredunder our standard limited warranty. The specific warranty terms and conditionsvary depending upon the product sold but generally include technical support,parts, and labor over a period ranging from 90 days to three years.Factors that affect our warranty liability include the number of installedunits currently under warranty, historical and anticipated rates of warrantyclaims on those units, and the average cost of claims on our installed base tosatisfy our warranty obligation. The anticipated rate of warranty claims is theprimary factor impacting our estimated warranty obligation. The other factorsare less significant due to the fact that the average remaining aggregatewarranty period of the covered installed base is approximately 9 months,repair parts are generally already in stock or available at pre-determinedprices, and labor rates which are fairly predictable and historically have notfluctuated significantly from period to period.  Warranty claims arerelatively predictable based on historical experience of failure rates. Ifactual results differ from our estimates, we revise our estimated warrantyliabilities to reflect such changes. Each quarter, we reevaluate our estimatesto assess the adequacy of the recorded warranty liabilities and adjust theamounts as necessary.

 

***Derivative Financial Instruments***

 

The accounting forconvertible debt with derivative features is highly complex, subject to anumber of accounting pronouncements and subject to broadinterpretations. Determination of the treatment of these convertible debtinstruments is based on current interpretation of the facts, treatment by othercompanies and discussion with industry experts. Management is alsorequired to make highly subjective estimates of future share price volatility,the probability of future events and effective discount rates. We anticipatethat future changes in the fair value of our derivative financial instrumentsmay have a material impact in our results of operations. Among otherfactors, the fair value of our derivative financial instruments is affected bythe market value of our common stock. Increases in the market price of ourcommon stock will adversely impact our financial results.  Declines in themarket value of our common stock will have a positive impact. The changesin the fair value of these derivatives have no impact on our cash flows.

 

28

----

 

***Impairment of Acquired IntangibleAssets***

 

Theestimates used by management in determining the impairment of acquiredintangible assets is a critical accounting estimate susceptible to change fromperiod to period. It requires management to make assumptions about future cashflows over future years and utilize an estimated discountrate. Management’s assumptions about future cash flows involvessignificant judgment because actual operating levels have fluctuated in thepast and may continue to do so in the future and economic conditions maychange. Also, the adoption of any new strategic plan inherently involvesuncertainty. A significant adverse change in our business could result in afuture impairment of the value of our acquired intangible assets.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

Our primary sources ofliquidity have been our Wells Fargo Receivables Advance Facility and additionalfunding through $14.5 million in private placements made during 2006.

 

We face significantconstraints with respect to our liquidity and working capital that havematerially impacted our business and may to continue to impact ourbusiness.  As of September 30, 2007, wehad cash and cash equivalents of $1.1 million, current assets of $68.5 millionand current liabilities (exclusive of deferred revenue which is not yet earned)totaling $67.9 million. At September 30, 2007 our shareholder’s equity wasa deficit of $24.4 million. Our operations have not generated positive annualcash flows since our IPO. For the nine months ended September 30, 2007, cashprovided by operating activities was $6.1 million primarily as a result ofcollections on accounts receivables, partially offset by an increase ininventory as we prepare for orders received from the federal government.  Cash used by operating activities for thenine months ended September 30, 2006 totaled $10.7 million.

 

***Background***

 

Our liquidity has beenconstrained because of various factors. A significant amount of cash withdrawnby MPC Computer’s prior owner in the years before the acquisition left thebusiness without adequate liquidity at the time of the acquisition. Sincethe acquisition, we have used funds to consummate the MPC acquisition, hadinsufficient revenues and gross margins to sustain our operations, incurredongoing operating losses and interest expense on our debt, and have expendedcash to support fundraising initiatives.

 

Since inception, we havefinanced our operations through the private placements of equity securities,convertible debt, loans from our founder and other members of our Board ofDirectors, short-term loans, a line of credit and net proceeds of $7.1 millionfrom our IPO. In connection with our IPO, we also issued 3.6 million warrants.These warrants were exercisable at $5.50 per share, but have subsequently beenadjusted to $3.77 due to anti-dilution provisions triggered due to convertibledebentures and warrants issued by us in September 2006 with conversion featuresat below then current market prices. The warrants are callable by us at$0.25 per share if our common stock trades at or above $9.50 per share for 20consecutive days. None of these warrants have yet been exercised, and we do notanticipate that a material amount of the warrants will be exercised unless weare able to exercise our call right, which would require our stock tradingprice to close at a price of at least $9.50 for 20 consecutive trading days.Our stock has never traded above $9.50 per share. From December 2005 to February2006, we raised approximately $12.6 million, prior to expenses and commissions,through warrant exercises.

 

Because our liquidityhas been constrained, we have managed our cash position by extending paymentsto suppliers, some of whom have placed us on credit hold, reduced credit linesor placed on a pre-pay position for 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.

 

During the quartersended June 30, 2006 and September 30, 2006, delivery and credit issues with suppliersincreased compared to prior periods because of late payments, but werealleviated to a limited extent later in our fourth quarter when we replaced ourWachovia Credit Facility with the Wells Fargo Receivables Advance Facility onNovember 16, 2006. Initially, the Receivables Advance Facility providedapproximately $13 million in availability over the Wachovia Credit Facility. InFebruary 2007, we amended the Receivables Advance Facility to obtain additionaltemporary liquidity as needed subject to the terms of the amendment as notedbelow. Financing under the Receivables Advance Facility is dependant uponour sales volume and related receivables to assign to WellsFargo. Historically, our sales volume has been lower during the first two quartersof the year and increases during the third and fourth quarters due to theFederal-buying season. Periods of lower revenue volume and lower relatedreceivables reduce our assignment of receivables, borrowing capacity, and ourability to cover our operating expenses.

 

29

----

 

In conjunction with the acquisition of the ProfessionalBusiness from Gateway, 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.  Additionally, through the acquisition of theProfessional Business, we acquired specified inventory totaling approximately$26 million. We are currently consuming inventory acquired in the transactionto produce finished goods, which we will sell to our customers and will obtainadditional cash flow. See Note 9 — “October 1, 2007 Acquisition of GatewayProfessional Business” further in this Management Discussion and Analysis foradditional information.

 

Although we have raised additional funds as a result of theacquisition of the Professional Business, we are currently seeking to expandcredit lines with many of our current vendors, and obtain credit lines fromvendors we have not previously done business with as a means to continue tofund our operations in the near term. Certain of these vendors have requiredletters of credit to secure credit lines, and since September 30, 2007 we haveput letters of credit in place with three vendors, totaling $3.3 million. Weare currently negotiating with other vendors, and anticipate providingadditional letters of credit to secure credit lines with certain vendors.Continuing to provide letters of credit to vendors constrains our liquidity aswe are required to cash collateralize the letters of credit, and therecan be no assurance that we will be successful in obtaining sufficient vendorcredit in the future.  Since theacquisition of the Professional Business, we have also experienced partsshortages in certain instances as a result of not having our IT systems fullyintegrated with these of the Professional Business.  Anyinability to maintain adequate liquidity in the future or inability tointegrate our IT systems on a timely basis may do significant harm to vendorrelationships we are able to secure, and could cause us to experience creditholds, requirements that we pre-pay for products, and/or a refusal to delivercomponents or termination of supply arrangements, any of which could have amaterial adverse effect on our financial condition and results of operations.

 

Wemay need to raise a significant amount of additional funds to satisfy vendorpayment obligations and fund our business if our losses continue. There can beno assurance that we will be able to secure additional sources of financing.Even if we do obtain additional funding, the amount of such funding may not besufficient to fully address all of our liquidity constraints. Continuingliquidity constraints could negatively and materially impact our business andresults of operations.

 

***Wells Fargo Receivables Advance Facility***

 

On November 16, 2006, we entered into an agreementwith Wells Fargo Business Credit, Inc. (“Wells Fargo”) for an accountsreceivable assignment and advance facility (“Receivables Advance Facility”)that replaced our existing line of credit with Wachovia Capital FinanceCorporation (Western). Under the new facility, we may assign to Wells Fargo,and Wells Fargo may purchase from us, Accounts (as defined in the ReceivablesAdvance Facility). Wells Fargo will advance 90% of the value of the purchasedAccounts. Wells Fargo may adjust the advancement percentage at any time in itscommercially reasonable discretion upon prior notice to us. We will pay fees equalto the Wells Fargo Prime Rate (as defined in the Receivables Advance Facility),plus 1.75% per annum multiplied by the total amount of Accounts purchased andnot yet paid by our customers, computed daily. The effective rate at September30, 2007 was 9.5%.  Wells Fargo has theright to require that we re-purchase the Accounts in the event our customerdoes not pay the receivable within a timeframe specified under the ReceivablesAdvance Facility, if a material customer dispute arises or in the event of adefault under the Receivables Advance Facility. The Receivables AdvanceFacility is subject to customary default provisions. Wells Fargo has discretionunder the Receivables Advance Facility as to the Accounts purchased and thepercentage advanced after submission of the Account for approval. Wells Fargois not obligated to buy any Account from us that Wells Fargo does not deemacceptable in its sole discretion. There is no minimum amount of Accounts to bepurchased by Wells Fargo under the Receivables Advance Facility. The facilityis secured by substantially all of our assets. The Receivables Advance Facilityis for a term of three (3) years. There is an annual fee of $100 thousand inaddition to a minimum fee. Early termination fees apply if the ReceivablesAdvance Facility is terminated before the end of the term. The agreementalso provides for a $1.5 million collateral account for the benefit of WellsFargo for repayment of any obligations arising under the Receivables AdvanceFacility .

 

InFebruary 2007, we entered into an amendment to of the Receivables AdvanceFacility under which Wells Fargo agreed to advance an additional 7.5% of theface amount of currently outstanding Accounts assigned to Wells Fargo, providedthat the total advance does not exceed 97.5% of the face amount of any Account(the “Temporary Advance”), and increase the advance rate on new accountsassigned to Wells Fargo to 98% of the amount of the accounts for a period ofeight weeks (the “Special Facility Period”). We must repay the differencebetween the Advance and the Temporary Advance within four weeks aftertermination of the Special Facility Period. Failure to repay amounts advancedunder the Special Facility would constitute an event of default under the ReceivablesAdvance Facility. At any time when the Temporary Advance has been paid infull for a minimum of 60 days, we

 

30

----

 

mayrequest that the Special Facility be reinstated for another eight week periodwith repayment to be made within four weeks.

 

Theterms of Receivables Advance Facility were later amended on October 1,2007.  See “Amended Account PurchaseAgreements’, further in this Management Discussion and Analysis.

 

***Bridge Loan***

 

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

 

The convertibledebentures accrued interest at 10% per annum and the $5 million aggregateprincipal amount became due and payable July 24, 2006. We prepaid the interestexpense through July 24, 2006 with 40,064 shares of common stock at the time ofthe closing. On July 24, 2006, holders of the $5 million bridge loan agreed toextend the maturity date by 30 days to August 24, 2006 in return for anincrease in the effective interest rate to 12%, payable in cash, for theextended term.

 

The debentures wereconvertible at the option of the holders into shares of common stock at aninitial conversion price of $3.12 per share, subject to adjustment as set forthin the debentures. The exercise price of the warrants was reduced to $1.10 inconnection with a September 6, 2006 financing. Except for the initial interestpaid in shares of common stock at closing, all interest payments were requiredto be made on cash. The debentures contained various customary events ofdefault as well as negative covenants that, among other things, prohibit usfrom incurring additional debt.

 

***New Convertible Debentures and Warrants***

 

On September 6, 2006, weentered into a securities purchase agreement with certain existing investorsand new investors pursuant to which we sold convertible debentures for anaggregate of $4.6 million. Additionally, the investors of the April 24, 2006bridge loan exchanged $5 million face value of their convertible debenturesplus accrued interest thereon into the new convertible debentures and theexisting and new investors received 4,924,500 additional warrants. Thedebentures become convertible into shares of common stock at a conversion priceof $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 and the aggregate principle amountbecomes due and payable September 6, 2009. In the event that thedebentures are not repaid on the maturity date, we will be in default and thedebentures will begin to accrue interest at a rate of 22% per annum or the maximumamount permitted by law, whichever is less. The debentures contain variouscustomary events of default as well as negative covenants that, among otherthings, prohibit us from incurring additional debt.

 

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

 

Boththe debentures and the warrants contain provisions limiting conversion and exercise,or issuance of shares in lieu of interest, as the case may be, in the eventthat the holder’s beneficial ownership of our common stock would exceed 9.99%.We concurrently entered into a registration rights agreement with the investorsthat requires us to register all of the common stock issued and underlying thesecurities sold to the investors. The registration rights agreement containscustomary indemnification and contribution provisions. We initially filed theregistration statement with the SEC on November 8, 2006 and it was declaredeffective on June 28, 2007. Not all of the common stock underlying thedebentures and warrants was registered under this registration statement due tothe large number of shares of common stock to be registered relative to thenumber of shares of our common stock then outstanding.   We believe we have substantiallyfulfilled our obligations under the registration rights agreement and willregister the remaining unregistered shares as required by the registration rightsagreement and as allowed by the SEC.

 

OnMarch 5, 2007, we obtained amendments and waivers to, the registration rightsagreement and the debentures. Pursuant to a letter agreement, the majority ofthe investors, including Crestview Capital Master, LLC and Toibb Investment LLCagreed to waive the penalty provisions for not yet having an effectiveregistration statement,

 

31

----

 

extendedthe dates for filing a registration statement and all related deadlines, includingthe date by which the initial registration statement must be declared effectiveby the SEC, by 120 days. The 120-day extension period lapsed and theregistration statement was not declared effective until June 28, 2007. Forthe nine months ended September 30, 2007, we incurred liquidated damages of$369 thousand under the registration rights agreement.

 

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

 

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

 

Duringthe nine months ended September 30, 2007, we issued 1,533,333 shares of commonstock upon conversion of $1.2 million in face value of New Convertible Debenturesplus accrued interest and penalties.

 

***September 29, 2006 Financing***

 

OnSeptember 29, 2006 we entered into a securities purchase agreement with certainexisting investors and new investors pursuant to which we sold convertibledebentures for an aggregate of $4.9 million. The majority of the transaction closed on October 4, 2006.  The investors also received an aggregate of2,468,125 warrants to purchase our common stock.  The debentures become convertible into sharesof common 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 and the aggregateprincipal amount becomes due and payable September 29, 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.

 

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

 

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%. In connection with this financing, we issued 499,867 warrants with a5-year term to the placement agent to purchase our common stock for $1.10 pershare.

 

Weconcurrently entered into a registration rights agreement with the investorsthat requires us to register all of the common stock issued and underlying thesecurities sold to the investors. The registration rights agreement containscustomary indemnification and contribution provisions.

 

Weinitially filed the registration statement with the SEC on November 8, 2006 andit was declared effective 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.  In order to register the shares on a FormS-3, the SEC required that we reduce the number of shares being registered. Webelieve we have substantially fulfilled our obligations under the registrationrights agreement and will register the remaining unregistered shares asrequired by the registration rights agreement an 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 onJune 28, 2007. These liquidated damages must be paid in cash, and theyaccrue interest at a rate of 18% per annum. We have notified the investorsthat we are currently unable to pay the interest and will accrue the interestif unpaid to their account. There is no assurance that they will allow us todefer payment of the liquidated damages. For the nine months endedSeptember 30, 2007, we incurred liquidated damages of $344 thousand under theregistration rights agreement related to the delay of the effectiveness of ourregistration statement.  Since we havenot paid the interest or penalties due under the debentures or the registrationrights agreement, a holder could declare the debentures to be in default andaccelerate the debt due under the debentures. If this were to happen, the debentures would accrue interest at a rateof

 

32

----

 

22%per annum.  We may be required to payinterest or other required payments in cash rather than stock and could beforced to use our limited cash resources to redeem all or a portion of theoutstanding debentures.

 

During the ninemonths ended September 30, 2007, we issued 1,705,333 shares of common stockupon conversion of $1.3 million face value of debentures from the September 29,2006 Financing plus accrued interest and penalties.

 

***Payable to Lessor***

 

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

 

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

 

***Payable to TPV***

 

On June 30, 2006 we entered into a settlement agreement with TPVInternational (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd(collectively “TPV”).    Under theagreement we agreed to pay TPV $2.1 million over a period of twelve months withinterest at 8%.  The agreement providesfor monthly payments of $120 thousand for six months and $254 thousandthereafter. The settlement amount had been previously recorded as accountspayable.

 

***Payable to Wacom Technology Corporation***

 

On August 31, 2007 we entered into asettlement agreement with Wacom Technology Corporation (Wacom).   The agreement provides for monthly principalpayments to Wacom beginning September 2007, with the interest at 5%.  The settlement amount of $1.2 million hadpreviously been recorded as accounts payable.

 

**October 1,2007 Acquisition of Gateway Professional Business**

 

On October 1, 2007 (“Closing Date”) 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 provides technicalservices to customers of the Professional and Consumer Direct Divisions(collectively, the “Professional Business”) pursuant to an Asset PurchaseAgreement dated September 4, 2007.  TheProfessional Business is primarily engaged in the sale, resale and marketing ofdesktop computer systems, laptops, servers, networking gear and other peripherals,and replacement parts to educational institutions, government entities(federal, state and local), value-added resellers and certain other resellers,and small business sales generated by Gateway’s web and phone centers.

 

The purchase included specified inventory currently valued at approximately$26 million, customer lists and customer relationships, and the sales,marketing, service and administrative functions supporting the ProfessionalBusiness.   The acquisition included thepurchase of all of the capital stock of Gateway Companies Inc. (“GCI”), and themembership interests of Gateway Professional, LLC (“GP”) and Gateway ProPartners, LLC (“GCC”).

 

As consideration, MPC-PRO assumed certain warranty obligations andother obligations currently estimated at $70 million and will issue to Gatewaya promissory note currently estimated to be $2 million. The amount of the

 

33

----

 

promissory note is subject to adjustment based on the Final NetInventory/Liability Statement as defined in the Asset Purchase Agreement. Thepromissory note will bear interest at a rate of 8% and is repayable by April 1,2008 in equal bi-monthly installments.  The promissory note will be executed within 5 days after the receipt ofthe Final Net Inventory/Liability Statement provided by Gateway, Inc.  In addition, we issued 5,602,454 shares ofMPC Corporation common stock totaling approximately 19.9% of our outstandingcommon stock as of the Closing Date (the “MPC Common Shares”), and 249,171shares of MPC Corporation Series B Preferred Stock convertible into 4,983,416shares of our common stock (following approval by our shareholders permittingsuch conversion) representing the difference between (a) 19.9% of our outstandingcommon stock as of the Closing Date on a fully-diluted basis (excludingsecurities issued to our employees under our current employee equity plans) and(b) the number of shares of the MPC Common Shares (the “MPC Preferred Shares”and, together with the MPC Common Shares, the “MPC Shares.”)  In the event shareholder approval is notobtained within one year following closing, all outstanding shares of MPCCorporation Series B Preferred Stock must be redeemed by us at 1.5 times theclosing price times the number of shares of our common stock into which the MPCCorporation Series B Preferred Stock is then convertible.

 

Inconnection with the transaction, we entered into several material agreements onthe Closing Date that were conditions to closing the transaction: (1) a Lock-UpAgreement between us and Gateway with respect to the MPC Shares (the “Lock-UpAgreement”); (2) a Registration Rights Agreement with Gateway with respect tothe MPC Corporation common stock, no par value, and MPC Corporation Series BPreferred Stock issued as consideration to the transaction (the “RegistrationRights Agreement”), (3) a Transition Services Agreement between MPC-PRO andGateway (the “TSA”); and (4) an Intercreditor Agreement between MPC-PRO,Gateway, GCI, and Wells Fargo (the “Intercreditor Agreement”). Additionally, inconnection with the transactions contemplated by the Asset Purchase Agreement,MPC Corporation and/or our affiliates entered into the following agreements:(1) Account Purchase Agreements between Wells Fargo and each of MPC-PRO and GCI(the “Account Purchase Agreements”); (2) Second Amendments to the Wells FargoReceivables Advance Facility between Wells Fargo and each of MPC Computers,LLC, MPC-G, LLC and MPC Solutions Sales LLC (the “Amended Account PurchaseAgreements”); (3) Lease Agreement between MPC-PRO and Gateway (the “LeaseAgreement”); and (4) Letter Agreement between MPC, MPC-PRO, Gateway and GatewayTechnologies.  Each of the foregoingagreements is described in more detail below.

 

***Lock up and Registration Rights Agreement***s

 

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 provides that following theRestriction Period as set forth in the Lock-Up Agreement and upon receipt of ademand request from Gateway, we will file a registration statement with respectto the Registrable Securities, as defined by the agreement, which include theMPC Shares issued in connection with the transaction.  The Registration Rights Agreement grantsGateway customary and piggyback rights.

 

***Transition Services Agreement***

 

Under the TSA (as amended on October 26, 2007), Gateway will provideaccounting, human resource, manufacturing, procurement, marketing, informationtechnology, and other specified services (collectively, “the Services”).Additionally, Gateway will provide buy/sell services for components fromsuppliers and will procure systems from Original Distribution Manufacturers(ODM’s).  We will pay Gateway atotal fee of $6.5 million, payable as follows: (1) one payment of $724 thousanddue on the second Friday after the Closing Date, (ii) one payment of $806thousand due on the fourth Friday after the Closing Date, (iii) six bi-weeklyinstallments of $765 thousand due on the sixth, eighth, tenth, fourteen andsixteenth Friday after the Closing Date and (iv) one payment of $382 thousanddue on the seventeenth Friday after the Closing Date. In addition, theAgreement provides that if any Extended Services are provided by Gateway afterthe Expiration Date (as defined by the agreement), we will pay Gateway $627thousand for each week or part thereof, payable on the Friday of every weeksuch Extended Services are performed. We must reimburse Gateway for allcomponents purchased by Gateway, plus a percentage markup of (i) one-halfpercent during the first eight-week period following close, (ii) one percentduring the second eight-week period, and (iii) two percent thereafter.  We will also reimburse Gateway for allsoftware license fees paid in the course of providing the Services and expensesincurred in the Buy/Sell Activity at the rates specified in the TSA.  The TSA will continue in effect from October1, 2007 until the latest expiration date specified by the Agreement for theServices, generally for 17 weeks, unless the TSA or any Service providedthereunder is earlier terminated by us.

 

34

----

 

***Intercreditor Agreement***

 

Under of MPC’s agreement with Wells Fargo, we have granted a seniorsecurity position on the assets of MPC Corporation and our affiliates. TheIntercreditor Agreement provides Gateway with a junior security interest inaccounts receivable generated on or after the Closing Date, inventory, and allother property of MPC-PRO and GCI as specified in the agreement (the “WellsFargo Collateral”) to secure the payment of obligations owing to Gatewayunder the Transition Services Agreement (the “TSA Obligations”).  WellsFargo and MPC-PRO agreed to set aside certain accounts receivable forthe payment of the TSA Obligations.

 

***Account Purchase Agreements***

 

On October 1, 2007, MPC-PRO and GCI (which was acquired by MPC-PRO inconnection with the Professional Business, each entered into an AccountPurchase Agreement with Wells Fargo.  Under these agreements, MPC-PRO and GCI mayassign to Wells Fargo,and Wells Fargo may purchasefrom MPC-PRO and GCI, Accounts (as defined in the Agreements). Wells Fargo will advance to MPC-PROand GCI 90% of the value of the purchased Accounts. Wells Fargo may adjust the advancement percentage at any time inits commercially reasonable discretion upon prior notice to MPC-PRO and GCI.MPC-PRO and GCI will pay fees equal to the Wells Fargo Prime Rate (as definedin the Agreements), plus 0.75% per annum (the “Wells Fargo Discount”) multiplied by the total amount ofAccounts purchased and not yet paid by MPC-PRO and GCI customers, computeddaily. Wells Fargo has the rightto require that MPC-PRO re-purchase the Accounts in the event customers ofMPC-PRO and GCI do not pay the receivable within a timeframe specified in theAccount Purchase Agreements, if a material customer dispute arises or in theevent of a default under the Account Purchase Agreements. The Account PurchaseAgreements are subject to customary default provisions. Wells Fargo has discretion under the Account Purchase Agreementsas to the accounts purchased and the percentage advanced after submission ofthe Accounts for approval. Wells Fargois not obligated to buy any Account from MPC-PRO and GCI that Wells Fargo does not deem acceptablein its sole discretion. There is no minimum amount of Accounts to be purchasedby Wells Fargo under the AccountPurchase Agreements. The facilities are secured by the assets of MPC-PRO andGCI. The Account Purchase Agreements are for a term of three (3) years fromNovember 14, 2006. There is an initial annual combined fee for all MPCCorporation entities of $100 thousand and an annual fee of $200 thousandthereafter in addition to a minimum fee. Early termination fees apply if theAccount Purchase Agreements are terminated before the end of their term.  An origination fee of $150 thousand was paidat closing.  

 

***Amended Account Purchase Agreements***

 

On October 1, 2007, MPC and its subsidiaries MPC-G, LLC and MPCSolutions Sales LLC (MPC Computers, LLC and its subsidiaries being referred tocollectively herein as “MPC LLC”) entered into separate Second Amendments toAccount Purchase Agreements with Wells Fargo. The Amended Account PurchaseAgreements modify the Wells Fargo Receivables Advance Facilityagreements dated November 14, 2006, as amended, primarily as to minimum feesand Wells Fargo Prime Rate as defined in the Amended Account PurchaseAgreements.  The minimum monthly fee tobe paid in aggregate by MPC affiliates to Wells Fargo is determined by multiplying the Wells FargoDiscount, times $30 thousand times 30 divided by 360.  In addition the Amended Account PurchaseAgreements increased the collateral account for the benefit of Wells Fargo to$3.5 million from $1.5 million under the Receivables Advance Facility.

 

***Lease Agreement***

 

MPC-PRO entered into a Lease Agreement with Gateway to lease a portionof a manufacturing facility in North Sioux City, South Dakota, for a term of 5years from the Lease Commencement Date, as defined in the Lease Agreement, withtwo 5-year renewal options. Under the Lease Agreement, the monthly initial baserent is $36 thousand per month with annual escalation in base rent as specifiedin the Lease Agreement.

 

***Letter Agreement***

 

As a condition to close under the Asset Purchase Agreement, MPC Corporationwas to have raised at least $9.0 million in additional cash and cashequivalents through the conversion of outstanding convertible securities, theexercise of warrants or the sale of additional equity securities, as measuredrelative to MPC’s cash and cash equivalents as of the September 4, 2007 date ofthe Asset Purchase Agreement.  Thiscondition was modified to raising at least $8.0 million under a letteragreement dated October 1, 2007 among the parties to the Asset PurchaseAgreement.  In satisfaction of thiscondition, we raised $8.3 million from the exercise for cash of $1.10 warrantsissued in connection with two private placement financings in September 2006that included the issuance of convertible debentures.  As of the October 1, 2007 closing, $13.4million of face value of the convertible debentures have been converted intoMPC Corporation common stock and Series A Preferred Stock since originalissuance.

 

In connection with the obligation under the Letter Agreement, two MPCCorporation investors, Crestview Capital Master LLC (“Crestview”) and ToibbInvestment LLC (“Toibb”), intended to exercise their warrants and convertible

 

35

----

 

debentures, but because of their large holdings, their beneficialownership of our common stock, as defined in Rule 13d-3 as promulgated underthe Securities Exchange Act of 1934, as amended, could have exceeded9.99%.  As such, on October 1, 2007, weentered into an Amendment No. 1 to Convertible Debenture with each of Crestviewand Toibb (the “Debenture Amendments”), pursuant to which their respectiveConvertible Debentures due on September 6, 2009 were amended such that thedebentures were convertible into shares of Series A Preferred Stock.  Additionally, MPC 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 beneficial ownershipreaches 9.99% and (ii) the number of shares of MPC Corporation Series A PreferredStock that will convert into a number of shares of MPC Corporation common stockequal to the difference between the number of shares of common stock suchholder would receive if all of such holder’s warrants were exercised for ourcommon stock and the number of shares of our common stock such holder actuallyreceived in order to avoid exceeding 9.99% beneficial ownership.

 

Additionally, on October 1, 2007, we entered into an amendment to theRegistration Rights Agreement dated as of September 6, 2006 with Crestview andToibb 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 A Preferred Stockissued pursuant to the Debenture Amendments.

 

***License Agreement***

 

On the Closing Date, MPC Corporation and Gateway entered into a LimitedLicense Agreement to grant us a non-exclusive, royalty-free, one-year use ofGateway Licensed Marks on Licensed Products, as defined, subject to the termsand conditions of the agreement.  Gatewaymay, in its sole discretion, terminate the Limited License Agreement in theevent of a change of control of MPC Corporation.

 

**CONTRACTUAL OBLIGATIONS**

 

During the nine months ended September30, 2007, estimated purchase obligations increased $5.7 million. Duringthe nine months ended September 30, 2007, an accrued liability for deferredrent obligations to Micron Technology was converted to an interest bearingpayable totaling $1.3 million at September 30, 2007. Also accounts payableto TPV and Wacom, respectively, were converted to an interest bearing payabletotaling $1.8 and $1.2 respectively at September 30, 2007.  In addition, $2.4 million face value plusaccrued interest of convertible debentures were converted to common stock witha fair value of $3.0 million. There were no other material changes in ourcontractual obligations during the nine months ended September 30, 2007.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

We are subject tointerest rate risk on our Wells Fargo Receivable Assignment Facility. Theinterest rate is a floating rate based on the prime rate plus 1.75% perannum.  Effective October 1, 2007 therate was lowered to the prime rate plus 0.75% per annum.  If interestrates continue to rise we will be subject to higher interest payments ifoutstanding balances remain unchanged.

 

We have convertibledebentures and warrants that are derivative financial instruments and arecarried at fair value as derivatives liabilities. The fair values aredetermined in part by, and fluctuate with, the market value of ourstock. If the market price of our stock increases during a period, thefair value of the derivatives is expected to increase and will adversely affectour earnings.  A decline in the market price of our stock as expectedcause a decrease in fair value of the derivatives and have a positive impact toearnings.

 

Currently, most of oursales are in the United States. All of our foreign sales and purchases ofproduct are denominated in US dollars, minimizing our foreign currency risk.All of our international suppliers, mostly from Asia, denominate contracts inUS dollars thereby eliminating foreign currency risk. In the future we may not besuccessful in negotiating most of our international supply agreements in USdollars, thereby increasing our foreign currency risk. Amounts we pay forcomponents from international suppliers could be affected by a continuedweakening of the US dollar as compared with other foreign currencies. Wecurrently have no foreign exchange contracts, option contracts or other foreigncurrency hedging arrangements. We continue to evaluate our risk position on anongoing basis to determine whether foreign exchange hedging strategies may needto be employed.

 

We depend on arelatively small number of third party suppliers for substantially all thecomponents in our PC systems. Additionally, we maintain several single-sourcesupplier relationships primarily to increase our purchasing power with thesesuppliers. If shortages or delays arise, the prices of these components mayincrease or the components may not be available at all. We do not havelong-term supply contracts with suppliers that would

 

36

----

 

require them to supplyproducts to us for any specific period or in any specific quantities, whichcould result in shortages or delays. Supplier risks have also increased due toour liquidity problems and many suppliers have reduced credit limits and terms.Some suppliers do not grant us credit at all and require us to pre-pay forproducts. There is no assurance, absent future financing, that suppliers willcontinue to grant us credit at all. Should an increasing number of suppliersreduce or cancel our credit terms, and we are forced to pre-pay for products,it would have a material negative impact on our business and results ofoperations.

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

We maintain a set of disclosure controlsand procedures designed to reasonably assure that information required to bedisclosed by us in reports that we file or submit under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission (“SEC”) rules andforms. Disclosure controls are also designed to reasonably assure thatinformation required to be disclosed is accumulated and communicated to ourmanagement, including our Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”). The evaluation of our disclosure controls performed by our CEOand CFO included obtaining an understanding of the design and objective of thecontrols, the implementation of those controls and the results of the controlson this report on Form 10-Q. In the course of the evaluation of disclosurecontrols, we reviewed the controls that are in place to record, process,summarize and report, on a timely basis, matters that require disclosure in ourreports filed under the Securities Exchange Act of 1934. We also considered theadequacy of the items disclosed in this report on Form 10-Q.

 

As of the date of the financialstatements, an evaluation was carried out under the supervision and with theparticipation of our management, including the CEO and CFO, of theeffectiveness of our disclosure controls and procedures. Based on thatevaluation the CEO and the CFO concluded that as of September 30, 2007 ourdisclosure controls and procedures were effective at the reasonable assurancelevel in ensuring that all information required to be disclosed in reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC rules and forms and thatsuch information is accumulated and communicated to our management, includingour CEO and CFO, in a manner that allows timely decisions regarding requireddisclosure.

 

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

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

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

 

We are adefendant in a lawsuit, alleging infringement of certain patents, relating tofloppy disk controllers, owned by Phillip Adams & Associates, LLC. Wewere added to this suit by an amended complaint filed on May 31, 2005 in theU.S. District Court, District of Utah. We have tendered indemnificationdemands to certain of our component suppliers. Because the case is stillin the discovery phase, we are not able to determine the financial impact, ifany, arising from an adverse result in the matter.

 

***Bingham McCutchen,LLP***

 

We were a defendant in a lawsuit filed by alaw firm seeking damages for unpaid legal services.  Bingham McCutchen alleged that approximately$530 thousand was owed for services rendered. This suit was filed on orabout December 20, 2006 in the District Court of the 3rd JudicialCourt of the State of Idaho, Canyon County.  The matter was settled onJuly 11, 2007 with a payment to Bingham in the amount of $225 thousand.  The dismissal date was July 26, 2007.

 

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

 

We were a defendant in a lawsuit filed by TPVInternational (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd. filedin the 98th Judicial Court of Travis County, Texas alleging that wefailed to pay invoices for computer

 

37

----

 

equipment. In June 2007, we settled the case by agreeing to pay $2.1 million over aperiod of 12 months, with interest accruing at 8%. The lawsuit was dismissed onJuly 6, 2007.

 

***Wacom TechnologyCorporation***

 

We were a defendant in a lawsuit filed byWacom Technology Corporation. This suit was filed on March 6, 2007 in theU.S. District Court, District of Idaho alleging that we have failed to payinvoices for computer equipment in the amount of approximately $1.2million.  On August 31, 2007, we settledthe case by agreeing to pay the full $1.2 million in monthly payments of $100thousand beginning September 2007 plus interest accruing at 5%.  There is no date of dismissal. If thesettlement is paid, Wacom will file a satisfaction of judgment claim.

 

**OtherMatters**

 

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.  RISK FACTORS**

 

*Investing in our securities involves a high degree of risk. You shouldcarefully consider the following risk factor, and other information included inor incorporated by reference into this report, including our financial statementsand the related notes thereto. You should also carefully review and considerall of the risk factors set forth in “Item I, Risk Factors” in our previouslyfiled Form 10-KSB/A for the period ending December 31, 2006.  Additional risks and uncertainties that we donot presently know about, or have not yet identified, may also adversely affectour business. Our business, operating results and financial condition could beseriously harmed and you could lose your entire investment by the occurrence ofany of these risks, or by unforeseen risks not listed below.*

 

**RisksRelated to the Gateway Professional Business**

 

***Therevenue and operating performance of the Professional Business has beendeclining and we cannot assure you that we will be profitable after theacquisition of the Professional Business.***

 

The revenue and segment contribution of Gateway’s Professional businesssegment relating to the Professional Business has been declining. According to Gateway’s annual report on Form 10-K for the fiscal year endedDecember 31, 2006, the Professional segment had revenues of $896 million, $987million, and $1,114 million, respectively for the years ended December 31,2006, 2005 and 2004.  Segment contribution for the Professional segmenttotaled $(6.5) million, $16.9 million, and $58.4 million, respectively, for theyears ended December 31, 2006, 2005 and 2004.   We cannot assure you thatwe will be successful in reversing this trend of declining revenues or that theProfessional Business will be profitable.  If we are not successful, thereis a material possibility that it would result in the failure of our business,and you could lose your entire investment.

 

***Inability tosuccessfully integrate management teams could adversely affect our financialcondition and results of operations.***

 

The successful acquisition and future operations of the ProfessionalBusiness is highly dependent on the successful integration of the ProfessionalBusiness management team.  We may encounter various issues including aninability to retain critical members of the management team, significantdifferences in management or operating philosophy, or difficulties in thetimely execution of critical directives that may impact the integration of theProfessional Business and/or combined operations and performance of ourcompany.  If we are unable to integratemanagement, or if we lose key members of the Professional Business management,it could have a material adverse impact on our business.

 

***Our limitedliquidity may result in an inability to meet the financing needs of the largercombined company.***

 

We face significant liquidity and working capital constraints thatnegatively impact our business.  We will encounter additional complexitiesand costs of a significantly larger organization that will cause additionalstrain on our limited resources. We expect revenues to grow as a result of theacquisition, and we believe that we will have adequate working capital tomanage the business. However, our limited liquidity may result in an inability tomeet

 

38

----

 

the future financing needs of the larger combined company, which couldimpact our business strategies including the full integration of theProfessional Business, and could result in the failure of our business andbankruptcy.

 

***Inventory may not besufficient to satisfy backlog or products under warranty, requiring thecombined entity to acquire more additional inventory than planned.***

 

As a part of the acquisition of theProfessional Business, we acquired approximately $26 million ofinventory.  The inventory may not be sufficient to satisfy the acquiredbacklog of orders or products under warranty of the Professional Business andmay require us to purchase additional inventory, which may adversely impact ourlimited liquidity and cash flows.  Sincethe acquisition of the Professional Business we have experienced partsshortages in certain instances as a result of not having out IT systems fullyintegrated with those of the Professional Business.  To the extent we are unable to purchaseadditional parts and components on a timely basis, we may lose orders inbacklog and related customers, which could ultimately materially affect ourresults of operations and financial position.

 

***Gateway’s suppliersmay not be willing to provide credit terms to us on acceptable terms.***

 

Gateway has a stronger financial position,greater liquidity, and a better credit standing than us.  As a result ofour acquisition of the Professional Business, it is possible that some of thesuppliers to the Professional Business may not be willing to provide credit tous on the same terms as they offer to Gateway or on other acceptableterms.  We are currently seeking to expand credit lines with many of ourcurrent vendors, and obtain credit lines from vendors we have not previouslydone business with.  Certain of thesevendors have required letters of credit to secure credit lines, and sinceSeptember 30, 2007 we have put letters of credit in place with three vendors,totaling $3.3 million.  We are currentlynegotiating with other vendors, and anticipate providing additional letters ofcredit to secure credit lines with certain vendors.  Continuing to provide letters of credit tovendors constrains our liquidity , and there can be no assurance that we willbe successful in obtaining sufficient vendor credit in the future.  In the event suppliers reduce, restrict oreliminate their credit lines, it would adversely impact our limited liquidity,impact our operating cash flows, cause delays in receiving components, effectour ability to timely deliver to our customers and retain those customers, selladditional products or satisfy other obligations.

 

***Payables to Gatewaylimit the liquidity provided by our Wells Fargo credit facility.***

 

We have entered into an additional agreement with Wells Fargo to expandour Receivables Advance Facility after the transaction to acquire theProfessional Business closed, to include accounts receivable transactions ofthe Professional Business under substantially the same credit terms as theReceivables Advance Facility in order to continue to fund our operationspost-close. In connection with this arrangement, we entered into theIntercreditor Agreement.

 

Under the Receivables Advance Facility, we may assign to Wells Fargo,and Wells Fargo may purchase from us, certain accounts receivable. Wells Fargowill advance us a percentage of the value of the purchased accounts. TheReceivables Advance Facility provides us with liquidity only to the extent thatwe are able to generate accounts receivable from our operations, and does notprovide for borrowing by us against the value of our other assets.Additionally, Wells Fargo has the right to require that we repurchase thepurchased accounts in the event our customer does not pay the accounts withinspecified timeframes, if a material customer dispute arises, or in the event ofa default under the Receivables Advance Facility. Wells Fargo has discretion asto the percentage advanced to us against any accounts. Wells Fargo is notobligated to purchase any accounts from us that Wells Fargo deems unacceptablein its sole discretion, and it is not required to purchase any minimum amountof accounts receivable from us. Because of Wells Fargo’s discretion pursuant tothe terms of the Receivables Advance Facility and because borrowing isavailable only against accounts receivable generated from our operations, wecannot assure you of the amount of liquidity, if any, that will be available tous from Wells Fargo.

 

In connection to the expansion of our Receivables Advance Facility withWells Fargo after the Professional Business acquisition, we have additionalconstraints under the terms of the Intercreditor Agreement. The IntercreditorAgreement provides among other things, that after our first week of operationspost closing, our ability to factor receivables to Wells Fargo is blocked andsecured in favor of Gateway up to the amount of our payable with Gatewaypursuant to the terms of the Transition Services Agreement for the 4-monthperiod after the close (“Transition Period”). As a result, this agreementlimits our liquidity during the Transition Period. In addition, theIntercreditor Agreement gives Gateway a junior security interest in our assetsonly behind Wells Fargo to secure our obligations to Gateway.

 

39

----

 

The Receivables Advance Facility with Wells Fargo is secured bysubstantially all of our assets. In the event we default, our assets aresubject to foreclosure by both Wells Fargo and Gateway. Additionally, WellsFargo has several additional remedies for default, including acceleration ofour payment obligations and discontinuation of the purchase of accountsreceivable. If, in the event of a default by us, Wells Fargo forecloses underthe Receivables Advance Facility, we may be forced to declare bankruptcy andyou will likely lose the entire value of your investment.

 

***Gateway’s warrantyand other obligations assumed by us may exceed those contemplated at the timeof the acquisition.***

 

We assumed all of the warranty obligations and certain otherobligations of the Professional Business.  The amount of the assumedobligations and timing of related cash flows to fund such obligations maydiffer from our estimates and could adversely impact our limited ability tofund these obligations and adversely impact our relationship with customers andsuppliers. While we are indemnified by Gateway for certain past liabilities ofthe Professional Business, it is possible that we could become liable forobligations arising out of prior operations of the Professional Business. Weare not indemnified for prior liabilities of the GCC, and would be responsiblefor any associated liabilities. Additionally, we have agreed to assume certainpotential environmental liabilities with respect to Gateway products previouslysold by the Professional Business.

 

***We may experiencedifficulties or delays in transitioning the Professional Business to our ITsystems.***

 

Our ability to integrate the financial, human resource, sales,procurement and other data of the Professional Business into our IT systems isdependent upon receiving and testing the data from Gateway and effectivelyremediating any identified issues in a timely fashion. In addition, we havesome processes that are manually intensive.  We may experiencedifficulties in the timely remediation of all IT issues or in applying ourmanual processes over an expected large volume of data from the ProfessionalBusiness, which may lead to inefficiencies, delays, inaccurate informationprocessing, or we may experience other unforeseen issues that could adverselyimpact our business and financial reporting.

 

***The combined companymay face increased risk of intellectual property lawsuits, inasmuch as Gatewayhas significantly more licenses than us.***

 

Gateway has significantly more patent licenses than us relating tovarious aspects of its products and business methods of the ProfessionalBusiness. It is possible that the acquisition of the Professional Business willresult in increased intellectual property litigation and claims against us.While we are indemnified by Gateway for prior intellectual propertyinfringement of the Professional Business, we are not indemnified for futureinfringement. Intellectual property litigation is very costly, and anyjudgments against us with respect to intellectual property infringement couldhave a material adverse impact on our business and could cause our bankruptcy.In addition, responding to such claims and litigation, regardless or theirmerit, is time consuming and diverts the attention of management and technicalpersonnel. Given our significant liquidity challenges, it is unlikely that wewould be able to pay any significant judgments against us, and it is probablethat we would not have sufficient funds to enter into any material settlementwith respect to intellectual property matters. While it may be necessary in thefuture to seek or renew these licenses, there is no assurance that theselicenses can be renewed or will be available on commercially reasonable terms,or that we would have the funds to acquire such licenses given our liquiditychallenges.  If we or our suppliers are unable to obtain such licenses, wemay be forced to market the Professional Business products without certaindesirable technological features. We could also incur substantial costs toredesign these products around other parties’ protected technology.

 

***The cost of theacquisition could adversely impact our operating results and cash flows.***

 

We will incur significant costs in connection with the acquisition,transition and integration of the Professional Business.  These costs maycause additional strain on our liquidity and adversely impact our cash flowsand operating results.  We may not have sufficient cash flows to fund allof these costs, which, in turn, may prevent us from adequately implementingsome or all of the steps in the transition and integration of the ProfessionalBusiness into our business and realizing anticipated synergies.  If we areunable to complete all of our transition and integration plans, it mayadversely impact the operation of our business and result in among otherissues, higher operating costs than planned, a loss of revenue, employeeretention problems or other unforeseen issues.

 

40

----

 

***Gateway personnelmay choose to leave the company.***

 

In conjunction with the acquisition of the Professional Business, wehave extended offers of employment to a substantial number of ProfessionalBusiness employees to continue employment with us after the acquisition. While the majority of these offers were accepted, it is possible that theemployees will not elect to remain with us on a long term basis, and some ofthe employees have elected to terminate employment.  The loss of key sales personnel couldnegatively impact our ability to retain customers. Additionally, the loss ofkey personnel could impact the efficiency and performance and, cause administrativeissues, delay or cause other challenges in the integration and transition ofthe business to us, or other issues.

 

***Inability to retainGateway customers could result in lower than anticipated revenues for thecombined company. We received only a one-year license of the Gateway name, and theloss of the right to use that name could result in decreased sales.***

 

It is probable that we will not retain all of the current customers ofthe Professional Business. Our inability to retain customers of theProfessional Business could result in lower than anticipated revenues for thecombined company.  The customers of the Professional Business may chooseto buy products from our competitors rather than us should they have aperception of higher quality, better service, greater financial strength or otherfactors.  We received a one-year license to utilize the Gateway name andtrademark. We believe the Gateway name and trademark offers significantly morebrand recognition than the MPC name and trademark, and the loss of the right touse the Gateway trademark after one year could have a negative impact onsales..

 

***The granting ofshares to Gateway diluted existing MPC shareholders.***

 

As part of the consideration for the purchase of the ProfessionalBusiness, Gateway received an approximate 19.9% equity stake in MPC. Theissuance of these shares to Gateway in connection with the transaction dilutedour existing common shareholders, could possibly negatively impact the marketvalue of the common stock, and makes Gateway the largest holder of our commonstock.  After consummation of the acquisition, Gateway now has influenceover matters requiring shareholder approval, and as such, may approve actionsthat are adverse to your interests or negatively impact the value of yourinvestment. In addition, all MPC Series B Preferred Stock to be issued toGateway converts to MPC common stock (i) upon shareholder approval by amajority of the MPC common shareholders and (ii) at such time as the shares maybe converted without causing Gateway’s beneficial ownership of MPC common stockto exceed 19.9% (the “Series B Automatic Conversion Event”).  Under the Asset Purchase Agreement, Gatewayagrees to vote in favor of the Series B Automatic Conversion Event.   In the event shareholder approval is notobtained within one year of the closing date, all outstanding shares of SeriesB Preferred Stock are to be redeemed by MPC at 1.5 times the closing pricetimes the number of shares of MPC common stock into which the Series BPreferred Stock is then convertible.

 

***The inability of thecombined company to timely achieve SOX compliance for the combined operationcould adversely impact us.***

 

We are in the process of meeting certain requirements in connectionwith the implementation of the provisions of the Sarbanes-Oxley Act of 2002(“SOX”). We anticipate that we will be required to achieve SOX compliance forthe Professional Business by the end of 2008. There can be no assurance that wewill timely achieve SOX compliance with respect to the Professional Business.Should we be unable to timely achieve SOX compliance, it could adversely affectour business and negatively impact the value of your investment.

 

***Integrating productlines and developing/continuing research & development activities may proveunsuccessful.***

 

Integrating the product lines of MPC and the Professional Business willbe critical to the effectiveness and efficiency of our future operationsincluding sales, procurement, manufacture, production, and distribution of ourproducts.  A successful and timely integration will avoid costs ofmultiple systems and duplicative human resources, streamline the marketing andprocurement functions and simplify the manufacturing and delivery of ourproducts.

 

In addition, we will benefit from an increased focus on fewer productlines and market branding of our products.  If we are not successful inthe timely integration of the product lines, it may adversely impact ourresults of operations and financial condition.

 

The PC industry is characterized by short product life cycles resultingfrom rapid changes in technology, consumer preferences and declining productprices.  Our internal engineering personnel work closely with product andcomponent suppliers and other technology developers to evaluate the latestdevelopments in PC and non-PC products.  There is no assurance that wewill continue to have access to, or have the right to use, new technology, orbe successful in the incorporation of such technology in our products in atimely manner.

 

41

----

 

**RisksRelating to Our Company**

 

If we are unable to continue our listing on the AMEX, the value of yourinvestment could be substantially reduced.

 

OnOctober 25, 2007, American Stock Exchange (“AMEX”) notified us that it hasresolved the continued listing deficiencies based on a review by the AMEX ofpublicly available information, including the our press release dated October1, 2007 regarding the acquisition of the Gateway Professional Business, ourSecurities and Exchange Commission filings, and other correspondence we haveprovided to the AMEX. Previously, the AMEX issued a notice dated April 13, 2006that we had failed to satisfy the continued listing standards of Section1003(a)(iv) of the AMEX Company Guide because we had sustained losses which wereso substantial in relation to its overall operations or its existing financialresources, or our financial condition had become so impaired that it appearedquestionable, in the opinion of AMEX, as to whether the Company would be ableto continue operations and/or meet its obligations as they mature. The October25, 2007 notice from the AMEX has indicated that Company is subject toprovisions of Section 1009(h) of the AMEX Company Guide for a period of twelvemonths which provides for the method of evaluation and appropriate action bythe AMEX staff should the Company fall below the continued listing standardsduring that period. Depending on the circumstances, such action includestruncating procedures related to compliance with the continued listing standardsor immediately initiating delisting proceedings.

 

**ITEM 6.  EXHIBITS**

 

**EXHIBIT** **INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                            |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description  of Document**                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                  |
| 2.1         |       | Asset Purchase Agreement  dated September 4, 2007 (1)                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                  |
| 3.1*        |       | Amended and Restated  Articles of Incorporation of the Registrant, as amended                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                  |
| 4.1*        |       | Lock-up Agreement dated  October 1, 2007 by and between the Company and Gateway, Inc.                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                  |
| 4.2 *       |       | Registration Rights  Agreement dated October 1, 2007 by and between the Company and Gateway, Inc.                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                  |
| 4.3*        |       | Amendment No. 1 to  Convertible Debenture dated as of October 1, 2007 by and between the Company  and Crestview Capital Master LLC                                                                                                    |
|        |       |                                                                                                                                                                                                                                  |
| 4.4*        |       | Amendment No. 1 to  Convertible Debenture dated as of October 1, 2007 by and between the Company  and Toibb Investment LLC                                                                                                            |
|        |       |                                                                                                                                                                                                                                  |
| 4.5*        |       | Amendment No. 1 to  Registration Rights Agreement dated as of October 1, 2007 among the Company  and the purchasers signatory thereto                                                                                                 |
|        |       |                                                                                                                                                                                                                                  |
| 10.1*       |       | Transition Services  Agreement dated as of October 1, 2007 among MPC PRO, LLC and Gateway, Inc.                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                  |
| 10.2*       |       | Intercreditor Agreement  dated as of October 1, 2007 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 |
|        |       |                                                                                                                                                                                                                                  |
| 10.3*       |       | Account Purchase Agreement  dated as of October 1, 2007 between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and  MPC-Pro, LLC                                         |
|        |       |                                                                                                                                                                                                                                  |
| 10.4*       |       | Account Purchase Agreement  dated as of October 1, 2007 between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and Gateway Companies, Inc.                               |

 

42

----

 
|   |   |                                                                                                                                                                                                                                                                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5*  |   | Guaranty by Corporation  dated as of October 1, 2007, by and between MPC Corporation for the benefit  of Wells Fargo Bank, National Association through its operating Division  Wells Fargo Business Credit                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.6*  |   | Guaranty by Corporation  dated as of October 1, 2007, by and between MPC Corporation for the benefit  of Wells Fargo Bank, National Association through its operating Division  Wells Fargo Business Credit                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.7*  |   | Second Amendment to Account Purchase Agreement dated as  of October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Computers, LLC                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.8*  |   | Second Amendment to Account Purchase Agreement dated as  of October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC-G, LLC                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.9*  |   | Second Amendment to Account Purchase Agreement dated as  of October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC Solutions Sales LLC                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.10* |   | Cross-Collateral and Cross  Default Agreements dated as of October 1, 2007 by and among Wells Fargo Bank,  National Association, acting through its Wells Fargo Business Credit  operating division, and MPC Computers, LLC, MPC-G, LLC, MPC Solutions Sales,  LLC, Gateway Companies, Inc. and MPC-Pro, LLC |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.11* |   | Lease dated September 4,  2007 by and between Gateway, Inc. and MPC-PRO, LLC                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.12* |   | Letter Agreement dated  October 1, 2007 by and between MPC Corporation, MPC-PRO, LLC, Gateway  Technologies Inc. and Gateway, Inc.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.13* |   | Limited License of  Gateway’s Rights dated October 1, 2007 by and between the Company and  Gateway, Inc.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.14  |   | Executive Employment  Agreement between MPC Corporation and John Yeros dated as of October 15, 2007  (2)                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.15  |   | Executive Employment  Agreement between MPC Corporation and Jeffrey E. Fillmore dated as of October  15, 2007 (2)                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.16  |   | Executive Employment  Agreement between MPC Corporation and Curtis Akey dated as of October 15,  2007 (2)                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.17  |   | Executive Employment  Agreement between MPC Corporation and Ross Ely dated as of October 15, 2007  (2)                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 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, pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 32.2** |   | Certification of the Chief  Financial Officer of MPC Corporation, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                            |

 

43

----

 

----

| * Filed  herewith.                                                                                                                              |
|-------------------------------------------------------------------------------------------------------------------------------------------------|
| ** Furnished  herewith.                                                                                                                         |
|                                                                                                                                            |
| (1)Incorporated  by reference to Exhibit 2.1 on Form 8-K filed with the Securities and  Exchange Commission on September 6, 2007.               |
|                                                                                                                                            |
| (2)Incorporated  by reference to Exhibits 99.1 through 99.4 on Form 8-K filed with the  Securities and Exchange Commission on October 19, 2007. |

 

44

----

 

*SIGNATURES*

 

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

 

 
|                    | MPC Corporation         |
|-------------------------|-------------------------|
|                    |                    |
|                    |                    |
| Date: November 14, 2007 | /s/: John P. Yeros      |
|                    | John P. Yeros           |
|                    | Chairman and CEO        |
| .                       |                    |
|                    |                    |
| Date: November 14, 2007 | /s/: Curtis M. Akey     |
|                    | Curtis M. Akey          |
|                    | Chief Financial Officer |

 

45

----

 

**EXHIBIT** **INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                            |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description  of Document**                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                  |
| 2.1         |       | Asset Purchase Agreement  dated September 4, 2007 (1)                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                  |
| 3.1*        |       | Amended and Restated  Articles of Incorporation of the Registrant, as amended                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                  |
| 4.1*        |       | Lock-up Agreement dated  October 1, 2007 by and between the Company and Gateway, Inc.                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                  |
| 4.2 *       |       | Registration Rights  Agreement dated October 1, 2007 by and between the Company and Gateway, Inc.                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                  |
| 4.3*        |       | Amendment No. 1 to  Convertible Debenture dated as of October 1, 2007 by and between the Company  and Crestview Capital Master LLC                                                                                                    |
|        |       |                                                                                                                                                                                                                                  |
| 4.4*        |       | Amendment No. 1 to  Convertible Debenture dated as of October 1, 2007 by and between the Company  and Toibb Investment LLC                                                                                                            |
|        |       |                                                                                                                                                                                                                                  |
| 4.5*        |       | Amendment No. 1 to  Registration Rights Agreement dated as of October 1, 2007 among the Company  and the purchasers signatory thereto                                                                                                 |
|        |       |                                                                                                                                                                                                                                  |
| 10.1*       |       | Transition Services  Agreement dated as of October 1, 2007 among MPC PRO, LLC and Gateway, Inc.                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                  |
| 10.2*       |       | Intercreditor Agreement  dated as of October 1, 2007 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 |
|        |       |                                                                                                                                                                                                                                  |
| 10.3*       |       | Account Purchase Agreement  dated as of October 1, 2007 between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and  MPC-Pro, LLC                                         |
|        |       |                                                                                                                                                                                                                                  |
| 10.4*       |       | Account Purchase Agreement  dated as of October 1, 2007 between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and Gateway Companies, Inc.                               |
|        |       |                                                                                                                                                                                                                                  |
| 10.5*       |       | Guaranty by Corporation  dated as of October 1, 2007, by and between MPC Corporation for the benefit  of Wells Fargo Bank, National Association through its operating Division  Wells Fargo Business Credit                           |
|        |       |                                                                                                                                                                                                                                  |
| 10.6*       |       | Guaranty by Corporation  dated as of October 1, 2007, by and between MPC Corporation for the benefit  of Wells Fargo Bank, National Association through its operating Division  Wells Fargo Business Credit                           |
|        |       |                                                                                                                                                                                                                                  |
| 10.7*       |       | Second Amendment to Account Purchase Agreement dated as  of October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Computers, LLC        |
|        |       |                                                                                                                                                                                                                                  |
| 10.8*       |       | Second Amendment to Account Purchase Agreement dated as  of October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC-G, LLC                 |
|        |       |                                                                                                                                                                                                                                  |
| 10.9*       |       | Second Amendment to Account Purchase Agreement dated as  of October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC Solutions Sales LLC    |

 

46

----

 
| 10.10* |   | Cross-Collateral and Cross  Default Agreements dated as of October 1, 2007 by and among Wells Fargo Bank,  National Association, acting through its Wells Fargo Business Credit  operating division, and MPC Computers, LLC, MPC-G, LLC, MPC Solutions Sales,  LLC, Gateway Companies, Inc. and MPC-Pro, LLC |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.11* |   | Lease dated September 4,  2007 by and between Gateway, Inc. and MPC-PRO, LLC                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.12* |   | Letter Agreement dated  October 1, 2007 by and between MPC Corporation, MPC-PRO, LLC, Gateway  Technologies Inc. and Gateway, Inc.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.13* |   | Limited License of Gateway’s  Rights dated October 1, 2007 by and between the Company and Gateway, Inc.                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.14  |   | Executive Employment  Agreement between MPC Corporation and John Yeros dated as of October 15, 2007  (2)                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.15  |   | Executive Employment  Agreement between MPC Corporation and Jeffrey E. Fillmore dated as of October  15, 2007 (2)                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.16  |   | Executive Employment  Agreement between MPC Corporation and Curtis Akey dated as of October 15,  2007 (2)                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.17  |   | Executive Employment  Agreement between MPC Corporation and Ross Ely dated as of October 15, 2007  (2)                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 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, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 32.2** |   | Certification of the Chief  Financial Officer of MPC Corporation, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                            |

 

----

| * Filed  herewith.                                                                                                                              |
|-------------------------------------------------------------------------------------------------------------------------------------------------|
| ** Furnished  herewith.                                                                                                                         |
|                                                                                                                                            |
| (1)Incorporated  by reference to Exhibit 2.1 on Form 8-K filed with the Securities and  Exchange Commission on September 6, 2007.               |
|                                                                                                                                            |
| (2)Incorporated  by reference to Exhibits 99.1 through 99.4 on Form 8-K filed with the  Securities and Exchange Commission on October 19, 2007. |

 

47

----