**Exhibit 13.1**

**SELECTED FINANCIALDATA**

Theselected financial data for Magnetek, Inc. (the “Company” or “Magnetek”)presented below reflect the historical financial results of the Company’sdivested power electronics business within discontinued operations for allperiods presented, as described in Note 2 of Notes to Consolidated FinancialStatements.

**Statement of Operations Data**

| ***For the years ended****(Amounts in thousands, except per share data)* | ** ** | **July 1,  2007** | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net sales                                                                                                             |       | $                      | 103,808    |                   | $          | 101,657                |       | $                       | 86,346     |                    | $          | 79,420 |   | $ | 75,570 |   |
| Gross profit                                                                                                          |       | 28,927                 |       | 30,137                 |       | 26,337                 |       | 23,176                  |       | 23,021                  |       |
| Gross profit %                                                                                                        |       | 27.9%                  |       | 29.6%                  |       | 30.5%                  |       | 29.2%                   |       | 30.5%                   |       |
| Income (loss)  from operations                                                                                        |       | $                      | (3,048     | )                      | $          | (3,289                 | )          | $                       | (5,147     | )                       | $          | (6,904 | ) | $ | 23,561 |   |
| Net income  (loss):                                                                                                   |       |                   |       |                   |       |                   |       |                    |       |                    |       |
| Continuing  operations                                                                                                |       | $                      | (5,186     | )                      | $          | (7,373                 | )          | $                       | (6,551     | )                       | $          | (12,609 | ) | $ | 11,813 |   |
| Discontinued  operations                                                                                              |       | (2,806                 | )          | (39,476                | )          | (20,319                | )          | (462                    | )          | (47,657                 | )          |
| Net loss                                                                                                              |       | $                      | (7,992     | )                      | $          | (46,849                | )          | $                       | (26,870    | )                       | $          | (13,071 | ) | $ | (35,844 | ) |
| Per common share  - basic and diluted:                                                                                |       |                   |       |                   |       |                   |       |                    |       |                    |       |
| Net income (loss)  from continuing operations                                                                         |       | $                      | (0.18      | )                      | $          | (0.25                  | )          | $                       | (0.23      | )                       | $          | (0.47 | ) | $ | 0.50 |   |
| Net loss from  discontinued operations                                                                                |       | $                      | (0.10      | )                      | $          | (1.36                  | )          | $                       | (0.71      | )                       | $          | (0.02 | ) | $ | (2.02 | ) |
| Net loss                                                                                                              |       | $                      | (0.27      | )                      | $          | (1.62                  | )          | $                       | (0.94      | )                       | $          | (0.48 | ) | $ | (1.52 | ) |
|                                                                                                                  |       |                   |       |                   |       |                   |       |                    |       |                    |       |

 

*Net loss for the fiscal year ended July 2,2006 includes asset impairment charges of $37.8 million included indiscontinued operations.*

*Net loss for the fiscal year ended July 3,2005 includes a $22.0 million patent arbitration charge included indiscontinued operations.*

*Net loss for the fiscal year ended June 27,2004 includes a $6.7 million provision for income taxes to increase thevaluation allowance against the Company’s deferred tax assets.*

*Net lossfor the fiscal year ended June 29, 2003 includes a $27.8 million pre-taxgain ($17.2 million after-tax) from termination of the Company’s retireemedical plan; discontinued operations includes after-tax charges of $38.7million for asset impairment and a $3.3 million after-tax charge for settlementof litigation.*

**Balance Sheet Data**

| ***(Amounts in thousands)***     | ** ** | **July 1,  2007** | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|
| Total assets                               |       | $                      | 104,738    |                   | $          | 233,026                |       | $                       | 229,180    |                    | $          | 228,024 |   | $ | 221,326 |   |
| Long-term debt,  including current portion |       | 32                     |       | 27,455                 |       | 3,980                  |       | 4,295                   |       | 9,250                   |       |
| Other long term  obligations               |       | 1,709                  |       | 1,106                  |       | -                      |       | -                       |       | -                       |       |
| Pension benefit  obligations               |       | 15,965                 |       | 45,494                 |       | 70,568                 |       | 31,366                  |       | 51,356                  |       |
| Stockholders’  equity                 |       | 41,473                 |       | 42,908                 |       | 46,060                 |       | 109,922                 |       | 78,671                  |       |
|                                            |            |                        |            |                        |            |                        |            |                         |            |                         |            |  |  |  |  |  |

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**OVERVIEW**

Magnetek, Inc. is global provider of digital powercontrol systems that are used to control motion and power primarily in materialhandling, elevator, telecommunications (“telecom”) and energy deliveryapplications. Our systems consist primarily of programmable motion control andpower conditioning systems used in the following applications: overhead cranesand hoists; elevators; wireless telecom; coal mining equipment; and fuel cellsand wind turbines. We believe that with our technical and productive resourceswe are well positioned to respond to increasing demand in our served markets. Ouroperations are located in North America, predominantly in Menomonee Falls,Wisconsin, the location of our Company headquarters.

Our material handling offerings include drives, radioremote controls, and braking, collision-avoidance, and electrificationsubsystems, sold primarily to original equipment manufacturers (“OEMs”) ofoverhead cranes and hoists. We have a significant market share in North Americain alternating current (“AC”) drives and believe we have growth opportunitiesin direct current (“DC”) drives for retrofit applications and in wirelessremote controls.

Our elevator product offerings are comprised of highlyintegrated subsystems and drives used to control motion primarily in high-rise,high speed elevator applications. Our products are sold mainly to elevator OEMsand we have a significant share of the available market for DC drives andsubsystems used in high-rise elevators for both new and retrofit projects. Webelieve we have opportunities for growth in available elevator markets byintroducing new energy-saving product offerings for both DC and ACapplications, expanding the breadth of our product offering to includecompetitive low-end products for lower performance applications, and using ournew product offerings to expand geographically, primarily into Asia.

Our telecom product offerings are focused on providingback-up power for wireless applications. During fiscal year 2005, wereclassified the assets and liabilities of our telecom power business as heldfor sale, and the results of operations of the business as discontinuedoperations. During fiscal year 2006, we reached various stages of negotiationswith several interested parties, however, we were not able to reach anagreement to sell the business. In October 2006 (fiscal 2007), we decidedto retain the business and initiated restructuring actions in order to improveits operating results. We completed the relocation of the manufacturingoperations from Dallas, Texas to Menomonee Falls, Wisconsin during the thirdquarter of fiscal 2007. We are now focused on increasing sales by expanding ourcustomer base and gaining market share in microwave backhaul and mobile powerapplications, as well as improving operating results through material costreductions and improvements in manufacturing efficiency.

Our energy delivery product offerings include powerinverters for wind turbines, which deliver AC power from multiple generators tothe utility power grid. The wind market is growing very rapidly in NorthAmerica as wind power is becoming increasingly competitive from a coststandpoint with more traditional methods of power generation. We believe ourproduct offerings have us well positioned to take advantage of growth in thewind market and expect sales of inverters for wind applications to be ourfastest revenue growth product over the next several years.

During fiscal 2007 we completed the divestiture of ourpower electronics business, repaid all of our outstanding debt, and made a $30million contribution to our defined benefit pension plan. We also restructuredour management team, reduced our corporate overhead by over $6 million annuallyand relocated our corporate headquarters as well as our telecom operations toWisconsin. Our continuing operations returned to profitability during thesecond half of fiscal 2007.

The decision to divest our power electronics businessresulted from our review of cash raising alternatives, completed late in fiscal2006. Our operating results for the past several years have been negativelyimpacted by asset impairment and restructuring charges, and other expenses relatedto businesses we no longer own, including a $22 million charge (net of amountspreviously recorded) in fiscal 2005 for a patent infringement arbitration award(see Note 11 of Notes to Consolidated Financial Statements). Early in fiscal2006, we entered into financing agreements to provide funds for payment of thearbitration award, and placed $22.6 million into an escrow account to satisfypayment of the award in the event our ongoing appeal of the award is notsuccessful. Higher interest expense and costs incurred to obtain thesefinancing agreements negatively impacted our fiscal 2006 cash flows. Inaddition, scheduled debt repayments and required pension contributions infuture periods were expected to negatively impact our future cash flows. As a result,during the fourth quarter of fiscal 2006, we decided to divest our powerelectronics business to enable us to address these pending obligations as wellas provide funds for future growth initiatives. During the fourth quarter of fiscal year 2006,we reclassified the assets and liabilities of the power electronics business asheld for sale, and the results of operations of this business as discontinuedoperations (see Note 2 of Notes to Consolidated Financial Statements).

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In October 2006, we sold the power electronicsbusiness to Power-One, Inc. (“Power-One”) for $63.5 million in cash (netof closing costs and post-closing adjustments) and the assumption by Power-Oneof approximately $16 million of Magnetek’s debt (see Note 3 of Notes toConsolidated Financial Statements). We used a portion of the proceeds from thedivestiture of the business to repay all of our remaining long-term debt,approximately $29 million, and also made a $30 million contribution to ourdefined benefit pension plan in December 2006. While the contribution hassignificantly reduced our funding obligation, additional contributions to ourpension plan will be required beginning in April 2008, and could still besignificant. We intend to use the remainder of the proceeds from the saleprimarily to fund continuing operations.

The divestiture of our power electronics businessresulted in a smaller company which compelled us to take actions to reduce ourcorporate overhead. Accordingly, in November 2006, we downsized certaincorporate functions and decided to relocate our corporate headquarters fromChatsworth, California to Wisconsin. As discussed above, we also decided toretain our telecom power business. We completed the consolidation andrestructuring of our manufacturing operations and administrative facilitiesduring the third quarter of fiscal 2007. The resulting cost savings, togetherwith a reduction in pension expense from the contribution to our pension planand lower interest expense from reduced borrowings, enabled our continuingoperations to generate net income for the third and fourth quarters of fiscal2007.

While we are a smaller company following thedivestiture of our power electronics business, we are a leader in several ofour served markets, our operations are centralized in North America, and webelieve we have good growth prospects heading into fiscal 2008. Our sales were$103.8 million in fiscal 2007, and we expect double-digit revenue growth infiscal 2008; however, our sales growth is dependent on successful introductionof new products for elevator and wind markets. In addition, we may experience acyclical slowdown in the material handling market, which comprisedapproximately half of our sales in fiscal 2007. Gross margins in our powercontrol systems business have historically been in the range of upper 20% to30% and we are targeting this level of gross margin going forward. Gross marginin fiscal 2007 was negatively impacted by restructuring costs in telecomoperations and start up expenses related to production of new products. Inaddition, we will focus on controlling operating expenses and, throughutilization of our net operating loss carryforwards for tax purposes, webelieve the majority of our reported operating profit can be realized as netincome.

**ContinuingOperations**

Demand in certain of our key markets, mainly materialhandling, was strong during fiscal 2007 and our sales increased to $103.8million, an increase of 2% from fiscal 2006 sales of $101.7 million. Grossprofit as a percentage of sales declined from 29.6% in fiscal 2006 to 27.9% infiscal 2007, mainly the result of restructuring, relocation costs and relatedmanufacturing efficiency issues in our telecom business, and start up costs toinstall manufacturing capacity for new product offerings.

Our research and development (“R&D”) expense,including the impact of approximately $0.6 million in restructuring costs,decreased to approximately $4.7 million in fiscal 2007 from $4.9 million infiscal 2006. We continued to invest in developing new products for existing andnew markets, including alternative energy products for wind applications, butalso took actions to reduce costs in our corporate R&D function. We intendto continue to invest in R&D going forward, although the rate of growth inR&D investment may slow in fiscal 2008. Fiscal 2007 selling, general andadministrative (“SG&A”) expense decreased by $1.3 million compared tofiscal 2006, and at $27.3 million, represents more than 26% of sales. We expectSG&A to decrease in fiscal 2008, as upon the divestiture of our powerelectronics business, we consolidated administrative offices and implementedcost reduction actions to reduce both payroll costs and pension expense. Ourfiscal 2007 general and administrative (“G&A”) expense includes $1.3million in restructuring charges, mainly severance costs, and also includes aone-time stock compensation charge of $1.1 million related to down-sizingactions. We also contributed to our defined benefit pension plan in fiscal 2007.Under current pension funding regulations, no mandatory contributions arerequired until April 2008, and required contributions in periodssubsequent to fiscal 2008 could be significant (see “Summary ofContractual Obligations and Commitments”). Our future annual pensionexpense included in our results of operations will depend on future interestrate levels, investment returns in equity and fixed income markets, and thelevel and timing of contributions we make to the plan.

Capital expenditures in fiscal 2007 were $1.6 millioncompared to fiscal 2007 depreciation expense of $1.4 million. Our totallong-term debt decreased during fiscal 2007 from $27.4 million to zero, as weused proceeds from the divestiture of our power electronics business to repayall of our outstanding debt.

Going into fiscal 2008, webelieve that future sustained profitability is dependent upon increasedrevenues and improvements in gross margins. Improvement in our gross margins ismainly dependent upon a continuing economic expansion, successful introductionof new products at acceptable margins, and improvement in operating performancein our telecom business. Given our current cost structure with reducedoperating expenses, the lack of outstanding debt, and 

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the availability of taxloss carryforwards to offset future taxable income, we believe the majority ofany incremental gross margin we earn will be realized as net income, andtherefore the key driver of increased net income for us is higher grossmargins.

**DiscontinuedOperations**

The results of our divested power electronicsbusiness, as well as certain income and expenses related to other divestedbusinesses, have been classified as discontinued operations in the accompanyingconsolidated financial statements and footnotes for all periods presented. Theassets and liabilities of our divested power electronics business areclassified as held for sale in the accompanying consolidated balance sheets asof July 2, 2006.

Our fiscal 2007 loss from discontinued operations was$2.8 million, due mainly to losses incurred by our divested power electronicsbusiness of $2.3 million prior to its divestiture in October 2006. Inaddition, the loss from discontinued operations includes a loss on the sale ofour power electronics business of $0.4 million including post-closing purchaseprice adjustments (see Note 3 of Notes to Consolidated Financial Statements). Costsassociated with other previously owned businesses were $1.7 million for fiscal2007. These costs have historically included charges for an arbitration awardin a patent infringement claim and related legal fees, as well as certainexpenses for workers’ compensation claims, environmental issues, and asbestosclaims (see Note 11 of Notes to Consolidated Financial Statements). All ofthese issues relate to businesses we no longer own and most relate toindemnification agreements we provided when we divested those businesses. Alsoincluded in our fiscal 2007 loss from discontinued operations was $2.0 millionof income from the favorable settlement of litigation in a development dispute,partially offset by $0.5 million in legal fees related to the lawsuit andsettlement.

Going forward, ourdiscontinued operations will include additional costs we may incur related tobusinesses no longer owned and may include additional costs above thosecurrently estimated and accrued related to the divestiture of our powerelectronics business.

**RESULTS OFOPERATIONS FOR YEAR ENDED JULY 1, 2007 COMPARED WITH YEAR ENDED JULY 2, 2006**

**Net Sales and GrossProfit**

Netsales increased 2.1% to $103.8 million in fiscal 2007 from $101.7 million infiscal 2006. The increase in net sales in fiscal 2007 was due primarily toincreased sales of material handling systems, $4.8 million, and elevatorproduct, $1.5 million, offset by lower sales in energy systems and telecommarkets. Net sales by market were as follows, in millions:

| ***Fiscal Year Ended*** | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Material handling                 |       | $                          | 61.8       |                       | 60         | % | $ | 57.0 |   | 56 | % |
| Elevator motion  control          |       | 19.0                       |       | 18                         | %          | 17.5 |   | 17 | % |
| Telecom power systems             |       | 16.0                       |       | 15                         | %          | 18.6 |   | 18 | % |
| Energy systems                    |       | 7.0                        |       | 7                          | %          | 8.6 |   | 9 | % |
| Total net sales                   |       | $                          | 103.8      |                       | 100        | % | $ | 101.7 |   | 100 | % |

 

Fiscal 2007 and fiscal 2006 each contained 52 weeks.

Gross profit in fiscal2007 decreased to $28.9 million (27.9% of sales) from $30.1 million (29.6% ofsales) in fiscal 2006. The $1.2 million decline in gross profit was due torestructuring costs incurred in relocating our telecom power business of $0.9million, lower sales volume in telecom and energy systems, $1.0 million, due inpart to the lower sales of our residential solar product line, start up costsand manufacturing efficiency issues in telecom and energy systems, andunfavorable sales mix in the elevator market, partially offset by the favorableimpact on gross profit of $1.6 million from higher sales of material handlingsystems.

**Operating Expenses**

Research and developmentexpense was $4.7 million in fiscal 2007, or 4.5% of sales, compared to $4.9million, or 4.8% of sales, in fiscal 2006. Fiscal 2007 R&D includes $0.6million in restructuring costs related to elimination of our corporate R&Dfunction. The decreased spending in R&D expense in fiscal 2007 as comparedto fiscal 2006 also reflects the substantial completion of new productdevelopment programs for elevator and wind markets. Selling, general andadministrative expense was $27.3 million, or 26.3% of sales, in fiscal 2007compared to $28.6 million, or 28.1% of sales, in fiscal 2006. Selling expenseswere $11.1 million, or 10.7% of sales in fiscal 2007 compared to $10.2 million,or 10.0% of sales 

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in fiscal 2006. Theincrease is mainly due to higher volume-related expenses in fiscal 2007 ascompared to fiscal 2006, as well as increased spending on payroll-related costs.G&A expense was $16.2 million in fiscal 2007 compared to $18.4 million infiscal 2006. The decrease in G&A expense in fiscal 2007 as compared tofiscal 2006 mainly reflects reduced corporate payroll-related costs fromrestructuring actions, reduced professional fees and lower pension expense. Fiscal2007 G&A expense includes severance charges of $1.3 million and one-timestock compensation charges of $1.1 million from stock awards, acceleratedvesting of stock options and restricted stock for employees and directors nolonger employed as a result of downsizing actions. Fiscal 2007 pension expensewas $2.0 million compared to $3.7 million in fiscal 2006. The decrease inpension expense was mainly due to a contribution of $30.0 million to ourdefined benefit pension plan in December 2006, which reduced our pension expensein the second half of fiscal 2007 to $0.3 million.

**Loss fromOperations**

Loss from operations was$3.0 million in fiscal 2007, comparable to a loss from operations of $3.3million in fiscal 2006. The loss from operations in fiscal 2007 includes the impactof restructuring and relocation of both our telecom power business as well asour corporate administrative functions.

**Interest Income andExpense and Other Expense**

Interest income was $2.0 million and interest expensewas $2.4 million in fiscal 2007. Interest income was $0.7 million and interestexpense was $3.2 million in fiscal 2006. The increase in interest income infiscal 2007 as compared to fiscal 2006 was due to higher cash balances duringmuch of fiscal 2007 and $0.3 million in interest income related to a previoustax settlement.

The decrease in interest expense in fiscal 2007 wasmainly due to the repayment of all of our outstanding debt following thedivestiture of our power electronics business in October 2006. Fiscal 2007interest expense includes the write-off of deferred financing assets of $0.7million from the early retirement of debt. Interest expense in fiscal 2006reflects interest on outstanding borrowings and deferred financingamortization.

Other expense of $0.4million in fiscal 2007 is comprised of a prepayment penalty of $0.3 millionrelated to the early repayment of our term loan in October 2006 and a lossof $0.1 million on the sale of our metal fabrication fixed assets and inventoryto a third party.

**Provision forIncome Taxes**

Despite the pretax loss of $3.9 million in fiscal 2007and the pretax loss of $5.8 million in fiscal 2006, we recorded tax provisionsin those periods of $1.3 million and $1.5 million respectively, due to non-cashdeferred tax provisions related to changes in deferred tax liabilities fromgoodwill amortization and to a lesser extent, provisions for income taxes onour pretax income in Canada (see Note 10 of Notes to Condensed ConsolidatedFinancial Statements).

As of July 1, 2007,our U.S. net operating loss carryforward (“NOL”) was approximately $178 millionand our capital loss carryforwards were approximately $31 million. Thepotential tax benefit of all carryforwards, approximately $98 million, has beenfully reserved with a valuation allowance and therefore there is no net taxasset on the consolidated balance sheets related to this asset at July 1,2007. Our NOL has carryforward periods of 15 to 20 years with expiration datesranging from 2013 to 2027. Since our balance sheet reflects no benefit of suchNOL’s, we anticipate that no federal tax expense (other than alternativeminimum tax) would be recorded if and when U.S. taxable income is generated andsuch carryforwards are utilized.

**Loss fromContinuing Operations**

In fiscal 2007, werecorded a loss from continuing operations of $5.2 million, or a $0.18 loss pershare, basic and diluted, compared to a fiscal 2006 loss from continuingoperations of $7.4 million, or a $0.25 loss per share on both a basic anddiluted basis.

**Loss fromDiscontinued Operations**

We recorded a loss fromdiscontinued operations in fiscal 2007 of $2.8 million, or a $0.10 loss pershare on both a basic and diluted basis, compared to a loss from discontinuedoperations in fiscal 2006 of $39.5 million, or a $1.36 loss per share on both abasic and diluted basis. The loss from discontinued operations in fiscal 2007was comprised of losses in our divested power electronics business of $2.3million, expenses related to previously divested businesses of $1.7 million,the loss we recorded on the sale of the power electronics business of $0.4million, and legal fees incurred related to litigation of a 

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development dispute,partially offset by $2.0 million of income from the favorable settlement of thedevelopment dispute (see Note 2 of Notes to Consolidated Financial Statements).The loss from discontinued operations in fiscal 2006 was comprised of agoodwill impairment charge of $22.4 million, a charge for the write-off of thenet basis of assets held for sale related to reclassification of accumulatedcurrency translation adjustment amounts of $10.6 million related to the planneddivestiture of our power electronics business, operating losses in our powerelectronics business of $2.8 million, and other expenses related to businesseswe no longer own, mainly legal fees in the patent infringement claim andenvironmental issues, as well as asbestos-related legal fees, totaling $3.6million.

**Net Loss**

We recorded a net loss infiscal 2007 of $8.0 million, or a $0.27 loss per share on both a basic anddiluted basis, compared to a fiscal 2006 net loss of $46.8 million, or a $1.62loss per share on both a basic and diluted basis.

**RESULTS OFOPERATIONS FOR YEAR ENDED JULY 2, 2006 COMPARED WITH YEAR ENDED JULY 3, 2005**

**Net Sales and GrossProfit**

Netsales increased 17.7% to $101.7 million in fiscal 2006 from $86.3 million infiscal 2005. The increase in net sales in fiscal 2006 was due primarily toincreased sales of telecom power systems, $8.3 million, and material handlingsystems, $4.5 million. Net sales by market were as follows, in millions: 

| ***Fiscal Year Ended*** | ** ** | **July 2, 2006** | ** ** | **July 3, 2005** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Material handling                 |       | $                          | 57.0       |                       | 56         | % | $ | 52.5 |   | 61 | % |
| Elevator motion  control          |       | 17.5                       |       | 17                         | %          | 17.4 |   | 20 | % |
| Telecom power  systems            |       | 18.6                       |       | 18                         | %          | 10.3 |   | 12 | % |
| Energy systems                    |       | 8.6                        |       | 9                          | %          | 6.1 |   | 7 | % |
| Total net sales                   |       | $                          | 101.7      |                       | 100        | % | $ | 86.3 |   | 100 | % |

 

Fiscal 2006 contained 52 weeks; fiscal 2005 contained53 weeks.

Gross profit in fiscal2006 increased to $30.1 million (29.6% of sales) compared to $26.3 million(30.5% of sales) in fiscal 2005. The $3.8 million improvement in gross profitfor the year ended July 2, 2006 was mainly due to higher sales volumes totelecom and material handling markets. The reduction in gross profit as apercentage of sales for the year ended July 2, 2006 was due to sales pricereductions and product mix in sales to elevator markets, and higher sales oflower margin alternative energy products for photo-voltaic (solar) markets.

**Operating Expenses**

R&D expense was $4.9million in fiscal 2006, or 4.8% of sales, compared to $4.7 million, or 5.4% ofsales, in fiscal 2005. The increase in R&D expense reflects continuedinvestment in product development for new markets and applications such aspower inverters for wind markets. Selling, general and administrative expensewas $28.6 million, or 28.1% of sales, in fiscal 2006 compared to $26.8 million,or 31.0% of sales, in fiscal 2005. Selling expenses were $10.2 million, or10.0% of sales in fiscal 2006 compared to $9.7 million, or 11.3% of sales infiscal 2005. The increased selling expense in fiscal 2006 reflects higher salesvolume as well as increased investment in marketing new products in alternativeenergy markets. G&A expense was $18.4 million in fiscal 2006 compared to$17.1 million in fiscal 2005. The increase of $1.2 million in G&A expensein fiscal 2006 was due to increased pension expense of $2.3 million, partiallyoffset by lower rent expense of $0.8 million from relocation and consolidationof administrative facilities.

**Loss fromOperations**

Our loss from operations was$3.3 million in fiscal 2006 compared to a loss from operations of $5.1 millionin fiscal 2005. The reduction in loss from operations was due mainly to highersales volume and increased gross profit, partially offset by higher spending inR&D, higher volume-related selling expenses, and higher pension expense.

**Interest and OtherIncome and Expenses**

Interest income was $0.7 million in fiscal 2006compared to $0.1 million in fiscal 2005. Interest expense was $3.2 million infiscal 2006 compared to $0.5 million in fiscal 2005, and as a result, netinterest expense increased $2.1 million in fiscal 2006 compared to fiscal 2005.The increase in net interest expense in fiscal 2006 was due to higheroutstanding debt balances, due 

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mainly to borrowings associated with the Nilssenpatent arbitration award (see Note 11 of Notes to Consolidated FinancialStatements) and higher deferred financing amortization expense. In November 2005,we deposited $22.6 million into escrow to satisfy payment of the award in theevent our appeal is not successful. The escrow deposit was funded by our $18.0million term loan and $4.6 million from our revolving debt facility. The termloan bore interest at a rate of 12.6% while we received interest on the escrowdeposit at a rate of 4.7%. As a result, both our reported interest income andexpense increased in fiscal 2006 as compared to fiscal 2005.

Deferred financingamortization expense included in interest expense was $0.9 million in fiscal2006 compared to $0.3 million in fiscal 2005. The increase in deferredfinancing amortization expense in fiscal 2006 compared to fiscal 2005 was dueto costs incurred in obtaining our new credit agreements entered into on September 30,2005, as well as the write-off of deferred financing costs under our previouscredit agreements.

**Provision forIncome Taxes**

We recorded a provisionfor income taxes of $1.5 million in fiscal 2006, comprised of $1.1 million(non-cash) primarily to increase the deferred tax liability for tax deductibleamortization of goodwill and $0.4 million related to our foreign operations. Werecorded a provision for income taxes of $1.0 million in fiscal 2005, due tonon-cash deferred tax provisions related to changes in deferred tax liabilitiesfrom goodwill amortization of $0.9 million and to a lesser extent, provisionsfor income taxes on our pretax income in Canada.

**Loss fromContinuing Operations**

In fiscal 2006, werecorded a loss from continuing operations of $7.4 million, or a $0.25 loss pershare, basic and diluted, compared to a fiscal 2005 loss from continuingoperations of $6.6 million, or a $0.23 loss per share on both a basic anddiluted basis.

**Loss fromDiscontinued Operations**

We recorded a loss fromdiscontinued operations in fiscal 2006 of $39.5 million, or a $1.36 loss pershare on both a basic and diluted basis, compared to a loss from discontinuedoperations in fiscal 2005 of $20.3 million, or a $0.71 loss per share on both abasic and diluted basis. The loss from discontinued operations in fiscal 2006is comprised of a goodwill impairment charge of $22.4 million (see Note 2 ofNotes to Consolidated Financial Statements), a charge for the write-off of thenet basis of assets held for sale related to reclassification of accumulatedcurrency translation adjustment amounts of $10.6 million related to the planneddivestiture of our power electronics business, operating losses in our powerelectronics business of $2.8 million, and other expenses related to businesseswe no longer own, mainly legal fees in the patent infringement claim andenvironmental issues, as well as asbestos-related costs, totaling $3.7 million.The loss from discontinued operations in fiscal 2005 is comprised of a chargefor an arbitration award related to a patent infringement claim of $22.0million, and other expenses related to businesses we no longer own, mainlyproduct liability costs, legal fees in the patent infringement claim andasbestos-related costs, totaling $4.7 million, partially offset by operatingincome in our power electronics business of $6.4 million.

**Net Loss**

We recorded a net loss infiscal 2006 of $46.8 million, or a $1.62 loss per share on both a basic anddiluted basis, compared to a fiscal 2005 net loss of $26.9 million, or a $0.94loss per share on both a basic and diluted basis.

**Liquidity and CapitalResources**

Our cash balance, excluding restricted cash, increased$5.3 million during the 12 months ended July 1, 2007, from $0.1 million atJuly 2, 2006 to $5.4 million at July 1, 2007. Our primary source ofcash during the 12 months ended July 1, 2007 was from the divestiture ofour power electronics business. Our primary uses of cash during the same periodwere for debt repayment and a contribution to our defined benefit pension plan(see below). During the 12 months ended July 1, 2007, our accountsreceivable balances increased $3.3 million and inventories increased $3.1million, while accounts payable increased $4.4 million. We also paidapproximately $1.6 million in severance costs during fiscal 2007 related to ourcorporate downsizing. Our capital expenditures for the year ended July 1,2007 were $1.6 million and we are in the process of adding capacity for theproduction of wind inverters. We do not anticipate capital expenditures infiscal 2008 will exceed $3.0 million. The expected amount of capitalexpenditures could change depending upon changes in revenue levels, ourfinancial condition and the general economy.

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As discussed in Notes 2 and 3 of the Notes toConsolidated Financial Statements, in October, 2006, we sold our power electronicsbusiness to Power-One for $63.5 million in cash (net of closing costs of $2.2million and post-closing adjustments of $2.3 million) and the assumption ofapproximately $16.0 million in outstanding debt in Europe. We usedapproximately $29.0 million of the proceeds from the divestiture to repay allborrowings outstanding under our term loan with Ableco Finance LLC (“Ableco”)and revolving credit facility with Wells Fargo Foothill, Inc. (“WFF”) in October 2006.Pursuant to the terms of the loan agreement with Ableco, the agreement wasterminated prior to the December 2007 expiration date in exchange for ourpayment to Ableco of $0.3 million. The revolving credit facility remains inplace with availability of $12.1 million at July 1, 2007. We are currentlyin default under certain covenants of the revolving credit agreement, and weare in the process of obtaining a waiver. There were no borrowings outstandingunder the revolving credit facility as of July 1, 2007.

Primarily as a result of the decline in interest ratesover the past several years, the accumulated benefit obligation of our definedbenefit pension plan currently exceeds plan assets. We used a portion of theproceeds from the divestiture of our power electronics business to contribute$30.0 million to our pension plan in December 2006 and under currentfunding regulations, actuarial projections indicate no contributions to theplan would be required before April 2008. Future required contributionswill depend on future interest rate levels, values in equity and fixed incomemarkets, and the level and timing of interim contributions we may make to theplan, and could still be significant.

We are subject to certain potential environmental andlegal liabilities associated primarily with past divestitures (see Note 11of Notes to Consolidated Financial Statements). In the fourth quarter of fiscal2005, a decision was rendered in a patent infringement action brought againstus by Ole K. Nilssen. In settlement of pending litigation, we agreed to submitthe matter to binding arbitration, and in May 2005, the arbitrator awardeddamages to Mr. Nilssen of $23.4 million, to be paid within ten days of theaward. Nilssen’s counsel filed a motion to enter the award in U.S. DistrictCourt for the Northern District of Illinois, and we filed a counter-motion tovacate the award on grounds that it was fraudulently obtained. Our request fororal argument was granted and the hearing was held on October 19, 2005. Thejudge is expected to render his decision by mail after further consideration. Anunfavorable decision by the Court could result in payment of the award of $22.6million, net of previously paid amounts, to Nilssen, which would have amaterial adverse effect on our cash flows during the period in which paymentwould be made. We have adequate resources to support payment of the award ifsuch a payment is necessary, as we currently have $22.9 million of restrictedcash in an interest-earning escrow account.

Based upon current plans and business conditions, webelieve that available cash balances, borrowing capacity under our revolvingcredit facility, and internally generated cash flows will be sufficient to fundanticipated operational needs, capital expenditures and other commitments overthe next 12 months.

We do not have anyoff-balance sheet arrangements or variable interest entities as of July 1,2007.

**Summary of ContractualObligations and Commitments**

Futurepayments due under contractual obligations of the Company’s continuingoperations as of July 1, 2007 are as follows (in thousands):

| ** **                 | ** ** | **Less than** | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **More than** | ** ** | ** ** | ** ** |
|----------------------------|------------|--------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|------------|------------|
| ** **                 | ** ** | **1 Year**    | ** ** | **Years**            | ** ** | **Years**            | ** ** | **5 Years**   | ** ** | **Total**  | ** ** |
| Pension funding            |       |               | $          | 2,680                |       |                 | $          | 20,990             |       | $          | 16,880     |   |   | $ | 7,210 |   |   | $ | 47,760 |   |
| Operating leases           |       |               | 3,039      |                 |       | 5,583                |       | 4,848              |       |       | 7,108      |   |   | 20,578 |   |
| Purchase  obligations      |       |               | 16,916     |                 |       | -                    |       | -                  |       |       | -          |   |   | 16,916 |   |
| Capital lease  obligations |       |               | 11         |                 |       | 21                   |       | -                  |       |       | -          |   |   | 32 |   |
| Total                      |       |               | $          | 22,646               |       |                 | $          | 26,594             |       | $          | 21,728     |   |   | $ | 14,318 |   |   | $ | 85,286 |   |

 

Pension funding amounts in the table above are basedon current regulations and actuarial calculations at July 1, 2007. Actualfunding amounts could vary, depending on future interest rate levels and valuesin equity and fixed-income markets.

The amounts in the tableabove do not include our aggregate future minimum rentals to be received undernoncancelable subleases of $6.4 million as of July 1, 2007.

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**Critical AccountingPolicies**

Our accounting policiesare more fully described in Note 1 of Notes to Consolidated FinancialStatements. As disclosed in Note 1, the preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires estimates and judgments by management that affect the reported amountof assets and liabilities, revenues, expenses, and related disclosures. Suchestimates are based upon historical experience and other assumptions believedto be reasonable given known circumstances. Actual results could differ fromthose estimates. On an ongoing basis, we evaluate and update our estimates, andwe believe the following discussion addresses our policies which are mostcritical to understanding our financial position and results of operations, andwhich require our most complex judgments.

***Accounts Receivable***

Accounts receivablerepresent amounts due from customers in the ordinary course of business. We aresubject to losses from uncollectible receivables in excess of our allowances. Wemaintain allowances for doubtful accounts for estimated losses from customers’inability to make required payments. In order to estimate the appropriate levelof this allowance, we analyze historical bad debts, customer concentrations,current customer creditworthiness, current economic trends and changes incustomer payment patterns. Our total allowance includes a specific allowancebased on identification of customers where we feel full payment is in doubt, aswell as a general allowance calculated based on our historical losses onaccounts receivable as a percentage of historical sales. We believe that ourmethodology has been effective in accurately quantifying our allowance fordoubtful accounts and do not anticipate changing our methodology in the future.However, if the financial conditions of any of our customers were todeteriorate and impair their ability to make payments, additional allowancesmay be required in future periods. We believe that all appropriate allowanceshave been provided.

***Inventories***

Our inventories are statedat the lower of cost or market. Cost is determined by the first-in, first-out(FIFO) method, including material, labor and factory overhead. We identifypotentially obsolete and excess inventory by evaluating overall inventorylevels in relation to expected future requirements and market conditions, andprovisions for excess and obsolete inventory and inventory valuation arerecorded accordingly. Items with no usage for the past twelve months and noexpected future usage are considered obsolete, and are disposed of or fullyreserved. Reserves for excess inventory are determined based upon historicaland anticipated usage as compared to quantities on hand. Excess inventory isdefined as inventory items with on-hand quantities in excess of one year’susage and specified percentages are applied to the excess inventory value indetermining the reserve. Our assumptions have not changed significantly in thepast, and are not likely to change in the future. We believe that ourassumptions regarding inventory valuation have been accurate in the past.

***Long-Lived Assets and Goodwill***

We periodically evaluate the recoverability of ourlong-lived assets, including property, plant and equipment. Impairment chargesare recorded in operating results when the undiscounted future expected cashflows derived from an asset are less than the carrying value of the asset.

We are required to performannual impairment tests of our goodwill, and may be required to test morefrequently in certain circumstances. We have elected to perform our annualimpairment test in the fourth quarter of our fiscal year. In assessingpotential impairment, we make estimates regarding the fair value of the relatedlong-lived assets. No impairments were recognized in long-lived assets orgoodwill for the year ended July 1, 2007. For the year ended July 2,2006, we recorded a goodwill impairment charge of $22.4 million related to our discontinuedpower electronics business, included in loss from discontinued operations inthe consolidated statement of operations for fiscal 2006.

***Pension Benefits***

We sponsor a defined benefit plan that covers a numberof current and former employees in the U.S. The valuation of our pension planrequires the use of assumptions and estimates that attempt to anticipate futureevents to develop actuarial valuations of expenses, assets and liabilities. Theseassumptions include discount rates, expected rates of return on plan assets andmortality rates. We consider market conditions, including changes in investmentreturns and interest rates, in making these assumptions. Our plan assets arecomprised mainly of common stock and bond funds. The expected rate of return onplan assets is a long-term assumption and is generally not changed on an annualbasis. The expected rate of return on plan assets was 9.0% in fiscal 2007, 2006and 2005. The discount rate reflects the market for high-quality fixed incomedebt instruments and is subject to change each year. As of July 1, 2007,the discount rate used to determine the benefit obligation was 6.25% ascompared to 6.375% at July 2, 2006. Changes in assumptions typicallyresult in actuarial gains or 

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losses that are amortized in accordance with themethods specified in Statement of Financial Accounting Standard (“SFAS”) No. 87,*Employers’ Accounting for Pensions, as Amended.*Adecrease in the discount rate, as occurred during fiscal 2007, results in anincrease to our projected benefit obligation and an actuarial loss, whichtypically results in increased future pension expense. However, we expect thatour future pension expense will be lower than our pension expense over the pastseveral fiscal years due to a $30 million contribution to our pension plan in December 2006,which will result in an increase in our expected return on plan assets infuture periods.

Significant differencesbetween our assumptions and actual future investment return or discount ratescould have a material impact on our financial position or results of operationsand related funding requirements.

***Reserves for Contingencies***

We periodically record the estimated impact of variousconditions, situations or circumstances involving uncertain outcomes. The accountingfor such events is prescribed under SFAS No. 5, *Accountingfor Contingencies*. SFAS No. 5 defines a contingency as anexisting condition, situation, or set of circumstances involving uncertainty asto possible gain or loss to an entity that will ultimately be resolved when oneor more future events occur or fail to occur.

SFAS No. 5 does not permit the accrual of gaincontingencies under any circumstances. For loss contingencies, the loss must beaccrued if (1) information is available that indicates it is probable thatthe loss has been incurred, given the likelihood of uncertain events; and (2) theamount of the loss can be reasonably estimated.

The accrual of acontingency involves considerable judgment and we use our internal expertiseand outside experts, as necessary, to help estimate the probability that a losshas been incurred and to assist in determining the amount or range of the loss.In those circumstances where we determined that it was probable that a loss hadbeen incurred, our estimates of the amount of loss have been reasonablyaccurate.

***Income Taxes***

We operate in several taxing jurisdictions and aresubject to a variety of income and related taxes. Judgment is required indetermining our provision for income taxes and related tax assets andliabilities. We believe we have reasonably estimated our tax positions for alljurisdictions for all open tax periods. It is possible that, upon closure ofour tax periods, our final tax liabilities could differ from our estimates.

We record deferred income tax assets in taxjurisdictions where we generate losses for income tax purposes. We also recordvaluation allowances against these deferred tax assets in accordance with SFAS No. 109,*Accounting for Income Taxes*, when in ourjudgment, the deferred income tax assets will likely not be realized in theforeseeable future.

Since fiscal 2002 we haveprovided valuation reserves against our U.S. deferred tax assets that result ina net deferred tax liability position. A portion of our deferred tax liabilityrelates to tax-deductible amortization of goodwill that is no longer amortizedfor financial reporting purposes. Under applicable accounting rules, suchdeferred tax liabilities are considered to have an indefinite life and aretherefore ineligible to be considered as a source of future taxable income inassessing the realization of deferred tax assets.

**CAUTION REGARDINGFORWARD-LOOKING STATEMENTS**

This Annual Report and Form 10-K,including documents incorporated herein by reference, contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. The words “believe”, “expect”, “estimate”, “anticipate”, “intend”, “may”,“might”, “will”, “would”, “could”, “project” and “predict”, or similar wordsand phrases generally identify forward-looking statements. Forward-lookingstatements contained or incorporated by reference in this document, includingthose set forth in the CEO’s Letter, the section of this Annual Report entitled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”, and the section of the Form 10-K entitled “Descriptionof Business” include, but are not limited to, statements regarding projectionsof revenues, income or loss, capital expenditures, plans for future operations,products or services, legal issues and financing needs or expectations, as wellas assumptions relating to the foregoing. Forward-looking statements areinherently subject to risks and uncertainties which in many cases are beyondthe control of the Company and which cannot be predicted or quantified. As aresult, future events and actual results could differ materially from those setforth in, contemplated by, or underlying forward-looking statements. Such risksand uncertainties include, but are not limited to, economic conditions ingeneral, sensitivity to industry conditions, competitive factors such astechnology and pricing pressures, business conditions in electronics,telecommunications, industrial equipment and energy markets, internationalsales and operations, dependence on major customers, increased material costs,risks and costs associated with acquisitions, litigation and environmentalmatters and 

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the risk that the Company’sultimate costs of doing business exceed present estimates. A discussion ofthese and other specific risks is included below under the heading “RiskFactors Affecting the Company’s Outlook.” Forward-looking statements containedin this Annual Report and Form 10-K speak only as of the date ofthis document or, in the case of any document incorporated by reference, thedate of that document. The Company does not have an obligation to publiclyupdate or revise any forward-looking statement contained or incorporated byreference in these documents to reflect changed assumptions, the occurrence ofunanticipated events or changes to future operating results over time.

**Risk Factors Affectingthe Company’s Outlook**

Our future results of operations and the otherforward-looking statements contained in our Report on Form 10-K andthis Annual Report, including this section titled “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” involve anumber of risks and uncertainties. In particular, the statements regardingfuture goals and strategies, new product introductions, penetration of newmarkets, projections of sales revenues, manufacturing costs and operatingcosts, pricing of our products and raw materials required to manufacture ourproducts, gross margin expectations, relocation and outsourcing of productioncapacity, capital spending, research and development expenses, the outcome ofpending legal proceedings and environmental matters, tax rates, sufficiency offunds to meet our needs including contributions to our defined benefit pensionplan, and our plans for future operations, as well as our assumptions relatingto the foregoing, are all subject to risks and uncertainties.

A number of other factorscould cause our actual results to differ materially from our expectations. We aresubject to all of the business risks facing public companies, includingbusiness cycles and trends in the general economy, financial market conditions,demand variations and volatility, potential loss of key personnel, supply chaindisruptions, government legislation and regulation, and natural causes. Thefollowing list of risk factors is not all-inclusive. Other factors andunanticipated events could adversely affect our financial position or resultsof operations. We believe that the most significant potential risk factors thatcould adversely impact us are the following:

***Economic Conditions and Demand for our Products***

Demand for our products,which impacts our revenue and gross profit, is affected by general business andeconomic conditions. Demand for our products is also impacted by changes incustomer order patterns, such as changes in inventory levels maintained bycustomers and the timing of customer purchases. If demand in certain of ourserved markets deteriorates in subsequent periods, our operating results couldbe adversely affected and operating losses could recur.

***Competitive Industry***

We operate in an intenselycompetitive industry characterized by rapid changes in technology, productdemand, prices and lead times. Our future profitability depends on our abilityto successfully identify and react to these changing trends. Specifically,achievement of our sales and profit goals is dependent in part upon our abilityto successfully anticipate product demand, to introduce quality products to meetthat demand in a timely manner at competitive prices, to gain acceptance of ourproducts in the marketplace, to achieve cost reductions during the product lifecycle and to adapt our existing product platforms in the event of changes intechnology. Failure to do so could result in low returns on investment in newproducts and technologies, a loss of competitive position relative to ourpeers, obsolete products and technologies, and an adverse impact on ouroperating results. In addition, price erosion in response to competition in ourserved markets could have a material impact on our financial position orresults of operations.

***Dependence on New Products***

Our expected growth insales and profits is in part dependent upon the successful introduction of new productsfor the elevator and wind markets, acceptance of these new products bycustomers in those markets, and successful cost reduction efforts related tonew products. Any delay in introduction of new products, customer acceptance ofnew products, or cost reduction actions could have an adverse impact on ourfinancial position or results of operations.

***Dependence on Customers and Credit Risk***

We rely on several largecustomers for a significant portion of our sales. While we have taken actionsto diversify our customer base, sales to our top three customers representedapproximately 16% of our net sales in fiscal 2007. The loss of any suchcustomers or significant decreases in any such customers’ levels of purchasescould have an adverse effect on our business. In addition, we are exposed tothe credit risk of our customers, including risk of bankruptcy, and are subjectto losses from uncollectible accounts receivable. If the financial conditionsof any of our customers deteriorates and impairs 

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their ability to makepayments, we could incur future write-offs of accounts receivable that couldhave a material impact on our financial position, results of operations or cashflows.

***Reliance on Suppliers***

We purchase raw materialsand subassemblies used in our products from third-party suppliers, and alsopurchase finished goods for resale to customers from third party subcontractors.If our suppliers or subcontractors cannot meet their commitments to us in termsof price, delivery, or quality, it may negatively impact our ability to meetour commitments to our customers. This could result in disruption ofproduction, delay in shipments to customers, higher material costs, qualityissues with our products and damage to customer relationships. In addition,increases in the cost of raw materials purchased from third party supplierscould negatively impact our gross profit and results of operations.

***Competitive Size***

We compete with crane andhoist drive manufacturers and drive system integrators, elevator drivemanufacturers and control system integrators, mining machinery drive builders,and power inverter builders. The total number of such enterprises with whom wecompete directly is believed to be fewer than 100. However, certain of ourcompetitors are significantly larger and have substantially greater resourcesthan us, and some are global in scope, whereas we currently compete primarilyin the North American market.

***International Business***

While international salescurrently account for approximately 12% of our revenue, currency exchange ratescould impact our results. This is partially a currency translation issue withno economic impact on actual results. However, a fluctuation in exchange ratesbetween a foreign currency and the U.S. dollar can have an economic impact onrevenue and profit. Additional weakening in the value of the dollar againstother currencies or changes in any of the other risks listed previously couldhave an adverse effect on our financial position or results of operations.

***Restructuring and Outsourcing***

We have taken actions torelocate some of our production capacity and may develop action plans regardingadditional relocation, consolidation or outsourcing activities in the future. Whilewe believe that these actions will result in a more competitive position andshould also increase our gross profits and reduce our operating expenses, thereis no guarantee that these plans will succeed. There is also no assurance thatthe expected cost savings and improvement in gross profits will be realized, andin addition, these actions may result in quality issues or delays in productionor shipment to customers that could have an adverse impact on our results ofoperations. In addition, there is no assurance that any future activities notyet planned would provide any benefits to our operating results, and any suchfuture plans may result in asset impairment charges.

***Intellectual Property***

We believe that our intellectual property is equal orsuperior to our competitors’ and we do not know of any new technologies thatcould cause a shift away from digital power-electronic solutions. However, as atechnology-based company we are highly dependent on both patented andproprietary intellectual property. Therefore, major advancements in digitalpower-electronic technology by competitors or the advent of technologiesobviating digital power-electronic solutions could have an adverse effect onour financial position or results of operations.

Likewise, we could beadversely affected financially should we be judged to have infringed upon theintellectual property of others.

***Pension Funding Obligations***

Current actuarialestimates indicate that we will be required to make significant contributionsto our defined benefit pension plan beginning in April 2008. Based uponcurrent projections of our operating results and financial position, we believethat existing cash balances, amounts available under our revolving creditfacility, and cash generated from operations will be sufficient to make allrequired pension contributions. However, if actual future operating resultsdiffer significantly from current projections, we may be required to seekadditional sources of cash to enable us to fund required contributions underour pension plan.

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***Legal and Environmental Issues***

Our results of operations could be adversely impactedby pending and future litigation, including claims related to, but not limitedto, product liability, patent infringement, contracts, employment and laborissues, personal injury and property damage, including damage to theenvironment.

In some cases, we haveagreed to provide indemnification against legal and environmental liabilitiesand potential liabilities associated with operations that we have divested,including certain motor, generator, lighting ballast, transformer, drive andpower supply manufacturing operations. If we are required to make paymentsunder such indemnification obligations, such payments could have a materialadverse impact on our financial position, results of operations or cash flows. Further,we have been indemnified against potential legal and environmental liabilitiesand potential liabilities associated with operations that we have acquired,including lighting ballast, transformer, capacitor and crane brakemanufacturing operations that were subsequently divested. If not borne by theindemnifiers, such liabilities, if any, could be borne by us and have anadverse effect on our financial position or results of operations.

**QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our exposure to marketrisks has changed significantly as a result of the divestiture of our powerelectronics business in October 2006. Our exposure to interest rate riskdecreased significantly, as we have no debt outstanding as of July 1,2007, and our exposure to foreign currency exchange rates decreasedsignificantly, as the divestiture included the majority of our internationaloperations. We did not have any outstanding hedge instruments or contracts at July 1,2007 and July 2, 2006.

***Interest Rates***

The fair value of our debtwas effectively zero at July 1, 2007. Our reported debt balance wascomprised entirely of capital lease obligations. As a result, at July 1,2007, a hypothetical 10% adverse change in interest rates would have anegligible impact on our annual interest expense.

***Foreign Currency Exchange Rates***

We generally do not enter into foreign exchangecontracts to protect against reductions in value and volatility of future cashflows caused by changes in exchange rates, but we may selectively enter intoforeign exchange contracts to hedge certain exposures. Gains and losses onthese non-U.S.-currency investments would generally be offset by correspondinglosses and gains on the related hedging instruments, resulting in negligiblenet exposure.

We had no foreign currency contracts outstanding at July 1,2007 and July 2, 2006.

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ***For the years ended  (Amounts in thousands, except per share data)*** | ** ** | **July 1,  2007** | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| Net sales                                                                                                             |       | $                      | 103,808    |                   | $          | 101,657                |       | $ | 86,346 |   |
| Cost of sales                                                                                                         |       | 74,881                 |       | 71,520                 |       | 60,009                 |       |
| Gross profit                                                                                                          |       | 28,927                 |       | 30,137                 |       | 26,337                 |       |
| Research and development                                                                                              |       | 4,689                  |       | 4,871                  |       | 4,691                  |       |
| Sales, general and  administrative                                                                                    |       | 27,286                 |       | 28,555                 |       | 26,793                 |       |
| Loss from operations                                                                                                  |       | (3,048                 | )          | (3,289                 | )          | (5,147                 | )          |
| Non operating expense  (income):                                                                                      |       |                   |       |                   |       |                   |       |
| Interest income                                                                                                       |       | (1,951                 | )          | (687                   | )          | (138                   | )          |
| Interest expense                                                                                                      |       | 2,401                  |       | 3,232                  |       | 513                    |       |
| Other expense                                                                                                         |       | 395                    |       | —                 |       | —                 |       |
| Loss from continuing  operations before provision for income taxes                                                    |       | (3,893                 | )          | (5,834                 | )          | (5,522                 | )          |
| Provision for income  taxes                                                                                           |       | 1,293                  |       | 1,539                  |       | 1,029                  |       |
| Loss from continuing  operations                                                                                      |       | (5,186                 | )          | (7,373                 | )          | (6,551                 | )          |
| Loss from discontinued  operations, net of taxes                                                                      |       | (2,806                 | )          | (39,476                | )          | (20,319                | )          |
| Net loss                                                                                                              |       | $                      | (7,992     | )                      | $          | (46,849                | )          | $ | (26,870 | ) |
| Per common share  basic and diluted:                                                                                  |       |                   |       |                   |       |                   |       |
| Loss from continuing  operations                                                                                      |       | $                      | (0.18      | )                      | $          | (0.25                  | )          | $ | (0.23 | ) |
| Loss from discontinued  operations                                                                                    |       | $                      | (0.10      | )                      | $          | (1.36                  | )          | $ | (0.71 | ) |
| Net loss                                                                                                              |       | $                      | (0.27      | )                      | $          | (1.62                  | )          | $ | (0.94 | ) |
| Weighted average shares outstanding - basic and  diluted                                                              |       | 29,435                 |       | 28,931                 |       | 28,535                 |       |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

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**CONSOLIDATEDBALANCE SHEETS**

| ***As of  (Amounts in thousands)***                                                                           | ** ** | **July 1,  2007** | ** ** | **July 2,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Assets                                                                                                                       |       |                   |       |                   |       |
| Current assets:                                                                                                              |       |                   |       |                   |       |
| Cash                                                                                                                         |       | $                      | 5,404      |                   | $          | 96 |   |
| Restricted cash                                                                                                              |       | 22,852                 |       | 22,602                 |       |
| Accounts  receivable, less allowance for doubtful accounts of $726 in 2007 and $723 in  2006                                 |       | 18,104                 |       | 14,765                 |       |
| Inventories                                                                                                                  |       | 16,201                 |       | 13,134                 |       |
| Deferred income  taxes                                                                                                       |       | 94                     |       | 23                     |       |
| Prepaid expenses  and other current assets                                                                                   |       | 1,806                  |       | 670                    |       |
| Assets held for  sale                                                                                                        |       | -                      |       | 140,549                |       |
| Total current assets                                                                                                         |       | 64,461                 |       | 191,839                |       |
| Property, plant and  equipment:                                                                                              |       |                   |       |                   |       |
| Buildings and  improvements                                                                                                  |       | 1,972                  |       | 1,479                  |       |
| Machinery and  equipment                                                                                                     |       | 17,800                 |       | 17,101                 |       |
| Less accumulated  depreciation                                                                                               |       | 15,470                 |       | 14,369                 |       |
| Net property, plant and  equipment                                                                                           |       | 4,302                  |       | 4,211                  |       |
| Goodwill                                                                                                                     |       | 28,187                 |       | 28,150                 |       |
| Other assets                                                                                                                 |       | 7,788                  |       | 8,826                  |       |
| Total assets                                                                                                                 |       | $                      | 104,738    |                   | $          | 233,026 |   |
| Liabilities and  Stockholders’ Equity                                                                                   |       |                   |       |                   |       |
| Current liabilities:                                                                                                         |       |                   |       |                   |       |
| Accounts payable                                                                                                             |       | $                      | 12,238     |                   | $          | 7,862 |   |
| Accrued  liabilities                                                                                                         |       | 7,639                  |       | 7,557                  |       |
| Accrued  arbitration award                                                                                                   |       | 22,602                 |       | 22,602                 |       |
| Liabilities held  for sale                                                                                                   |       | -                      |       | 75,933                 |       |
| Current portion  of long-term debt                                                                                           |       | 11                     |       | 27,412                 |       |
| Total current  liabilities                                                                                                   |       | 42,490                 |       | 141,366                |       |
| Long-term debt, net of  current portion                                                                                      |       | 21                     |       | 43                     |       |
| Pension benefit  obligations, net                                                                                            |       | 15,965                 |       | 45,494                 |       |
| Other long-term  obligations                                                                                                 |       | 1,709                  |       | 1,106                  |       |
| Deferred income taxes                                                                                                        |       | 3,080                  |       | 2,109                  |       |
| Commitments and  contingencies                                                                                               |       |                   |       |                   |       |
| Stockholders’  Equity:                                                                                                  |       |                   |       |                   |       |
| Common stock, $0.01 par  value, 100,000 shares authorized; 30,114 and 28,712 shares issued and  outstanding in 2007 and 2006 |       | 301                    |       | 287                    |       |
| Additional paid-in  capital                                                                                                  |       | 134,449                |       | 129,473                |       |
| Accumulated deficit                                                                                                          |       | (14,823                | )          | (6,831                 | )          |
| Accumulated other  comprehensive loss                                                                                        |       | (78,454                | )          | (80,021                | )          |
| Total stockholders’  equity                                                                                             |       | 41,473                 |       | 42,908                 |       |
| Total liabilities and stockholders’ equity                                                                              |       | $                      | 104,738    |                   | $          | 233,026 |   |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

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**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                                                      | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|------------------------|------------|---------------------------------------|------------|------------|------------|
| ***(Amounts in thousands)***                                          | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**            | ** ** | **(Deficit)**                         | ** ** | **Loss**   | ** ** | **Total** | ** ** |
| **Balance, June 27, 2004**                                                 | ** ** |                  | **28,492** | ** **              |       |                   | **$**      | **285**                               | ** ** |       |       | **$** | **127,692** | ** ** |   |   | **$** | **66,888** | ** ** |   |   | **$** | **(84,943** | **)** |   | **$** | **109,922** | ** ** |
| Exercise of stock  options                                                      |       |                  | 53         | ** **              |       |                   | –     | ** **                            |       |       | 172        |   |   |   | – |   |   |   | – |   |   | 172 |   |
| Shares issued                                                                   |       |                  | 3          | ** **              |       |                   | –     | ** **                            |       |       | 5          |   |   |   | – |   |   |   | – |   |   | 5 |   |
| Employee stock purchase  plan                                                   |       |                  | 6          | ** **              |       |                   | –     | ** **                            |       |       | 37         |   |   |   | – |   |   |   | – |   |   | 37 |   |
| Stock-based compensation  expense                                               |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | 506        |   |   |   | – |   |   |   | – |   |   | 506 |   |
| Shares issued to trust                                                          |       |                  | 61         | ** **              |       |                   | 1          | ** **                            |       |       | 252        |   |   |   | – |   |   |   | – |   |   | 253 |   |
| Net loss                                                                        |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | (26,870 | ) |   |   | – |   |   | (26,870 | ) |
| Translation adjustments                                                         |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | (199 | ) |   | (199 | ) |
| Minimum pension  liability                                                      |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | (37,766 | ) |   | (37,766 | ) |
| Comprehensive loss                                                              |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | – |   |   | (64,835 | ) |
| **Balance, July 3, 2005**                                                  | ** ** |                  | **28,615** | ** **              |       |                   | **$**      | **286**                               | ** ** |       |       | **$** | **128,664** | ** ** |   |   | **$** | **40,018** | ** ** |   |   | **$** | **(122,908** | **)** |   | **$** | **46,060** | ** ** |
| Exercise of stock  options                                                      |       |                  | 3          | ** **              |       |                   | –     | ** **                            |       |       | 8          |   |   |   | – |   |   |   | – |   |   | 8 |   |
| Shares issued                                                                   |       |                  | 4          | ** **              |       |                   | –     | ** **                            |       |       | 13         |   |   |   | – |   |   |   | – |   |   | 13 |   |
| Stock-based compensation  expense                                               |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | 500        |   |   |   | – |   |   |   | – |   |   | 500 |   |
| Shares issued to trust                                                          |       |                  | 90         | ** **              |       |                   | 1          | ** **                            |       |       | 288        |   |   |   | – |   |   |   | – |   |   | 289 |   |
| Net loss                                                                        |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | (46,849 | ) |   |   | – |   |   | (46,849 | ) |
| Translation adjustments                                                         |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | 3,480 |   |   | 3,480 |   |
| Reclassification of  accumulated translation adjustment to assets held for sale |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | 10,589 |   |   | 10,589 |   |
| Minimum pension  liability                                                      |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | 28,818 |   |   | 28,818 |   |
| Comprehensive loss                                                              |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | – |   |   | (3,962 | ) |
| **Balance, July 2, 2006**                                                  | ** ** |                  | **28,712** | ** **              |       |                   | **$**      | **287**                               | ** ** |       |       | **$** | **129,473** | ** ** |   |   | **$** | **(6,831** | **)** |   |   | **$** | **(80,021** | **)** |   | **$** | **42,908** | ** ** |
| Exercise of stock  options                                                      |       |                  | 775        | ** **              |       |                   | 8          | ** **                            |       |       | 3,013      |   |   |   | – |   |   |   | – |   |   | 3,021 |   |
| Shares issued                                                                   |       |                  | 557        | ** **              |       |                   | 5          | ** **                            |       |       | (5         | ) |   |   | – |   |   |   | – |   |   | – |   |
| Stock-based compensation  expense                                               |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | 1,667      |   |   |   | – |   |   |   | – |   |   | 1,667 |   |
| Shares issued to trust                                                          |       |                  | 70         | ** **              |       |                   | 1          | ** **                            |       |       | 301        |   |   |   | – |   |   |   | – |   |   | 302 |   |
| Net loss                                                                        |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | (7,992 | ) |   |   | – |   |   | (7,992 | ) |
| Translation adjustments                                                         |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | 59 |   |   | 59 |   |
| Minimum pension  liability                                                      |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | 1,508 |   |   | 1,508 |   |
| Comprehensive loss                                                              |       |                  | –     | ** **              |       |                   | –     | ** **                            |       |       | –     |   |   |   | – |   |   |   | – |   |   | (6,425 | ) |
| **Balance, July 1, 2007**                                                  | ** ** |                  | **30,114** | ** **              |       |                   | **$**      | **301**                               | ** ** |       |       | **$** | **134,449** | ** ** |   |   | **$** | **(14,823** | **)** |   |   | **$** | **(78,454** | **)** |   | **$** | **41,473** | ** ** |

 

*The accompanying notes are an integral part ofthese consolidated financial statements.*

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

| *** For the years ended  (Amounts in thousands)***                                       | ** ** | **July 1,  2007** | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** Cash flows from continuing operating  activities:**                                                                 |       |                   |       |                   |       |                   |       |
|  Net loss from continuing operations                                                                                   |       | $                      | (5,186     | )                      | $          | (7,373                 | )          | $ | (6,551 | ) |
|  Adjustments to reconcile net loss from  continuing operations to net cash provided by (used in) operating activities: |       |                   |       |                   |       |                   |       |
|  Depreciation                                                                                                          |       | 1,391                  |       | 1,081                  |       | 1,512                  |       |
|  Amortization                                                                                                          |       | 580                    |       | 906                    |       | 287                    |       |
|  Write-off of deferred financing                                                                                       |       | 670                    |       | –                 |       | –                 |       |
|  Pension expense                                                                                                       |       | 1,978                  |       | 3,744                  |       | 1,436                  |       |
|  Stock based compensation expense                                                                                      |       | 1,555                  |       | 500                    |       | 506                    |       |
|  Deferred income tax provision                                                                                         |       | 900                    |       | 1,102                  |       | 911                    |       |
|  Changes in operating assets and liabilities                                                                           |       | (3,950                 | )          | 2,809                  |       | 119                    |       |
|  Cash contribution to pension fund                                                                                     |       | (30,000                | )          | –                 |       | –                 |       |
|  Total adjustments                                                                                                     |       | (26,876                | )          | 10,142                 |       | 4,771                  |       |
|  Net cash provided by (used in) continuing  operating activities                                                       |       | (32,062                | )          | 2,769                  |       | (1,780                 | )          |
| ** Cash flows from investing activities:**                                                                             |       |                   |       |                   |       |                   |       |
|  Proceeds from sale of business, net of  transaction costs                                                             |       | 63,546                 |       | –                 |       | –                 |       |
|  Deposit into escrow account                                                                                           |       | (250                   | )          | (22,602                | )          | –                 |       |
|  Capital expenditures                                                                                                  |       | (1,572                 | )          | (986                   | )          | (1,444                 | )          |
|  Net cash provided by (used in) investing  activities                                                                  |       | 61,724                 |       | (23,588                | )          | (1,444                 | )          |
| ** Cash flow from financing activities:**                                                                              |       |                   |       |                   |       |                   |       |
|  Proceeds from issuance of common stock                                                                                |       | 3,323                  |       | 310                    |       | 430                    |       |
|  Proceeds from employee stock purchase plan                                                                            |       | –                 |       | –                 |       | 37                     |       |
|  Borrowings under long term notes                                                                                      |       | –                 |       | 18,000                 |       |                   |       |
|  Repayment of long term notes                                                                                          |       | (18,000                | )          | –                 |       | –                 |       |
|  Borrowings (repayments) under line-of-credit  agreements                                                              |       | (9,412                 | )          | 5,485                  |       | (368                   | )          |
|  Borrowings under capital lease obligations                                                                            |       | –                 |       | –                 |       | 53                     |       |
|  Principal payments under capital lease  obligations                                                                   |       | (11                    | )          | (10                    | )          | –                 |       |
|  Increase in deferred financing costs                                                                                  |       | (210                   | )          | (1,865                 | )          | (82                    | )          |
|  Net cash provided by (used in) financing  activities                                                                  |       | (24,310                | )          | 21,920                 |       | 70                     |       |
| ** Cash flows from discontinued operations:**                                                                          |       |                   |       |                   |       |                   |       |
|  Provided by operating activities                                                                                      |       | 6,048                  |       | 635                    |       | 2,106                  |       |
|  Used in investing activities                                                                                          |       | (930                   | )          | (5,279                 | )          | (7,545                 | )          |
|  Provided by (used in) financing activities                                                                            |       | (5,162                 | )          | 3,044                  |       | 9,155                  |       |
|  Cash provided by (used in) discontinued  operations                                                                   |       | (44                    | )          | (1,600                 | )          | 3,716                  |       |
|  Net increase (decrease) in cash                                                                                       |       | 5,308                  |       | (499                   | )          | 562                    |       |
|  Cash at the beginning of the period                                                                                   |       | 96                     |       | 595                    |       | 33                     |       |
| ** Cash at  the end of the period**                                                                                    | ** ** | **$**                  | **5,404**  | ** **             | **$**      | **96**                 | ** ** | **$** | **595** | ** ** |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

*(Allamounts in the notes to consolidated financial statements are expressed inthousands unless otherwise noted, except share and per share data)*

**1.** Summaryof Significant Accounting Policies

**Profile**

Magnetek, Inc. (the “Company”or “Magnetek”) is a global provider of digital power control systems that areused to control motion and power primarily in material handling, elevator,telecommunications (“telecom”) and energy delivery applications. The Company’sproducts consist primarily of programmable motion control and powerconditioning systems used on the following applications: overhead cranes andhoists; elevators; wireless telecom; coal mining equipment; and fuel cells andwind turbines.

**Basis of Presentation**

The consolidated financialstatements include the accounts of Magnetek, Inc. and its subsidiaries.All significant inter-company accounts and transactions have beeneliminated. 

**Fiscal Year**

The Company uses a 52 or53 week fiscal year ending on the Sunday nearest June 30. The fiscal yearsended July 1, 2007 and July 2, 2006 each contained 52 weeks. Thefiscal year ended July 3, 2005 contained 53 weeks. 

**Reclassification**

Certain prior year amountswere reclassified to conform to the current year presentation, including thereclassification of the telecom power business assets, liabilities, and resultsof operations from discontinued operations to continuing operations.

**Use of Estimates**

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates. Significantareas requiring management estimates include the following key financial areas:

***Accounts Receivable***

Accounts receivablerepresent receivables from customers in the ordinary course of business. TheCompany is subject to losses from uncollectible receivables in excess of itsallowances. The Company maintains allowances for doubtful accounts forestimated losses from customers’ inability to make required payments. In orderto estimate the appropriate level of this allowance, the Company analyzeshistorical bad debts, customer concentrations, current customercreditworthiness, current economic trends and changes in customer paymentpatterns. If the financial conditions of the Company’s customers were todeteriorate and impair their ability to make payments, additional allowancesmay be required in future periods. The Company’s management believes that allappropriate allowances have been provided.

***Inventories***

The Company’s inventoriesare stated at the lower of cost or market. Cost is determined by the first-in,first-out (“FIFO”) method, including material, labor and factory overhead. Inventoryon hand may exceed future demand either because the product is obsolete, or theamount on hand is more than can be used to meet future needs. The Companyidentifies potentially obsolete and excess inventory by evaluating overallinventory levels. In assessing the ultimate realization of inventories, theCompany is required to make judgments as to future demand requirements andcompare those with the current or committed inventory levels. If future demandrequirements are less favorable than those projected by management, additionalinventory write-downs may be required.

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***Reserves for Litigation and Environmental Issues***

The Company periodically records the estimated impactsof various conditions, situations or circumstances involving uncertain outcomes.The accounting for such events is prescribed under SFAS No. 5, *Accounting for Contingencies*. SFAS No. 5 defines acontingency as an existing condition, situation, or set of circumstancesinvolving uncertainty as to possible gain or loss to an enterprise that willultimately be resolved when one or more future events occur or fail to occur.

SFAS No. 5 does not permit the accrual of gaincontingencies under any circumstances. For loss contingencies, the loss must beaccrued if (1) information is available that indicates it is probable thatthe loss has been incurred, given the likelihood of uncertain events; and (2) theamount of the loss can be reasonably estimated.

The accrual of acontingency involves considerable judgment on the part of management. TheCompany uses its internal expertise, and outside experts, as necessary, to helpestimate the probability that a loss has been incurred and the amount or rangeof the loss.

***Income Taxes***

The Company uses theliability method to account for income taxes. The preparation of consolidatedfinancial statements involves estimating the Company’s current tax exposuretogether with assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included in the consolidatedbalance sheets. An assessment of the recoverability of deferred tax assets ismade, and a valuation allowance is established if necessary based upon thisassessment.

***Pension Benefits***

The valuation of theCompany’s pension plan requires the use of assumptions and estimates to developactuarial valuations of expenses, assets and liabilities. These assumptionsinclude discount rates, investment returns and mortality rates. Changes inassumptions and future investment returns could potentially have a materialimpact on the Company’s expenses and related funding requirements.

**Revenue Recognition**

The Company’s policy is to recognize revenue when theearnings process is complete. The criteria used in making this determinationare persuasive evidence that an arrangement exists, delivery has occurred, thesales price is fixed or determinable, and collectibility is reasonably assured.Sales are recorded net of returns and allowances, which are estimated usinghistorical data, at the time of sale.

Revenue is recognized uponshipment, except in those cases where product is shipped to customers withconsignment stock agreements, wherein revenue is recognized when the customerremoves the product from consignment stock. With the exception of consignmentstock, terms of shipment are FOB shipping point, and payment is not contingentupon resale or any other matter other than passage of time. As a result, titleto goods passes upon shipment. Amounts billed to customers for shipping costsare reflected in net sales; shipping costs are reflected in cost of sales.

**Property, Plant andEquipment**

Additions and improvementsare capitalized at cost, whereas expenditures for maintenance and repairs arecharged to expense as incurred. Depreciation is provided over the estimateduseful lives of the respective assets principally on the straight-linemethod (machinery and equipment normally five to ten years; buildings andleasehold improvements over the shorter of the lease term or the economic life,estimated at ten to forty years). 

**Goodwill**

In accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*,the Company reviews the carrying value of goodwill at least annually, and morefrequently if indicators of potential impairment arise. 

**Stock-BasedCompensation**

On December 16, 2004, the Financial AccountingStandards Board (FASB) issued SFAS No. 123 (revised 2004), *Share-Based Payment*, which is arevision of SFAS No. 123,*Accountingfor Stock-Based Compensation*. SFAS No. 123(R) supersedesAPB Opinion No. 25, *Accounting forStock Issued to Employees,* and amends SFAS No. 95, 

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*Statement of Cash Flows*.Generally, the approach in SFAS No. 123(R) is similar to the approachdescribed in SFAS No. 123. However, SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values.Pro forma disclosure is no longer an alternative.

Prior to fiscal year 2006, as was permitted under SFASNo. 123,**the Companyaccounted for stock-based awards using the intrinsic-value method under APB No. 25.Under APB No. 25, the Company recognized no compensation expense withrespect to such awards, as the exercise prices of stock option grants werealways equal to or greater than the market price of the stock at the grant date.Accordingly, no stock-based employee compensation expense for stock options isreflected in determining net loss in the accompanying consolidated financialstatements for fiscal year 2005.

Effective July 4, 2005 (fiscal 2006), the Companyadopted SFAS No. 123 (R), which requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theCompany’s financial statements based upon their fair values. The Companyselected the modified prospective method of adoption in which compensation costis recognized beginning with the effective date. Compensation cost recognizedfor the fiscal year ended July 2, 2006 is the same as that which wouldhave been recognized had the fair value method of SFAS No. 123 beenapplied from its original effective date. In accordance with the modifiedprospective method of adoption, the Company’s results of operations for priorperiods have not been restated.

In the fourth quarter of fiscal 2005, the Companyapproved the acceleration of the vesting of all out-of-the-money (“underwater”)unvested stock options held by the Company’s current employees, includingexecutive officers. A stock option was considered underwater if the optionexercise price was greater than $2.19 per share, which was the closing price ofthe Company’s common stock on June 1, 2005. No stock options held bydirectors were subject to the acceleration. The decision to accelerate vestingof these underwater options was made primarily to avoid recognizingcompensation cost in the consolidated statement of operations upon adoption ofSFAS No. 123 (R), as described above. As a result of the acceleration, theCompany reduced the stock option compensation expense it otherwise would berequired to record by approximately $1.9 million in fiscal 2006, $1.4 million infiscal 2007 and less than $0.1 million in fiscal 2008 on a pre-tax basis,resulting in an additional $3.4 million of pro-forma expense in fiscal 2005. Theaccelerated vesting was a modification of outstanding awards as defined by SFASNo. 123, which resulted in incremental pro-forma compensation expense of$0.3 million in fiscal 2005.

Thefollowing table illustrates the effect on net loss and loss per share as if thefair value method had been applied to all outstanding and unvested awards forthe year ended July 3, 2005:

| ***For the years ended***                                                          | ** ** | **July 3,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ***(Thousands except per share amounts)***                                    | ** ** | **2005**         | ** ** |
| Net loss - as reported                                                                            |       | $                | (26,870    | ) |
| Add: Stock-based compensation expense included in  reported net loss                              |       | 506              |       |
| Deduct: Total stock-based compensation expense determined  under fair value method for all awards |       | (8,894           | )          |
| Pro forma net  loss                                                                               |       | $                | (35,258    | ) |
| Loss per share as reported:                                                                       |       |             |       |
| Basic and diluted                                                                                 |       | $                | (0.94      | ) |
| Pro forma loss per share:                                                                         |       |             |       |
| Basic and diluted                                                                                 |       | $                | (1.24      | ) |

 

Compensation expenserelated to all stock-based awards for fiscal years 2007, 2006 and 2005 isincluded in selling, general and administrative expense in the consolidatedstatements of operations. No tax benefit was recorded on the stock compensationexpense for fiscal years 2007, 2006 and 2005 due to deferred tax valuationallowances recorded by the Company in those years.

**Recent AccountingPronouncements**

In September 2006, the FASB issued under SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension and Other PostRetirement Plans*, which requires the Company to recognize the over-fundedor under-funded status of a defined benefit postretirement plan as an asset orliability in the balance sheet and to recognize changes in that funded status inthe year in which the changes occur through comprehensive income. Additionally,SFAS No. 158 requires the Company to measure the 

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funded status of a plan as of the date of its fiscalyear-end. The requirement to recognize the funded status of a defined benefitpostretirement plan and the related disclosure requirements are effective forthe Company’s fiscal year ended July 1, 2007, while the requirement tomeasure the funded status as of fiscal year-end is not effective for theCompany until fiscal 2009. The Company’s adoption of SFAS No. 158 infiscal 2007 did not have a material effect on its financial position, results ofoperations or cash flows (see Note 13 of Notes to Consolidated FinancialStatements).

On July 13, 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(“FIN48”). FIN 48 creates a single model to address uncertainty in tax positions,clarifying the accounting for income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 applies to all taxpositions related to income taxes subject to SFAS No. 109, *Accounting for Income Taxes*.

FIN 48 utilizes a two-step approach for evaluating taxpositions. Recognition (step one) occurs when an enterprise concludes that atax position, based solely on its technical merits, is “more-likely-than-not”to be sustained upon examination. Measurement (step two) is only addressed ifstep one has been satisfied. Those tax positions failing to qualify for initialrecognition are recognized in the first subsequent interim period they meet themore-likely-than-not standard, or are resolved through negotiation orlitigation with the taxing authority, or upon expiration of the statute oflimitations. 

FIN 48 is effective for fiscal years beginning after December 15,2006. Differences between the amounts recognized in the statements of financialposition prior to the adoption of FIN 48 and the amounts reported afteradoption would be accounted for as a cumulative-effect adjustment recorded tothe beginning balance of retained earnings. The adoption of this pronouncementis not expected to have a material effect on the Company’s financial position,results of operations, or liquidity.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. SFAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The Company is currentlyassessing the impact of the adoption of this statement.

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – including an amendment of FASBStatement No. 115*. SFAS No. 159 provides companies with anoption to report selected financial assets and financial liabilities at fairvalue. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings at each subsequent reporting date. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. TheCompany is currently assessing the impact of the adoption of this statement.

**Research andDevelopment**

Expenditures for researchand development are charged to expense as incurred and totaled $4,689, $4,871,and $4,691, for the fiscal years 2007, 2006, and 2005, respectively.

**Advertising**

Expenditures foradvertising are charged to expense as incurred and totaled $119, $245, and $383for the fiscal years 2007, 2006, and 2005, respectively.

**Foreign CurrencyTranslation**

The Company’s foreignentities’ accounts are measured using local currency as the functional currency.Assets and liabilities are translated at the exchange rate in effect atyear-end. Revenues and expenses are translated at the rates of exchangeprevailing during the year. Unrealized translation gains and losses arisingfrom differences in exchange rates from period to period are included as acomponent of accumulated other comprehensive gain or loss in stockholders’equity.

**Deferred FinancingCosts**

Costs incurred to obtainfinancing are deferred and included in other assets in the consolidated balancesheets. Deferred financing costs are amortized over the term of the financingfacility, and related amortization expense was $1,250, $906 and $287 for thefiscal years 2007, 2006, and 2005, respectively. Amortization expense forfiscal 2007 includes the write-off of 

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$670 related to earlyrepayment of the Company’s term loan (see Note 6 of Notes to ConsolidatedFinancial Statements). These expenses are included in interest expense in theconsolidated statements of operations.

**Earnings Per Share**

In accordance with SFAS No. 128,*Earnings Per Share*, basic earnings pershare is computed using the weighted average number of common sharesoutstanding during the period. Diluted earnings per common share incorporatesthe incremental shares issuable upon the assumed exercise of stock options asif all exercises had occurred at the beginning of the fiscal year. 

**2.** DiscontinuedOperations

TheCompany’s power electronics business, divested in October 2006, as well ascertain expenses incurred related to businesses the Company no longer owns, areclassified as discontinued operations. The results of discontinued operationsare as follows:

| ** **                                                          | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ***For the years ended***                            | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Loss from  discontinued operations before interest and income taxes |       | $                | (1,434     | )                | $          | (41,003          | )          | $ | (18,974 | ) |
| Loss on sale of power electronics business                          |       | (420             | )          | -                |       | -                |       |
| Interest expense,  net                                              |       | 521              |       | 1,487            |       | 1,249            |       |
| Other income                                                        |       | -                |       | -                |       | (1,300           | )          |
| Provision  (benefit) for income taxes                               |       | 431              |       | (3,014           | )          | 1,396            |       |
| Loss from discontinued  operations                                  |       | $                | (2,806     | )                | $          | (39,476          | )          | $ | (20,319 | ) |

 

Loss from discontinued operations for the year ended July 1,2007 includes losses of the divested power electronics business of $2.3million, which includes the interest expense and provision for income taxes inthe table above, and the loss recorded on the sale of the power electronicsbusiness of $0.4 million. Interest expense included in discontinued operationsrepresents interest on debt of the power electronics business that was assumedby Power-One upon their purchase of the business. In addition, the fiscal 2007loss from discontinued operations includes expenses related to previouslydivested businesses of $1.7 million, comprised mainly of $1.0 million of legalfees related to the Nilssen patent award, asbestos claims and other legalmatters related to previously owned businesses, as well as charges of $0.8million to increase reserves for various workers compensation, environmentaland other contingencies (see Note 11 of Notes to Consolidated FinancialStatements). These charges were partially offset by $2.0 million of income fromthe favorable settlement of litigation in a development dispute with Samsung Electro-MechanicsCo., Ltd. (“SEMCO”), a Korean corporation, whereby SEMCO agreed to pay theCompany the total sum of $2.1 million in four semiannual installments (netpresent value of $2.0 million) between June 2007 and December 2008. Lossfrom discontinued operations also includes charges of $0.5 million for legalfees incurred related to the lawsuit and settlement of the dispute with SEMCO. Thetechnology in dispute was initially developed by the Company’s powerelectronics business and as a result, the impact of the resolution is recordedin discontinued operations.

Loss from discontinued operations in fiscal 2006 wascomprised of a goodwill impairment charge of $22.4 million, a charge for thewrite-off of the net basis of assets held for sale related to reclassificationof accumulated currency translation adjustment amounts of $10.6 million relatedto the planned divestiture of the power electronics business, losses in thediscontinued power electronics business of $2.8 million, and other expensesrelated to previously-owned businesses, mainly legal fees in the patentinfringement claim and environmental issues, as well as asbestos-related legalfees, totaling $3.6 million.

Loss from discontinued operations for fiscal 2005 includesa charge of $22.0 million related to a patent infringement claim (see Note 11of Notes to Consolidated Financial Statements), and charges for legal fees andother costs related to the patent infringement claim and the Company’s appealof the award, product liability claims, environmental issues and asbestosclaims totaling $4.7 million. Income from the discontinued power electronicsbusiness of $6.4 million is also included in loss from discontinued operationsin fiscal 2005.

22

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During the fourth quarter of fiscal year 2006, theCompany committed to a plan to divest its power electronics business. As aresult, in June 2006, the Company reclassified the assets and liabilitiesas held for sale and the results of this business as discontinued operations.The Company’s power electronics business was comprised mainly of the Company’swholly-owned subsidiaries Magnetek S.p.A. (Italy), Magnetek Kft. (Hungary) andMagnetek Electronics Co., Ltd. (China), and a North American divisionlocated in Chatsworth, California. The Company entered into an agreement tosell the business to Power-One (see Note 3 of Notes to ConsolidatedFinancial Statements), and the transaction was completed in October, 2006.

Theresults of the Company’s power electronics business are as follows:

| ** **                                                                   | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| *** For the years ended***                               | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
|  Net sales                                                              |       | $                | 53,545     |             | $          | 156,820          |       | $ | 166,390 |   |
| Income (loss) from discontinued operations before  interest and income taxes |       | $                | (1,319     | )                | $          | (37,388          | )          | $ | 7,701 |   |
| Interest expense,  net                                                       |       | 521              |       | 1,487            |       | 1,249            |       |
| Other income                                                                 |       | -                |       | -                |       | (1,300           | )          |
| Provision  (benefit) for income taxes                                        |       | 431              |       | (3,014           | )          | 1,396            |       |
| Income (loss) from  discontinued operations                                  |       | $                | (2,271     | )                | $          | (35,861          | )          | $ | 6,356 |   |

 

Based upon its determination of fair value, in thefourth quarter of fiscal 2006, the Company recorded a goodwill impairmentcharge of $22.4 million and an additional net asset impairment charge of $10.6million, equal to the net basis of assets held for sale related to thereclassification of accumulated translation adjustment amounts, which reducedthe carrying value of the business to the estimated fair value at July 2,2006. The impairment charges are included in loss from discontinued operationsin fiscal 2006 in the accompanying consolidated statements of operations.

Assetsand liabilities of the Company’s power electronics business classified as heldfor sale as of July 2, 2006 were as follows:

| ** **                                             | ** ** | **July 2,** | ** ** |
|--------------------------------------------------------|------------|------------------|------------|
| ** **                                             | ** ** | **2006**         | ** ** |
| Cash and  equivalents                                  |       | $                | 1,491      |   |
| Accounts receivable                                    |       | 51,431           |       |
| Inventories                                            |       | 45,438           |       |
| Net property, plant and  equipment                     |       | 27,320           |       |
| Other assets                                           |       | 18,485           |       |
| Assets of discontinued  power electronics business     |       | $                | 144,165    |   |
|     Eliminations                   |       | (3,616           | )          |
| Total assets                                           |       | $                | 140,549    |   |
| Accounts payable                                       |       | $                | 34,985     |   |
| Other current  liabilities                             |       | 5,926            |       |
| Other long term  liabilities                           |       | 10,728           |       |
| Long term debt                                         |       | 24,294           |       |
| Liabilities of discontinued power electronics business |       | $                | 75,933     |   |

 

During fiscal year 2005,the Company committed to a plan to divest its telecom power business, and as aresult, reclassified assets and liabilities as held for sale and the results ofthe business as discontinued operations. The Company did not complete thedivestiture of its telecom power business despite actively marketing thebusiness to potential interested parties. In October 2006, the Companydecided to retain the business, and accordingly, the operating results of itstelecom power business have been classified as continuing operations in theaccompanying consolidated statements of operations and its assets andliabilities have been reclassified from held for sale to held and used in theaccompanying consolidated balance sheets for all periods presented.

**3. Divestitureof Power Electronics Business**

On October 23, 2006, the Company completed thesale of its power electronics business to Power-One. The transaction, whichsatisfied all applicable regulatory approvals and other customary closingconditions, included payment by Power-One 

23

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to the Company of $68.0 million in cash and theassumption by Power-One of approximately $16.0 million of the Company’s debt,representing the total debt balances outstanding of the Company’s subsidiaryMagnetek, S.p.A. The Company used approximately $29.0 million of the proceedsto repay all of its remaining outstanding debt and in December 2006 made acontribution of $30.0 million to its defined benefit pension plan. The Companyintends to use the remainder of the proceeds from the sale of the businessprimarily to fund ongoing operations.

Pursuant to the purchase and sale agreement by andbetween the Company and Power-One, Power-One purchased the business through theacquisition of all of the outstanding shares of Magnetek, S.p.A., a subsidiaryof the Company, and of the assets and liabilities of the U.S. division of thebusiness. The terms of the agreement were negotiated at arms-length. Theagreement provided for a final purchase price adjustment to be negotiatedprimarily based on changes in tangible net worth of the business from September 28,2006 to the October 23, 2006 closing date. In February 2007, theCompany and Power-One completed negotiations of the final purchase priceadjustment. As a result, the Company paid a final settlement to Power-One of$2.3 million and recorded a loss on the sale of the power electronics businessof $0.4 million (net of amounts previously accrued), included in loss fromdiscontinued operations in the accompanying consolidated statements of operationsfor year ended July 1, 2007.

The agreement also provides indemnification forbreaches of representations and warranties and other customary matters that theCompany believes are typical for this type of transaction, includingindemnifications for certain tax, legal, environmental and warranty issues.

In June 2007, theCompany and Power-One completed negotiations related to a contingent softwareliability and as a result, the Company paid $0.6 million to Power-One. Theamount was previously accrued when the Company recorded the divestiture of thebusiness during the second quarter of fiscal 2007. The consolidated balancesheet as of July 1, 2007 includes certain accrued liabilities whichrepresent the Company’s best estimate of remaining closing costs and contingentliabilities related to the indemnification provisions of the purchase and saleagreement. While management has used its best judgment in assessing thepotential liability for these items, given the uncertainty regarding futureevents, it is difficult to estimate the possible timing or magnitude of anypayments that may be required for liabilities subject to indemnification. Anyfuture adjustment to currently recorded closing cost estimates or contingenciesrelated to indemnifications based upon changes in circumstances would also berecorded as a gain or loss on the sale of the business in discontinuedoperations.

**4. Goodwill**

The increase in thecarrying value of goodwill for the years ended July 1, 2007 and July 2,2006 was due to translation adjustments for goodwill denominated in foreigncurrencies.

**5. Inventories**

Inventoriesconsist of the following: 

| ** **            | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|-----------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **2007**         | ** ** | **2006**         | ** ** |
|  Raw materials   |       | $                | 11,046     |             | $          | 9,425 |   |
|  Work-in-process |       | 1,544            |       | 1,637            |       |
|  Finished  goods |       | 3,611            |       | 2,072            |       |
|                  |       | $                | 16,201     |             | $          | 13,134 |   |

 

**6. Long-TermDebt and Bank Borrowing Arrangements**

Long-termdebt consists of the following: 

| ** **                 | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **2007**         | ** ** | **2006**         | ** ** |
|  Term loan            |       |             | $          | -                |       |   | $ | 18,000 |   |
|  Revolving bank loans |       |             | -          |             |       | 9,412 |   |
|  Capital leases       |       |             | 32         |             |       | 43 |   |
|                       |       |             | 32         |             |       | 27,455 |   |
|  Less current portion |       |             | 11         |             |       | 27,412 |   |
|                       |       |             | $          | 21               |       |   | $ | 43 |   |

 

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**Bank BorrowingArrangements**

On September 30, 2005, the Company entered intoan agreement with Ableco Finance LLC (“Ableco”) providing for an $18 millionterm loan and an agreement with Wells Fargo Foothill, Inc. (“WFF”)providing for a $13 million revolving credit facility. Borrowings under theterm loan bore interest at the lender’s reference rate plus 5%, or, at theCompany’s option, the London Interbank Offering Rate (“LIBOR”) plus 7.5%. Suchrates could be increased by up to one percentage point depending upon the levelof the Company’s U.S. funded debt to EBITDA as defined in the agreement. Theterm loan required quarterly principal payments of $1 million beginning inOctober, 2006. Borrowings under the revolving credit facility, which expires inDecember 2007, bear interest at the bank’s prime lending rate plus 2.5% or,at the Company’s option, LIBOR plus 4%. Borrowing levels under the revolvingcredit facility are determined by a borrowing base formula as defined in theagreement, based on the level of eligible domestic accounts receivable andinventory. The revolving credit facility also supports the issuance of lettersof credit. Borrowings under the term loan were secured, and under the revolvingcredit facility are secured, by a lien over substantially all of the Company’sdomestic assets.

In November 2005, under terms of the financingagreements with WFF and Ableco, the Company deposited $22.6 million into anescrow account to fund the Nilssen arbitration award in the event that itsappeal of the award is not successful (see Note 11 of Notes to ConsolidatedFinancial Statements). The deposit is reported as restricted cash in theaccompanying consolidated balance sheets as of July 1, 2007 and July 2,2006.

As discussed in Notes 2and 3 of the Notes to Consolidated Financial Statements, the Company completedthe divestiture of its power electronics business in October 2006. TheCompany used a portion of the proceeds from the divestiture to repay allborrowings outstanding under its term loan and revolving credit facility.   In accordance with provisions of the agreementwith Ableco, the agreement was terminated prior to the December 2007expiration date in exchange for a $0.3 million prepayment penalty by theCompany. The prepayment penalty is included in other expense in theconsolidated statements of operations for fiscal 2007. In addition, thewrite-off of deferred financing costs of $0.7 million related to the term loanis included in interest expense in the consolidated statements of operationsfor fiscal 2007. The revolving credit facility remains in place and the Companyis currently in default under certain covenants of the revolving creditagreement. The Company is in the process of obtaining a waiver. There were noborrowings outstanding under the revolving credit facility as of July 1,2007.

**7. Loss PerShare**

Thefollowing table sets forth the computation of basic and diluted loss per sharefor the fiscal years ended:

| ** **                                                | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
|  Numerator:                                          |       |             |       |             |       |             |       |
|  Loss from  continuing operations                    |       | $                | (5,186     | )                | $          | (7,373           | )          | $ | (6,551 | ) |
|  Loss from  discontinued operations                  |       | (2,806           | )          | (39,476          | )          | (20,319          | )          |
|  Net loss                                            |       | $                | (7,992     | )                | $          | (46,849          | )          | $ | (26,870 | ) |
|  Denominator:                                        |       |             |       |             |       |             |       |
|  Weighted  average shares for basic loss per share   |       | 29,435           |       | 28,931           |       | 28,535           |       |
|  Add dilutive  effect of stock options outstanding   |       | -                |       | -                |       | -                |       |
|  Weighted  average shares for diluted loss per share |       | 29,435           |       | 28,931           |       | 28,535           |       |
|  Basic and  Diluted:                                 |       |             |       |             |       |             |       |
|  Loss per  share from continuing operations          |       | $                | (0.18      | )                | $          | (0.25            | )          | $ | (0.23 | ) |
|  Loss per  share from discontinued operations:       |       | $                | (0.10      | )                | $          | (1.36            | )          | $ | (0.71 | ) |
| Net loss per  share                                       |       | $                | (0.27      | )                | $          | (1.62            | )          | $ | (0.94 | ) |

 

Due to the loss fromcontinuing operations, the loss from discontinued operations, and the net lossfor all periods presented, the dilutive effect of stock options outstanding wasexcluded from the calculation of diluted loss per share for all periodspresented, as the impact would be anti-dilutive.

25

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**8. FairValues of Financial Instruments**

The carrying amounts ofcertain financial instruments including cash, restricted cash, accountsreceivable, accounts payable and investments in annuity contracts approximatetheir fair values, based on the short-term nature of these instruments. Inaddition, the Company’s investment in an annuity contract of $6.0 millionand $6.3 million at July 1, 2007 and July 2, 2006 respectivelyis recorded at fair value based on quoted market prices. The annuity contractis included in other assets in the accompanying consolidated balance sheets.

**9. RestructuringCosts**

During fiscal 2007, the Company completed a series ofrestructuring activities that impacted its operating results. SFAS No. 146,*Accounting for Costs Associated with Exit orDisposal Activities* requires that liabilities for costs associatedwith exit or disposal activities initiated after December 31, 2002, berecognized when the liability is incurred, with the exception of termination ofcertain leases and contracts.

Following the divestiture ofits power electronics business in October, 2006, the Company downsizedand relocated its corporate office to Menomonee Falls, Wisconsin fromChatsworth, California. In addition, the Company decided to retain andrestructure the telecom power business, including relocating the manufacturingoperations from Dallas, Texas to Menomonee Falls.

The consolidated statement of operations for fiscal2007 includes severance and related costs of $1.9 million related to downsizingthe corporate office, of which $0.6 million is included in research and developmentexpense and $1.3 million is included in selling, general and administrativeexpense. All of the severance amounts were paid during fiscal 2007.

Costs incurred during fiscal 2007 related to therestructuring and relocation of the telecom power business, including inventorycharges and duplicate facility and labor costs, were $0.9 million, of which$0.8 million are included in cost of sales and $0.1 million in selling, generaland administrative expense in the consolidated statements of operations for fiscal2007. The Company completed these restructuring activities during the thirdquarter of fiscal 2007.

In the fourth quarter offiscal 2004, the Company began the consolidation of its Glendale Heights, ILoperation into its Menomonee Falls, WI facility. The Company completed theserestructuring activities in fiscal 2005. Costs incurred were $0.9 million forfiscal 2005, of which $0.2 million is included in cost of goods sold and $0.7million is included in selling, general and administrative expense in theaccompanying consolidated statement of operations.

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**10. Income Taxes**

Theprovision (benefit) for income taxes consists of the following:

| ** **                            | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|---------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ***Fiscal year ended***     | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| *Continuing  Operations:*             | ** ** |             | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| Current:                              |       |             |       | ** **       |       |             |       |   |   |   |   |
| Federal                               |       |             | $          | –           | ** ** |             | $          | – |   |   | $ | (85 | ) |   |
| State                                 |       |             | –     | ** **       |       | –           |       |   | – |   |   |
| Foreign                               |       |             | 393        | ** **       |       | 437              |       |   | 203 |   |   |
| Deferred:                             |       |             |       | ** **       |       |             |       |   |   |   |   |
| Federal                               |       |             | 900        | ** **       |       | 1,102            |       |   | 911 |   |   |
| State and foreign                     |       |             | –     | ** **       |       | –           |       |   | – |   |   |
| Total continuing  operations          |       |             | $          | 1,293            | ** ** |             | $          | 1,539 |   |   | $ | 1,029 |   |   |
| *Discontinued Operations:*            | ** ** |             | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| Current:                              |       |             |       | ** **       |       |             |       |   |   |   |   |
| Federal                               |       |             | $          | –           | ** ** |             | $          | – |   |   | $ | – |   |   |
| State                                 |       |             | –     | ** **       |       | –           |       |   | – |   |   |
| Foreign                               |       |             | 431        | ** **       |       | 1,505            |       |   | 898 |   |   |
| Deferred:                             |       |             |       | ** **       |       |             |       |   |   |   |   |
| Federal                               |       |             | –     | ** **       |       | (3,133           | )          |   | 685 |   |   |
| State and foreign                     |       |             | –     | ** **       |       | (1,386           | )          |   | (187 | ) |   |
| Total  discontinued operations        |       |             | $          | 431              | ** ** |             | $          | (3,014 | ) |   | $ | 1,396 |   |   |
| *Total Company:*                      | ** ** |             | ** ** | ** **       |       | ** **       | ** ** |   | ** ** | ** ** |   |
| Current:                              |       |             |       | ** **       |       |             |       |   |   |   |   |
| Federal                               |       |             | $          | –           | ** ** |             | $          | – |   |   | $ | (85 | ) |   |
| State                                 |       |             | –     | ** **       |       | –           |       |   | – |   |   |
| Foreign                               |       |             | 824        | ** **       |       | 1,942            |       |   | 1,101 |   |   |
| Deferred:                             |       |             |       | ** **       |       |             |       |   |   |   |   |
| Federal                               |       |             | 900        | ** **       |       | (2,031           | )          |   | 1,596 |   |   |
| State and foreign                     |       |             | –     | ** **       |       | (1,386           | )          |   | (187 | ) |   |
| Total income tax  provision (benefit) |       |             | $          | 1,724            | ** ** |             | $          | (1,475 | ) |   | $ | 2,425 |   |   |

 

Areconciliation of the Company’s effective tax rate for continuing operations tothe statutory Federal tax rate is as follows:

| ** **                             | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| ***Fiscal year ended***      | ** ** | **Amount**       | ** ** | **%**            | ** ** | **Amount**       | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Benefit computed at the statutory rate |       |             | $          | (1,363           | )          |             | 35.0       |   |   | $ | (1,943 | ) |   | 35.0 |   |   | $ | (1,578 | ) |   | 35.0 |   |
| Losses not  benefited                  |       |             | 2,656      |             |       | (68.2            | )          |   | 3,482 |   |   | (62.7 | ) |   | 2,607 |   |   | (57.8 | ) |
| Total income tax  provision            |       |             | $          | 1,293            |       |             | (33.2      | ) |   | $ | 1,539 |   |   | (27.7 | ) |   | $ | 1,029 |   |   | (22.8 | ) |

 

Income before provision for income taxes of theCompany’s foreign subsidiaries (located in Canada and the United Kingdom)included in continuing operations was approximately $1,124, $1,192 and $969 forfiscal years 2007, 2006 and 2005, respectively.

27

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Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of theCompany’s deferred tax liabilities and assets as of July 1, 2007 andJuly 2, 2006 are as follows:

| ** **                                                                             | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **2007**         | ** ** | **2006**         | ** ** |
| Deferred tax  liabilities:                                                             |       |             |       |             |       |
| Depreciation and amortization (including differences  in the basis of acquired assets) |       | $                | (3,080     | )                | $          | (2,109 | ) |
| Total deferred  tax liabilities                                                        |       | (3,080           | )          | (2,109           | )          |
| Deferred tax  assets:                                                                  |       |             |       |             |       |
| Accrued arbitration award, inventory and other  reserves                               |       | 12,249           |       | 10,980           |       |
| Net operating loss and capital loss carryforwards                                      |       | 85,325           |       | 72,520           |       |
| Total gross  deferred tax assets                                                       |       | 97,574           |       | 83,500           |       |
| Less: valuation  allowance                                                             |       | (97,480          | )          | (83,477          | )          |
| Deferred tax  assets less valuation allowance                                          |       | 94               |       | 23               |       |
| Net deferred tax  liability                                                            |       | $                | (2,986     | )                | $          | (2,086 | ) |

 

The Company records valuation allowances against itsdeferred tax assets, when necessary, in accordance with SFAS No. 109,*Accounting for Income Taxes.*Realizationof deferred tax assets (such as net operating loss carryforwards and income taxcredits) is dependent on future taxable earnings and is therefore uncertain. Tothe extent the Company believes that recovery is unlikely, a valuationallowance is established against its deferred tax asset, increasing its incometax expense in the period such determination is made. Due to the uncertaintysurrounding the timing of realizing the benefits of its deferred tax assets infuture tax returns, the Company has recorded a valuation allowance against itsotherwise recognizable deferred tax assets.

The Company has a netoperating and capital loss carryforward for tax purposes of $178,000 and$146,000 as of July 1, 2007 and July 2, 2006, respectively, expiringbetween fiscal years 2013 and 2027.

**11. Commitments andContingencies**

**Leases**

The Company leases certainfacilities and machinery and equipment primarily under operating leasearrangements, which generally provide renewal options. Future minimum rentalpayments under noncancelable operating leases as of July 1, 2007 are asfollows:

| ** **             | ** ** | **Minimum**  | ** ** | **Minimum**  | ** ** | **Net**      | ** ** |
|------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **             | ** ** | **Lease**    | ** ** | **Sublease** | ** ** | **Lease**    | ** ** |
| ***Fiscal Year*** | ** ** | **Payments** | ** ** | **Rentals**  | ** ** | **Payments** | ** ** |
| 2008                   |       |         | $          | 3,039        |       |         |       | $ | 1,986 |   |   |   | $ | 1,053 |   |   |
| 2009                   |       |         | 3,022      |         |       |         | 2,025      |   |   |   | 997 |   |   |
| 2010                   |       |         | 2,561      |         |       |         | 2,066      |   |   |   | 495 |   |   |
| 2011                   |       |         | 2,440      |         |       |         | 345        |   |   |   | 2,095 |   |   |
| 2012                   |       |         | 2,408      |         |       |         | -          |   |   |   | 2,408 |   |   |
| Thereafter             |       |         | 7,108      |         |       |         | -          |   |   |   | 7,108 |   |   |
|                   |       |         | $          | 20,578       |       |         |       | $ | 6,422 |   |   |   | $ | 14,156 |   |   |

 

For fiscal years 2007,2006 and 2005, rent expense was $3.2 million, $3.4 million and $4.1 millionrespectively, while sublease rental income was $1.9 million in each fiscalyear.

**Litigation—ProductLiability**

The Company has settled or otherwise resolved all ofthe product liability lawsuits associated with its discontinued businessoperations except for any potential future product liability claims which mayarise in connection with the recent sale of the Company’s Power Electronicsbusiness (see Note 3 of Notes to Consolidated Financial Statements). The lastremaining limited obligation to defend and indemnify the purchaser of adiscontinued business operation (other than Power-One) against new productliability or warranty claims expired in December 2003 and the Companybelieves that any new claims would either qualify as an assumed liability, asdefined in the various purchase agreements, or would be barred by an 

28

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applicable statute of limitations. The Company is alsoa named party in two product liability lawsuits related to the Telemotive IndustrialControls business acquired in December 2002 through the purchase of thestock of MXT Holdings, Inc.  Both claims pre-dated the acquisitionand were tendered to the insurance companies that provided coverage for MXTHoldings, Inc., against such claims and the defense and indemnificationhas been accepted by the carriers, subject to a reservation of rights.Management believes that the insurers will bear all liability, if any, withrespect to both cases and that the proceedings, individually or in the aggregate,will not have a material adverse effect on the Company’s results of operationsor financial position.

In August 2006, Pamela L. Carney, Administratorof the Estate of Michael J. Carney, filed a lawsuit in the Court of CommonPleas of Westmoreland County, Pennsylvania, against the Company and otherdefendants, alleging that a product manufactured by the Telemotive IndustrialControls business acquired by the Company in December 2002 contributed toan accident that resulted in the death of Michael J. Carney inAugust 2004. The claim has been tendered to the Company’s insurancecarrier and legal counsel has been retained to represent the Company.Plaintiff’s claim for damages is unknown at this time, but management believesthat its insurers will bear all liability in excess of deductible amounts forthe claim, if any.

The Company has beennamed, along with multiple other defendants, in asbestos-related lawsuitsassociated with business operations previously acquired by the Company, butwhich are no longer owned. During the Company’s ownership, none of thebusinesses produced or sold asbestos-containing products. With respect tothese claims, the Company is either contractually indemnified against liabilityfor asbestos-related claims or believes that it has no liability for suchclaims. The Company aggressively seeks dismissal from these proceedings, andhas also tendered the defense of these cases to the insurers of the previouslyacquired businesses. Several insurance carriers have recently filed a declaratoryjudgment action relating to insurance coverage for such previously acquiredbusinesses, seeking a determination that no coverage is available under thepolicies. The Company has also filed late claims in the Federal-Mogulbankruptcy proceedings to recover attorney’s fees paid for the defense of theseclaims. The Company and Federal-Mogul entered into a settlement agreement underwhich the Company is entitled to receive amounts from a settlement trustestablished under Federal-Mogul’s reorganization plan and funded by insuranceproceeds. The Company is entitled to receive 15% of the first $20 million and10% of the next $25 million of insurance proceeds, up to a maximum of $5.5million, in exchange for withdrawing its bankruptcy claims and objections tothe reorganization plan and execution of certain releases. The settlement issubject to final approval of the plan by the Bankruptcy Court. There is noguarantee that any amounts will be collected on any insurance policies, andFederal-Mogul and the trust have control over the collection process.Management does not believe the asbestos proceedings, individually or in theaggregate, will have a material adverse effect on its financial position orresults of operations.

**Litigation—PatentInfringement**

In April 1998, Ole K. Nilssen filed a lawsuit inthe U.S. District Court for the Northern District of Illinois alleginginfringement by the Company of seven of his patents pertaining to electronicballast technology, and seeking unspecified damages and injunctive relief topreclude the Company from making, using or selling products allegedlyinfringing his patents. The Company denied that its products infringed anyvalid patent and filed a response asserting affirmative defenses, as well as acounterclaim for a judicial declaration that its products do not infringe thepatents asserted by Mr. Nilssen and also that the asserted patents areinvalid. In June 2001, the Company sold its lighting business to UniversalLighting Technologies, Inc. (“ULT”), and agreed to provide a limitedindemnification against certain claims of infringement that Nilssen mightallege against ULT. In April 2003, Nilssen’s lawsuit and the counterclaimswere dismissed with prejudice and both parties agreed to submit limited issuesin dispute to binding arbitration before an arbitrator with a relevanttechnical background. The arbitration occurred in November, 2004 and a decisionawarding Nilssen $23.4 million was issued on May 3, 2005, to be paidwithin ten days of the award. Nilssen’s counsel filed a motion to enter theaward in U.S. District Court for the Northern District of Illinois, andMagnetek filed a counter-motion to vacate the award for a number of reasons,including that the award was fraudulently obtained. Magnetek’s request for oralargument was granted and the hearing took place on October 19, 2005. Adecision has not been announced. An unfavorable decision by the Court wouldlikely result in payment of the award to Nilssen.

In February 2003,Nilssen filed a second lawsuit in the U.S. District Court for the NorthernDistrict of Illinois alleging infringement by ULT of twenty-nine of his patentspertaining to electronic ballast technology, and seeking unspecified damagesand injunctive relief to preclude ULT from making, using or selling productsallegedly infringing his patents. ULT made a claim for indemnification, whichthe Company accepted, subject to the limitations set forth in the saleagreement. The case is now pending in the Middle District of Tennessee. Nilssenvoluntarily dismissed all but four of the patents from the lawsuit. The Companydenies that the products for which it has an indemnification obligation to ULTinfringe any valid 

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patent and responded onbehalf of ULT asserting affirmative defenses, as well as a counterclaim for ajudicial declaration that the patents are unenforceable and invalid and thatthe products do not infringe Nilssen’s patents.  The case against ULT hasbeen stayed pending Nilssen’s appeal of an unfavorable decision against him inanother case that could influence the outcome of his lawsuits against ULT. Oralarguments were heard by the appellate court in July on Nilssen’s appeal.ULT requested a re-examination of the patents at issue by the Patent andTrademark Office (PTO) and the PTO recently rejected claims in two of thepatents at issue in the lawsuit against ULT. The Company will continue toaggressively defend the claims against ULT that are subject to defense andindemnification; however, an unfavorable decision could have a material adverseeffect on the Company’s financial position, cash flows and results ofoperations.

**EnvironmentalMatters - General**

From time to time, Magnetek has taken action to bringcertain facilities associated with previously owned businesses into compliancewith applicable environmental laws and regulations. Upon the subsequent sale ofcertain businesses, the Company agreed to indemnify the buyers againstenvironmental claims associated with the divested operations, subject tocertain conditions and limitations. Remediation activities, including thoserelated to the Company’s indemnification obligations, did not involve materialexpenditures during fiscal years 2007, 2006, or 2005.

The Company has also beenidentified by the United States Environmental Protection Agency and certainstate agencies as a potentially responsible party for cleanup costs associatedwith alleged past waste disposal practices at several previously ownedfacilities and offsite locations. Its remediation activities as a potentiallyresponsible party were not material in fiscal years 2007, 2006 and 2005.Although the materiality of future expenditures for environmental activitiesmay be affected by the level and type of contamination, the extent and natureof cleanup activities required by governmental authorities, the nature of theCompany’s alleged connection to the contaminated sites, the number andfinancial resources of other potentially responsible parties, the availabilityof indemnification rights against third parties and the identification ofadditional contaminated sites, the Company’s estimated share of liability, ifany, for environmental remediation, including its indemnification obligations,is not expected to be material.

*Century Electric(McMinnville, Tennessee)*

Prior to the Company’spurchase of Century Electric, Inc. (“Century Electric”) in 1986, CenturyElectric acquired a business from Gould Inc. (“Gould”) in May 1983that included a leasehold interest in a fractional horsepower electric motormanufacturing facility located in McMinnville, Tennessee. Gould agreed toindemnify Century Electric from and against liabilities and expenses arisingout of the handling and cleanup of certain waste materials, including but notlimited to cleaning up any polychlorinated biphenyls (“PCBs”) at theMcMinnville facility (the “1983 Indemnity”). The presence of PCBs and othersubstances, including solvents, in the soil and in the groundwater underlyingthe facility and in certain offsite soil, sediment and biota samples has beenidentified. The McMinnville plant is listed as a Tennessee Inactive HazardousWaste Substance Site and plant employees were notified of the presence ofcontaminants at the facility. Gould has completed an interim remedialexcavation and disposal of onsite soil containing PCBs and a preliminaryinvestigation and cleanup of certain onsite and offsite contamination. TheCompany believes the cost of further investigation and remediation (includingancillary costs) are covered by the 1983 Indemnity. The Company sold its leaseholdinterest in the McMinnville plant in August 1999 and while the Companybelieves that Gould will continue to perform substantially under its indemnityobligations, Gould’s substantial failure to perform such obligations could havea material adverse effect on the Company’s financial position, cash flows andresults of operations.

*Environmental—Effectof Fruit of the Loom Bankruptcy (Bridgeport, Connecticut)*

In 1986, the Company acquired the stock of UniversalManufacturing Company (“Universal”) from a predecessor of Fruit of the Loom(“FOL”), and the predecessor agreed to indemnify the Company against certainenvironmental liabilities arising from pre-acquisition activities at a facilityin Bridgeport, Connecticut. Environmental liabilities covered by theindemnification agreement include completion of additional cleanup activities,if any, at the Bridgeport facility and defense and indemnification againstliability for potential response costs related to offsite disposal locations.The Company’s leasehold interest in the Bridgeport facility was assigned to thebuyer in connection with the sale of the Company’s transformer business inJune 2001. FOL, the successor to the indemnification obligation, filed apetition for Reorganization under Chapter 11 of the Bankruptcy Code in 1999 andthe Company filed a proof of claim in the proceeding for obligations related tothe environmental indemnification agreement. The Company believes that FOL hadsubstantially completed the clean-up obligations required by theindemnification agreement prior to the bankruptcy filing. InNovember 2001, the Company and FOL entered into an agreement involving theallocation of certain potential tax benefits and Magnetek 

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withdrew its claims in the bankruptcy proceeding.FOL’s obligation to the state of Connecticut was not discharged in thereorganization proceeding. 

In October 2006, theowner of the Bridgeport facility filed a lawsuit in Superior Court, J.D. ofFairfield, Connecticut alleging that the Company is obligated to remediateenvironmental contamination at the facility. The Company filed a Motion to Stayand Remand the matter to the Connecticut Department of Environmental Protection(“DEP”) on the basis that DEP has primary jurisdiction to determine the needand responsibility for any further remediation. Following the court’s denial ofsuch motion, the Company filed its answer, affirmative defenses andcounterclaims. Plaintiff amended its complaint, alleging breach of leaseobligations and violation of Connecticut environmental statutory requirements.The case is in discovery. DEP recently requested parties, including theCompany, to submit reports summarizing the investigations and remediationperformed to date at the site and the proposed additional investigations and remediationnecessary to complete those actions at the site. DEP requested additionalinformation from the Company relating to site investigations and remediation.DEP also conducted an on-site inspection at the Bridgeport facility. FOL’sinability to satisfy its remaining obligations related to the Bridgeportfacility and any offsite disposal locations, or an unfavorable ruling in thelawsuit with the owner of the Bridgeport facility, or the discovery ofadditional environmental contamination at the Bridgeport facility could have amaterial adverse effect on the Company’s financial position, cash flows orresults of operations.

**Litigation—Breachof Contract**

On May 1, 2007, theCompany entered into an agreement to settle litigation withSamsung-Electro-Mechanics Co., Ltd. (SEMCO), a Korean corporation, wherebySEMCO agreed to pay the Company the total sum of $2.12 million in foursemi-annual installments between June 1, 2007 and December 1, 2007 toresolve a dispute in a development agreement. The net present value of thesettlement amount, $2.0 million of income, as well as legal fees of $0.5million incurred during the fourth quarter of fiscal 2007 related to thesettlement, are included in results of discontinued operations in theaccompanying consolidated statement of operations for fiscal 2007.

**Letters of Credit**

The Company hadapproximately $0.9 million of outstanding letters of credit as of July 1,2007. The Company’s revolving credit agreement dated September 30, 2005permits the issuance of up to $4.0 million of letters of credit.

**12. Stock-BasedCompensation Agreements**

The Company has two stock option plans (the “Plans”),one of which provides for the issuance of both incentive stock options (underSection 422A of the Internal Revenue Code of 1986) and non-qualifiedstock options at exercise prices not less than the fair market value at thedate of grant, and one of which only provides for the issuance of non-qualifiedstock options at exercise prices not less than the fair market value at thedate of grant. One of the Plans also provides for the issuance of stockappreciation rights, restricted stock, incentive bonuses and incentive stockunits. The total number of shares of the Company’s common stock authorized tobe issued upon exercise of the stock options and other stock rights under thePlans is 2,100,000.

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Asummary of certain information with respect to outstanding options under thePlans is as follows (options in thousands):

| ** **                              | ** ** | ** **  | ** ** | **Weighted-** | ** ** | **Aggregate**     | ** ** |
|-----------------------------------------|------------|-------------|------------|---------------|------------|-------------------|------------|
| ** **                              | ** ** | ** **  | ** ** | **Average**   | ** ** | **Intrinsic**     | ** ** |
| ** **                              | ** ** | ** **  | ** ** | **Exercise**  | ** ** | **Value**         | ** ** |
| ** **                              | ** ** | **Options** | ** ** | **Price**     | ** ** | **($000’s)** | ** ** |
| Options outstanding, June 27, 2004 |       |        | 7,949      |          |       |              | $          | 8.92 |   |   |   |   |   |   |
| Granted                                 |       |        | 750        |          |       |              | 7.48       |   |   |   |   |   |   |
| Exercised                               |       |        | (53        | )             |       |              | 3.26       |   |   |   | $ | 128 |   |   |
| Cancelled                               |       |        | (468       | )             |       |              | 9.83       |   |   |   |   |   |   |
| Options  outstanding, July 3, 2005 |       |        | 8,178      |          |       |              | $          | 8.77 |   |   |   | – |   |   |
| Granted                                 |       |        | 45         |          |       |              | 2.53       |   |   |   |   |   |   |
| Exercised                               |       |        | (3         | )             |       |              | 3.35       |   |   |   | $ | 2 |   |   |
| Cancelled                               |       |        | (1,131     | )             |       |              | 10.05      |   |   |   |   |   |   |
| Options  outstanding, July 2, 2006 |       |        | 7,089      |          |       |              | $          | 8.53 |   |   |   | $ | 19 |   |   |
| Granted                                 |       |        | 123        |          |       |              | 5.33       |   |   |   |   |   |   |
| Exercised                               |       |        | (783       | )             |       |              | 3.90       |   |   |   | $ | 1,118 |   |   |
| Cancelled                               |       |        | (1,145     | )             |       |              | 9.28       |   |   |   |   |   |   |
| Options  outstanding, July 1, 2007 |       |        | 5,284      |          |       |              | $          | 8.96 |   |   |   | $ | 1,344 |   |   |
| Exercisable options, July 3, 2005  |       |        | 8,096      |          |       |              | $          | 8.81 |   |   |   | $ | – |   |   |
| Exercisable  options, July 2, 2006 |       |        | 7,003      |          |       |              | $          | 8.59 |   |   |   | 8 |   |   |
| Exercisable options,  July 1, 2007 |       |        | 5,151      |          |       |              | $          | 9.07 |   |   |   | $ | 1,314 |   |   |

 

Thefair value of the Company’s stock option grants was estimated using theBlack-Scholes valuation model, assuming no dividends, with the followingassumptions:

| ** **                                      | ** ** | **Options** | ** ** |
|-------------------------------------------------|------------|-------------|------------|
| ** **                                      | ** ** | **2007**    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected life in  years                         |       | 6.1         |       | 6.1 |   | 6.1 |   |
| Expected stock  price volatility                |       | 65.5        | %          | 66.6 | % | 72.2 | % |
| Risk-free  interest rate                        |       | 4.9         | %          | 5.1 | % | 4.4 | % |
| Options granted  (in thousands)                 |       | 123         |       | 45 |   | 750 |   |
| Weighted average fair  value of options granted |       | $           | 3.42       |   | $ | 1.65 |   | $ | 5.04 |   |
|                                                 |            |             |            |  |  |  |  |  |  |  |

 

Thefollowing table provides information regarding exercisable and outstandingoptions as of July 1, 2007 (options in thousands):

| ** **                                                       | ** ** | **Exercisable** | ** ** | **Outstanding**    | ** ** |
|------------------------------------------------------------------|------------|-----------------|------------|--------------------|------------|
| ** **                                                       | ** ** | ** **      | ** ** | **Weighted**       | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted** | ** ** |
| ** **                                                       | ** ** | ** **      | ** ** | **average**        | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** | **average** | ** ** |
| ** **                                                       | ** ** | ** **      | ** ** | **exercise**       | ** ** | **remaining** | ** ** | ** ** | ** ** | **exercise** | ** ** | **remaining** | ** ** |
| ** **                                                       | ** ** | **Options**     | ** ** | **price per** | ** ** | **contractual** | ** ** | **Options** | ** ** | **price per** | ** ** | **contractual** | ** ** |
| ***Range of exercise price per share*** | ** ** | **exercisable** | ** ** | **share**          | ** ** | **life (years)** | ** ** | **outstanding** | ** ** | **share** | ** ** | **life (years)** | ** ** |
| Under $5.00                                                      |       |            | 1,002      |               |       |   | $ | 3.84 |   |   |   | 6.2 |   |   |   | 1,012 |   |   |   | $ | 3.82 |   |   |   | 6.2 |   |   |
| $5.00 - $10.00                                                   |       |            | 2,536      |               |       |   | 7.80 |   |   |   | 4.3 |   |   |   | 2,659 |   |   |   | 7.68 |   |   |   | 4.5 |   |   |
| $10.01 - $15.00                                                  |       |            | 772        |               |       |   | 11.35 |   |   |   | 3.6 |   |   |   | 772 |   |   |   | 11.35 |   |   |   | 3.6 |   |   |
| Over $15.00                                                      |       |            | 841        |               |       |   | 17.02 |   |   |   | 1.0 |   |   |   | 841 |   |   |   | 17.02 |   |   |   | 1.0 |   |   |
| Total                                                            |       |            | 5,151      |               |       |   | $ | 9.07 |   |   |   | 4.0 |   |   |   | 5,284 |   |   |   | $ | 8.96 |   |   |   | 4.2 |   |   |

 

During fiscal 2005, the Company issued 240,000 sharesof restricted stock to its CEO with immediate vesting. Accordingly, the Companyrecorded stock compensation expense related to the grant of $0.5 million duringfiscal 2005.

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In August 2005 (fiscal 2006), the Company granted500,000 shares of restricted stock (the “August 2005 stock grant”) with afair value of $2.77 per share to certain officers and key employees. Therestricted shares fully vest on January 1, 2009. The divestiture of theCompany’s power electronics business in October 2006 resulted in theforfeiture of 90,000 shares of the August 2005 stock grant from employeesof the power electronics business. The divestiture also resulted in thetermination of several corporate officers and the accelerated vesting of175,000 shares of the August 2005 stock grant that were granted to theseofficers. Compensation expense related to the August 2005 stock grant infiscal 2007 and 2006 was $0.3 million and $0.4 million respectively. As of July 1,2007, there was $0.3 million of total unrecognized compensation cost related tothe grant, to be expensed ratably over a weighted-average remaining period of1.5 years.

In July 2006 (fiscal 2007), the Company granted abonus equal to 200,000 shares of common stock to its former CEO who elected todefer the shares pursuant to the terms of the Director and Officer Compensationand Deferral Investment Plan (“DDIP”) pending approval of an amendment to theDDIP by the Company’s shareholders. Such amendment was approved at the annualmeeting of the shareholders on October 25, 2006. The Company recordedcompensation expense of $1.0 million related to the bonus in fiscal 2007.

In January and February, 2007, the Company issuedan aggregate of 100,000 stock options at exercise prices of $5.31 and $5.83,equal to the market prices of the Company’s common stock at the respectivegrant dates. The shares vest ratably over a four year period. Compensationexpense related to the January and February 2007 stock option grantsin fiscal 2007 was $38, and as of July 1, 2007, there was $0.3 million oftotal unrecognized compensation cost related to the grant, to be expensedratably over a weighted-average remaining period of 3.5 years.

Also in January 2007, the Company granted anaggregate of 90,000 shares of restricted stock to certain officers which veston January 1, 2010 and also entered into an agreement with the Company’sCEO whereby the CEO will receive cash bonuses payable quarterly in an amountequal to the fair market value of 6,250 shares of common stock (for a total of12 payments with a total value equal to 75,000 shares). The Company’s CEOhas elected to defer the bonus payments pursuant to the terms of the DDIP. Paymentsunder the DDIP are made in shares of common stock and the amounts deferred arepaid in January following the year in which the termination of service asa key executive occurs. The shares awarded under both of these arrangements hada fair value of $4.98 per share at the grant date. Compensation expense of $0.1million related to both of these grants was included in the consolidatedstatements of operations for fiscal 2007. As of July 1, 2007, there was$0.7 million of total unrecognized compensation cost remaining, to be expensedratably over a weighted-average remaining period of 2.5 years.

In June, 2007, the Company issued 22,500 stock optionsto directors at an exercise price of $5.185, equal to the market price of theCompany’s common stock at the grant date. The shares vest ratably over a twoyear period. Compensation expense related to director stock option grants infiscal 2007 and 2006 was $0.1 million in each year. As of July 1, 2007,there was $0.1 million of total unrecognized compensation cost related todirector grants, to be expensed ratably over a weighted-average remainingperiod of 1.5 years.

Thefollowing table provides information regarding unvested restricted stockactivity for the fiscal years 2005, 2006 and 2007 (shares in thousands):

| ** **                      | ** ** | ** ** | ** ** | **Weighted**        | ** ** | **Weighted**        | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|---------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **average**         | ** ** | **average**         | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **grant date** | ** ** | **grant date** | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **fair value** | ** ** | **fair value** | ** ** |
| Unvested at  June 27, 2004 |       |       | –     |                |       |                | $          | – |   |   |   |   |   |   |
| Granted                         |       |       | 240        |                |       |                | 2.11       |   |   |   |   |   |   |
| Vested                          |       |       | (240       | )                   |       |                | 2.11       |   |   |   | $ | 506 |   |   |
| Forfeited                       |       |       | –     |                |       |                | –     |   |   |   |   |   |   |
| Unvested at  July 3, 2005  |       |       | –     |                |       |                | $          | – |   |   |   |   |   |   |
| Granted                         |       |       | 500        |                |       |                | $          | 2.77 |   |   |   |   |   |   |
| Vested                          |       |       | –     |                |       |                | –     |   |   |   |   |   |   |
| Forfeited                       |       |       | –     |                |       |                | –     |   |   |   |   |   |   |
| Unvested at  July 2, 2006  |       |       | 500        |                |       |                | $          | 2.77 |   |   |   |   |   |   |
| Granted                         |       |       | 90         |                |       |                | $          | 4.98 |   |   |   |   |   |   |
| Vested                          |       |       | (175       | )                   |       |                | 2.77       |   |   |   | $ | 847 |   |   |
| Forfeited                       |       |       | (120       | )                   |       |                | 2.77       |   |   |   |   |   |   |
| Unvested at July 1,  2007  |       |       | 295        |                |       |                | $          | 3.44 |   |   |   |   |   |   |

 

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Thefollowing table summarizes stock-based compensation expense included in sales,general and administrative expense in the accompanying consolidated statementsof operations related to all share-based awards for the fiscal years ended: 

| ** **                                               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Shares granted to  the Company’s former CEO         |       |             | $          | 952              |       |             |       | $ | - |   |   |   | $ | 506 |   |   |
| August 2005  restricted stock grant                 |       |             | 334        |             |       |             | 354        |   |   |   | - |   |   |
| January 2007  restricted stock grant and CEO bonus  |       |             | 136        |             |       |             | -          |   |   |   | - |   |   |
| Director stock  option grants                            |       |             | 95         |             |       |             | 146        |   |   |   | - |   |   |
| January and  February 2007 stock option grants |       |             | 38         |             |       |             | -          |   |   |   | - |   |   |
| Total stock-based  compensation expense                  |       |             | $          | 1,555            |       |             |       | $ | 500 |   |   |   | $ | 506 |   |   |

 

In addition, the Companyrecognized $112 of stock-based compensation in discontinued operations relatedto the accelerated vesting of certain restricted stock in connection with thedivestiture of the power electronics business.

**13.**          EmployeeBenefit Plans

The Company maintains a defined benefit retirementplan (“the Plan”) for the benefit of eligible employees, former employees andretirees in the U.S. Effective June 30, 2003, the Plan was frozen and nofuture compensation credits will be accrued to participants’ individualaccounts. Participant accounts will continue to be credited with interest.

As discussed in Note 1, the Company adopted SFAS No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Post Retirement Plans*, which requires the Company torecognize the funded status of the defined benefit postretirement plan in theconsolidated balance sheet and provide related disclosures. The Plan has beenin a net under-funded position for the past several years, and as a result, theCompany has recognized an additional minimum pension liability on its balancesheet in accordance with SFAS No. 87, *Employers’ Accounting forPensions.*The Company recorded an additional minimum pensionliability of $96,329 and $97,837 at July 1, 2007 and July 2, 2006,respectively. These amounts, net of tax benefits of $17,000, have been recordedas a reduction to equity in “Accumulated Other Comprehensive Loss” on theCompany’s consolidated balance sheets as of July 1, 2007 and July 2,2006. The adoption of SFAS No. 158 had no impact on the Company’sfinancial position at July 1, 2007 due to the Plan having no unrecognizedprior service cost, the Plan accumulated benefit obligation equaling theprojected benefit obligation and as a result of the minimum pension liabilitypreviously recognized by the Company.

The Company funds the Plan in accordance withapplicable employee benefit and tax laws, and made a voluntary $30.0 millioncontribution to the Plan during fiscal 2007. During 2006, Congress passed thePension Protection Act of 2006 (the “Act”) with the stated purpose of improvingthe funding of U.S. private pension plans. The Act introduces new fundingrequirements for qualified defined benefit pension plans, introduces benefitlimitations for certain under-funded plans and raises tax deduction limits forcontributions. The Act applies to pension plan years beginning after December 31,2007. Based upon current and pending pension funding regulations, actuarialprojections indicate the only required contribution to the Plan in fiscal 2008is $2.7 million in April, 2008, although the Company may elect to makecontributions prior to that time. Required contributions in years subsequent tofiscal 2008 will depend on future interest rate levels, values in equity andfixed income markets, and the level and timing of interim contributions we maymake to the Plan, and could be significant.

Plan fiduciaries set investment policies andstrategies for the Plan’s trust. The primary investment objectives are tomaximize total return within a prudent level of risk, to fully diversifyinvestment holdings, and to meet the long-term return target selected as anactuarial assumption. The Plan’s fiduciaries oversee the investment allocationprocess, which includes selecting investment managers, setting long-termstrategic targets and monitoring asset allocations.

Weightedaverage assumptions used to determine benefit cost and benefit obligation forthe Plan are as follows:

| ** **                                          | ** ** | **2007**          | ** ** | **2006**          | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| Discount rate  used to determine benefit obligation |       | 6.25              | %          | 6.38              | %          |
| Discount rate  used to determine benefit cost       |       | 6.13              | %          | 5.25              | %          |
| Expected return  on plan assets                     |       | 9.00              | %          | 9.00              | %          |
| Measurement date for  pension benefit obligations   |       | July 1, 2007 |       | July 2, 2006 |       |

 

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The Company determines the expected return on planassets based upon the overall expected long-term rate of return over the periodthat benefits are expected to be paid. This estimate considers the targetedallocation of plan assets among securities with various risk and returnprofiles and incorporates historical data as well as anticipated economic andmarket conditions. Plan assets are invested in a diversified mix of fundscontaining equity and debt securities through a professional investment managerwith the objective to achieve targeted risk adjusted returns while maintainingliquidity sufficient to fund current benefit payments. Pension plan assets donot include any shares of Company common stock as July 1, 2007 and July 2,2006.

Expected future benefit payments under the Plan forfiscal years are as follows: $10,862 in 2008; $10,879 in 2009; $10,462 in 2010;$10,409 in 2011; $11,232 in 2012; and $60,089 in 2013 through 2017.

Theallocation of Plan assets by investment type as of July 1, 2007 and July 2,2006 are as follows:

| ** **              | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|-------------------------|------------|------------------|------------|------------------|------------|
| **Asset Category** | ** ** | **2007**         | ** ** | **2006**         | ** ** |
| Equity securities       |       |             | 66         | %                |       |   | 66 | % |   |
| Fixed income securities |       |             | 34         | %                |       |   | 34 | % |   |
| Total                   |       |             | 100        | %                |       |   | 100 | % |   |

 

Netperiodic benefit costs (income) for the Company’s pension plan for the fiscalyears 2007, 2006, and 2005 were as follows:

| ** **                                                            | ** ** | **Pension Benefits** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|
| ***Fiscal year ended***                                     | ** ** | **July 1,**          | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
| **Components of Net Periodic Benefit Cost:** | ** ** | **2007**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest cost                                                         |       | $                         | 10,309     |   | $ | 9,788 |   | $ | 10,302 |   |
| Expected return on plan assets                                        |       | (11,947                   | )          | (10,407 | ) | (11,720 | ) |
| Recognized net actuarial loss                                         |       | 3,616                     |       | 4,363 |   | 2,854 |   |
| Net periodic  benefit cost                                            |       | $                         | 1,978      |   | $ | 3,744 |   | $ | 1,436 |   |

 

Pensionbenefit obligations at year-end, fair value of plan assets and prepaidbenefit costs for the years ended July 1, 2007 and July 2, 2006, wereas follows:

| ** **                                                  | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **2007**         | ** ** | **2006**         | ** ** |
| **Change  in Benefit Obligation:**                          |       |             |       |             |       |
| Benefit  obligation at beginning of year                    |       | $                | 166,305    |             | $          | 191,448 |   |
| Interest cost                                               |       | 10,309           |       | 9,788            |       |
| Actuarial (gain)  loss                                      |       | 7,755            |       | (23,869          | )          |
| Benefits paid                                               |       | (12,040          | )          | (11,062          | )          |
| Benefit  obligation at end of year                          |       | $                | 172,329    |             | $          | 166,305 |   |
| **Change in Plan Assets:**                                  |       |             |       |             |       |
| Fair value of plan  assets at beginning of year             |       | $                | 120,812    |             | $          | 120,880 |   |
| Actual return on  plan assets                               |       | 17,592           |       | 10,994           |       |
| Employer  contributions                                     |       | 30,000           |       | -                |       |
| Benefits paid                                               |       | (12,040          | )          | (11,062          | )          |
| Fair value of  plan assets at end of year                   |       | $                | 156,364    |             | $          | 120,812 |   |
| Funded status                                               |       | $                | (15,965    | )                | $          | (45,494 | ) |
| Unrecognized net  actuarial loss                            |       | 96,329           |       | 97,837           |       |
| Prepaid benefit  cost                                       |       | $                | 80,364     |             | $          | 52,343 |   |
| **Amounts Recognized in Statement of Financial  Position:** |       |             |       |             |       |
| Pension benefit  obligations, net                           |       | (15,965          | )          | (45,494          | )          |
| Accumulated other  comprehensive loss                       |       | 96,329           |       | 97,837           |       |
| Net amount recognized                                       |       | $                | 80,364     |             | $          | 52,343 |   |

 

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Amounts included in accumulated other comprehensiveloss, net of tax, at July 1, 2007, which have not yet been recognized innet periodic benefit cost, relate solely to unrecognized net actuarial lossesof the Plan. During fiscal 2008, it is expected that $3.4 million of amountsincluded in accumulated other comprehensive loss will be recognized in netperiodic benefit cost. Total net periodic benefit cost for fiscal 2008 isestimated at $0.2 million.

In addition to the definedbenefit retirement plans, the Company maintains a defined contribution (401k)savings plan for eligible employees. Contributions made to this plan by theCompany were $499, $507, and $500 for the fiscal years 2007, 2006 and 2005respectively.

**14.**          RelatedParty Transactions

The Company had anagreement with the Spectrum Group, Inc. (“Spectrum”) which expired in December 2005,whereby Spectrum provided management services to the Company at an annual feeplus out of pocket expenses. The Company’s former chairman is also thechairman, president and sole shareholder of Spectrum. Services providedincluded consultation and direct management assistance with respect tooperations, strategic planning and other aspects of the business of the Company.Fees and expenses paid to Spectrum for these services under the agreementamounted to $390 and $791 for the fiscal years 2006 and 2005, respectively. Therewere no fees paid to Spectrum during fiscal year 2007.

**15.**          Warranties

The Company offers warranties for certain productsthat it manufactures, with the warranty term generally ranging from one to twoyears. Warranty reservesare established for costs expected to be incurred after the sale and deliveryof products under warranty, based mainly on known product failures andhistorical experience.

Changesin the warranty reserve for fiscal 2007 and 2006 were as follows:

| ** **                               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **2007**         | ** ** | **2006**         | ** ** |
| Balance at  beginning of year            |       |             | $          | 464              |       |   |   | $ | 310 |   |   |
| Additions charged  to earnings           |       |             | 121        |             |       |   | 829 |   |   |
| Use of reserve  for warranty obligations |       |             | (270       | )                |       |   | (675 | ) |   |
| Balance at end of year                   |       |             | $          | 315              |       |   |   | $ | 464 |   |   |

 

**16.**          SupplementalCash Flow Information

Changesin operating assets and liabilities of continuing operations were as follows: 

| ** **                                    | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|-----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ***Fiscal year ended***             | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| (Increase) decrease in accounts receivable    |       | $                | (3,330     | )                |       | $                | 54         |   |   | $ | (1,539 | ) |
| Increase in inventories                       |       | (3,058           | )          |             | (883       | )                |       | (2,337 | ) |
| Decrease in prepaids and other current assets |       | 408              |       |             | 295        |             |       | 3,373 |   |
| Decrease in other operating assets            |       | 2                |       |             | 1,436      |             |       | 1,081 |   |
| Increase (decrease) in accounts payable       |       | 4,376            |       |             | (541       | )                |       | 1,950 |   |
| Increase (decrease) in accrued liabilities    |       | (2,348           | )          |             | 2,448      |             |       | (2,409 | ) |
|                                          |       | $                | (3,950     | )                |       | $                | 2,809      |   |   | $ | 119 |   |
| Cash paid for  interest and income taxes :    |       |             |       |             |       |             |       |   |   |
| Interest                                      |       | $                | 1,151      |             |       | $                | 2,122      |   |   | $ | 308 |   |
| Income taxes                                  |       | $                | 744        |             |       | $                | 9          |   |   | $ | 115 |   |

 

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**17.**          AccumulatedOther Comprehensive Loss

Accumulatedother comprehensive loss consisted of the following at July 1, 2007 and July 2,2006:

| ** **                                                                | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                | ** ** | **2007**         | ** ** | **2006**         | ** ** |
| Unrecognized pension plan liabilities, net of  $17,000 income tax benefit |       | $                | (79,329    | )                | $          | – |   |
| Minimum pension liability, net of $17,000 income tax  benefit             |       | -                |       | (80,837          | )          |
| Foreign currency translation adjustments                                  |       | 875              |       | 816              |       |
|                                                                      |       | $                | (78,454    | )                | $          | (80,021 | ) |

 

**18.   Business Segment and Geographic Information**

The Company currently operates within a singlebusiness segment, digital power control systems. The Company sells its productsprimarily to large original equipment manufacturers and distributors. TheCompany performs ongoing credit evaluations of its customers’ financialconditions and generally requires no collateral. The Company has no singlecustomer whose purchases represented 10% of the Company’s total revenue infiscal year 2007.

Informationwith respect to the Company’s foreign subsidiaries follows:

| ** **                               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ***For the fiscal year*** | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Sales                                    |       | $                | 11,190     |             |       | $                | 9,749      |   |   |   | $ | 8,931 |   |   |
| Income from  operations                  |       | 1,124            |       |             | 1,192      |             |       |   | 969 |   |   |
| Identifiable  assets                     |       | 7,713            |       |             | 6,509      |             |       |   | 5,955 |   |   |
| Capital  expenditures                    |       | 98               |       |             | 63         |             |       |   | 64 |   |   |
| Depreciation and  amortization           |       | 62               |       |             | 75         |             |       |   | 78 |   |   |
|                                          |            |                  |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

Sales by foreign subsidiaries include sales ofproducts to customers within the U.S.

Export sales from theUnited States were $7,897, $6,231 and $5,802 in fiscal years 2007, 2006, and2005, respectively.

**19.**          QuarterlyResults (unaudited)

Thesupplementary quarterly financial information presented below reflects theresults of the Company’s telecom power business power business as continuingoperations and the results of the Company’s power electronics business asdiscontinued operations for all periods presented as described in Note 2 ofNotes to Consolidated Financial Statements.

| ** **                                                    | ** ** | **Oct 1,** | ** ** | **Dec 31,** | ** ** | **Apr 1,** | ** ** | **Jul 1,** | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|------------------|------------|-----------------|------------|-----------------|------------|
| ***Fiscal 2007 quarter ended***                | ** ** | **2006**        | ** ** | **2006**         | ** ** | **2007**        | ** ** | **2007**        | ** ** |
| Net sales                                                     |       | $               | 25,955     |             | $          | 27,578          |       | $               | 23,311     |   | $ | 26,964 |   |
| Gross profit                                                  |       | 7,420           |       | 7,059            |       | 6,905           |       | 7,543           |       |
| Income (loss)  from operations                                |       | (1,196          | )          | (3,718           | )          | 365             |       | 1,501           |       |
| Income (loss)  from continuing operations before income taxes |       | (1,984          | )          | (4,195           | )          | 542             |       | 1,744           |       |
| Provision for  income taxes                                   |       | 276             |       | 373              |       | 307             |       | 337             |       |
| Income (loss)  from continuing operations                     |       | (2,260          | )          | (4,568           | )          | 235             |       | 1,407           |       |
| Income (loss)  from discontinued operations                   |       | (934            | )          | (1,647           | )          | (654            | )          | 429             |       |
| Net income (loss)                                             |       | $               | (3,194     | )                | $          | (6,215          | )          | $               | (419       | ) | $ | 1,836 |   |
| Per common share:                                             |       |            |       |             |       |            |       |            |       |
| Basic and diluted:                                            |       |            |       |             |       |            |       |            |       |
| Income (loss) from continuing operations                      |       | $               | (0.08      | )                | $          | (0.16           | )          | $               | 0.01       |   | $ | 0.05 |   |
| Income (loss) from discontinued operations                    |       | $               | (0.03      | )                | $          | (0.06           | )          | $               | (0.02      | ) | $ | 0.01 |   |
| Net income (loss)                                             |       | $               | (0.11      | )                | $          | (0.21           | )          | $               | (0.01      | ) | $ | 0.06 |   |

 

Thequarter ended July 1, 2007 includes year-end adjustments of $0.6 millionin discontinued operations primarily for workers compensation claims andpost-employment benefits for certain employees of businesses the Company nolonger owns. The Company believes these charges are sufficient to provide forall future liabilities associated with the claims. 

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Theseadjustments, which reduced income from discontinued operations for the quarterended July 2, 2007, did not materially misstate prior year results.

| ** **                                           | ** ** | **Oct 2,** | ** ** | **Jan 1,** | ** ** | **Apr 2,** | ** ** | **Jul 2,** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ***Fiscal 2006 quarter ended***       | ** ** | **2005**        | ** ** | **2006**        | ** ** | **2006**        | ** ** | **2006**        | ** ** |
| Net sales                                            |       | $               | 23,613     |            | $          | 26,063          |       | $               | 26,582     |   | $ | 25,399 |   |
| Gross profit                                         |       | 7,286           |       | 7,927           |       | 7,311           |       | 7,613           |       |
| Loss from  operations                                |       | (498            | )          | (508            | )          | (1,231          | )          | (1,052          | )          |
| Loss from  continuing operations before income taxes |       | (925            | )          | (1,210          | )          | (1,908          | )          | (1,791          | )          |
| Provision for  income taxes                          |       | 334             |       | 345             |       | 490             |       | 370             |       |
| Loss from  continuing operations                     |       | (1,259          | )          | (1,555          | )          | (2,398          | )          | (2,161          | )          |
| Income (loss)  from discontinued operations          |       | 205             |       | (170            | )          | (2,032          | )          | (37,479         | )          |
| Net loss                                             |       | $               | (1,054     | )               | $          | (1,725          | )          | $               | (4,430     | ) | $ | (39,640 | ) |
| Per common share:                                    |       |            |       |            |       |            |       |            |       |
| Basic and diluted:                                   |       |            |       |            |       |            |       |            |       |
| Loss from continuing operations                      |       | $               | (0.04      | )               | $          | (0.05           | )          | $               | (0.08      | ) | $ | (0.07 | ) |
| Income (loss) from discontinued operations           |       | $               | 0.01       |            | $          | (0.01           | )          | $               | (0.07      | ) | $ | (1.30 | ) |
| Net income (loss)                                    |       | $               | (0.04      | )               | $          | (0.06           | )          | $               | (0.15      | ) | $ | (1.37 | ) |

 

The quarter ended July 2, 2006 includes assetimpairment charges of $37.8 million included in loss from discontinuedoperations.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersMagnetek, Inc.

We have audited the accompanying consolidated balancesheets of Magnetek, Inc. as of July 1, 2007 and July 2, 2006,and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended July 1,2007. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Magnetek, Inc. at July 1, 2007 and July 2, 2006, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended July 1, 2007, in conformity with U.S.generally accepted accounting principles.

As discussed in Note 1 to the consolidated financialstatements, on July 4, 2005 the Company changed its method of accountingfor share-based awards and on July 1, 2007, the Company changed its methodof accounting for defined benefit pension plans.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Magnetek, Inc.’sinternal control over financial reporting as of July 1, 2007, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated August 17, 2007, expressed an unqualified opinion thereon.

|                       | /s/ Ernst &  Young LLP |   |   |
|-----------------------|---------------------------------|--------|--------|
| Milwaukee, Wisconsin  |                            |
| August 17,  2007 |                            |

 

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