Exhibit 13.1

----

| ****Front Cover: What is the ‘New’  Magnetek? |
|---------------------------------------------------------|

 

Magnetekwas formed in July of 1984 through a leveraged buy-out of LittonIndustries’ Magnetics Group and went public in July of 1989 (NYSE: MAG) asa general electrical equipment manufacturer. Today, Magnetek is much morehighly focused, serving selected segments of traditional and emerging marketsthat are becoming increasingly dependent on digital **power**,**control** and **systems**technology:

·  In **material handling**, we provide *EnergyEngineered*TM drives, radio remote controls, braking andcollision-avoidance subsystems, motors and more to most of America’s buildersof overhead cranes and hoists.

·  In **people-moving** we specialize in designing and manufacturing highlyintegrated *Energy Engineered*motion-controlsubsystems for elevators, serving the world’s foremost ‘lift’ builders.

·  In **mining** we focus on coal, our country’s most abundantfossil-fuel, building the *Energy Engineered*drives that enable mining equipment to recover that resource for refinementand, ultimately, “clean coal” energy.

·  In **alternative energy** which, together with coal, offers thebest hope of reducing our dependence on foreign oil, we make digital powerinterfaces that tie fuel cells, wind turbines and solar arrays to the utilitygrid.

Magnetek’s *Energy Engineered* trademark means that our products: meet orexceed generally accepted industry and/or U.S. government standards for “highefficiency”; meet or exceed customer specifications for power efficiency andintegrity; and/or, when properly applied, enhance the efficiency orenvironmental compatibility of the systems into which they are incorporated.

Today,Magnetek operates two manufacturing plants in the United States and one inCanada, together employing 308 talented, dedicated people. For the fiscalyear ended July 2, 2006, the Company had revenue of $83 million.

| **Chairman/CEO Letter**                    | **1**                 |
|-------------------------------------------------|-----------------------|
| **Management’s  Discussion and Analysis**  | **5**                 |
| **Consolidated  Financial Statements**          | **17**                |
| **Notes to  Consolidated Financial Statements** | **21**                |
| **Annual Report on  Form 10K**             | **43**                |
| **Stockholder Information**                     | **Inside Back Cover** |

 

***CautionRegarding Forward-Looking Statements.****   This AnnualReport and Form 10-K, including documents incorporated herein byreference, contain forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. The words “believe”, “expect”, “estimate”,“anticipate”, “intend”, “may”, “might”, “will”, “would”, “could”, “project” and“predict”, or similar words and phrases generally identify forward-lookingstatements. Forward-looking statements contained or incorporated by referencein this document, including those set forth in the Chairman/CEO’s Letter, thesection of this Annual Report entitled “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, and the section of the Form 10-Kentitled “Description of Business” include, but are not limited to, statementsregarding projections of revenues, income or loss, capital expenditures, plansfor future operations, products or services, legal issues and financing needsor expectations, as well as assumptions relating to the foregoing. Forward-lookingstatements are inherently subject to risks and uncertainties which in manycases are beyond the control of the Company and which cannot be predicted orquantified. As a result, future events and actual results could differmaterially from those set forth in, contemplated by, or underlyingforward-looking statements. Such risks and uncertainties include, but are notlimited to, economic conditions in general, sensitivity to industry conditions,competitive factors such as technology and pricing pressures, businessconditions in electronics, telecommunications, information technology,transportation, consumer products, industrial equipment and energy markets,international sales and operations, dependence on major customers, increasedmaterials costs, risks and costs associated with acquisitions, litigation andenvironmental matters and the risk that the Company’s ultimate costs of doingbusiness exceed present estimates. A discussion of these and other specificrisks is included in Management’s Discussion and Analysis of FinancialCondition and Results of Operations under the heading “Risk Factors Affectingthe Company’s Financial Outlook”. Forward-looking statements contained in thisAnnual Report and Form 10-K speak only as of the date of this document or,in the case of any document incorporated by reference, the date of thatdocument. The Company does not have an obligation to publicly update or reviseany forward-looking statement contained or incorporated by reference in thesedocuments to reflect changed assumptions, the occurrence of unanticipatedevents or changes to future operating results over time.*

----

**Dear Fellow Shareholder:**

As theCompany description on the front cover suggests, Magnetek is restructuringitself—it is, in essence, becoming a new Company.

Weare in the final stages of divesting our Power Electronics Group (PEG). We expectthis divestiture to leave Magnetek substantially debt-free, able to meet its financialobligations, and solidly positioned in markets offering not only long-termstability but also excellent growth potential and profitability (historicallyin excess of 30%, gross margin).

PEG’sfiscal 2006 and prior results have therefore been included in “Results ofDiscontinued Operations”. Related adjustments in operating results and assetvalues are reflected in the Financial Statements that follow and are addressedin Management’s Discussion and Analysis on page 5.

Atfirst glance, the divestiture of PEG appears to change Magnetek in a big way. Andquantitatively it will; as reported in last year’s annual report, in 2005 PEGaccounted for two-thirds of Magnetek’s revenue (although only half of itsoperating profit, before corporate expense). But upon reflection, the decision todivest PEG simply accelerates Magnetek’s often-stated strategy: to concentrateincreasingly on high-margin digital-power-based systems businesses. (See: **What is the ‘New’ Magnetek**, opposite.)

We areas convinced as ever that this strategy will pay off. But what factors led to ourrather sudden up-shift in the execution of our strategy, and where will it takeus?

Those who have read Magnetek’s past reports know that ourCompany has been operating under a burden of legacy issues. During fiscal 2005and 2006, these issues came to the fore. Specifically:

·       A patent infringementlawsuit filed against Magnetek in 1998 culminated in a $23.4 million arbitrationaward on May 3, 2005. We petitioned the U.S District Court for the Northern District of Illinois tovacate the award based on fraud. While the patent in question has since beendeclared unenforceable in another case in the same Court, we must hold funds inescrow to pay the award until a decision is reached in our case.

·       We currently retain a pensionobligation dating back to the mid-1990s when Magnetek was a $1.5 billionelectrical equipment manufacturer. Benefits under this defined-benefit pension planwere “frozen” in 2003; but based on current actuarial measures, we must beginmaking cash contributions to the pension trust in October of 2007 averagingsome $20 million annually for several years.

Withdebt-to-equity exceeding 1-to-1 and such large cash commitments looming, itwould have been very difficult to finance an effective strategy of upwardintegration into systems. As we announced on May 12, 2006, we engaged StephensInc., an investment banking firm experienced in the power technology field, to helpus evaluate various cash-raising alternatives, including asset sales andcapital market transactions.

Inthe ensuing months, no viable alternative went unexplored. However, capitalmarket transactions were relegated to options of last resort, as they wouldentail incurring more high-priced debt and/or risking stock dilution. On theasset-sale side, a number of operating units and product lines were assessed,and a few were “shopped” to determine their marketability. Smaller divisionsand product lines were ruled out because they are not “stand-alone”, their salewould compromise the performance of sister operations, or they would not bringin enough cash.

That left the largest stand-alone parts of the Company:the Power Electronics Group (PEG) and Power Control Systems (PCS). Our decisionto divest PEG was based largely on the fact that the fragmented powerelectronics industry is consolidating, as sheer size becomes a competitivefactor, and due to cash constraints we could not be a consolidator. Ourdecision to retain and focus on Power Control Systems was based on our strategicbusiness shift into systems mentioned above.

**Power Electronics GroupDivestiture**

PEG’sproducts include, primarily, switching power supplies, rectifiers, batterychargers, power converters and power inverters custom-designed for originalequipment manufacturers (OEMs) who “embed” them in their products. PEG operatedat a loss in fiscal 2006, primarily due to inefficiencies and costs incurred inmoving higher-volume manufacturing to a new factory in China while downsizing factorieselsewhere.

Nevertheless,PEG made an attractive acquisition candidate because of its state-of-the-arttechnology, elite engineering staff, impressive customer list, and historicalrecord of profitability. Also, PEG is well along in establishing low-costmanufacturing capability in China, an attractive capability for manyprospective acquirers.

Atthe same time, we obviously believe that our divestiture of PEG holds immediateas well as long-term benefits for Magnetek’s shareholders. Specifically, weexpect net proceeds from the sale of PEG should enable us to meet all of thefollowing objectives by December 2007:

·       Pay off Long-Term Debt. (Whilethe arbitration case referenced above will have a bearing on this, a decisionunfavorable to Magnetek would not prevent us from paying down debt with divestitureproceeds.)

·       Make a sufficiently largecash contribution to Magnetek’s pension fund to reduce or potentially 

1

----

eliminatethe need for further contributions to the fund, thus restoring Stockholders’Equity to well above $100 million.

·       Reduce Corporate overhead,a substantial portion of which is pension expense that would be reduced or eliminatedby the aforementioned cash contributions.

·       Focus on our Power ControlSystems business, enabling the Company to achieve gross margins of around 30% withpositive operating margins and net income.

·       Use Magnetek’s $146 millionof net operating loss carry-forwards (NOLs), most of which do not expire untilafter 2020, to shelter income from taxes.

·       Generate consistentpositive cash flow for investment, both internal and external, in promisinggrowth businesses.

In short, given three to six months to consolidateoperations and relocate administrative functions, we expect Magnetek to emergeas a solidly profitable company with positive cash flow, negligible debt and outstandinggrowth opportunities.

**Prospects in Power ControlSystems**

Going forward, Magnetek will be exclusively a digitalpower-based systems integrator, serving selected segments of traditional andemerging commercial markets that are becoming increasingly dependent on “smart”power. We will no longer be in the embedded power electronic componentsbusiness.

As we said in last year’s annual report, we believe thata key driver of Magnetek’s future growth and profitability will be thecapability of our products to help generate and utilize energy more efficiently.We have lost none of that conviction or capability by focusing on commercialpower control systems. Consider the following examples:

·       **Materialhandling automation**.   In April, Magnetek signed an agreementwith Eaton Corp. (NYSE: ETN), taking over responsibility for design,manufacturing, sales and service of Eaton direct DC (DDC) crane and hoist drivesystems under our ***OmniPulse***TM brand name. Alreadya clear leader in AC crane and hoist drive systems, Magnetek’s addition of the ***OmniPulse*** line should furtherenhance our position in the Overhead material handling market. In North Americaalone, there are some 3,000 factory cranes running with traditional DCcontrols that could be retrofitted with energy-saving DDC drive systems overtime.

·       **Elevatormotion control systems**.   While savings vary with elevator use,high-rise building owners typically can expect energy savings of up to $2,000 ayear per elevator by installing Magnetek’s new ***Quattro***TMregenerative drive systems versus non-regenerative systems. Since it representsless than 10% of the cost of a $150,000 elevator retrofit, ***Quattro***can pay for itself in five years. In August, we announced receipt of our firstproduction orders for energy-saving ***Quattro*** DCdrive systems from Otis Elevator and KONE Corporation.

·       **Commercial energy interfaces**.   Clean energy is a majorpotential growth market that is dependent upon digital-power interfaces toconnect fuel cell, wind and solar power sources to the utility grid. Magnetek hasbeen building 250-kilowatt fuel-cell interfaces for United Technologies formore than a decade. Leveraging this technology, we developed multi-megawatt ***Marin***TM wind inverters for large windturbines. We expect these systems, just introduced, to be the main source ofrevenue in our Alternative Energy business.

**Refocusing on Digital-Power-BasedSystems**

Magnetek’stransition from, predominantly, a manufacturer of custom power-electronic productsfor OEM and consumer markets to an ***Energy Engineered****TM* systems integrator changes our role from meeting customer-definedspecifications to addressing market-defined needs. By so doing we stand toincrease our profitability substantially; however, we must choose our markets carefully.We must see our way clear to gaining prominent share positions in well-defined marketniches with constantly expanding products and services.

Ourpolicy is not to compete in commodity markets. Furthermore, depending on thesize of the market niche served, our philosophy is always to rank among the topfive suppliers to that market, with the goal of being number one.

Historically,our Power Control Systems group has done this quite well. Today, Magnetek commandsapproximately half of the $100 million domestic crane and hoist controls market.In AC-powered crane controls, Magnetek is already the clear leader in NorthAmerica, with a 73% market share. The global market for both AC and DC cranecontrol systems exceeds half a billion dollars a year, and is growing at anestimated 20% annually. Factoring in new products like the ***OmniPulse***TMDDC drives mentioned above and our ***Telemotive***TMline of radio remote controls, we believe we have plenty of room for futuregrowth just in overhead material handling.

The global elevator motion control market addressed byMagnetek amounts to an estimated $80 million a year, of which we already commandapproximately 25%. Including aftermarket and OEM outsourcing of motion controlsubsystems, this market niche is growing at an estimated 24% a year; and withstate-of-the-art products such as the ***Quattro***drivesystems noted above, we believe that we can double revenues from our elevatorline within three years.

2

----

**Large Wind and Coal vs.Oil Dependence**

Wehave set our sights on promising energy markets as well. While Magnetek’srevenues from alternative energy are still relatively small, dramatic growth ispossible due to our advanced technology and market-niche philosophy.

Inthe mid-1990s, Magnetek’s Milwaukee-based Power Control Systems group developedthe first power interfaces for United Technologies’ self-contained 200-kilowattpower plant fuel cells. Today, we remain the world’s leading builder of commercial-sizefuel cell power inverters, with more than 100 installations totaling over 30megawatts and 1.5 million operating hours in the field. As previously noted, wehave turned this “home-grown” technology into multi-megawatt power interfacesystems for commercial-size wind-turbines, and will launch a new line ofcommercial solar photovoltaic (PV) power inverters in 2007.

Windpower currently represents a $400-million global market for digital powerinterfaces, and is growing nearly 30 percent annually. Given the worldwideshortage of solar PV materials and cells, and the fact that “large wind” is nowcost-competitive with fossil-fuel-generated power, we believe wind power will growby leaps and bounds in the years immediately ahead.

Ournew ***Marin***TM wind inverters come inmodular “power clusters” that can deliver up to five megawatts of cleanalternating current to the utility grid from a single wind turbine. They aredesigned for the latest wind technology: full-conversion, variable-speedturbines with direct-drive or permanent-magnet generators. Only two independentinterface builders deliver this kind of technology in the North American market;Magnetek is one of them. And we are actively targeting the 40% of large domesticturbine builders that don’t have internal power interface capabilities. This—plusthe fact that we are just entering the large wind business—leads us to believethat Magnetek’s revenue growth in this business can be significant for years tocome.

Geographically,there are significant opportunities in North America alone, with wind powergeneration expected to grow at over 24% annually through 2010. It is here that Magnetekbuilds all of its large power inverters, and it is here that our primaryalternative energy efforts will be focused.

Nor are we counting solely onalternative energy. Magnetek’s advanced motion control systems are usedin coal mining as well as material handling and people-moving. Over-dependenceon foreign oil cannot be broken by alternative energy sources alone. Foreconomic as well as environmental reasons, the United States must takeadvantage of its most abundant domestic energy resource through “clean coal” technology(driven by Federal energy subsidies). So Magnetek stands to benefit from bothalternative and traditional energy sources in the years ahead.

**2007: Entering a New Erafor Magnetek**

Tosummarize: during fiscal year 2007 we expect Magnetek to emerge as a newCompany. One able to fund its pension trust, resulting in increasedStockholders Equity, cut corporate overhead in half, increase quarterly grossprofit margins to near 30 percent, get back into the black, begin using itsabundant NOLs to shelter profits and cash flow, and concentrate full time on itsmost consistent and promising businesses.

Simplystated, the new Magnetek provides power control systems for material handling, people-moving,mining and alternative energy—all markets that are becoming increasinglydependent on digital technology. We are America’s largest supplier of digitaldrive systems for industrial cranes, hoists and movable bridges. We are theworld’s largest independent builder of digital motion control systems forelevators. We are the leading builder of power conditioners for commercial fuelcells; we are about to enter the large wind market in a big way; and we are a providerof a new generation of digital drive systems for coal mining as well.

The opportunities open to us in all of Magnetek’saddressed markets are excellent. We are preparing the Company, bothoperationally and financially, to take full advantage of these opportunities—andto expand upon them. We appreciate your patience through what was a watershedyear in fiscal 2006, and we invite your renewed confidence and continuedsupport as we enter a new era for Magnetek in 2007.

3

----

**SELECTED FINANCIALDATA**

The selected financialdata for Magnetek, Inc. (the “Company” or “Magnetek”) presented below reflectthe reclassification of the Company’s power electronics business and telecompower business as discontinued operations for all periods presented, asdescribed in Notes 1 and 2 of Notes to Consolidated Financial Statements.

**Statement of Operations Data**

| *For the years ended**(Amounts in thousands, except per share data)* | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** | **June 30,  2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net sales                                                                                                         |       | $                      | 83,102     |                   | $          | 75,999                  |       | $                       | 67,853     |                    | $          | 63,139 |   |   | $ | 65,349 |   |   |
| Gross profit                                                                                                      |       | 26,687                 |       | 24,035                 |       | 21,205                  |       | 21,177                  |       |                    | 18,285     |   |   |
| Gross profit %                                                                                                    |       | 32.1%                  |       | 31.6%                  |       | 31.3%                   |       | 33.5%                   |       |                    | 28.0%      |   |   |
| Income (loss)  from operations                                                                                    |       | $                      | (2,877     | )                      | $          | (4,133                  | )          | $                       | (4,975     | )                       | $          | 27,159 |   |   | $ | 1,790 |   |   |
| Net income (loss):                                                                                                |       |                   |       |                   |       |                    |       |                    |       |                    |       |   |   |
| Continuing  operations                                                                                            |       | $                      | (7,091     | )                      | $          | (5,537                  | )          | $                       | (10,680    | )                       | $          | 15,411 |   |   | $ | 2,948 |   |   |
| Discontinued operations                                                                                           |       | (39,758                | )          | (21,333                | )          | (2,391                  | )          | (51,255                 | )          |                    | (1,540     | ) |   |
| Net income (loss)                                                                                                 |       | $                      | (46,849    | )                      | $          | (26,870                 | )          | $                       | (13,071    | )                       | $          | (35,844 | ) |   | $ | 1,408 |   |   |
| Per common share - basic and  diluted:                                                                            |       |                   |       |                   |       |                    |       |                    |       |                    |       |   |   |
| Net income (loss)  from continuing operations                                                                     |       | $                      | (0.25      | )                      | $          | (0.19                   | )          | $                       | (0.39      | )                       | $          | 0.65 |   |   | $ | 0.13 |   |   |
| Net loss from discontinued  operations                                                                            |       | $                      | (1.37      | )                      | $          | (0.75                   | )          | $                       | (0.09      | )                       | $          | (2.17 | ) |   | $ | (0.07 | ) |   |
| Net income (loss)                                                                                                 |       | $                      | (1.62      | )                      | $          | (0.94                   | )          | $                       | (0.48      | )                       | $          | (1.52 | ) |   | $ | 0.06 |   |   |
|                                                                                                              |       |                   |       |                   |       |                    |       |                    |       |                    |       |   |   |

 

*Net loss for the fiscal year ended July 2,2006 includes asset impairment charges of $37,843 included in discontinuedoperations.*

*Net loss for fiscal year ended July 3, 2005includes a $21,977 patent arbitration charge included in discontinuedoperations.*

*Net loss for the fiscal year ended June 27,2004 includes a $6,700 provision for income taxes to increase the valuationallowance against the Company’s deferred tax assets.*

*Net lossfor the fiscal year ended June 29, 2003 includes a $27,771 pre-tax gain($17,218 after-tax) from termination of the Company’s retiree medical plan;discontinued operations includes after-tax charges of $38,698 for assetimpairment and a $3,275 after-tax charge for settlement of litigation.*

**Balance Sheet Data**

| ***(Amounts in thousands)***     | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** | **June 29,  2003** | ** ** | **June 30,  2002** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| Total assets                               |       | $                      | 232,463    |                   | $          | 229,180                 |       | $                       | 228,024    |                    | $          | 221,326 |   | $ | 304,891 |   |
| Long-term debt,  including current portion |       | 27,455                 |       | 3,980                  |       | 4,295                   |       | 9,250                   |       | -                       |       |
| Other long term  obligations               |       | -                      |       | -                      |       | -                       |       | -                       |       | 33,699                  |       |
| Pension benefit  obligations               |       | 45,494                 |       | 70,568                 |       | 31,366                  |       | 51,356                  |       | 74,363                  |       |
| Stockholders’  equity                 |       | 42,908                 |       | 46,060                 |       | 109,922                 |       | 78,671                  |       | 142,819                 |       |
|                                            |            |                        |            |                        |            |                         |            |                         |            |                         |            |  |  |  |  |  |

 

4

----

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

**OVERVIEW**

Since fiscal year 2001, Magnetek has been a globalprovider of digital power-electronic products, including electronic converters,inverters, rectifiers and systems. We have operated in a single businesssegment, Digital Power Products, comprised of two broad product categories,systems and components. Our products are used primarily in industrial, telecommunications,data processing, consumer, imaging, alternative energy, power generation andother applications.

Our operating results for the past several years havebeen negatively impacted by asset impairment and restructuring charges, andother expenses related to businesses we no longer own, including a $22 millioncharge for goodwill impairment in fiscal 2006 and a $22 million charge infiscal 2005 for a patent infringement arbitration award (see Note 11 of Notesto Consolidated Financial Statements). Our fiscal 2006 cash flows have beennegatively impacted by higher interest expense and costs incurred to obtain newfinancing agreements, and we expect our future cash flows will be impacted byscheduled debt repayments and pension contributions in fiscal years 2007 and2008. As a result, during the fourth quarter of fiscal 2006, we completed areview of various cash raising alternatives to enable us to address thesepending obligations as well as provide funds for future growth initiatives, andwe decided to divest our power electronics business (components).

Going forward, we intend to focus on digital powercontrol systems and operate solely in this product category. Our systems and subsystemsare used primarily in material handling, motion control and alternative energyapplications requiring precise, efficient, reliable power. We believe that withour technical and productive resources we are well positioned to respond toincreasing demand for such power.

Our power control systems consist primarily ofprogrammable motion control and power conditioning systems used in thefollowing applications: cranes and hoists; elevators; mining; fuel cell, andwind markets.

Our power electronics business (to be divested) isengaged in the manufacture of embedded power electronic products, which aresold primarily to original equipment manufacturers for installation in theirproducts and include: AC-to-DC switching power supplies, AC-to-DC rectifiersand battery chargers, DC to-DC power converters, and DC-to-AC power inverters. Theseproducts are used primarily in telecommunications (telecom), data processingand storage, digital imaging, semiconductor processing and testing equipment,medical instrumentation and home appliances. The business has manufacturing andadministrative facilities in Italy, China, Hungary and Chatsworth, California,and accounted for $166 million, or 69%, of our reported net sales forfiscal year 2005 of $242 million. Upon divestiture of the power electronicsbusiness, we will no longer have any operations in Italy, China or Hungary, andour operations will be based primarily in North America.

Accordingly, during the fourth quarter of fiscal year2006, we reclassified the assets and liabilities of our power electronicsbusiness as held for sale, and the results of operations of this business asdiscontinued operations (see Note 2 of Notes to Consolidated Financial Statements).Subsequent to July 2, 2006, we entered into an agreement to sell thebusiness to Power One, Inc. for $71.7 million in cash plus the assumptionof $16.7 million in debt. We intend to use the proceeds from the sale of thebusiness primarily to repay debt and fund pension obligations. The transactionis expected to be completed during October 2006.

During fiscal year 2005, we reclassified the assetsand liabilities of our telecom power business as held for sale, and the resultsof operations of this business as discontinued operations (see Note 2 of Notesto Consolidated Financial Statements). While we have not yet divested thisbusiness as of July 2, 2006, the business is being actively marketed topotential interested parties at a price that is reasonable.

We also recorded other expenses related to previouslydivested businesses as discontinued operations, including a fiscal 2005 chargefor an arbitration award in a patent infringement claim of $22.0 million (netof an amount of $1.4 million previously recorded) and related legal fees, aswell as certain expenses for product liability claims, environmental issues,and asbestos claims. All of these issues relate to businesses we no longer ownand most relate to indemnification agreements we provided when we divestedthose businesses.

Prior period amounts related to the power electronicsand telecom businesses, and expenses related to other divested businesses havealso been reclassified in the accompanying consolidated financial statementsand footnotes for all periods presented in order to conform to the current yearpresentation.

As stated above, upondivestiture of our power electronics business, our remaining power controlsystems business will be comprised mainly of operations in North America basedin Menomonee Falls, Wisconsin. Our results of continuing operations reflectedin the accompanying consolidated financial statements include the results ofpower control systems and 

5

----

corporate operatingexpenses for all periods presented. The divestiture of our power electronicsbusiness will result in a smaller company in terms of sales but our grossmargins in power control systems have historically exceeded 30%. We intend tofurther consolidate administrative facilities during fiscal 2007, and webelieve that the resulting cost savings, together with a reduction in pensionexpense from expected contributions to our pension plan and lower interestexpense from reduced borrowings, should enable us to return to profitabilityand positive cash generation in the second half of fiscal 2007.

**ContinuingOperations**

Demand in certain of our key markets, mainly materialhandling, was strong during fiscal 2006 and our sales increased to $83.1million, an increase of 9% from fiscal 2005 sales of $76.0 million, while grossprofit rose to 32.1% from 31.6%. Our research and development (R&D) expenseincreased to more than $4 million, as we continued to invest in developing newproducts for existing and new markets, including alternative energy productsfor wind applications. We will continue to invest in R&D going forward,although the rate of growth in R&D investment may slow in fiscal 2007. Fiscal2006 selling, general and administrative (SG&A) expense increased by morethan $1 million compared to fiscal 2005, and at $25.5 million, represents morethan 30% of sales. Upon the divestiture of our power electronics business, we expectto consolidate administrative offices and implement cost reduction actions,both in terms of payroll costs and pension expense, as we plan to contribute toour defined benefit pension plan in fiscal 2007. Our future annual pensionexpense will depend on future interest rate levels, values in equity and fixedincome markets, and the level and timing of contributions we make to the plan.

Capital expenditures in fiscal 2006 of $1.0 millionwere roughly equal to depreciation expense of $1.1 million. Our total long-termdebt increased during fiscal 2006 by $23.5 million to $27.5 million, mainly dueto a deposit to an escrow account in November 2005 to fund payment of apatent arbitration award in the event our appeal of the award is unsuccessful. Wedid not make any contributions to our defined benefit pension plan in fiscal2006. Under current regulations, no mandatory contributions are expectedthrough fiscal 2007, however, required contributions in periods subsequent tofiscal 2007 could be significant (see “Summary of Contractual Obligations andCommitments” below). Due mainly to an increase in interest rates duringthe fiscal year, our pension benefit obligation decreased by $28.8 million witha related increase in equity of $28.8 million due to a decrease in our minimumpension liability.

We are also focusing ourdevelopment and marketing capabilities on higher margin systems applicationsand markets. As noted above, we plan to further consolidate administrativeoperations and functions in fiscal 2007, however future sustained profitabilityis dependent upon improvement in revenues and gross margins, and successfulimplementation of our strategy to penetrate higher margin markets.

**DiscontinuedOperations**

Our fiscal 2006 loss from discontinued operations,comprised of our power electronics business, our telecom power business andcertain corporate legacy costs, was $39.8 million. The loss includes chargesfor goodwill impairment of $22.4 million, the write-off of the net basis ofassets held for sale related to reclassification of accumulated currencytranslation adjustment amounts of $10.6 million, and inventory charges of $4.5million, all related to our power electronics business.

We also incurred $3.6million of expenses in fiscal 2006 related to businesses we no longer own,comprised mainly of environmental expenses and costs related to our appeal ofthe Nilssen arbitration award. In the fourth quarter of fiscal 2005, a decisionwas rendered in a patent infringement claim brought against us by Ole K.Nilssen (see Note 11 of Notes to Consolidated Financial Statements). Insettlement of pending litigation, we had agreed to submit the matter to bindingarbitration, and in May 2005, the arbitrator awarded damages to Mr. Nilssenof $23.4 million. The amount due was to be paid within ten days of the award,however, we are currently contesting the award in Federal court on grounds thatthe patent and related award were fraudulently obtained. Our request for oralargument was granted and a hearing took place on October 19, 2005. Adecision has not been announced. Since the patent infringement award relates toa business we divested in June 2001, the accompanying consolidatedfinancial statements reflect the impact of this award, net of amountspreviously recorded of $1.4 million, in discontinued operations in fiscal 2005.Mainly as a result of this award, our fiscal 2005 loss from discontinuedoperations was $21.3 million.

6

----

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

**Net Sales and GrossProfit**

Net sales increased 9.3% to $83.1 million in fiscal2006 from $76.0 million in fiscal 2005. The increase in net sales in fiscal2006 is due primarily to increased sales of material handling systems, $5.4million, and increased sales of alternative energy products, $1.6 million. Fiscal2006 contained fifty-two weeks while fiscal 2005 contained fifty-three weeks.

Gross profit in fiscal2006 increased to $26.7 million (32.1% of sales) compared to $24.0 million(31.6% of sales) in fiscal 2005. The $2.7 million improvement in gross profitis due to higher sales of material handling systems and reduced manufacturingcosts from consolidation of our manufacturing facilities in North America.

**Operating Expenses**

Research and developmentexpense was $4.1 million in fiscal 2006, or 4.9% of sales, compared to $3.9million, or 5.1% of sales, in fiscal 2005. The increase spending in R&Dexpense reflects our continuing investment in product development for newmarkets and applications such as alternative energy for wind markets. Selling,general and administrative expense was $25.5 million, or 30.7% of sales, infiscal 2006 compared to $24.2 million, or 31.9% of sales, in fiscal 2005. Sellingexpenses were $8.3 million, or 10.0% of sales, in fiscal 2006 compared to $8.1million, 10.7% of sales, in fiscal 2005. The increase is mainly due to highervolume-related expenses in fiscal 2006 as compared to fiscal 2005. General andadministrative expense (G&A) was $17.2 million in fiscal 2006 compared to$16.1 million in fiscal 2005. The increase of $1.1 million in G&Aexpense in fiscal 2006 is due to higher pension expense, $2.3 million, partiallyoffset by lower restructuring expenses of $0.8 million and lower rent expenseof $0.8 million from relocation and consolidation of administrative facilities.

**Loss fromOperations**

Loss from operations was$2.9 million in fiscal 2006 compared to a loss from operations of $4.1 millionin fiscal 2005. The reduced loss from operations in fiscal 2006 compared tofiscal 2005 was due to higher sales volume which resulted in increased grossprofit, cost savings from consolidation of facilities, and the absence ofrestructuring charges in fiscal 2006, partially offset by higher pensionexpense and selling expenses.

**Interest Income andExpense**

Interest income was $0.7 million in fiscal 2006compared to $0.1 million in fiscal 2005. Interest expense was $3.4 million infiscal 2006 compared to $0.5 million in fiscal 2005, and as a result netinterest expense increased $2.3 million in fiscal 2006 compared to fiscal 2005.The increase in net interest expense in fiscal 2006 was due to higher outstandingdebt balances, due mainly to borrowings associated with the Nilssen patentarbitration award (see Note 11 of Notes to Consolidated Financial Statements), andhigher deferred financing amortization expense. In November 2005, wedeposited $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 bears interest at a current rate of 12.6% while we receive interest on theescrow deposit at a current rate of 4.7%. As a result, both our reportedinterest income and expense increased in fiscal 2006 as compared to fiscal2005.

Deferred financing amortizationexpense included in interest expense was $0.9 million in fiscal 2006 comparedto $0.3 million in fiscal 2005. The increase in deferred financingamortization expense in fiscal 2006 compared to fiscal 2005 was due to costsincurred in obtaining our new credit agreements entered into on September 30, 2005,as well as the accelerated amortization of deferred financing costs under ourprevious credit agreements.

**Provision for IncomeTaxes**

We recorded a provision for income taxes of $1.5million in fiscal 2006, comprised of $1.1 million (non-cash) primarily toincrease the deferred tax liability for tax deductible amortization of goodwilland $0.4 million related to our foreign operations. As of July 2, 2006,our U.S. net operating loss carryforward (“NOL”) was approximately $146 millionand our capital loss carryforwards were approximately $31 million. Thepotential tax benefit of these carryforwards, approximately $73 million, hasbeen fully reserved with a valuation allowance and therefore there is no nettax asset on the consolidated balance sheets related to this asset at July 2,2006. Our NOL and capital loss have carry-forward periods of 15 to 20 yearswith expiration dates ranging from 2013 to 2026. Since our balance sheetreflects no benefit of such NOL’s, we anticipate that no federal tax expense(other than alternative minimum tax) would be recorded if and when U.S. taxableincome is generated and such carryforwards are utilized.

7

----

We operate in several taxjurisdictions and are subject to a variety of income and related taxes, and asa result, we may record tax expense on a consolidated basis despite pre-taxlosses in the U.S. Although we anticipate little or no tax on income generatedin the U.S., income generated by our foreign operations cannot be offset withU.S. net operating losses. Therefore we anticipate there will be tax expense infiscal 2007 associated with our foreign operations.

**Loss fromContinuing Operations**

In fiscal 2006, werecorded a loss from continuing operations of $7.1 million, or $0.25 per share,basic and diluted, compared to a fiscal 2005 loss from continuing operations of$5.5 million, or $0.19 per share on both a basic and diluted basis.

**Loss fromDiscontinued Operations**

We recorded a loss fromdiscontinued operations in fiscal 2006 of $39.8 million, or $1.37 per share onboth a basic and diluted basis, compared to a loss from discontinued operationsin fiscal 2005 of $21.3 million, or $0.75 per share on both a basic and dilutedbasis. The loss from discontinued operations in fiscal 2006 is comprised of agoodwill impairment charge of $22.4 million (see Note 3 of Notes toConsolidated Financial Statements), a charge for the write-off of the net basisof assets held for sale related to reclassification of accumulated currencytranslation 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, operating losses in our telecom businessof $0.4 million, and other expenses related to businesses we no longer own,mainly legal fees in the patent infringement claim and environmental issues, aswell as asbestos-related costs, totaling $3.6 million. The loss fromdiscontinued operations in fiscal 2005 is comprised of a charge for anarbitration award related to a patent infringement claim of $22.0 million,operating losses in our telecom business of $1.0 million, and other expensesrelated to businesses we no longer own, mainly product liability costs, legalfees in the patent infringement claim and asbestos-related costs, totaling $4.7million, partially offset by operating income in our power electronics businessof $6.4 million.

**Net Loss**

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

**RESULTS OFOPERATIONS FOR YEAR ENDED JULY 3, 2005 COMPARED WITH YEAR ENDED JUNE 27, 2004**

**Net Sales and GrossProfit**

Net sales increased 12.0% to $76.0 million in fiscal2005 from $67.9 million in fiscal 2004. The increase in net sales in fiscal2005 is due primarily to increased sales of material handling systems, $6.8million, increased sales of alternative energy products, $0.8 million, andincreased sales of elevator products, $0.5 million. Fiscal 2005 containedfifty-three weeks while fiscal 2004 contained fifty-two weeks.

Gross profit in fiscal2005 increased to $24.0 million (31.6% of sales) compared to $21.2 million(31.2% of sales) in fiscal 2004. The $2.8 million improvement in gross profitis mainly due to higher sales of material handling systems.

**Operating Expenses**

R&D expense was $3.9million in fiscal 2005, or 5.1% of sales, compared to $3.1 million, or 4.6% ofsales, in fiscal 2004. The increase in R&D expense reflects continuedinvestment in product development for new markets and applications such asalternative energy for wind markets. Selling, general and administrativeexpense was $24.2 million, or 31.9% of sales, in fiscal 2005 compared to $23.1million, or 34.0% of sales, in fiscal 2004. Selling expenses were $8.1 million,or 10.7% of sales, in fiscal 2005 compared to $7.1 million, 10.5% of sales, infiscal 2004. The increase reflects higher sales volume as well as increasedinvestment in marketing new products in alternative energy markets. G&A was$16.1 million in fiscal 2005 compared to $16.0 million in fiscal 2004. Theincrease of $0.1 million in G&A expense in fiscal 2005 is due to restructuringexpenses of $0.8 million, payroll-related costs of $0.6 million and higherprofessional fees, partially offset by lower pension expense, $1.8 million.

8

----

**Loss fromOperations**

Our loss from operationswas $4.1 million in fiscal 2005 compared to a loss from operations of $5.0million in fiscal 2004. The reduction in loss from operations was due mainly tohigher sales volume and increased gross profit, partially offset by higherspending in R&D, higher volume-related selling expenses, and restructuringexpenses.

**Interest and OtherIncome and Expenses**

Interest income was $0.1 million in fiscal 2005compared to $1.2 million in fiscal 2004. Fiscal 2004 interest income includes$1.0 million of interest income related to a tax refund. Interest expense was$0.5 million in fiscal 2005 compared to $0.9 million in fiscal 2004.Fiscal 2005 and 2004 interest expense includes $0.3 million and $0.5 million,respectively, in deferred financing amortization expense.

Other expense in fiscal2004 of $1.0 million primarily included a $0.7 million charge for write down ofinvestments.

**Provision for IncomeTaxes**

We recorded a provision for income taxes of $1.0million in fiscal 2005, comprised primarily of $0.9 million (non-cash) toincrease the valuation allowance against U.S. net deferred tax assets to 100%.

Our fiscal 2004 provisionfor income taxes of $4.9 million largely reflects an increase to the valuationallowance against U.S. deferred tax assets to 100%, offset by a U.S.income tax refund related to a settlement with the Internal Revenue Serviceregarding certain proposed adjustments to previously filed tax returns.

**Loss fromContinuing Operations**

In fiscal 2005, werecorded a loss from continuing operations of $5.5 million, or $0.19 per share,basic and diluted, compared to a fiscal 2004 loss from continuing operations of$10.7 million, or $0.39 per share on both a basic and diluted basis.

**Loss fromDiscontinued Operations**

We recorded a loss fromdiscontinued operations in fiscal 2005 of $21.3 million, or $0.75 per share onboth a basic and diluted basis, compared to a loss from discontinued operationsin fiscal 2004 of $2.4 million, or $0.09 per share on both a basic and dilutedbasis. The loss from discontinued operations in fiscal 2005 is comprised of acharge for an arbitration award related to a patent infringement claim of $22.0million, operating losses in our telecom business of $1.0 million, and otherexpenses related to businesses we no longer own, mainly product liabilitycosts, legal fees in the patent infringement claim and asbestos-related costs,totaling $4.7 million, partially offset by operating income in our powerelectronics business of $6.4 million. The loss from discontinued operations infiscal 2004 is comprised of losses in our telecom business of $2.3 million,and other expenses related to businesses we no longer own, mainly productliability costs, legal fees for the patent infringement claim andasbestos-related costs, totaling $1.3 million, partially offset by operatingincome in our power electronics business of $1.2 million.

**Net Loss**

We recorded a net loss infiscal 2005 of $26.9 million, or $0.94 per share on both a basic and dilutedbasis, compared to a fiscal 2004 net loss of $13.1 million, or $0.48 per shareon both a basic and diluted basis.

**Liquidity andCapital Resources**

Our cash balances increased $22.1 million duringfiscal 2006, from $0.6 million at July 3, 2005 to $22.7 million at July 2, 2006,which includes restricted cash of $22.6 million. In November 2005 wedeposited $22.6 million into an escrow account to fund payment of the Nilssenarbitration award in the event that our appeal of the award is not successful(see Note 11 of Notes to Consolidated Financial Statements). The depositwas funded by our $18.0 million term loan and borrowings of $4.6 million fromour revolving credit facility. As a result, our outstanding debt balance increased$23.5 million during fiscal 2006, from $3.9 million at July 3, 2005to $27.4 million at July 2, 2006. Our primary uses of cash in fiscal 2006were for vendor payments, capital expenditures of $1.0 million, and loanorigination and legal fees related to our new financing agreements of $1.9million. We have no current requirements or plans for additional major capacityexpansion and we currently anticipate capital expenditures in fiscal 2007 willbe less than $2.0 million. The expected amount 

9

----

of capital expenditures could change depending uponchanges in revenue levels, our financial condition and the general economy.

During the fourth quarter of fiscal 2006, we completedour review of various cash raising alternatives to enable us to address pendingdept repayment and pension obligations, as well as provide funds for operationsand future growth initiatives, and we decided to divest our power electronicsbusiness. Subsequent to July 2, 2006, we entered into an agreement to sellthe business to Power One, Inc. for $71.7 million in cash, plus theassumption of $16.7 million in debt. We expect the transaction to close inOctober 2006, and expect to use the proceeds primarily to repay debt, fundpension obligations and fund continuing operations.

On September 30, 2005, we entered into anagreement with Ableco Finance LLC providing for an $18.0 million term loan andan agreement with Wells Fargo Foothill, Inc. providing for a $13.0 millionrevolving credit facility. Borrowings under the term loan bear interest at thelender’s reference rate plus 5%, or, at our option, the London InterbankOffering Rate (LIBOR) plus 7.5%. Such rates may be increased by up to onepercentage point depending upon the level of U.S. funded debt to EBITDA asdefined in the agreement. The term loan requires quarterly principal paymentsof $1.0 million beginning October 1, 2006. Borrowings under the revolvingloan bear interest at the bank’s prime lending rate plus 2.5% or, at our option,LIBOR plus 4%. Borrowings under the revolving credit facility are determined bya borrowing base formula as defined in the agreement, based on the level ofeligible domestic accounts receivable and inventory. The revolving creditfacility also supports the issuance of letters of credit. Borrowings under theterm loan and revolving credit facility are secured by substantially all of ourdomestic assets. We used funds from the revolving credit facility to fullyrepay all outstanding obligations under our previous financing agreement withChase Bank, which expired on September 30, 2005. As of July 2, 2006,the $18.0 million term loan was outstanding, and approximately $9.4 million wasoutstanding under our revolving credit facility. The total of these twoamounts, $27.4 million, is included in current portion of long-term debt in theaccompanying consolidated balance sheet as of July 2, 2006 (see Note 5 ofNotes to Consolidated Financial Statements).

As a result of lower than planned performance andcertain expenses of discontinued operations, we were in violation of certainfinancial covenants included in our credit agreements for the quarter endedJuly 2, 2006. Accordingly, we have entered into a forbearance agreementwith our lenders whereby the lenders have agreed not to take any action withrespect to the covenant violations through October 31, 2006. In addition,Ableco has agreed to defer the initial $1 million term loan principalpayment to October 31, 2006. If we are not able to complete thedivestiture of our power electronics business prior to October 31, 2006,the lenders could require repayment of the outstanding debt or we would need toobtain additional waivers from our lenders.

Our fiscal 2006 cash flows have been negatively impactedby higher interest expense and costs incurred to obtain new financingagreements, and we expect our future cash flows will be impacted by debtrepayments and pension contributions in fiscal years 2007 and 2008. Theaccumulated benefit obligation of our defined benefit pension plan exceeds planassets as of July 2, 2006 (see Note 13 of Notes to Consolidated FinancialStatements). We did not make any contributions to the plan during fiscal 2006,as none were mandated. Based upon current contribution credits available underpension funding regulations, actuarial projections indicate no mandatorycontributions to the plan would be required through fiscal year 2007. Dependingupon changes in asset values and interest rates, as well as any discretionarycontributions made by us in the interim period, required contributions inperiods subsequent to fiscal 2007 could be significant.

We are subject to certain potential environmental andlegal liabilities associated primarily with past divestitures (see Note 11of Notes to Condensed Consolidated Financial Statements). In the fourth quarterof fiscal 2005, a decision was rendered in a patent infringement action broughtagainst us by Mr. Ole K. Nilssen. In settlement of pending litigation, weagreed to submit the matter to binding arbitration, and in May 2005, thearbitrator awarded damages to Nilssen of $23.4 million, to be paid within 10days of the award. Nilssen’s counsel filed a motion to enter the award in U.S.District Court for the Northern District of Illinois, and we filed acounter-motion to vacate the award on grounds that it was fraudulently obtained.Our request for oral argument was granted and the hearing was held on October 19,2005. The judge is expected to render his decision by mail after furtherconsideration. An unfavorable decision by the Court could result in payment ofthe award by the Company to Nilssen in the amount of $22.6 million (thearbitration award of $23.4 million net of previously paid amounts of $0.8million).

Based upon current plans and business conditions, webelieve that proceeds from the sale of our power electronics business,borrowing capacity under our various credit facilities, and internallygenerated cash flows will be sufficient to fund anticipated operational needs,capital expenditures and other near-term commitments.

We do not have anyoff-balance sheet arrangements or variable interest entities as of July 2,2006.

10

----

**Summary ofContractual Obligations and Commitments**

Futurepayments due under contractual obligations of the Company’s continuingoperations as of July 2, 2006 are as follows (in thousands):

| ** **            | ** ** | **Less than** | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **More than** | ** ** | ** ** | ** ** |
|-----------------------|------------|--------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|------------|------------|
| ** **            | ** ** | **1 Year**    | ** ** | **Years**            | ** ** | **Years**            | ** ** | **5 Years**   | ** ** | **Total**  | ** ** |
| Debt repayment        |       |               | $          | 4,011                |       |                 | $          | 23,435             |       | $          | 9          |   |   | $ | - |   |   | $ | 27,455 |   |
| Operating leases      |       |               | 2,496      |                 |       | 4,930                |       | 4,017              |       |       | 8,292      |   |   | 19,735 |   |
| Purchase  obligations |       |               | 13,559     |                 |       | -                    |       | -                  |       |       | -          |   |   | 13,559 |   |
| Pension funding       |       |               | -          |                 |       | 41,000               |       | 19,600             |       |       | 400        |   |   | 61,000 |   |
| Total                 |       |               | $          | 20,066               |       |                 | $          | 69,365             |       | $          | 23,626     |   |   | $ | 8,692 |   |   | $ | 121,749 |   |

 

Pension funding amounts in the table above are basedon current regulations and actuarial calculations at July 2, 2006. Actualfunding amounts could vary, depending on future interest rate levels and valuesin equity and fixed-income markets.

The figures in the table above do not include ouraggregate future minimum rentals to be received under noncancelable subleasesof $8.4 million as of July 2, 2006.

The figures in the tableabove also exclude contractual obligations of the Company’s discontinuedoperations, which total $60.6 million, comprised of $23.5 million of purchaseobligations, $24.3 million of debt repayments, operating leases of $4.3 million,and $8.5 million of other long-term obligations.

**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 feel that our assumptionsregarding inventory valuation have been accurate in the past.

11

----

***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 perform annual impairment tests ofour goodwill, and may be required to test more frequently in certaincircumstances. We have elected to perform our annual impairment test in thefourth quarter of our fiscal year. We have identified our Power Electronics andPower Systems groups as reporting units under Statement of Financial AccountingStandard (“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*. In assessing potential impairment, we makesignificant estimates and assumptions regarding the discounted future cashflows of our reporting units to determine the fair value of those reportingunits. Such estimates include, but are not limited to, projected futureoperating results, working capital ratios, cash flow, terminal values, marketdiscount rates and tax rates. We review the accuracy of our projections bycomparing them to our actual results annually, and have determined that,historically, our cash flow estimates used in determining the fair value of ourreporting units have been reasonably accurate. We use the results of this analysisas well as projected operating results to modify our estimates annually. However,if circumstances cause these estimates to change in the future, or if actualcircumstances vary significantly from these assumptions, this could result inadditional goodwill impairment charges. We cannot predict the occurrence offuture events that may adversely affect our reported goodwill balance.

As indicated in Note 2 ofNotes to Consolidated Financial Statements, during the fourth quarter of fiscal2006, we committed to a plan to divest our power electronics business. Inevaluating impairment in the carrying value of goodwill for this business, weused information contained in indications of value received from third partiesduring the process of marketing the business. Based on this information, werecorded a goodwill impairment charge for the power electronics business of$22.4 million in the fourth quarter of fiscal 2006, representing thedifference between the estimated fair value and the carrying amount of thebusiness (see Note 3 to Consolidated Financial Statements).

***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 each of fiscal2006, 2005 and 2004. The discount rate reflects the market for high-qualityfixed income debt instruments and is subject to change each year. As of July 2,2006, the discount rate was 6.375% as compared to 5.25% at July 3, 2005and 6.375% at June 27, 2004. Changes in assumptions typically result inactuarial gains or losses that are amortized in accordance with the methodsspecified in SFAS No. 87, *Employers’ Accounting forPensions*. An increase in the discount rate, as occurred duringfiscal 2006, results in a decrease to our projected benefit obligation and anactuarial gain, which typically results in lower future pension expense.

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. Theaccounting 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 circumstances involvinguncertainty as to possible gain or loss to an enterprise that will ultimatelybe 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 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.

12

----

***Income Taxes***

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 zero net deferred tax position (net deferred assets equal to deferred taxliabilities). A portion of our deferred tax liability relates to tax-deductibleamortization of goodwill that is no longer amortized for financial reportingpurposes. Under applicable accounting rules, such deferred tax liabilities areconsidered to have an indefinite life and are therefore ineligible to beconsidered as a source of future taxable income in assessing the realization ofdeferred tax assets.

**Risk FactorsAffecting the Company’s Outlook**

Our future results of operations and the otherforward-looking statements contained in our Report on Form 10-K and this AnnualReport including this section titled “Management’s Discussion and Analysisof Financial Condition and Results of Operations”, involve a number of risksand uncertainties. In particular, the statements regarding future economicconditions, our goals and strategies, new product introductions, penetration ofnew markets, 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. Weare subject to all of the business risks facing public companies, includingbusiness cycles and trends in the general economy, financial market conditions,changes in interest rates, demand variations and volatility, potential loss ofkey personnel, supply chain disruptions, government legislation and regulation,and natural causes. The following list of risk factors is not all-inclusive.Other factors and unanticipated events could adversely affect our financial positionor results of operations. We believe that the most significant potential riskfactors that could adversely impact us are the following:

***Potential Sale of Power Electronics Business andLiquidity Impact***

We are in the process of divesting our power electronicsbusiness and expect to complete the transaction during October 2006. While wehave entered into a definitive agreement for this divestiture, it cannot becertain that the divestiture will close. Also, while we expect the proceeds ofthe divestiture will be sufficient to enable us to repay debt and fund pensionobligations as well as fund ongoing operations, it cannot be certain that theseactions will eliminate all future pension funding obligations.  In addition, it cannot be certain that additionaldebt financing would not be required in the future, nor can it be certain thatthe performance of our remaining continuing operations can generate sufficientcash flow to fund operations.

In the event that we arenot able to sell the power electronics business prior to October 31, 2006, ourlenders could require repayment of our outstanding debt unless we are able toobtain additional waivers from our lenders.

***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 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 new products to meetthat demand in a timely manner at competitive prices, to gain acceptance of ourproducts in the marketplace, and to adapt our existing product platforms in theevent of changes in technology. Failure to do so could result in low returns oninvestment in new products and technologies, a loss of competitive positionrelative to our peers, obsolete products and technologies, and an adverseimpact on our operating 

13

----

results. In addition,price erosion in our served markets could have a material 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 21% of our net sales in fiscal 2006. The loss of any such customersor significant decreases in any such customers’ levels of purchases could havean adverse effect on our business. In addition, we are exposed to the creditrisk of our customers, including risk of bankruptcy, and are subject to lossesfrom uncollectible accounts receivable. If the financial conditions of any ofour customers deteriorates and impairs their ability to make payments, we couldincur future write-offs of accounts receivable that could have a materialimpact on our financial position, results of operations or cash flows.

***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***

In power systems, wecompete with crane and hoist drive manufacturers and drive system integrators,elevator drive manufactures and control system integrators, mining machinerydrive builders, and power inverter builders. The total number of suchenterprises with whom we compete directly is considered to be fewer than 100. However,certain of our competitors are significantly larger and have substantiallygreater resources than us, and some are global in scope, whereas we currentlycompete primarily in the North American market.

***International Business***

Our internationaloperations are subject to risks associated with changes in local economic andpolitical conditions, laws, codes and standards, currency exchange rates andrestrictions, regulatory requirements and taxes. 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 and may develop action plans regardingadditional relocation or consolidation activities in the future. While webelieve 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,and in addition, these actions may result in quality issues or delays inproduction or shipment to customers that could have an adverse impact on ourresults of operations. In addition, there is no assurance that any futureactivities not yet planned would provide any benefits to our operating results,and any such future 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 in an industry characterized by short product lifecycles, we are highly dependent on both patented and proprietary intellectualproperty. Therefore, major advancements in digital power-electronic technologyby competitors or the advent of technologies obviating digital power-electronicsolutions could have an adverse effect on our financial position or results ofoperations.

14

----

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

***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 have agreed to provideindemnification against legal and environmental liabilities and potentialliabilities associated with operations that we have divested, including certainmotor, generator, lighting ballast, transformer and drive manufacturingoperations. If we are required to make payments under such indemnificationobligations, such payments could have a material adverse impact on ourfinancial position or results of operations. Further, we have been indemnifiedagainst potential legal and environmental liabilities and potential liabilitiesassociated with operations that we have acquired, including lighting ballast,transformer, capacitor and crane brake manufacturing operations that weresubsequently divested. If not borne by the indemnifiers, such liabilities, ifany, could be borne by us and have an adverse effect on our financial positionor results of operations.

In connection with our June 2001 sale of ourlighting business to Universal Lighting Technologies, Inc. (“ULT”), weagreed to provide a limited indemnification against certain claims of patentinfringement that Ole K. Nilssen might allege against ULT (see Note 11 of Notesto Consolidated Financial Statements). Mr. Nilssen subsequently filed alawsuit against ULT alleging infringement by ULT of certain of his patentspertaining to electronic ballast technology. The lawsuit is currently pendingin the U.S. District Court for the Middle District of Tennessee. ULT has made aclaim for indemnification against us in respect of this matter, which weaccepted. If Mr. Nilssen succeeds in his claim against ULT, our obligationto indemnify ULT for its damages payable to Mr. Nilssen could have amaterial adverse effect on our financial position and results of operations.

15

----

**QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

We are exposed to marketrisks in the areas of foreign exchange and interest rates. To mitigate theeffect of such risks, from time to time we selectively use specific financialinstruments. Hedging transactions can be entered into under Company policiesand procedures and are monitored monthly. Company policy prohibits the use ofsuch financial instruments for trading or speculative purposes. A discussion ofour accounting policies for derivative financial instruments is included in theSummary of Significant Accounting Policies under Note 1 in the Notes to theConsolidated Financial Statements. We did not have any outstanding hedgeinstruments or contracts at July 2, 2006 and July 3, 2005.

***Interest Rates***

The fair value of our debtof continuing operations was $27.5 million and $4.0 million at July 2,2006 and July 3, 2005, respectively. The fair value of our debt is equalto the borrowings outstanding from domestic banks and small amounts owed undercapital lease arrangements. For our debt outstanding at July 2, 2006 and July 3,2005, a hypothetical 10% adverse change in interest rates would have increasedour interest expense by approximately $0.2 million in fiscal year 2006, andwould have had almost no impact on interest expense in fiscal 2005, due to thelow level of debt outstanding. Prospectively we expect our interest expense todecrease upon the divestiture of our power electronics business, as we expectto use proceeds from the divestiture to reduce our outstanding debt.

***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 currency exposures. Gains andlosses on these non-U.S.-currency investments would generally be offset bycorresponding losses and gains on the related hedging instruments, resulting innegligible net exposure.

Our results of discontinued operations have beenimpacted by fluctuations in exchange rates, mainly between the U.S. dollarand the Euro, as a portion of our power electronics products are manufacturedin Europe and sold in the U.S. Many of these sales to U.S. customers aredenominated in U.S. dollars. Our exposure on sales by our European subsidiariesconsists mainly of (1) the exposure related to a weakening U.S. dollar forU.S. dollar denominated sales, as most of our European subsidiaries’ costs arein Euro; in the event of a weakening U.S. dollar, locally recorded sales in thefunctional currency (the Euro) are decreased, and (2) the exposure relatedto a weakening U.S. dollar when payment of U.S. dollar receivables are receivedfrom customers, resulting in less local currency than was originally recordedat the date of sale.

We had no foreign currency contracts outstanding at July 2,2006 and July 3, 2005.

16

----

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ***For the years ended  (Amounts in thousands, except per share data)*** | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|
| Net sales                                                                                                             |       | $                      | 83,102     |                   | $          | 75,999                  |       | $ | 67,853 |   |
| Cost of sales                                                                                                         |       | 56,415                 |       | 51,964                 |       | 46,648                  |       |
| Gross profit                                                                                                          |       | 26,687                 |       | 24,035                 |       | 21,205                  |       |
| Research and development                                                                                              |       | 4,056                  |       | 3,925                  |       | 3,127                   |       |
| Sales, general and  administrative                                                                                    |       | 25,508                 |       | 24,243                 |       | 23,053                  |       |
| Loss from operations                                                                                                  |       | (2,877                 | )          | (4,133                 | )          | (4,975                  | )          |
| Non operating expense  (income):                                                                                      |       |                   |       |                   |       |                    |       |
| Interest income                                                                                                       |       | (687                   | )          | (138                   | )          | (1,151                  | )          |
| Interest expense                                                                                                      |       | 3,362                  |       | 513                    |       | 936                     |       |
| Other expense                                                                                                         |       | —                 |       | —                 |       | 981                     |       |
| Loss from continuing  operations before provision for income taxes                                                    |       | (5,552                 | )          | (4,508                 | )          | (5,741                  | )          |
| Provision for income  taxes                                                                                           |       | 1,539                  |       | 1,029                  |       | 4,939                   |       |
| Loss from continuing  operations                                                                                      |       | (7,091                 | )          | (5,537                 | )          | (10,680                 | )          |
| Loss from discontinued  operations, net of taxes                                                                      |       | (39,758                | )          | (21,333                | )          | (2,391                  | )          |
| Net loss                                                                                                              |       | $                      | (46,849    | )                      | $          | (26,870                 | )          | $ | (13,071 | ) |
| Per common share  basic and diluted:                                                                                  |       |                   |       |                   |       |                    |       |
| Loss from continuing  operations                                                                                      |       | $                      | (0.25      | )                      | $          | (0.19                   | )          | $ | (0.39 | ) |
| Loss from discontinued  operations                                                                                    |       | $                      | (1.37      | )                      | $          | (0.75                   | )          | $ | (0.09 | ) |
| Net loss                                                                                                              |       | $                      | (1.62      | )                      | $          | (0.94                   | )          | $ | (0.48 | ) |
| Weighted average shares outstanding - basic and  diluted                                                              |       | 28,931                 |       | 28,535                 |       | 27,094                  |       |

 

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

17

----

**CONSOLIDATEDBALANCE SHEETS**

| ***As of  (Amounts in thousands)***                                                                          | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Assets                                                                                                                      |       |                   |       |                   |       |
| Current assets:                                                                                                             |       |                   |       |                   |       |
| Cash                                                                                                                        |       | $                      | 96         |                   | $          | 595 |   |
| Restricted cash -  escrow account                                                                                           |       | 22,602                 |       | -                      |       |
| Accounts  receivable, less allowance for doubtful accounts of $568 in 2006 and $747 in  2005                                |       | 13,056                 |       | 13,035                 |       |
| Inventories                                                                                                                 |       | 9,836                  |       | 9,060                  |       |
| Deferred income  taxes                                                                                                      |       | 23                     |       | 1,357                  |       |
| Prepaid expenses  and other current assets                                                                                  |       | 623                    |       | 919                    |       |
| Assets held for  sale                                                                                                       |       | 145,282                |       | 162,770                |       |
| Total current assets                                                                                                        |       | 191,518                |       | 187,736                |       |
| Property, plant and  equipment:                                                                                             |       |                   |       |                   |       |
| Buildings and  improvements                                                                                                 |       | 1,479                  |       | 1,483                  |       |
| Machinery and  equipment                                                                                                    |       | 16,560                 |       | 15,896                 |       |
| Less accumulated  depreciation                                                                                              |       | 14,066                 |       | 13,293                 |       |
| Net property, plant and  equipment                                                                                          |       | 3,973                  |       | 4,086                  |       |
| Goodwill                                                                                                                    |       | 28,150                 |       | 28,073                 |       |
| Other assets                                                                                                                |       | 8,822                  |       | 9,285                  |       |
| Total assets                                                                                                                |       | $                      | 232,463    |                   | $          | 229,180 |   |
| Liabilities and  Stockholders’ Equity                                                                                  |       |                   |       |                   |       |
| Current liabilities:                                                                                                        |       |                   |       |                   |       |
| Accounts payable                                                                                                            |       | $                      | 6,996      |                   | $          | 7,410 |   |
| Accrued  liabilities                                                                                                        |       | 7,992                  |       | 5,468                  |       |
| Accrued  arbitration award                                                                                                  |       | 22,602                 |       | 22,602                 |       |
| Liabilities held  for sale                                                                                                  |       | 76,907                 |       | 70,752                 |       |
| Current portion  of long-term debt                                                                                          |       | 27,412                 |       | 3,927                  |       |
| Total current  liabilities                                                                                                  |       | 141,909                |       | 110,159                |       |
| Long-term debt, net of  current portion                                                                                     |       | 43                     |       | 53                     |       |
| Pension benefit obligations,  net                                                                                           |       | 45,494                 |       | 70,568                 |       |
| Deferred income taxes                                                                                                       |       | 2,109                  |       | 2,340                  |       |
| Commitments and  contingencies                                                                                              |       |                   |       |                   |       |
| Stockholders’  Equity:                                                                                                 |       |                   |       |                   |       |
| Common stock, $0.01 par  value, 100,000 shares authorized 28,712 and 28,615 shares issued and  outstanding in 2006 and 2005 |       | 287                    |       | 286                    |       |
| Additional paid-in  capital                                                                                                 |       | 129,473                |       | 128,664                |       |
| Retained earnings  (deficit)                                                                                                |       | (6,831                 | )          | 40,018                 |       |
| Accumulated other  comprehensive loss                                                                                       |       | (80,021                | )          | (122,908               | )          |
| Total stockholders’  equity                                                                                            |       | 42,908                 |       | 46,060                 |       |
| Total liabilities and stockholders’ equity                                                                             |       | $                      | 232,463    |                   | $          | 229,180 |   |

 

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

18

----

**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 29, 2003**                                                 | ** ** |                  | **23,696** | ** **              |       |                   | **$**      | **237**                               | ** ** |       |       | **$** | **106,541** | ** ** |   |   | **$** | **79,959** | ** ** |   |   | **$** | **(108,066** | **)** |   | **$** | **78,671** | ** ** |
| Exercise of stock  options                                                      |       |                  | 18         |                    |       |                   | –     |                                  |       |       | 67         |   |   |   | – |   |   |   | – |   |   | 67 |   |
| Shares issued                                                                   |       |                  | 4,200      |                    |       |                   | 42         |                                  |       |       | 18,480     |   |   |   | – |   |   |   | – |   |   | 18,522 |   |
| Employee stock purchase  plan                                                   |       |                  | 16         |                    |       |                   | –     |                                  |       |       | 47         |   |   |   | – |   |   |   | – |   |   | 47 |   |
| Pension plan  contribution                                                      |       |                  | 535        |                    |       |                   | 6          |                                  |       |       | 2,386      |   |   |   | – |   |   |   | – |   |   | 2,392 |   |
| Shares issued to trust                                                          |       |                  | 27         |                    |       |                   | –     |                                  |       |       | 146        |   |   |   | – |   |   |   | – |   |   | 146 |   |
| Deferred compensation  plan                                                     |       |                  | –     |                    |       |                   | –     |                                  |       |       | (22        | ) |   |   | – |   |   |   | – |   |   | (22 | ) |
| Share value trust                                                               |       |                  | –     |                    |       |                   | –     |                                  |       |       | 47         |   |   |   | – |   |   |   | – |   |   | 47 |   |
| Net loss                                                                        |       |                  | –     |                    |       |                   | –     |                                  |       |       | –     |   |   |   | (13,071 | ) |   |   | – |   |   | (13,071 | ) |
| Translation adjustments                                                         |       |                  | –     |                    |       |                   | –     |                                  |       |       | –     |   |   |   | – |   |   |   | 2,331 |   |   | 2,331 |   |
| Minimum pension  liability                                                      |       |                  | –     |                    |       |                   | –     |                                  |       |       | –     |   |   |   | – |   |   |   | 20,792 |   |   | 20,792 |   |
| Comprehensive income                                                            |       |                  | –     |                    |       |                   | –     |                                  |       |       | –     |   |   |   | – |   |   |   | – |   |   | 10,052 |   |
| **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          |                                  |       |       | 283        |   |   |   | – |   |   |   | – |   |   | 284 |   |
| Deferred compensation  plan                                                     |       |                  | 61         |                    |       |                   | 1          |                                  |       |       | 252        |   |   |   | – |   |   |   | – |   |   | 253 |   |
| Share value trust                                                               |       |                  | (61        | )                       |       |                   | (1         | )                                     |       |       | (283       | ) |   |   | – |   |   |   | – |   |   | (284 | ) |
| 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 |   |
| Deferred compensation  plan                                                     |       |                  | 90         |                    |       |                   | 1          |                                  |       |       | 288        |   |   |   | – |   |   |   | – |   |   | 289 |   |
| Share value 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** | ** ** |

 

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

19

----

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

| *** For the years ended (Amounts in thousands)***                                          | ** ** | **July 2,  2006** | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|
| ** Cash flows from continuing operating  activities:**                                                                   |       |                   |       |                   |       |                    |       |
|  Net loss from continuing operations                                                                                     |       | $                      | (7,091     | )                      | $          | (5,537                  | )          | $ | (10,680 | ) |
|  Adjustments to reconcile net loss from  continuing operations to net cash provided by (used in) continuing  operations: |       |                   |       |                   |       |                    |       |
|  Depreciation                                                                                                            |       | 1,081                  |       | 1,419                  |       | 1,372                   |       |
|  Amortization                                                                                                            |       | 906                    |       | 253                    |       | 513                     |       |
|  Stock based compensation expense                                                                                        |       | 500                    |       | 506                    |       | –                  |       |
|  Changes in operating assets and liabilities  of continuing operations                                                   |       | 7,877                  |       | 3,846                  |       | 7,975                   |       |
|  Total adjustments                                                                                                       |       | 10,364                 |       | 6,024                  |       | 9,860                   |       |
|  Net cash provided by (used in) continuing  operating activities                                                         |       | 3,273                  |       | 487                    |       | (820                    | )          |
| ** Cash flows from discontinued operations:**                                                                            |       |                   |       |                   |       |                    |       |
|  Loss from discontinued operations                                                                                       |       | (39,758                | )          | (21,333                | )          | (2,391                  | )          |
|  Adjustments to reconcile loss from  discontinued operations to net cash provided by (used in) discontinued  operations: |       |                   |       |                   |       |                    |       |
|  Depreciation and amortization                                                                                           |       | 6,574                  |       | 7,591                  |       | 7,876                   |       |
|  Arbitration award expense                                                                                               |       | –                 |       | 21,977                 |       | –                  |       |
|  Goodwill and other asset impairment                                                                                     |       | 37,843                 |       | –                 |       | –                  |       |
|  Changes in operating assets and liabilities  of discontinued operations                                                 |       | (1,513                 | )          | 759                    |       | (14,291                 | )          |
|  Capital expenditures                                                                                                    |       | (5,279                 | )          | (7,584                 | )          | (5,300                  | )          |
|  Net cash provided by (used in) discontinued  operations                                                                 |       | (2,133                 | )          | 1,410                  |       | (14,106                 | )          |
|  Net cash provided by (used in) operating  activities                                                                    |       | 1,140                  |       | 1,897                  |       | (14,926                 | )          |
| ** Cash flows from investing activities:**                                                                               |       |                   |       |                   |       |                    |       |
|  Proceeds from sale of businesses and other  assets                                                                      |       | –                 |       | –                 |       | 1,075                   |       |
|  Capital expenditures                                                                                                    |       | (957                   | )          | (1,405                 | )          | (645                    | )          |
|  Net cash provided by (used in) investing  activities                                                                    |       | (957                   | )          | (1,405                 | )          | 430                     |       |
| ** Cash flows from financing activities:**                                                                               |       |                   |       |                   |       |                    |       |
|  Deposit into escrow account                                                                                             |       | (22,602                | )          | –                 |       | –                  |       |
|  Proceeds from issuance of common stock                                                                                  |       | 310                    |       | 430                    |       | 18,760                  |       |
|  Proceeds from employee stock purchase plan                                                                              |       | –                 |       | 37                     |       | 47                      |       |
|  Borrowings (repayments) under line-of-credit  agreements                                                                |       | 5,485                  |       | (368                   | )          | (4,955                  | )          |
|  Principal payments under capital lease  obligations                                                                     |       | (10                    | )          | –                 |       | –                  |       |
|  Borrowings under long term notes                                                                                        |       | 18,000                 |       | –                 |       | –                  |       |
|  Borrowings under capital lease obligations                                                                              |       | –                 |       | 53                     |       | –                  |       |
|  Increase in deferred financing costs                                                                                    |       | (1,865                 | )          | (82                    | )          | (570                    | )          |
|  Net cash provided by (used in) financing  activities                                                                    |       | (682                   | )          | 70                     |       | 13,282                  |       |
|  Net increase (decrease) in cash                                                                                         |       | (499                   | )          | 562                    |       | (1,214                  | )          |
|  Cash at the beginning of the year                                                                                       |       | 595                    |       | 33                     |       | 1,247                   |       |
|  Cash at the end of the year                                                                                             |       | $                      | 96         |                   | $          | 595                     |       | $ | 33 |   |

 

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

20

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**1.** Summary of Significant AccountingPolicies

**Principles of Consolidation**

The consolidated financialstatements include the accounts of Magnetek, Inc. and its subsidiaries(the “Company” or “Magnetek”). All significant inter-company accounts andtransactions have been eliminated.

**Basis ofPresentation**

The accompanying consolidated financial statementshave been prepared on the basis of Magnetek continuing as a going concern. Duringrecent years, the Company has incurred significant net losses, primarilyrelated to discontinued operations and an adverse decision in a patentarbitration (see Notes 2 and 11 of Notes to Consolidated Financial Statements).As a result the Company is not in compliance with certain financial covenantsincluded in its credit agreements (see Note 5 of Notes to ConsolidatedFinancial Statements). Additionally, future cash flows will be negativelyimpacted by scheduled debt repayments and mandatory contributions to theCompany’s defined benefit pension plan. The Company’s term loan requiresquarterly principal payments of $1.0 million beginning October 1,2006. Based upon current pension funding regulations, actuarial projectionsindicate required contributions of $41.0 million to the Company’s definedbenefit pension plan within the next three fiscal years. These conditions raisesubstantial doubt about the Company’s ability to continue as a going concern.

As previously disclosed inits filing on Form 10-Q for the three months ended April 2,2006 the Company began a review of various cash raising alternatives that wouldenable it to address its pending obligations. During the fourth quarter offiscal 2006, the Company completed its review and committed to a plan to divestits power electronics business. The Company intends to use proceeds from thesale of this business (see Note 20 of Notes to Consolidated FinancialStatements) to repay its debt and substantially fund its pension plan whichwill result in a significant reduction in interest cost and pension expense. Inaddition, in light of its anticipated smaller size, the Company intends tofurther reduce its corporate overhead expenses. Management believes theseactions will enable the Company to both address its pending obligations andimprove future profitability and cash flow in its continuing operations. As aresult, the financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from the outcomeof the Company’s ability to continue as a going concern.

**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.Significant areas requiring management estimates include the following keyfinancial 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 to 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 inventories are stated at the lower ofcost or market. Cost is determined by the first-in, first-out (“FIFO”) method,including material, labor and factory overhead. Inventory on hand may exceedfuture demand either 

21

----

because the product is obsolete, or the amount on handis more than can be used to meet future needs. The Company identifiespotentially obsolete and excess inventory by evaluating overall inventorylevels. In assessing the ultimate realization of inventories, the Company isrequired to make judgments as to future demand requirements and compare thosewith the current or committed inventory levels. If future demand requirementsare less favorable than those projected by management, additional inventorywrite-downs may be required.

***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 Statement of FinancialAccounting Standard (“SFAS”) No. 5, *Accounting for Contingencies*.SFAS No. 5 defines a contingency as “an existing condition, situation, orset of circumstances involving uncertainty as to possible gain or loss to anenterprise that will ultimately be resolved when one or more future eventsoccur 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) thatthe amount 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 (orrange) of 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 the deferred tax assetsis made, and a valuation allowance is established based upon this assessment.

***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 investments 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 upon shipment, except in thosecases where product is shipped to customers with consignment stock agreements,wherein revenue is recognized when the customer removes the product from consignmentstock. With the exception of consignment stock, terms of shipment are FOBshipping point, and payment is not contingent upon resale or any other matterother than passage of time. As a result, title to goods passes upon shipment. Amountsbilled to customers for shipping costs are reflected in net sales; shippingcosts are reflected in cost of sales.

Sales to distributors arerecorded with appropriate reserves for future returns in accordance with SFAS No. 48,*Revenue Recognition When Right of Return Exists*,and generally do not include future installation obligations or acceptance requirements.

**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 andimprovements normally ten to forty years).

22

----

**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, using discounted futurecash flow analyses as prescribed in SFAS 142.

**Stock-BasedCompensation**

On December 16, 2004, the Financial AccountingStandards Board (FASB) issued SFAS No. 123 (revised 2004), *Share-Based Payment*(“SFAS No. 123(R)”), whichis a revision of SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS No. 123”). SFAS No. 123(R) supersedesAPB Opinion No. 25, *Accounting forStock Issued to Employees*(“APBNo. 25”)*,* and amendsSFAS No. 95, *Statement of CashFlows*. Generally, the approach in SFAS No. 123(R) issimilar to the approach described 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 Company accounted for stock-based awards using theintrinsic-value method under APB No. 25. Under APB No. 25, theCompany recognized no compensation expense with respect to such awards, as theexercise prices of stock option grants were always equal to or greater than themarket price of the stock at the grant date. Accordingly, no stock-basedemployee compensation expense for stock options is reflected in determining netloss in the accompanying condensed consolidated financial statements for fiscalyears 2005 and 2004.

Effective July 4, 2005, the Company adopted SFAS No. 123(R), which requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the Company’s financial statementsbased upon their fair values. The Company selected the modified prospectivemethod of adoption in which compensation cost is recognized beginning with theeffective date. Compensation cost recognized for the fiscal year ended July 2,2006 is the same as that which would have been recognized had the fair valuemethod of SFAS No. 123 been applied from its original effective date. Inaccordance with the modified prospective method of adoption, the Company’sresults of operations for prior periods 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, on June 1, 2005. A stock option was consideredunderwater if the option exercise price was greater than $2.19 per share, whichwas the closing price of the Company’s common stock on June 1, 2005. Nostock options held by directors were subject to the acceleration. The decisionto accelerate vesting of these underwater options was made primarily to avoidrecognizing compensation cost in the consolidated statement of operations uponadoption of SFAS No. 123 (R), as described above. As a result of theacceleration, the Company reduced the stock option compensation expense itotherwise would be required to record by approximately $1.9 million in fiscal2006, $1.4 million in fiscal 2007 and less than $0.1 million in fiscal 2008 ona pre-tax basis, resulting in an additional $3.4 million of pro-forma expensein fiscal 2005. The accelerated vesting was a modification of outstandingawards as defined by SFAS No. 123, which resulted in incremental pro-formacompensation expense of $0.3 million in fiscal 2005.

In August 2005, the Company granted 500,000shares of restricted stock with a fair value of $2.77 per share. The restrictedshares fully vest on January 1, 2009. The total estimated compensationexpense of $1.4 million related to the grant will be recorded ratably from thegrant date through the vesting date. Compensation expense related to therestricted stock grant included in the consolidated statement of operations forfiscal year 2006 is $354. The remaining portion of stock-based compensationexpense recorded in fiscal year 2006 of $146 relates to non-vested directorstock option grants.

In May 2005, the Company granted 240,000 sharesof restricted stock with a fair value of $2.11 per share. The restricted sharesfully vested on June 23, 2005. The total compensation expense related tothis restricted stock grant of $506 is included in the consolidated statementof operations for fiscal year 2005.

23

----

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 ineach period:

| ***For the years ended***                                                          | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ***(Thousands except per share amounts)***                                    | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
| Net loss - as reported                                                                            |       | $                | (46,849    | )                | $          | (26,870           | )          | $ | (13,071 | ) |
| Add: Stock-based compensation expense included in  reported net loss                              |       | 500              |       | 506              |       | -                 |       |
| Deduct: Total stock-based compensation expense  determined under fair value method for all awards |       | (500             | )          | (8,894           | )          | (4,700            | )          |
| Pro forma net  loss                                                                               |       | $                | (46,849    | )                | $          | (35,258           | )          | $ | (17,771 | ) |
| Loss per share as reported:                                                                       |       |             |       |             |       |              |       |
| Basic and diluted                                                                                 |       | $                | (1.62      | )                | $          | (0.94             | )          | $ | (0.48 | ) |
| Pro forma loss per share:                                                                         |       |             |       |             |       |              |       |
| Basic and diluted                                                                                 |       | $                | (1.62      | )                | $          | (1.24             | )          | $ | (0.66 | ) |

 

Compensation expense related to all stock-based awardsfor fiscal year 2006 and 2005 is included in selling, general andadministrative expense in the consolidated statements of operations. No taxbenefit was recorded on the stock compensation expense for fiscal years 2005and 2006 due to deferred tax valuation allowances recorded by the Company in thoseyears.

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

| ** **                         | ** ** | **Options** | ** ** |
|------------------------------------|------------|-------------|------------|
| ** **                         | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life  (years)             |       | 6.1         |       | 6.1 |   | 6.1 |   |
| Expected stock  price volatility   |       | 66.6        | %          | 72.2 | % | 65.8 | % |
| Risk-free  interest rate           |       | 5.1         | %          | 4.4 | % | 3.5 | % |
| Options granted                    |       | 45,000      |       | 750,000 |   | 1,836,000 |   |
| Exercise price of  options granted |       | $           | 2.53       |   | $ | 7.48 |   | $ | 4.58 |   |
| Fair value of options  granted     |       | $           | 1.65       |   | $ | 5.04 |   | $ | 2.83 |   |

 

**Recent AccountingPronouncements**

In November 2005, the FASB issued SFAS No. 151, *Inventory Costs, an amendment of ARB No. 43, Chapter 4. *The amendments made by SFAS No.151 clarify that abnormal amounts of idle facility expense, freight, handlingcosts and wasted materials (spoilage) should be recognized as current periodcharges and require the allocation fixed production overheads to inventorybased on normal capacity of the production facilities.  The pronouncement is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005.  The adoption of this pronouncement on July 4,2005 did not have a material effect on the Company’s financial position,results of operations or liquidity.

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections. *SFAS No. 154 replaces APB No. 20, *Accounting Changes*, and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and establishesretrospective application as the required method for reporting a change inaccounting principle.  SFAS No. 154provides guidance for determining whether retrospective application of a changein accounting principle is impracticable and for reporting a change whenretrospective application is impracticable. The reporting of a correction of an error by restating previously issuedfinancial statements is also addressed. SFAS No. 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005.  The adoption of this pronouncement on July 3,2006, is not expected to have a material effect on the Company’s financialposition, results of operations or liquidity.

On July 13, 2006, the FASB issued Interpretation No.48, *Accounting for Uncertainty in Income Taxes*(“FIN48”).  FIN 48 creates a single model toaddress uncertainty in tax positions, clarifying the accounting for incometaxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized 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 tax positions related to income taxes subject toSFAS No. 109, *Accounting for Income Taxes*.

24

----

FIN 48 utilizes a two-step approach for evaluating taxpositions.  Recognition (step one) occurswhen an enterprise concludes that a tax position, based solely on its technicalmerits, is “more-likely-than-not” to be sustained upon examination.  Measurement (step two) is only addressed ifstep one has been satisfied.  Those taxpositions failing to qualify for initial recognition are recognized in thefirst subsequent interim period they meet the more-likely-than-not standard, orare resolved through negotiation or litigation with the taxing authority, orupon expiration of the statute of limitations. 

FIN 48 is effective for fiscal years beginning afterDecember 15, 2006.  Differences betweenthe amounts recognized in the statements of financial position prior to theadoption of FIN 48 and the amounts reported after adoption would be accountedfor as a cumulative-effect adjustment recorded to the beginning balance ofretained earnings.  The adoption of thispronouncement is not expected to have a material effect on the Company’sfinancial position, results of operations, or liquidity.

**Research andDevelopment**

Expenditures for researchand development are charged to expense as incurred and aggregated $4,056,$3,925, and $3,127 for the fiscal years 2006, 2005, and 2004, respectively.

**Advertising**

Expenditures foradvertising are charged to expense as incurred and aggregated $245, $383, and$237 for the fiscal years 2006, 2005, and 2004, 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 loss in stockholders’ equity.

**DerivativeFinancial Instruments**

The Company periodicallyuses derivative financial instruments to reduce financial market risks. Theseinstruments are used to hedge foreign currency and interest rate marketexposures. The Company does not use derivative financial instruments forspeculative or trading purposes. The accounting policies for these instrumentsare based on the Company’s designation of such instruments as hedgingtransactions. The criteria the Company uses for designating an instrument as ahedge include the instrument’s effectiveness in risk reduction and the matchingof the derivative to the underlying transaction. The resulting gains or lossesare accounted for as part of the transactions being hedged, except that lossesnot expected to be recovered upon the completion of the hedge transaction areexpensed. The Company had no derivative financial instruments at July 2,2006 and July 3, 2005.

**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 $906, $253 and $513 for thefiscal years 2006, 2005, and 2004, respectively. These expenses are included ininterest expense in the consolidated statements of operations.

**Earnings Per Share**

In accordance withSFAS No. 128, *Earnings Per Share*,basic earnings per share is computed using the weighted average number ofcommon shares outstanding during the period. Diluted earnings per common shareincorporates the incremental shares issuable upon the assumed exercise of stockoptions as if all exercises had occurred at the beginning of the fiscal year.

**Reclassification**

Certain prior year amountswere reclassified to conform to the current year presentation, primarily thereclassification of prior period discontinued operations.

25

----

**Fiscal Year**

The Company uses a fifty-two,fifty-three week fiscal year ending on the Sunday nearest June 30. Thefiscal years ended July 2, 2006 and June 27, 2004 each containedfifty-two weeks. The fiscal year ended July 3, 2005 contained fifty-threeweeks.

**2.** Discontinued Operations

TheCompany’s power electronics business and telecom power business, 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 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ***For the years ended***                                     | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
| Net sales                                                                    |       | $                | 175,375    |             | $          | 176,737           |       | $ | 174,981 |   |
| Income (loss) from discontinued operations before  interest and income taxes |       | $                | (41,415    | )                | $          | (19,988           | )          | $ | 792 |   |
| Interest expense, net                                                        |       | 1,357            |       | 1,249            |       | 1,422             |       |
| Other income                                                                 |       | -                |       | (1,300           | )          | -                 |       |
| Provision  (benefit) for income taxes                                        |       | (3,014           | )          | 1,396            |       | 1,761             |       |
| Loss from discontinued  operations                                           |       | $                | (39,758    | )                | $          | (21,333           | )          | $ | (2,391 | ) |

 

Loss from discontinued operations for the year ended July 2,2006 includes asset impairment charges of $37,843, comprised of charges forgoodwill impairment of $22,412, the write-off of the net basis of assets heldfor sale related to reclassification of accumulated currency translationadjustment amounts of $10,589, inventories of $4,526, and property, plant andequipment of $316. Loss from discontinued operations for the year ended July 3,2005 includes a charge of $21,977 related to a patent infringement claim. Lossfrom discontinued operations for fiscal 2004 includes a net loss of $411 fromthe Company’s telecom service business, divested in the first quarter of fiscal2004.

Loss from discontinued operations for fiscal years2006, 2005 and 2004 also includes charges of $3,615, $4,698 and $1,261respectively, for legal fees and other costs related to the patent infringementclaim and appeal of the judgment, product liability claims, environmentalissues, and asbestos claims. These issues primarily relate to indemnificationagreements provided by the Company upon the sale of previously owned businessesin years prior to fiscal 2004.

During the fourth quarter of fiscal year 2006, theCompany committed to a plan to divest its power electronics business.Subsequent to July 2, 2006, the Company entered into an agreement to sellthe business to Power-One, Inc. (see Note 20 of Notes to ConsolidatedFinancial Statements). Management determined that the assets and liabilities tobe sold constituted a disposal group under SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,and that all of the “assets held for sale” criteria outlined in SFASNo. 144 were met. As a result, 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 is comprised mainly of itswholly-owned subsidiaries Magnetek S.p.A. (Italy), Magnetek Kft. (Hungary) andMagnetek Electronics Co., Ltd. (China), and a North American division locatedin Chatsworth, California.

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

| ** **                                                                         | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| *** For the years ended***                                     | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
|  Net sales                                                                    |       | $                | 156,820    |             | $          | 166,390           |       | $ | 162,427 |   |
|  Income  (loss) from discontinued operations before interest and income taxes |       | $                | (37,388    | )                | $          | 7,701             |       | $ | 4,393 |   |
|  Interest  expense, net                                                       |       | 1,357            |       | 1,249            |       | 1,422             |       |
|  Other income                                                                 |       | -                |       | (1,300           | )          | -                 |       |
|  Provision  (benefit) for income taxes                                        |       | (3,014           | )          | 1,396            |       | 1,761             |       |
|  Income (loss) from discontinued operations                                   |       | $                | (35,731    | )                | $          | 6,356             |       | $ | 1,210 |   |

 

26

----

Given the Company’s plan to divest of the powerelectronics business, in accordance with EITF 01-5, *Applicationof FASB Statement No.52 to an Investment Being Evaluated for Impairment ThatWill be Disposed Of,*the accumulated foreign currency translationadjustments (CTA) related to the business have been included as part of thecarrying amount of the investment in subsidiary when evaluating impairment. Theestimated fair value of the disposal group at July 2, 2006 is $68.4million, which approximates the expected proceeds, net of estimated transactioncosts, from the divestiture of the business. Based upon its determination offair value, in the fourth quarter of fiscal 2006, the Company recorded agoodwill impairment charge of $22.4 million and an additional net asset impairmentcharge of $10.6 million, equal to the net basis of assets held for sale relatedto reclassification of accumulated CTA amounts, which reduced the carryingvalue of the business to the estimated fair value at July 2, 2006. Theimpairment charges are included in loss from discontinued operations in fiscal2006 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 and July 3, 2005, are as follows:

| ** **                                                    | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **2006**         | ** ** | **2005**         | ** ** |
|  Cash and equivalents                                    |       | $                | 1,491      |             | $          | 6,259 |   |
|  Accounts  receivable                                    |       | 51,431           |       | 41,839           |       |
|  Inventories                                             |       | 45,586           |       | 40,890           |       |
|  Net property, plant and equipment                       |       | 27,320           |       | 27,853           |       |
|  Other  assets                                           |       | 18,485           |       | 42,054           |       |
|  Assets of  discontinued power electronics business      |       | $                | 144,313    |             | $          | 158,895 |   |
| Eliminations                                                  |       | (3,616           | )          | (852             | )          |
|  Total  assets                                           |       | $                | 140,697    |             | $          | 158,043 |   |
|  Accounts payable                                        |       | $                | 34,985     |             | $          | 29,564 |   |
|  Other  current liabilities                              |       | 5,926            |       | 4,830            |       |
|  Other long  term liabilities                            |       | 10,728           |       | 15,663           |       |
|  Long term  debt                                         |       | 24,294           |       | 19,475           |       |
|  Liabilities of  discontinued power electronics business |       | $                | 75,933     |             | $          | 69,532 |   |

 

During fiscal year 2005, the Company committed to aplan to divest its telecom power business, and as a result, reclassified assetsand liabilities as held for sale and the results of this business asdiscontinued operations. While the Company has not yet divested its telecompower business as of July 2, 2006, the business is being actively marketedto potential interested parties at a price that is reasonable. Accordingly, theoperating results of the telecom power business have continued to be classifiedas discontinued operations in the accompanying consolidated statements ofoperations and its assets and liabilities as held for sale in the accompanyingconsolidated balance sheets for all periods presented.

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

| ** **                                     | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| *** For the years ended*** | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
|  Net sales                                |       | $                | 18,555     |             | $          | 10,347            |       |   | $ | 11,567 |   |   |
|  Loss from discontinued operations        |       | $                | (412       | )                | $          | (1,014            | )          |   | $ | (1,929 | ) |   |

 

No interest expense or provision for income tax wasallocated to the Company’s telecom power business for any of the periodspresented above.

The estimated fair valueof the telecom power disposal group at July 2, 2006 is $3.5 million. Basedupon its determination of fair value, the Company recorded a write-down in thecarrying value of the business of $0.5 million, which is included in loss fromdiscontinued operations in fiscal 2005 in the accompanying consolidatedstatements of operations. The estimated fair value at July 2, 2006 iscomprised of $4.5 million in assets and $1.0 million in liabilities, asreflected in the accompanying consolidated balance sheets. Management iscurrently in negotiations with prospective buyers and expects the proceeds fromthe sale to approximate the adjusted carrying value.

27

----

**3. Goodwill**

In accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*, goodwill is no longeramortized but rather reviewed for impairment annually, or more frequently ifcertain indicators arise. The Company performed its annual impairment test forfiscal 2006 in its fourth quarter. The impairment tests, which consistprimarily of discounted cash flow analyses, indicated no goodwill impairment inthe Company’s power systems business as of June, 2006, but there wereindicators of impairment in the carrying value of goodwill in the Company’spower electronics business.

Under the provisions of SFAS No. 142, the bestindication of fair value of a reporting unit is the amount at which the unit asa whole could be bought or sold in a current transaction between willingparties. As indicated in Note 2 of Notes to Consolidated Financial Statements,during the fourth quarter of fiscal 2006, the Company committed to a plan todivest its power electronics business. Therefore, in evaluating impairment inthe carrying value of goodwill for the business, management used informationcontained in indications of value received from third parties during theprocess of marketing the business. Based on this information, the Companyrecorded a goodwill impairment charge for the power electronics business of$22.4 million in the fourth quarter of fiscal 2006, representing the differencebetween the estimated fair value and the carrying amount of the reporting unit.The impairment charge is included in discontinued operations in theaccompanying consolidated statement of operations.

Thechanges in the carrying value of goodwill for the years ended July 2, 2006and July 3, 2005 are as follows:

| ** **                              | ** ** | **Power**   | ** ** |
|-----------------------------------------|------------|-------------|------------|
| ** **                              | ** ** | **Systems** | ** ** |
| ** Balance at June 27, 2004** |       |        | $          | 28,041 |   |   |
|  Currency translation              |       |        | 32         |   |   |
| ** Balance at July 3, 2005**  |       |        | $          | 28,073 |   |   |
|  Currency translation              |       |        | 77         |   |   |
| ** Balance at July 2, 2006**  |       |        | $          | 28,150 |   |   |

 

The goodwill related tothe power electronics reporting unit is included in assets held for sale in theaccompanying consolidated balance sheets.

**4. Inventories**

Inventoriesconsist of the following: 

| ** **            | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|-----------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **2006**         | ** ** | **2005**         | ** ** |
|  Raw materials   |       |             | $          | 7,579            |       |   |   | $ | 7,405 |   |   |
|  Work-in-process |       |             | 970        |             |       |   | 992 |   |   |
|  Finished goods  |       |             | 1,287      |             |       |   | 663 |   |   |
|                  |       |             | $          | 9,836            |       |   |   | $ | 9,060 |   |   |

 

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

Long-termdebt consists of the following: 

| ** **                 | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **2006**         | ** ** | **2005**         | ** ** |
|  Term loan            |       | $                | 18,000     |             |       | $ | - |   |   |
|  Revolving bank loans |       | 9,412            |       |             | 3,927      |   |   |
|  Capital leases       |       | 43               |       |             | 53         |   |   |
|                       |       | 27,455           |       |             | 3,980      |   |   |
|  Less current portion |       | 27,412           |       |             | 3,927      |   |   |
|                       |       | $                | 43         |             |       | $ | 53 |   |   |

 

28

----

**Bank BorrowingArrangements**

On September 30, 2005, the Company entered intoan agreement with Ableco Finance LLC (Ableco) providing for an $18 million termloan and an agreement with Wells Fargo Foothill, Inc. (WFF) providing fora $13 million revolving credit facility. Borrowings under the term loan bearinterest at the lender’s reference rate plus 5%, or, at the Company’s option,the London Interbank Offering Rate (LIBOR) plus 7.5% (12.6% at July 2,2006). Such rates may be increased by up to one percentage point depending uponthe level of U.S. funded debt to EBITDA as defined in the agreement. The termloan requires quarterly principal payments of $1 million beginning October 1,2006. Borrowings under the revolving credit facility bear interest at the bank’sprime lending rate plus 2.5% or, at the Company’s option, LIBOR plus 4% (9.1%at July 2, 2006). Borrowings under the revolving credit facility aredetermined by a borrowing base formula as defined in the agreement, based onthe level of eligible domestic accounts receivable and inventory. The revolvingcredit facility also supports the issuance of letters of credit. Borrowingsunder the term loan and revolving credit facility are secured by substantiallyall of the Company’s domestic assets. The Company used the proceeds from therevolving credit facility to fully repay all outstanding obligations under itsprevious financing agreement with Chase Bank.

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 was funded by the $18.0 million term loanand borrowings of $4.6 million from the revolving credit facility, and isreported as restricted cash in the accompanying consolidated balance sheet asof July 2, 2006. As of July 2, 2006, the $18.0 million term loan andapproximately $9.4 million was outstanding under the revolving credit facility.The total of these two amounts, $27.4 million, is included in current portionof long-term debt in the accompanying condensed consolidated balance sheet.This classification reflects certain provisions in the term loan and revolvingcredit agreements which allow the lenders to declare a default and acceleratethe loans should certain events occur which could be expected to result in a “MaterialAdverse Effect” (as defined in the agreements) on the Company. Such provisionsare considered “subjective acceleration” clauses under accounting guidelineswhich require the classification of debt balances as current although therelated agreements have termination dates that are beyond one year from the balancesheet date.

As a result of lower than planned performance andcertain expenses of discontinued operations, the Company was in violation ofcertain financial covenants included in its credit agreements for the quarterended July 2, 2006. As discussed in Notes 2 and 20 of the Notes toConsolidated Financial Statements, the Company is in the process of divestingits power electronics business. The Company expects to use the proceeds of thedivestiture to repay borrowings outstanding under its term loan and revolvingcredit facility. Accordingly, the Company has entered into a forbearanceagreement with its lenders whereby the lenders have agreed not to take anyaction with respect to the covenant violations through October 31, 2006. Inaddition, Ableco has agreed to defer the initial $1 million term loan principalpayment to October 31, 2006.

Aggregateprincipal maturities on long-term debt outstanding at July 2, 2006of the Company’s continuing operations based on the terms of the Company’scredit agreements are as follows:

| *** Fiscal year*** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2007                         |       | $          | 4,011      |   |
| 2008                         |       | 23,423     |       |
| 2009                         |       | 12         |       |
| 2010                         |       | 9          |       |
| 2011                         |       | -          |       |
| Thereafter                   |       | -          |       |
|                         |       | $          | 27,455     |   |

 

The table above does notinclude debt outstanding at July 2, 2006 of the Company’s discontinuedoperations, which total $24.3 million.

*DiscontinuedOperations*

The Company’s European subsidiary maintains revolvingborrowing arrangements with local banks, primarily to support working capitalneeds. The European subsidiary is part of the power electronics business whichthe Company is in the process of divesting. Available borrowings under thesearrangements aggregate approximately Euro 20.0 million depending in part uponlevels of accounts receivable, and bear interest at various rates ranging from3% to 8%. In addition, the Company’s European subsidiary has an agreement witha European bank to provide borrowings secured by the subsidiary’s 

29

----

land and building. Borrowings under this agreementbear interest at EURIBOR plus 1.5%. The initial commitment to lend under thisagreement was Euro 7.0 million, and the commitment has been reduced ratably ona quarterly basis beginning March 31, 2004 and ending September 30,2013. As of July 2, 2006, the total amount outstanding under all Europeanborrowing arrangements was $24.3 million, which is included in liabilities heldfor sale in the accompanying consolidated balance sheet as of July 2,2006.

**6. Loss PerShare**

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

| ** **                                                | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
|  Numerator:                                          |       |             |       |             |       |              |       |
|  Loss from  continuing operations                    |       | $                | (7,091     | )                | $          | (5,537            | )          | $ | (10,680 | ) |
|  Loss from  discontinued operations                  |       | (39,758          | )          | (21,333          | )          | (2,391            | )          |
|  Net loss                                            |       | $                | (46,849    | )                | $          | (26,870           | )          | $ | (13,071 | ) |
|  Denominator:                                        |       |             |       |             |       |              |       |
|  Weighted  average shares for basic loss per share   |       | 28,931           |       | 28,535           |       | 27,094            |       |
|  Add dilutive  effect of stock options outstanding   |       | –           |       | –           |       | –            |       |
|  Weighted  average shares for diluted loss per share |       | 28,931           |       | 28,535           |       | 27,094            |       |
|  Basic and  Diluted:                                 |       |             |       |             |       |              |       |
|  Loss per  share from continuing operations          |       | $                | (0.25      | )                | $          | (0.19             | )          | $ | (0.39 | ) |
|  Loss per  share from discontinued operations:       |       | $                | (1.37      | )                | $          | (0.75             | )          | $ | (0.09 | ) |
|  Net loss per share:                                 |       | $                | (1.62      | )                | $          | (0.94             | )          | $ | (0.48 | ) |

 

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 their impact would be anti-dilutive.

**7. FairValues of Financial Instruments**

The carrying amounts ofcertain financial instruments such as cash, annuity contracts and borrowingsunder revolving credit agreements approximate their fair values, based on theshort-term nature of these instruments, accounting rules requiringmark-to-market on annuity contracts, and variable rates on borrowings.

**8. AssetImpairment Charges**

In the fourth quarter offiscal 2006, the Company recorded asset impairment charges related to its powerelectronics business aggregating $37,843. The charges consisted of $22,412 forgoodwill; $10,589 for the write-off of the net basis of assets held for salerelated to reclassification of accumulated currency translation adjustmentamounts; $4,526 for inventories; and $316 for property, plant and equipment. Theimpairment charges are included in loss from discontinued operations in theaccompanying consolidated statement of operations.

**9. Restructuring Costs**

During fiscal 2004, theCompany began a series of restructuring activities that impacted both itsdomestic and foreign operations. SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities* requires thatliabilities for costs associated with exit or disposal activities initiatedafter December 31, 2002, be recognized when the liability is incurred,with the exception of termination of certain leases and contracts.

30

----

During the second quarterof fiscal 2004, the Company began a workforce reduction of approximately 200positions in Italy and the relocation of those positions to lower costfacilities, mainly in China. The Company completed these activities in fiscal2005. Costs incurred were $296 and $1,277 for fiscal years 2005 and 2004,respectively, and are included in loss from discontinued operations in theaccompanying consolidated statement of operations.

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 $919 for fiscalyear 2005, of which $166 was included in cost of goods sold and $753 wasincluded in selling, general and administrative expense in the accompanyingconsolidated statement of operations. Costs incurred for fiscal year 2004 were$359 and are included in selling, general and administrative expense in theaccompanying consolidated statement of operations.

During the fourth quarterof fiscal 2006, the Company’s Italian subsidiary finalized negotiations withthe labor union in Italy to further reduce the workforce at its Valdarno, Italyfacility by 55 positions and communicated the planned reduction to itsworkforce. The reduction is expected to occur over the next three years. TheCompany currently estimates the total cost of the reduction at Euro 1.5 million(approximately $1.8 million). Of this amount, approximately $0.3 million hasbeen paid to date. The Italian subsidiary is part of the power electronicsbusiness that is being divested, and as a result, the estimated cost of theworkforce reduction is included in loss from discontinued operations, and theremaining liability of $1.5 million is included in liabilities held for sale inthe accompanying consolidated financial statements.

**10. Income Taxes**

The components ofprovision (benefit) for income taxes allocated to continuing operations anddiscontinued operations are as follows:

| ** **                            | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|---------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ***Fiscal year ended***     | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
| *Continuing  Operations:*             | ** ** | ** **       | ** ** |             | ** ** | ** **        |       |   | ** ** | ** ** |   |
| Current:                              |       |             |       |             |       |              |       |   |   |   |   |
| Federal                               |       | $                | –     |             |       | $                 | (85        | ) |   |   | $ | (1,363 | ) |   |
| State                                 |       | –           |       |             | –     |              |       |   | 438 |   |   |
| Foreign                               |       | 437              |       |             | 203        |              |       |   | – |   |   |
| Deferred:                             |       |             |       |             |       |              |       |   |   |   |   |
| Federal                               |       | 1,102            |       |             | 911        |              |       |   | 5,365 |   |   |
| State  and foreign                    |       | –           |       |             | –     |              |       |   | 499 |   |   |
| Total continuing  operations          |       | $                | 1,539      |             |       | $                 | 1,029      |   |   |   | $ | 4,939 |   |   |
| *Discontinued Operations:*            | ** ** | ** **       | ** ** |             | ** ** | ** **        |       |   | ** ** | ** ** |   |
| Current:                              |       |             |       |             |       |              |       |   |   |   |   |
| Federal                               |       | $                | –     |             |       | $                 | –     |   |   |   | $ | – |   |   |
| State                                 |       | –           |       |             | –     |              |       |   | – |   |   |
| Foreign                               |       | 1,505            |       |             | 898        |              |       |   | 959 |   |   |
| Deferred:                             |       |             |       |             |       |              |       |   |   |   |   |
| Federal                               |       | (3,133           | )          |             | 685        |              |       |   | 715 |   |   |
| State  and foreign                    |       | (1,386           | )          |             | (187       | )                 |       |   | 87 |   |   |
| Total  discontinued operations        |       | $                | (3,014     | )                |       | $                 | 1,396      |   |   |   | $ | 1,761 |   |   |
| *Total Company:*                      | ** ** | ** **       | ** ** |             | ** ** | ** **        |       |   | ** ** | ** ** |   |
| Current:                              |       |             |       |             |       |              |       |   |   |   |   |
| Federal                               |       | $                | –     |             |       | $                 | (85        | ) |   |   | $ | (1,363 | ) |   |
| State                                 |       | –           |       |             | –     |              |       |   | 438 |   |   |
| Foreign                               |       | 1,942            |       |             | 1,101      |              |       |   | 959 |   |   |
| Deferred:                             |       |             |       |             |       |              |       |   |   |   |   |
| Federal                               |       | (2,031           | )          |             | 1,596      |              |       |   | 6,080 |   |   |
| State  and foreign                    |       | (1,386           | )          |             | (187       | )                 |       |   | 586 |   |   |
| Total income tax  provision (benefit) |       | $                | (1,475     | )                |       | $                 | 2,425      |   |   |   | $ | 6,700 |   |   |

 

The Company’s provision for income taxes for fiscal2004 was restated in fiscal 2005. Since fiscal 2002, the Company had providedvaluation reserves against its U.S. deferred tax assets that resulted in a zeronet deferred tax position (net deferred assets equal to deferred taxliabilities). In fiscal 2005, the Company determined that a portion of itsdeferred tax liability related to tax-deductible amortization of goodwill thatwas no longer amortized for financial reporting purposes. These deferred taxliabilities were considered to have an indefinite life and were thereforeineligible to be considered as a source 

31

----

of future taxable income in assessing the realizationof deferred tax assets. Accordingly, the Company increased its valuationallowance for deferred tax assets at July 3, 2005 by $1.6 million,resulting in an increase to the provision for income taxes of $1.6 million forfiscal 2005.

The Company further determined that such deferred taxliabilities existed at June 27, 2004, and therefore restated that year toincrease its valuation allowance for deferred tax assets and the relatedprovision for income taxes by $1.6 million. The restatement had no impact onthe Company’s cash flows in fiscal 2004.

Areconciliation of the Company’s effective tax rate to the statutory Federal taxrate is as follows:

| ** **                             | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ** **                             | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
| ***Fiscal year ended***      | ** ** | **Amount**       | ** ** | **%**            | ** ** | **Amount**        | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Benefit computed at the statutory rate |       |             | $          | (1,943           | )          |              | 35.0       |   |   | $ | (1,578 | ) |   | 35.0 |   |   | $ | (2,009 | ) |   | 35.0 |   |
| Losses not  benefited                  |       |             | 3,482      |             |       | (62.7             | )          |   | 2,607 |   |   | (57.8 | ) |   | 6,948 |   |   | (121.0 | ) |
| Total income tax  provision            |       |             | $          | 1,539            |       |              | (27.7      | ) |   | $ | 1,029 |   |   | (22.8 | ) |   | $ | 4,939 |   |   | (86.0 | ) |

 

Income (loss) before provision for income taxes of theCompany’s foreign subsidiaries was approximately $(22,058), $8,631 and $(1,173)for fiscal years 2006, 2005 and 2004, respectively.

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 the Company’sdeferred tax liabilities and assets of continuing operations as of July 2,2006 and July 3, 2005 are as follows:

| ** **                                                                             | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Deferred tax  liabilities:                                                             |       |             |       |             |       |
| Depreciation and amortization (including differences  in the basis of acquired assets) |       | $                | (2,109     | )                | $          | (2,340 | ) |
| Total deferred  tax liabilities                                                        |       | (2,109           | )          | (2,340           | )          |
| Deferred tax  assets:                                                                  |       |             |       |             |       |
| Inventory and other reserves                                                           |       | 10,980           |       | 11,423           |       |
| Net operating loss & capital loss  carryforwards                              |       | 72,520           |       | 70,470           |       |
| Total gross  deferred tax assets                                                       |       | 83,500           |       | 81,893           |       |
| Less: valuation  allowance                                                             |       | (83,477          | )          | (80,536          | )          |
| Deferred tax  assets less valuation allowance                                          |       | 23               |       | 1,357            |       |
| Net deferred tax  liability                                                            |       | $                | (2,086     | )                | $          | (983 | ) |

 

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 valuation allowanceis established against its deferred tax asset, increasing its income taxexpense 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 carry forward for tax purposes of $146,000 and $138,000as of July 2, 2006 and July 3, 2005, respectively, expiring betweenfiscal years 2013 and 2026.

32

----

**11. Commitmentsand Contingencies**

**Leases**

TheCompany leases certain facilities and machinery and equipment primarily underoperating lease arrangements. Future minimum rental payments undernoncancelable operating leases of the Company’s continuing operations as of July 2,2006 are as follows:

| ** **             | ** ** | **Minimum**  | ** ** | **Minimum**  | ** ** | **Net**      | ** ** |
|------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **             | ** ** | **Lease**    | ** ** | **Sublease** | ** ** | **Lease**    | ** ** |
| ***Fiscal Year*** | ** ** | **Payments** | ** ** | **Rentals**  | ** ** | **Payments** | ** ** |
| 2007                   |       |         | $          | 2,496        |       |         |       | $ | 1,947 |   |   |   | $ | 549 |   |   |
| 2008                   |       |         | 2,471      |         |       |         | 1,986      |   |   |   | 485 |   |   |
| 2009                   |       |         | 2,459      |         |       |         | 2,025      |   |   |   | 434 |   |   |
| 2010                   |       |         | 2,059      |         |       |         | 2,066      |   |   |   | -7 |   |   |
| 2011                   |       |         | 1,958      |         |       |         | 345        |   |   |   | 1,613 |   |   |
| Thereafter             |       |         | 8,292      |         |       |         | -          |   |   |   | 8,292 |   |   |
|                   |       |         | $          | 19,735       |       |         |       | $ | 8,369 |   |   |   | $ | 11,366 |   |   |

 

For the fiscal years 2006,2005 and 2004, rent expense was $2,848, $3,601 and $3,963 respectively, whilesublease rental income was $1,909, $1,871 and $2,192 respectively.

**Litigation—ProductLiability**

The Company has settled or otherwise resolved all ofthe product liability lawsuits associated with its discontinued businessoperations. The last remaining limited obligation to defend and indemnify thepurchaser of a discontinued business operation against new product liabilityclaims expired in December 2003 and the Company believes that any newclaims would either qualify as an assumed liability, as defined in the variouspurchase agreements, or would be barred by an applicable statute of limitations.The Company is also a named party in two product liability lawsuits related tothe Telemotive Industrial Controls business acquired in December 2002through the purchase of the stock of MXT Holdings, Inc. Both claims weretendered to the insurance companies that provided coverage for MXT Holdings, Inc.,against such claims and the defense and indemnification has been accepted bythe carriers, subject to a reservation of rights. Management believes that theinsurers will bear all liability, if any, with respect to both cases andthat the proceedings, individually or in the aggregate, will not have amaterial adverse effect on the Company’s results of operations or financialposition.

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 in August 2004.The claim has been tendered to the Company’s insurance carrier and legalcounsel has been retained to represent the Company. Plaintiff’s claim fordamages is unknown at this time, but management believes that the Company’sinsurer will bear all liability for the 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 and is awaiting their response. The Company has also fileda late claim in the amount of $2.5 million in the Federal-Mogul bankruptcyproceedings to recover attorney’s fee paid for the defense of these claims,which the Company believes is an obligation of Federal Mogul although the claimis subject to challenge. Management does not believe the asbestos proceedings,individually or in the aggregate, will have a material adverse effect on itsfinancial position or results 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 

33

----

patents. The Company denied that its productsinfringed any valid patent and filed a response asserting affirmative defenses,as well as a counterclaim for a judicial declaration that its products do notinfringe the patents asserted by Mr. Nilssen and also that the assertedpatents are invalid. In June 2001, the Company sold its lighting businessto Universal Lighting Technologies, Inc. (“ULT”), and agreed to provide alimited indemnification against certain claims of infringement that Nilssenmight allege 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 Central 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 patent and responded on behalf of ULT asserting affirmativedefenses, as well as a counterclaim for a judicial declaration that the patentsare unenforceable and invalid and that the products do not infringe Nilssen’spatents. ULT requested a re-examination of the patents at issue by thePatent and Trademark Office and the request was granted. Meanwhile, the caseagainst ULT has been stayed pending Nilssen’s appeal of an unfavorable decisionagainst him in another case that could influence the outcome of his lawsuitsagainst ULT. The Company will continue to aggressively defend the claimsagainst ULT that are subject to defense and indemnification; however, anunfavorable decision could have a material adverse effect on the Company’sfinancial position, cash flows and results of operations.

**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 those relatedto the Company’s indemnification obligations, did not involve materialexpenditures during fiscal years 2006, 2005, or 2004.

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 2006, 2005 and 2004.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 the Company’salleged connection to the contaminated sites, the number and financialresources of other potentially responsible parties, the availability ofindemnification 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 to indemnifyCentury Electric from and against liabilities and expenses arising out of thehandling and cleanup of certain waste materials, including but not limited tocleaning up any polychlorinated biphenyls (“PCBs”) at the McMinnville facility(the “1983 Indemnity”). The presence of PCBs and other substances, includingsolvents, in the soil and in the groundwater underlying the facility and incertain offsite soil, sediment and biota samples has been identified. TheMcMinnville plant is listed as a Tennessee Inactive Hazardous Waste SubstanceSite and plant employees were notified of the presence of contaminants at thefacility. Gould has completed an interim remedial excavation and disposal ofonsite soil containing PCBs and a preliminary investigation and cleanup ofcertain onsite and offsite contamination. The Company believes the cost offurther investigation and remediation (including ancillary costs) are coveredby the 1983 Indemnity. The Company sold its leasehold interest in the 

34

----

McMinnville plant in August 1999and while the Company believes that Gould will continue to performsubstantially under its indemnity obligations, Gould’s substantial failure toperform such obligations could have a material adverse effect on the Company’sfinancial position, cash flows and results of operations.

*Effect of Fruit ofthe Loom Bankruptcy (Bridgeport, Connecticut)*

In 1986, the Companyacquired the stock of Universal Manufacturing Company (“Universal”) from apredecessor of Fruit of the Loom (“FOL”), and the predecessor agreed toindemnify the Company against certain environmental liabilities arising frompre-acquisition activities at a facility in Bridgeport, Connecticut.Environmental liabilities covered by the indemnification agreement includecompletion of additional cleanup activities, if any, at the Bridgeport facility(sold in connection with the sale of the transformer business in June 2001)and defense and indemnification against liability for potential response costsrelated to offsite disposal locations. FOL, the successor to Universal’sindemnification obligation, filed a petition for Reorganization under Chapter11 of the Bankruptcy Code in 1999 and the Company filed a proof of claim in theproceeding for obligations related to the environmental indemnificationagreement. The Company believes that FOL had substantially completed theclean-up obligations required by the indemnification agreement prior to thebankruptcy filing. In November 2001, the Company and FOL entered into anagreement involving the allocation of certain potential tax credits andMagnetek withdrew its claims in the bankruptcy proceeding. FOL’s obligation tothe state of Connecticut was not discharged in the reorganization proceeding.FOL’s inability to satisfy its remaining obligations related to the Bridgeportfacility and any offsite disposal locations, or the discovery of additionalenvironmental contamination at the Bridgeport facility could have a materialadverse effect on the Company’s financial position or results of operations.

**Letters of Credit**

The Company hadapproximately $866 of outstanding letters of credit as of July 2, 2006. TheCompany’s Revolving Loan agreement dated September 30, 2005 permits theissuance of up to $4,000 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 (under Section 422Aof the Internal Revenue Code of 1986) and non-qualified stock options atexercise prices not less than the fair market value at the date of grant, andone of which only provides for the issuance of non-qualified stockoptions at exercise prices not less than the fair market value at the date ofgrant. One of the Plans also provides for the issuance of stock appreciationrights, restricted stock, incentive bonuses and incentive stock units. Thetotal number of shares of the Company’s common stock authorized to be issuedupon exercise of the stock options and other stock rights under the Plans is2,100,000.

A summary of certaininformation with respect to options under the Plans follows (options inthousands):

| ** **                              | ** ** | ** **  | ** ** | **Weighted-** | ** ** | **Aggregate**     | ** ** |
|-----------------------------------------|------------|-------------|------------|---------------|------------|-------------------|------------|
| ** **                              | ** ** | ** **  | ** ** | **Average**   | ** ** | **Intrinsic**     | ** ** |
| ** **                              | ** ** | ** **  | ** ** | **Exercise**  | ** ** | **Value**         | ** ** |
| ** **                              | ** ** | **Options** | ** ** | **Price**     | ** ** | **($000’s)** | ** ** |
| Options outstanding, June 29, 2003 |       |        | 6,517      |          |       |              | $          | 10.27 |   |   |   |   |   |   |
| Granted                                 |       |        | 1,836      |          |       |              | 4.58       |   |   |   |   |   |   |
| Exercised                               |       |        | (18        | )             |       |              | 3.83       |   |   |   |   |   |   |
| Cancelled                               |       |        | (386       | )             |       |              |       |   |   |   |   |   |   |
| Options outstanding, June 27, 2004 |       |        | 7,949      |          |       |              | $          | 8.92 |   |   |   | $ | 8,860 |   |   |
| Granted                                 |       |        | 750        |          |       |              | 7.48       |   |   |   |   |   |   |
| Exercised                               |       |        | (53        | )             |       |              | 3.26       |   |   |   |   |   |   |
| Cancelled                               |       |        | (468       | )             |       |              |       |   |   |   |   |   |   |
| Options outstanding, July 3, 2005  |       |        | 8,178      |          |       |              | $          | 8.77 |   |   |   | – |   |   |
| Granted                                 |       |        | 45         |          |       |              | 2.53       |   |   |   |   |   |   |
| Exercised                               |       |        | (3         | )             |       |              | 3.35       |   |   |   |   |   |   |
| Cancelled                               |       |        | (1,131     | )             |       |              |       |   |   |   |   |   |   |
| Options outstanding, July 2, 2006  |       |        | 7,089      |          |       |              | $          | 8.53 |   |   |   | $ | 19 |   |   |
| Exercisable options, June 27, 2004 |       |        | 4,906      |          |       |              | $          | 10.91 |   |   |   | $ | 968 |   |   |
| Exercisable options, July 3, 2005  |       |        | 8,096      |          |       |              | $          | 8.81 |   |   |   | – |   |   |
| Exercisable options, July 2, 2006  |       |        | 7,003      |          |       |              | $          | 8.59 |   |   |   | $ | 8 |   |   |

 

35

----

Thefollowing table provides information regarding exercisable and outstandingoptions as of July 2, 2006 (options in thousands).

| ** **                                                       | ** ** | **Exercisable** | ** ** | **Outstanding**    | ** ** |
|------------------------------------------------------------------|------------|-----------------|------------|--------------------|------------|
| ** **                                                       | ** ** | ** **      | ** ** | **Weighted**       | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted** | ** ** |
| ** **                                                       | ** ** | ** **      | ** ** | **average**        | ** ** | ** ** | ** ** | **average** | ** ** | **average** | ** ** |
| ** **                                                       | ** ** | ** **      | ** ** | **exercise**       | ** ** | ** ** | ** ** | **exercise** | ** ** | **remaining** | ** ** |
| ** **                                                       | ** ** | **Options**     | ** ** | **price per** | ** ** | **Options** | ** ** | **price per** | ** ** | **contractual** | ** ** |
| ***Range of exercise price per share*** | ** ** | **exercisable** | ** ** | **share**          | ** ** | **outstanding** | ** ** | **share** | ** ** | **life (years)** | ** ** |
| Under $5.00                                                      |       |            | 1,672      |               |       |   | $ | 3.89 |   |   |   | 1,736 |   |   |   | $ | 3.84 |   |   |   | 7.2 |   |   |
| $5.00 - $10.00                                                   |       |            | 3,380      |               |       |   | 7.78 |   |   |   | 3,402 |   |   |   | 7.78 |   |   |   | 5.3 |   |   |
| $10.01 - $15.00                                                  |       |            | 1,032      |               |       |   | 11.31 |   |   |   | 1,032 |   |   |   | 11.31 |   |   |   | 4.6 |   |   |
| Over $15.00                                                      |       |            | 919        |               |       |   | 17.03 |   |   |   | 919 |   |   |   | 17.03 |   |   |   | 2.0 |   |   |
| Total                                                            |       |            | 7,003      |               |       |   | $ | 8.59 |   |   |   | 7,089 |   |   |   | $ | 8.53 |   |   |   | 5.2 |   |   |

 

During fiscal year 2006, the Company issued 500,000shares of restricted stock to key employees which vest on January 1, 2009. Thetotal estimated compensation expense of $1.4 million related to the grant willbe recorded ratably from the grant date through the vesting date. Compensationexpense related to this restricted stock grant included in the consolidatedstatement of operations for fiscal year 2006 is $354. As of July 2, 2006, therewas approximately $1.0 million of total unrecognized compensation cost relatedto the grant. This cost is expected to be amortized over a weighted-averageperiod of 2.5 years.

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

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

| ** **                      | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **average**         | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **grant date** | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **fair value** | ** ** |
| Unvested at  June 27, 2004 |       |       | –     |                |       |   |   |   |   |
| Granted                         |       |       | 240        |                |       |   | $ | 2.11 |   |   |
| Vested                          |       |       | (240       | )                   |       |   |   |   |   |
| Forfeited                       |       |       | –     |                |       |   |   |   |   |
| Unvested at July 3,  2005  |       |       | –     |                |       |   |   |   |   |
| Granted                         |       |       | 500        |                |       |   | $ | 2.77 |   |   |
| Vested                          |       |       | –     |                |       |   |   |   |   |
| Forfeited                       |       |       | –     |                |       |   |   |   |   |
| Unvested at July 2, 2006   |       |       | 500        |                |       |   | $ | 2.77 |   |   |

 

**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. TheCompany funds the Plan in accordance with applicable employee benefit and taxlaws, and did not make any contributions to the Plan during fiscal 2006. Basedupon current contribution credits available under pension funding regulations,actuarial projections indicate no mandatory contributions to the plan would berequired through fiscal year 2007 although the Company may elect to makecontributions prior to that time. The Company elected to contribute 535,000shares of its common stock valued at $2,391 during fiscal 2004.

36

----

Pensionbenefit obligations at year-end, fair value of plan assets and prepaidbenefit costs for the years ended July 2, 2006 and July 3, 2005, wereas follows:

| ** **                                                  | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| **Change  in Benefit Obligation:**                          |       |             |       |             |       |
| Benefit  obligation at beginning of year                    |       | $                | 191,448    |             | $          | 166,496 |   |
| Interest cost                                               |       | 9,788            |       | 10,302           |       |
| Actuarial (gain)  loss                                      |       | (23,869          | )          | 25,504           |       |
| Benefits paid                                               |       | (11,062          | )          | (10,854          | )          |
| Benefit  obligation at end of year                          |       | $                | 166,305    |             | $          | 191,448 |   |
| **Change in Plan Assets:**                                  |       |             |       |             |       |
| Fair value of  plan assets at beginning of year             |       | $                | 120,880    |             | $          | 135,130 |   |
| Actual return on  plan assets                               |       | 10,994           |       | (3,396           | )          |
| Employer  contributions                                     |       | -                |       | -                |       |
| Benefits paid                                               |       | (11,062          | )          | (10,854          | )          |
| Fair value of  plan assets at end of year                   |       | $                | 120,812    |             | $          | 120,880 |   |
| Funded status                                               |       | $                | (45,494    | )                | $          | (70,568 | ) |
| Unrecognized net  actuarial loss                            |       | 97,837           |       | 126,655          |       |
| Prepaid benefit  cost                                       |       | $                | 52,343     |             | $          | 56,087 |   |
| **Amounts Recognized in Statement of Financial  Position:** |       |             |       |             |       |
| Accrued benefit  liability                                  |       | (45,494          | )          | (70,568          | )          |
| Accumulated other  comprehensive income                     |       | 97,837           |       | 126,655          |       |
| Net amount recognized                                       |       | $                | 52,343     |             | $          | 56,087 |   |

 

Pension plan assets do not include any shares ofCompany common stock as of July 2, 2006, and include 900,000 shares ofCompany common stock valued at $2,286 as of July 3, 2005.

Under SFAS No. 87, *Employers’Accounting for Pensions*, when the accumulated benefit obligation (“ABO”)exceeds the fair value of the plan assets, a minimum liability (net of relatedincome tax benefit) must be established on the balance sheet with acorresponding amount in other comprehensive income (loss) in stockholders’equity. The minimum pension liability must also include any prepaid pensionasset balance (the amount by which contributions to a plan have exceededexpense recorded under SFAS No. 87) as of the measurement date. Pursuantto SFAS No. 87, the Company recorded a minimum pension liability of$97,837 and $126,655 at July 2, 2006 and July 3, 2005, respectively.These amounts, net of tax benefits of $17,000, have been recorded as areduction to equity in “Accumulated Other Comprehensive Loss” on the Company’sconsolidated balance sheets as of July 2, 2006 and July 3, 2005.

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

| ** **                                        | ** ** | **2006**          | ** ** | **2005**          | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| Discount rate                                     |       | 6.38              | %          | 5.25              | %          |
| Expected return  on plan assets                   |       | 9.00              | %          | 9.00              | %          |
| Rate of  compensation increase                    |       | N/                | A          | N/                | A          |
| Measurement date for  pension benefit obligations |       | July 2, 2006 |       | July 3, 2005 |       |

 

The rate of increase in future compensation levels isnot applicable due the freezing of the Plan in 2003. The Company determines theexpected return on plan assets based upon the overall expected long-term rateof return over the period that benefits are expected to be paid. This estimateconsiders the targeted allocation of plan assets among securities with variousrisk and return profiles and incorporates historical data as well asanticipated economic and market conditions. Plan assets are invested in adiversified mix of funds containing equity and debt securities through aprofessional investment manager with the objective to achieve targeted riskadjusted returns while maintaining liquidity sufficient to fund current benefitpayments. Expected future benefit payments under the Plan for fiscal years areas follows: $9,917 in 2007; $9,972 in 2008; $10,154 in 2009; $10,008 in 2010;$10,304 in 2011; and $57,397 in 2012 through 2016.

37

----

Theallocation of Plan assets by investment type as of July 2, 2006 and July 3,2005 are as follows:

| ** **              | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|-------------------------|------------|------------------|------------|------------------|------------|
| **Asset Category** | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Equity securities       |       |             | 66         | %                |       |   | 66 | % |   |
| Fixed income securities |       |             | 34         | %                |       |   | 34 | % |   |
| Total                   |       |             | 100        | %                |       |   | 100 | % |   |

 

Net periodic benefit costs(income) for the Company’s pension plan for the years ended July 2, 2006, July 3,2005, and June 27, 2004 were as follows:

| ** **                                                            | ** ** | **Pension Benefits** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|
| ***Fiscal year ended***                                     | ** ** | **July 2,**          | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
| **Components of Net Periodic Benefit Cost:** | ** ** | **2006**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest cost                                                         |       | $                         | 9,788      |   | $ | 10,302 |   | $ | 10,250 |   |
| Expected return on plan assets                                        |       | (10,407                   | )          | (11,720 | ) | (10,596 | ) |
| Recognized net actuarial loss                                         |       | 4,363                     |       | 2,854 |   | 3,539 |   |
| Net periodic  benefit cost                                            |       | $                         | 3,744      |   | $ | 1,436 |   | $ | 3,193 |   |

 

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 $507, $500, and $473 for the fiscal years 2006, 2005 and 2004respectively.

**14.** RelatedParty Transactions

The Company had anagreement with the Spectrum Group, Inc., which expired in December 2005,whereby Spectrum provided management services to the Company at an annual feeplus out of pocket expenses. The Company’s chairman is also the chairman,president and sole shareholder of Spectrum. Services provided includedconsultation and direct management assistance with respect to operations,strategic planning and other aspects of the business of the Company. Fees and expensespaid to Spectrum for these services under the agreement amounted to $390, $791and $588 for the fiscal years 2006, 2005 and 2004, respectively.

**15.** AccruedLiabilities

Accruedliabilities consisted of the following at fiscal year end:

| ** **                          | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Salaries, wages  and related items  |       |             | $          | 1,928            |       |   |   | $ | 795 |   |   |
| Environmental                       |       |             | 844        |             |       |   | 750 |   |   |
| Insurance                           |       |             | 615        |             |       |   | 744 |   |   |
| Stock  appreciation rights          |       |             | 604        |             |       |   | 604 |   |   |
| Audit &  professional fees |       |             | 437        |             |       |   | 266 |   |   |
| Commissions                         |       |             | 434        |             |       |   | 404 |   |   |
| Warranty                            |       |             | 414        |             |       |   | 260 |   |   |
| Income Taxes                        |       |             | 357        |             |       |   | 153 |   |   |
| Other                               |       |             | 2,359      |             |       |   | 1,492 |   |   |
|                                |       |             | $          | 7,992            |       |   |   | $ | 5,468 |   |   |

 

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.

38

----

Changesin the warranty reserve for fiscal 2006 and 2005 were as follows:

| ** **                               | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Balance at beginning of  year            |       |             | $          | 260              |       |   | $ | 128 |   |
| Additions charged to  earnings           |       |             | 829        |             |       | 774 |   |
| Use of reserve for  warranty obligations |       |             | (675       | )                |       | (642 | ) |
| Balance at end of year                   |       |             | $          | 414              |       |   | $ | 260 |   |

 

**16. SupplementalCash Flow Information**

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

| ** **                                                | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ***Fiscal year ended***                         | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
| Increase in  accounts receivable                          |       | $                | (21        | )                |       | $                 | (1,307     | ) |   | $ | (581 | ) |
| (Increase)  decrease in inventories                       |       | (776             | )          |             | (1,706     | )                 |       | 2,937 |   |
| (Increase)  decrease in prepaids and other current assets |       | 296              |       |             | 3,364      |              |       | (3,238 | ) |
| Decrease in other  operating assets                       |       | 1,421            |       |             | 1,089      |              |       | 1,307 |   |
| Increase  (decrease) in accounts payable                  |       | (414             | )          |             | 2,107      |              |       | 39 |   |
| Increase (decrease)  in accrued liabilities               |       | 2,524            |       |             | 483        |              |       | (2,714 | ) |
| Increase  (decrease) in deferred income taxes             |       | 1,103            |       |             | (1,618     | )                 |       | 7,029 |   |
| Increase in other  operating liabilities                  |       | 3,744            |       |             | 1,434      |              |       | 3,196 |   |
|                                                      |       | $                | 7,877      |             |       | $                 | 3,846      |   |   | $ | 7,975 |   |
| Cash paid for  interest and income taxes :                |       |             |       |             |       |              |       |   |   |
| Interest                                                  |       | $                | 2,122      |             |       | $                 | 308        |   |   | $ | 336 |   |
| Income taxes                                              |       | $                | 9          |             |       | $                 | 115        |   |   | $ | 160 |   |

 

The Company alsocontributed 535,000 shares of its common stock valued at $2,391 (non-cash) toits defined benefit pension during fiscal 2004.

**17. AccumulatedOther Comprehensive Loss**

Accumulatedother comprehensive loss consisted of the following at July 2, 2006 and July 3,2005:

| ** **                               | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| Minimum pension liability                |       | $                | (80,837    | )                | $          | (109,655 | ) |
| Foreign currency translation adjustments |       | 816              |       | (13,253          | )          |
|                                     |       | $                | (80,021    | )                | $          | (122,908 | ) |

 

The accumulated othercomprehensive loss related to the minimum pension liability is net of taxbenefits of $17,000.

During the fourth quarterof fiscal 2006, the Company transferred $10.6 million of accumulatedcurrency translation adjustments to assets held for sale, to reflect the assetbasis of the power electronics group.

**18. BusinessSegment 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 2006.

39

----

Informationwith respect to continuing operations of the Company’s foreign subsidiariesfollows:

| ** **                               | ** ** | **July 2,** | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ***For the fiscal year*** | ** ** | **2006**         | ** ** | **2005**         | ** ** | **2004**          | ** ** |
| Sales                                    |       |             | $          | 9,749            |       |              |       | $ | 8,931 |   |   |   | $ | 6,470 |   |   |
| Income from  operations                  |       |             | 1,192      |             |       |              | 969        |   |   |   | 862 |   |   |
| Identifiable  assets                     |       |             | 6,509      |             |       |              | 5,955      |   |   |   | 5,779 |   |   |
| Capital  expenditures                    |       |             | 63         |             |       |              | 64         |   |   |   | 58 |   |   |
| Depreciation and  amortization           |       |             | 75         |             |       |              | 78         |   |   |   | 87 |   |   |

 

Sales by foreign subsidiaries include only sales ofproducts to customers outside of the U.S.

Export sales from theUnited States were $6,231, $5,802 and $5,822 in fiscal years 2006, 2005 and2004, respectively.

**19. QuarterlyResults (unaudited)**

Thesupplementary quarterly financial information presented below reflects thereclassification of the Company’s power electronics and telecom powerbusinesses as discontinued operations for all periods presented as described inNotes 1 and 2 of Notes to Consolidated Financial Statements.

| ** **                                           | ** ** | **Oct 2,** | ** ** | **Jan 1,** | ** ** | **Apr 2,** | ** ** | **Jul 2,** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ***Fiscal 2006 quarter ended***       | ** ** | **2005**        | ** ** | **2006**        | ** ** | **2006**        | ** ** | **2006**        | ** ** |
| Net sales                                            |       | $               | 20,083     |            | $          | 21,801          |       | $               | 19,661     |   | $ | 21,557 |   |
| Gross profit                                         |       | 6,443           |       | 7,169           |       | 5,913           |       | 7,162           |       |
| Loss from  operations                                |       | (506            | )          | (366            | )          | (1,595          | )          | (410            | )          |
| Loss from  continuing operations before income taxes |       | (933            | )          | (1,068          | )          | (2,359          | )          | (1,192          | )          |
| Provision for  income taxes                          |       | 334             |       | 345             |       | 490             |       | 370             |       |
| Loss from  continuing operations                     |       | (1,267          | )          | (1,413          | )          | (2,849          | )          | (1,562          | )          |
| Income (loss)  from discontinued operations          |       | 213             |       | (312            | )          | (1,581          | )          | (38,078         | )          |
| Net loss                                             |       | $               | (1,054     | )               | $          | (1,725          | )          | $               | (4,430     | ) | $ | (39,640 | ) |
| Per common share:                                    |       |            |       |            |       |            |       |            |       |
| Basic and diluted:                                   |       |            |       |            |       |            |       |            |       |
| Loss from continuing operations                      |       | $               | (0.05      | )               | $          | (0.05           | )          | $               | (0.10      | ) | $ | (0.05 | ) |
| Income (loss) from discontinued operations           |       | $               | 0.01       |            | $          | (0.01           | )          | $               | (0.05      | ) | $ | (1.32 | ) |
| Net income (loss)                                    |       | $               | (0.04      | )               | $          | (0.06           | )          | $               | (0.15      | ) | $ | (1.37 | ) |

 

Thequarter ended July 2, 2006 includes asset impairment charges of $37,843included in loss from discontinued operations.

| ** **                                           | ** ** | **Oct 3,** | ** ** | **Jan 2,** | ** ** | **Apr 2,** | ** ** | **Jul 3,** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ***Fiscal 2005 quarter ended***       | ** ** | **2004**        | ** ** | **2005**        | ** ** | **2005**        | ** ** | **2005**        | ** ** |
| Net sales                                            |       | $               | 19,105     |            | $          | 19,122          |       | $               | 18,583     |   | $ | 19,189 |   |
| Gross profit                                         |       | 5,688           |       | 5,979           |       | 5,995           |       | 6,373           |       |
| Loss from  operations                                |       | (1,552          | )          | (900            | )          | (1,504          | )          | (177            | )          |
| Loss from  continuing operations before income taxes |       | (1,635          | )          | (977            | )          | (1,603          | )          | (293            | )          |
| Provision for  income taxes                          |       | 242             |       | 420             |       | 14              |       | 353             |       |
| Loss from  continuing operations                     |       | (1,877          | )          | (1,397          | )          | (1,617          | )          | (646            | )          |
| Income (loss)  from discontinued operations          |       | 2,417           |       | 1,559           |       | (23,384         | )          | (1,925          | )          |
| Net income (loss)                                    |       | $               | 540        |            | $          | 162             |       | $               | (25,001    | ) | $ | (2,571 | ) |
| Per common share:                                    |       |            |       |            |       |            |       |            |       |
| Basic and diluted:                                   |       |            |       |            |       |            |       |            |       |
| Loss from continuing operations                      |       | $               | (0.06      | )               | $          | (0.05           | )          | $               | (0.06      | ) | $ | (0.02 | ) |
| Income (loss) from discontinued operations           |       | $               | 0.08       |            | $          | 0.06            |       | $               | (0.82      | ) | $ | (0.07 | ) |
| Net income (loss)                                    |       | $               | 0.02       |            | $          | 0.01            |       | $               | (0.88      | ) | $ | (0.09 | ) |

 

The quarter ended January 2, 2005 includes $1,300income from the sale and license of rights and patents in income fromcontinuing operations.

40

----

The quarter ended April 2,2005 includes a $21,977 charge for an arbitration award related to a patentinfringement claim included in loss from discontinued operations.

**20. SubsequentEvents (unaudited)**

Subsequent to July 2, 2006, on September 28, 2006 theCompany entered into an agreement to sell its power electronics business (the “Business”)to Power One, Inc. for $71.7 million in cash plus the assumption ofapproximately $16.7 million in debt, subject to customary pre-closing andpost-closing tangible net worth and net debt adjustments. Pursuant to thePurchase and Sale Agreement (the “Agreement”) dated September 28, 2006, by andbetween the Company and Power One, Inc., Power-One will purchase theBusiness through the acquisition of all of the outstanding shares of Magnetek, S.p.A.,a subsidiary of the Company, and of the assets and liabilities of the U.S.division of the Business. The terms of the Agreement were negotiated atarms-length.

The Agreement provides for indemnification forbreaches of representations and warranties and other customary matters that theCompany believes are typical for this type of transaction, and for thesatisfaction or waiver of customary closing conditions. The Company intends touse the proceeds from the sale of the Business primarily to repay debt and fundpension obligations, as well as fund ongoing operations. The Company expectsthe transaction to be completed during October 2006.

41

----

**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 2, 2006 and July 3, 2005,and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended July 2,2006. 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 2, 2006 and July 3, 2005, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended July 2, 2006, in conformity with U.S.generally accepted accounting principles.

The accompanying financialstatements have been prepared assuming that Magnetek, Inc. will continue as agoing concern.  As more fully describedin Note 1, the Company has incurred recurring operating losses, has notcomplied with certain covenants of loan agreements with banks and hassignificant future cash flow commitments. These conditions raise substantial doubt about the Company’s ability tocontinue as a going concern. Management’s plans in regard to these matters are also described in Note1.  The financial statements do notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationof liabilities that may result from the outcome of this uncertainty.

As discussed in Note 1 to the financial statements, theCompany adopted Statement of Financial Accounting Standard No. 123(R)“Share Based Payment”, effective July 4, 2005.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Magnetek, Inc.’s internal controlover financial reporting as of July 2, 2006, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report datedSeptember 28, 2006, expressed an unqualified opinion on management’sassessment and an adverse opinion on the effectiveness of internal control overfinancial reporting.

|                        |                            |
|-----------------------------|---------------------------------|
|                             | /s/  Ernst & Young LLP |
| Woodland Hills,  California |                            |
| September 28,  2006    |                            |

 

42

----

**Board of Directors**

**Andrew G. Galef, **Chairman of the Board

**Thomas G. Boren, **President & Chief Executive Officer, Magnetek, Inc.

**Dewain K. Cross, **Retired Senior Vice President, Finance, CooperIndustries, Inc.

**Yon Y. Jorden, **Former Executive Vice President & ChiefFinancial Officer, Advance PCS

**Paul J. Kofmehl, **Retired Vice President & Group Executive, IBM

**Mitchell I. Quain, **Principal at Charter House Group International, Inc.

**Robert E.Wycoff, **RetiredPresident, Atlantic Richfield Company

**Corporate Officers**

**Thomas G. Boren, **President & Chief Executive Officer

**Antonio Canova Ph.D, **Executive Vice Presient,Power Electronic Products

**Alexander Levran Ph.D, **Executive Vice President,Chief Technology Officer

**Peter M. McCormick,  **Executive Vice President, PowerControl Systems

**David P. Reiland,**  Executive Vice President & ChiefFinancial Officer

**Stephen R. Torres,**  Executive Vice President, Alternative Energy

**Tina D. McKnight,**  Vice President, General Counsel &Secretary

**Marty J.Schwenner,**  VicePresident & Controller

**Stockholder Information**

**10-K Report**

**Magnetek’sAnnual Report on Form 10-K for the fiscal year ended July 2,2006, including the Company’s financial statements and related schedules forthe fiscal year ended July 2, 2006, is included herein beginning on page 43.Exhibits to Magnetek’s Form 10-K have been filed with the Securitiesand Exchange Commission. Most of these exhibits can be accessed from theInvestor Information section of the Company’s website***http://www.magnetek.com***or on the SEC’s Edgar website at*****http://www.sec.gov/cgi-bin/browse-edgar?actiongetcurrent*.Other exhibits are available upon request to Magnetek, subject to payment of areasonable fee to cover the Company’s cost of furnishing such exhibits. Torequest an exhibit from the Company, please contact:**

**Investor RelationsDepartment**

Magnetek, Inc.8966 Mason AvenueChatsworth, CA 91311Telephone: 1-818-727-2216 (extension 111)Web Site Address: *http://www.magnetek.com*

**Annual Stockholders’Meeting**

**Magnetek’s fiscal 2006 stockholders’ meeting willbe held on Wednesday, October 25,****2006 at 9:00 a.m. Pacific time at the WestwoodHotel, 10740 Wilshire Blvd., Los Angeles, CA 90024.**

Thefollowing table sets forth the high and low sales prices of the Company’sCommon Stock on theNew York Stock Exchange during each quarter of fiscal 2006:

| **Quarter Ending** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|
| October 2,  2005   |       | $3.70    |       | $2.37   |       |
| January 1,  2005   |       | 3.50     |       | 2.37    |       |
| April 2,  2006     |       | 4.10     |       | 3.03    |       |
| July 2, 2006       |       | 4.19     |       | 2.01    |       |

 

Magnetek’s Common Stock is listed on the New YorkStock Exchange under the ticker symbol “MAG”. As of September 1, 2006there were 198 holders of record of the Company’s Common Stock. No dividendshave been paid on the Common Stock. The Registrar and Transfer Agent for theCommon Stock is American Stock Transfer & Trust Company: 1-718-921-8380.

----

----