**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D. C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x    ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended:  December 31,2006**

**OR**

**o    ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thetransition period from    to**

**Commission file number 1-10233**

**MAGNETEK,INC.**(Exact name of Registrant as specified in its charter)

| **DELAWARE**                                               |   |   |   | **95-3917584**          |
|------------------------------------------------------------|--------|--------|--------|-------------------------|
| (State or other  jurisdiction of                           |   |   |   | (I.R.S. Employer        |
| incorporation or  organization)                            |   |   |   | Identification  Number) |
|                                                       |   |   |   |                    |
| **N49  W13650 Campbell Drive**                             |
| **Menomonee  Falls, Wisconsin 53051**                      |
| (Address of  principal executive offices)                  |
|                                                       |
| **(262)  783-3500**                                        |
| (Registrant’s  telephone number, including area code) |
|                                                       |
|                                                       |
| (Former name,  former address and former fiscal year,      |
| if changed since  last report)                             |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x  No  o  

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (Checkone):

Large acceleratedfiler    o    Acceleratedfiler    x    Non-acceleratedfiler    o    

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o  No  x  

Thenumber of shares outstanding of Registrant’s Common Stock, as of January 31,2007, was 29,838,345 shares.

** **

 

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2007 MAGNETEK FORM10-Q

TABLE OF CONTENTSFOR THE QUARTERLY REPORT ON FORM 10QFOR THE FISCAL QUARTER ENDED DECEMBER 31, 2006

MAGNETEK, INC.
| **Part I.**  | ** ** | **Financial Information**                                                                   |
|--------------|------------|---------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                  |
| Item 1.      |       | Financial Statements                                                                        |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3.      |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |
| Item 4.      |       | Controls and  Procedures                                                                    |
|         |       |                                                                                        |
| **Part II.** | ** ** | **Other Information**                                                                       |
| ** **   | ** ** | ** **                                                                                  |
| Item  1.     |       | Legal  Proceedings                                                                          |
| Item  1A.    |       | Risk  Factors                                                                               |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |
| Item 3.      |       | Defaults upon  Senior Securities                                                            |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                        |
| Item  5.     |       | Other  Information                                                                          |
| Item 6.      |       | Exhibits                                                                                    |
|         |       |                                                                                        |
| Signatures   |       |                                                                                        |

** **

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**PARTI.  FINANCIAL INFORMATION**

**Item 1 —Financial Statements**

MAGNETEK, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share data, unaudited)
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **(13 Weeks)**              | ** ** | **(13 Weeks)** | ** ** |
| ** **                                                         | ** ** | **December 31,**            | ** ** | **January 1,** | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2006** | ** ** |
|                                                               |       |                             |       |   |   |
| Net sales                                                          |       | $                                | 27,578     |   | $ | 26,063 |   |
| Cost of sales                                                      |       | 20,519                           |       | 18,136 |   |
| Gross profit                                                       |       | 7,059                            |       | 7,927 |   |
|                                                               |       |                             |       |   |   |
| Operating expenses:                                                |       |                             |       |   |   |
| Research and  development                                          |       | 1,588                            |       | 1,310 |   |
| Selling, general  and administrative                               |       | 9,189                            |       | 7,125 |   |
| Loss from operations                                               |       | (3,718                           | )          | (508 | ) |
|                                                               |       |                             |       |   |   |
| Non operating expense  (income):                                   |       |                             |       |   |   |
| Interest expense                                                   |       | 1,057                            |       | 808 |   |
| Interest income                                                    |       | (905                             | )          | (106 | ) |
| Other expense                                                      |       | 325                              |       | — |   |
| Loss from continuing  operations before provision for income taxes |       | (4,195                           | )          | (1,210 | ) |
|                                                               |       |                             |       |   |   |
| Provision for income  taxes                                        |       | 373                              |       | 345 |   |
| Loss from continuing  operations                                   |       | (4,568                           | )          | (1,555 | ) |
|                                                               |       |                             |       |   |   |
| Loss from discontinued  operations, net of tax                     |       | (1,647                           | )          | (170 | ) |
|                                                               |       |                             |       |   |   |
| Net loss                                                           |       | $                                | (6,215     | ) | $ | (1,725 | ) |
|                                                               |       |                             |       |   |   |
| Loss per common share                                              |       |                             |       |   |   |
|                                                               |       |                             |       |   |   |
| Basic and diluted:                                                 |       |                             |       |   |   |
| Loss from continuing  operations                                   |       | $                                | (0.16      | ) | $ | (0.05 | ) |
|                                                               |       |                             |       |   |   |
| Loss from discontinued  operations                                 |       | $                                | (0.06      | ) | $ | (0.01 | ) |
|                                                               |       |                             |       |   |   |
| Net loss                                                           |       | $                                | (0.21      | ) | $ | (0.06 | ) |
|                                                               |       |                             |       |   |   |
| Weighted average shares  outstanding:                              |       |                             |       |   |   |
| Basic                                                              |       | 29,264                           |       | 28,890 |   |
| Diluted                                                            |       | 29,264                           |       | 28,890 |   |

 

See accompanyingnotes

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MAGNETEK, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share data, unaudited)
| ** **                                                         | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **(26 Weeks)**            | ** ** | **(26 Weeks)** | ** ** |
| ** **                                                         | ** ** | **December 31,**          | ** ** | **January 1,** | ** ** |
| ** **                                                         | ** ** | **2006**                       | ** ** | **2006** | ** ** |
|                                                               |       |                           |       |   |   |
| Net sales                                                          |       | $                              | 53,533     |   | $ | 49,676 |   |
| Cost of sales                                                      |       | 39,054                         |       | 34,463 |   |
| Gross profit                                                       |       | 14,479                         |       | 15,213 |   |
|                                                               |       |                           |       |   |   |
| Operating  expenses:                                               |       |                           |       |   |   |
| Research and development                                           |       | 2,807                          |       | 2,479 |   |
| Selling, general and administrative                                |       | 16,586                         |       | 13,740 |   |
| Loss from  operations                                              |       | (4,914                         | )          | (1,006 | ) |
|                                                               |       |                           |       |   |   |
| Non operating  expense (income):                                   |       |                           |       |   |   |
| Interest expense                                                   |       | 2,133                          |       | 1,261 |   |
| Interest income                                                    |       | (1,193                         | )          | (132 | ) |
| Other expense                                                      |       | 325                            |       | — |   |
| Loss from  continuing operations before provision for income taxes |       | (6,179                         | )          | (2,135 | ) |
|                                                               |       |                           |       |   |   |
| Provision for  income taxes                                        |       | 649                            |       | 679 |   |
| Loss from  continuing operations                                   |       | (6,828                         | )          | (2,814 | ) |
|                                                               |       |                           |       |   |   |
| Income (loss)  from discontinued operations, net of tax            |       | (2,581                         | )          | 35 |   |
|                                                               |       |                           |       |   |   |
| Net loss                                                           |       | $                              | (9,409     | ) | $ | (2,779 | ) |
|                                                               |       |                           |       |   |   |
| Earnings (loss)  per common share                                  |       |                           |       |   |   |
|                                                               |       |                           |       |   |   |
| Basic and  diluted:                                                |       |                           |       |   |   |
| Loss from  continuing operations                                   |       | $                              | (0.23      | ) | $ | (0.10 | ) |
|                                                               |       |                           |       |   |   |
| Income (loss)  from discontinued operations                        |       | $                              | (0.09      | ) | $ | 0.00 |   |
|                                                               |       |                           |       |   |   |
| Net loss                                                           |       | $                              | (0.32      | ) | $ | (0.10 | ) |
|                                                               |       |                           |       |   |   |
| Weighted average  shares outstanding:                              |       |                           |       |   |   |
| Basic                                                              |       | 29,138                         |       | 28,888 |   |
| Diluted                                                            |       | 29,138                         |       | 29,273 |   |

 

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MAGNETEK, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Amounts in thousands)
| ** **                                       | ** ** | **December 31,** | ** ** | **July 2,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2006**         | ** ** |
| ** **                                       | ** ** | **(Unaudited)**       | ** ** | ** **       | ** ** |
| ASSETS                                           | ** ** | ** **            |       |             |       |
|                                             | ** ** | ** **            |       |             |       |
| Current assets:                                  |       |                  |       |             |       |
| Cash                                             |       | $                     | 7,276      |             | $          | 96 |   |
| Restricted cash                                  |       | 22,602                |       | 22,602           |       |
| Accounts receivable, net                         |       | 17,578                |       | 14,765           |       |
| Inventories                                      |       | 12,676                |       | 13,134           |       |
| Prepaid expenses and other current assets        |       | 1,016                 |       | 693              |       |
| Assets held for sale                             |       | —                |       | 140,549          |       |
| Total current  assets                            |       | 61,148                |       | 191,839          |       |
|                                             |       |                  |       |             |       |
| Property, plant  and equipment                   |       | 18,836                |       | 18,580           |       |
| Less-accumulated  depreciation                   |       | 15,141                |       | 14,369           |       |
| Net property,  plant and equipment               |       | 3,695                 |       | 4,211            |       |
|                                             |       |                  |       |             |       |
| Goodwill                                         |       | 28,117                |       | 28,150           |       |
| Other assets                                     |       | 7,809                 |       | 8,826            |       |
| Total Assets                                     |       | $                     | 100,769    |             | $          | 233,026 |   |
|                                             |       |                  |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY       |       |                  |       |             |       |
|                                             |       |                  |       |             |       |
| Current  liabilities:                            |       |                  |       |             |       |
| Accounts payable                                 |       | $                     | 9,831      |             | $          | 7,862 |   |
| Accrued liabilities                              |       | 12,240                |       | 8,663            |       |
| Accrued arbitration award                        |       | 22,602                |       | 22,602           |       |
| Liabilities held for sale                        |       | —                |       | 75,933           |       |
| Current portion of long-term debt                |       | —                |       | 27,412           |       |
| Total current  liabilities                       |       | 44,673                |       | 142,472          |       |
|                                             |       |                  |       |             |       |
| Long-term debt,  net of current portion          |       | 37                    |       | 43               |       |
|                                             |       |                  |       |             |       |
| Pension benefit  obligations, net                |       | 25,827                |       | 45,494           |       |
|                                             |       |                  |       |             |       |
| Deferred income  taxes                           |       | 2,559                 |       | 2,109            |       |
|                                             |       |                  |       |             |       |
| Commitments and  contingencies                   |       |                  |       |             |       |
|                                             |       |                  |       |             |       |
| Stockholders’  equity                       |       |                  |       |             |       |
| Common stock                                     |       | 293                   |       | 287              |       |
| Paid in capital in excess of par value           |       | 132,459               |       | 129,473          |       |
| Accumulated deficit                              |       | (16,240               | )          | (6,831           | )          |
| Accumulated other comprehensive loss             |       | (88,839               | )          | (80,021          | )          |
| Total  stockholders’ equity                 |       | 27,673                |       | 42,908           |       |
|                                             |       |                  |       |             |       |
| Total Liabilities and  Stockholders’ Equity |       | $                     | 100,769    |             | 233,026    |   |

 

See accompanyingnotes

5

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MAGNETEK, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW(Amounts in thousands, unaudited)
| ** **                                                                                                             | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                             | ** ** | **(26 Weeks)**            | ** ** | **(26 Weeks)** | ** ** |
| ** **                                                                                                             | ** ** | **December 31,**          | ** ** | **January 1,** | ** ** |
| ** **                                                                                                             | ** ** | **2006**                       | ** ** | **2006** | ** ** |
| Cash flows from  continuing operating activities:                                                                      |       |                           |       |   |   |
| Loss from  continuing operations                                                                                       |       | $                              | (6,828     | ) | $ | (2,814 | ) |
| Adjustments to  reconcile loss from continuing operations to net cash used in operating  activities:                   |       |                           |       |   |   |
| Depreciation and amortization                                                                                          |       | 1,056                          |       | 1,125 |   |
| Write-off of deferred financing                                                                                        |       | 670                            |       | — |   |
| Stock based compensation expense                                                                                       |       | 1,314                          |       | 222 |   |
| Changes in operating assets and liabilities                                                                            |       | (194                           | )          | 1,288 |   |
| Cash contribution to pension fund                                                                                      |       | (30,000                        | )          | — |   |
|                                                                                                                   |       |                           |       |   |   |
| Total  adjustments                                                                                                     |       | (27,154                        | )          | 2,635 |   |
| Net cash used in  continuing operating activities                                                                      |       | (33,982                        | )          | (179 | ) |
|                                                                                                                   |       |                           |       |   |   |
| Cash flows from  discontinued operations:                                                                              |       |                           |       |   |   |
| Income (loss)  from discontinued operations                                                                            |       | (2,581                         | )          | 35 |   |
| Adjustments to  reconcile (income) loss from discontinued operations to net cash provided by  discontinued operations: |       |                           |       |   |   |
| Depreciation and amortization                                                                                          |       | —                         |       | 3,364 |   |
| Changes in operating assets and liabilities                                                                            |       | 5,189                          |       | 1,332 |   |
| Capital expenditures                                                                                                   |       | (930                           | )          | (2,763 | ) |
|                                                                                                                   |       |                           |       |   |   |
| Net cash  provided by discontinued operations                                                                          |       | 1,678                          |       | 1,968 |   |
| Net cash  provided by (used in) operating activities                                                                   |       | (32,304                        | )          | 1,789 |   |
|                                                                                                                   |       |                           |       |   |   |
| Cash flows from  investing activities:                                                                                 |       |                           |       |   |   |
| Proceeds from sale of business, net of transaction costs                                                               |       | 65,823                         |       | — |   |
| Deposit into escrow account                                                                                            |       | —                         |       | (22,602 | ) |
| Capital expenditures                                                                                                   |       | (275                           | )          | (422 | ) |
| Net cash  provided by (used in) investing activities                                                                   |       | 65,548                         |       | (23,024 | ) |
|                                                                                                                   |       |                           |       |   |   |
| Cash flow from  financing activities:                                                                                  |       |                           |       |   |   |
| Proceeds from issuance of common stock                                                                                 |       | 1,561                          |       | 149 |   |
| Borrowings under long term notes                                                                                       |       | —                         |       | 18,000 |   |
| Repayment of long term notes                                                                                           |       | (18,000                        | )          | — |   |
| Borrowings (repayments) under line-of-credit  agreements                                                               |       | (9,412                         | )          | 4,234 |   |
| Principal payments under capital lease obligations                                                                     |       | (6                             | )          | (6 | ) |
| Increase in deferred financing costs                                                                                   |       | (207                           | )          | (1,468 | ) |
| Net cash  provided by (used in) financing activities                                                                   |       | (26,064                        | )          | 20,909 |   |
|                                                                                                                   |       |                           |       |   |   |
| Net increase  (decrease) in cash                                                                                       |       | 7,180                          |       | (326 | ) |
| Cash at the  beginning of the period                                                                                   |       | 96                             |       | 595 |   |
|                                                                                                                   |       |                           |       |   |   |
| Cash at the end of the  period                                                                                         |       | $                              | 7,276      |   | $ | 269 |   |

 

See accompanyingnotes

** **

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MAGNETEK, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006(Amounts in thousands unless otherwise noted, except per share data, unaudited)

**1.****                                      Summaryof Significant Accounting Policies**

Basis ofPresentation

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of Magnetek, Inc. and its subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial reporting and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  For further information, refer to thefinancial statements and footnotes thereto included in the Company’s Form 10-Kfor the year ended July 2, 2006 filed with the Securities and ExchangeCommission.  In the Company’s opinion,these unaudited statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the financial position ofthe Company as of December 31, 2006, and the results of its operations and itscash flows for the three- and six-months then ended.   Results for the three- and six-months endedDecember 31, 2006 are not necessarily indicative of results that may beexperienced for the full fiscal year.

The Company uses a fifty-two, fifty-three week fiscal year ending onthe Sunday nearest to June 30.  Fiscalquarters are the thirteen or fourteen week periods ending on the Sunday nearestSeptember 30, December 31, March 31 and June 30.  The three- and six-month periods endedDecember 31, 2006 and January 1, 2006 each contained 13 and 26 weeksrespectively.

Useof Estimates - Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.   Significant areas requiring managementestimates include the following key financial areas:

                *AccountsReceivable*

                                                Accounts receivable represent receivables fromcustomers in the ordinary course of business. The Company is subject to losses from uncollectible receivables inexcess of its allowances.  The Companymaintains allowances for doubtful accounts for estimated losses from customers’inability to make required payments.  Inorder to 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 ofthe Company’s customers were to deteriorate and to impair their ability to makepayments, additional allowances may be required in future periods.  The Company’s management believes that allappropriate allowances have been provided.

                *Inventories*

                                                TheCompany’s inventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out(FIFO) method, including material, labor and factory overhead.  Inventory on hand may exceed future demandeither because the product is obsolete, or the amount on hand is more than canbe used to meet future needs.  TheCompany identifies potentially obsolete and excess inventory by evaluatingoverall inventory levels.  In assessingthe ultimate realization of inventories, the Company is required to makejudgments as to future demand requirements and compare those with the currentor committed inventory levels.  If futuredemand requirements are less favorable than those projected by management,additional inventory write-downs may be required.

                *Reserves for Contingencies*

                                                TheCompany periodically records the estimated impacts of various conditions,situations or circumstances involving uncertain outcomes.  The accounting for such events is prescribedunder Statement of Financial Accounting Standard (SFAS) No. 5, *Accounting for Contingencies*.  SFAS No. 5 defines a contingency as anexisting condition, situation, or

7

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                                                setof 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.

                                                SFASNo. 5 does not permit the accrual of gain contingencies under anycircumstances.  For loss contingencies,the loss must be accrued if (1) information is available that indicates it isprobable that the loss has been incurred, given the likelihood of uncertainevents; and (2) that the amount of the loss can be reasonably estimated.

                                                Theaccrual of a contingency involves considerable judgment on the part ofmanagement.  The Company uses itsinternal expertise, and outside experts, as necessary, to help estimate theprobability that a loss has been incurred and the amount or range of the loss.

                                                *Income Taxes*

                                                TheCompany uses the liability method to account for income taxes.  The preparation of consolidated financialstatements involves estimating the Company’s current tax exposure together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes.  Thesedifferences result in deferred tax assets and liabilities, which are includedin the condensed consolidated balance sheets. An assessment of the recoverability of the deferred tax assets is made,and a valuation allowance is established based upon this assessment.

                                                *Pension Benefits*

                                                Thevaluation of the Company’s pension plan requires the use of assumptions andestimates to develop actuarial valuations of expenses, assets and liabilities.  These assumptions include discount rates,investment returns and mortality rates. Changes in assumptions and future investments returns could potentiallyhave a material impact on the Company’s expenses and related fundingrequirements.

Revenue Recognition— The Company’s policy is to recognize revenue when the earnings process iscomplete.  The criteria used in making this determination are persuasiveevidence that an arrangement exists, delivery has occurred, the sales price isfixed or determinable, and collectibility is reasonably assured.  Salesare recorded net of returns and allowances, which are estimated usinghistorical data at the time of sale.

Stock-Based Compensation — TheCompany accounts for all stock-based compensation in accordance with SFAS No.123 (R), *Share-Based Payment*, which requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the Company’s financial statements based upon their fairvalues.  The Company adopted SFAS No. 123in July, 2005 (fiscal year 2006) and selected the modified prospective methodof adoption in which compensation cost is recognized beginning with theeffective date.  In accordance with themodified prospective method of adoption, the Company’s results of operationsfor periods prior to adoption were not restated.

Property, Plant andEquipment — Additions and improvements are capitalized atcost, whereas expenditures for maintenance and repair are charged to expense asincurred.  Depreciation is provided over the estimated useful lives of therespective assets principally on the straight-line method (machinery andequipment normally five to ten years, buildings and improvements normally tento forty years).

Goodwill — In accordance with SFASNo. 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 analysis as prescribed in SFAS No. 142.

DeferredFinancing Costs — Costs incurred toobtain financing are deferred and included in other assets in the condensedconsolidated balance sheets.  Deferredfinancing costs are amortized over the term of the financing facility and theseexpenses are included in interest expense in the accompanying condensedconsolidated statements of operations.

Warranties— The Company offers warranties for certain products that it manufactures, withthe warranty term generally ranging from one to two years.  Warranty reserves are established for costsexpected to be incurred after the sale and delivery of products under warranty,based mainly on known product failures and historical experience.  Actual repair costs incurred for productsunder warranty are charged against the established reserve balance as incurred.

Earningsper Share — In accordance withSFAS No. 128, *Earnings per Share*, basicearnings per share are computed using the weighted average number of commonshares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuableupon the assumed exercise of stock options as if all exercises had occurred atthe beginning of the fiscal period.

Recent Accounting Pronouncements —In May 2005, the FASB issued SFAS No. 154, *Accounting Changes andError Corrections. *SFAS No.154 replaces APB No. 20, *Accounting Changes*,and SFAS No. 3, *Reporting Accounting Changes*

8

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* in InterimFinancial Statements*, and establishes retrospectiveapplication as the required method for reporting a change in accountingprinciple.  SFAS No. 154 providesguidance for determining whether retrospective application of a change inaccounting 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, did not have a material effect on the Company’s financial position,results of operations or liquidity.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”which prescribes a recognition threshold and measurement process for recordingin the financial statements uncertain tax positions taken or expected to betaken in a tax return.  Additionally, FIN48 provides guidance on derecognition, classification, accounting in interimperiods, and disclosure requirements for uncertain tax positions. FIN 48 iseffective for fiscal years beginning after December 15, 2006.  The adoption of this pronouncement is not expectedto have a material effect on the Company’s financial position, results ofoperations, or liquidity.

In September 2006,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin108, “Considering the Effects on Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements,” (“SAB 108”).  SAB 108 requires registrants to quantifyerrors using both the income statement method (i.e. iron curtain method) andthe rollover method and requires adjustment if either method indicates amaterial error. If a correction in the current year relating to prior yearerrors is material to the current year, then the prior year financialinformation needs to be corrected.  Acorrection to the prior year results that are not material to those years wouldnot require a “restatement process” where prior financials would beamended.  SAB 108 is effective for fiscalyears ending after November 15, 2006. The Company does not anticipate that SAB 108 will have a material effecton the Company’s consolidated financial statements.

Derivative FinancialInstruments — The Companyperiodically uses derivative financial instruments to reduce financial marketrisks. These instruments are used to hedge foreign currency and interest ratemarket exposures. The Company does not use derivative financial instruments forspeculative or trading purposes.  Theaccounting policies for these instruments are based on the Company’sdesignation of such instruments as hedging transactions. The criteria theCompany uses for designating an instrument as a hedge include the instrument’seffectiveness in risk reduction and the matching of the derivative to theunderlying transaction. The resulting gains or losses are accounted for as partof the transactions being hedged, except that losses not expected to berecovered upon the completion of the hedge transaction are expensed.  The Company’s continuing operations had noderivative financial instruments at December 31, 2006 and July 2, 2006.

ForeignCurrency Translation — TheCompany’s foreign entities’ accounts are measured using local currency as thefunctional currency.  Assets andliabilities are translated at the exchange rate in effect at the end of theperiod.  Revenues and expenses aretranslated at the rates of exchange prevailing during the period.  Unrealized translation gains and lossesarising from differences in exchange rates from period to period are includedas a component of accumulated other comprehensive loss in stockholders’ equity.

Reclassifications— Certain prior year balances were reclassified to conform to the current yearpresentation.

2.             **DiscontinuedOperations**

The Company’s power electronics business as well as certain expensesincurred related to businesses the Company no longer owns are classified asdiscontinued operations.  The results ofdiscontinued operations are as follows:

|                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**            | ** ** | **January 1,**            | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2006**                       | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                                                         |       |                             |       |                           |       |   |   |   |   |
| Net sales                                                                    |       | $                                | 10,056     |                           | $          | 37,532 |   | $ | 53,545 |   | $ | 73,960 |   |
|                                                                         |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  from discontinued operations before interest and income taxes |       | $                           | (1,294     | )                              | $     | 538 |   | $  | (1,629 | ) | $  | 1,654 |   |
| Interest  expense, net                                                       |       | 247                              |       | 303                            |       | 521 |   | 598 |   |
| Provision for  income taxes                                                  |       | 106                              |       | 405                            |       | 431 |   | 1,021 |   |
| Income (loss) from  discontinued operations                                  |       | $                                | (1,647     | )                              | $          | (170 | ) | $ | (2,581 | ) | $ | 35 |   |

 

9

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Income (loss) from discontinued operations in the table above includescharges of $280 and $310 for the three- and six-month periods ended December31, 2006 respectively, and $907 and $1,319 for the three- and six-month periodsended January 1, 2006, for legal fees and costs related to the Nilssen patentinfringement claim (see Note 5 of Notes to Condensed Consolidated FinancialStatements), environmental issues, and asbestos claims related to businessesthat the Company no longer owns.

During the fourth quarterof fiscal year 2006, the Company committed to a plan to divest its powerelectronics business.  As a result, in June 2006,the Company reclassified the assets and liabilities as held for sale and theresults of this business as discontinued operations.  The Company’s power electronics business wascomprised mainly of the Company’s wholly-owned subsidiaries Magnetek S.p.A.(Italy), Magnetek Kft. (Hungary) and Magnetek Electronics Co., Ltd. (China),and a North American division located in Chatsworth, California.  The Company entered into an agreement to sellthe business to Power-One, Inc. (see Note 13 of Notes to Condensed ConsolidatedFinancial Statements), and the transaction was completed on October 23, 2006.

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

|                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**            | ** ** | **January 1,**            | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2006**                       | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                                                         |       |                             |       |                           |       |   |   |   |   |
| Net sales                                                                    |       | $                                | 10,056     |                           | $          | 37,532 |   | $ | 53,545 |   | $ | 73,960 |   |
|                                                                         |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  from discontinued operations before interest and income taxes |       | $                           | (1,014     | )                              | $     | 1,445 |   | $  | (1,319 | ) | $  | 2,973 |   |
| Interest  expense, net                                                       |       | 247                              |       | 303                            |       | 521 |   | 598 |   |
| Provision for  income taxes                                                  |       | 106                              |       | 405                            |       | 431 |   | 1,021 |   |
| Income (loss)  from discontinued operations - power electronics business     |       | $                           | (1,367     | )                              | $     | 737 |   | $  | (2,271 | ) | $  | 1,354 |   |

 

Assets and liabilitiesof the Company’s power electronics business classified as held for sale as ofJuly 2, 2006, were as follows:

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

 

During fiscal year2005, the Company committed to a plan to divest its telecom power business, andas a result, reclassified assets and liabilities as held for sale and theresults of the business as discontinued operations.  The Company did not complete the divestitureof its telecom power business despite actively marketing the business topotential interested parties at a reasonable price.  In October 2006, the Company decided toretain the business, and accordingly, the operating results

10

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of its telecom powerbusiness have been classified as continuing operations in the accompanyingconsolidated statements of operations and its assets and liabilities have beenreclassified from held for sale to held and used in the accompanyingconsolidated balance sheets for all periods presented.

The results of theCompany’s telecom power business are as follows:

|                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **December 31,**            | ** ** | **January 1,**            | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
| ** **                        | ** ** | **2006**                         | ** ** | **2006**                       | ** ** | **2006** | ** ** | **2006** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Net sales                         |       | $                                | 4,580      |                           | $          | 4,262 |   | $ | 8,021 |   | $ | 7,792 |   |
|                              |       |                             |       |                           |       |   |   |   |   |
| Loss from telecom power  business |       | $                                | (475       | )                              | $          | (142 | ) | $ | (1,105 | ) | $ | (134 | ) |

 

No interest expense or provision for income tax was allocated to theCompany’s telecom power business for either of the periods presented above.

3.                                     **Stock-Based Compensation**

The Company has twostock option plans (the “Plans”), one of which provides for the issuance ofboth incentive stock options (under Section 422A of the Internal RevenueCode of 1986) and non-qualified stock options at exercise prices not lessthan the fair market value at the date of grant, and one of which only providesfor the issuance of non-qualified stock options at exercise prices notless than the fair market value at the date of grant. One of the Plans alsoprovides for the issuance of stock appreciation rights, restricted stock,incentive bonuses and incentive stock units. The total number of shares of theCompany’s common stock authorized to be issued upon exercise of the stockoptions and other stock rights under the Plans is 2,100,000.  Options granted under these Plans vest inequal annual installments of two, three or four years.

Effective July 4, 2005, the Company adopted SFAS No. 123 (R), *Share-Based Payment*, which requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe Company’s financial statements based upon their fair values.  The Company selected the modified prospectivemethod of adoption in which compensation cost is recognized beginning with theeffective date.  In accordance with the modifiedprospective method of adoption, the Company’s results of operations for priorperiods were not restated.

In the fourth quarter of fiscal 2005, the Company approved theacceleration of the vesting of “underwater” unvested stock options held by theCompany’s current employees, including executive officers, on June 1, 2005. Nostock options held by directors were subject to the acceleration.  The decision to accelerate vesting of theseunderwater options was made primarily to avoid recognizing compensation cost inthe consolidated statement of operations upon adoption of SFAS No. 123 (R), asdescribed 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 vestingwas a modification of outstanding awards as defined by FAS 123, which resultedin incremental pro-forma compensation expense of $0.3 million in fiscal 2005.

The Company did not issue any stock options in the six month periodended December 31, 2006.

In August 2005, the Company granted 500,000 shares of restricted stock(the “August 2005 stock grant”) with a fair value of $2.77 per share to certainofficers and key employees.  Therestricted shares fully vest on January 1, 2009.  The total estimated compensation expenserelated to the grant of $1.4 million is being recorded ratably from the grantdate through the vesting date.  Thedivestiture of the Company’s power electronics business in October 2006resulted in the forfeiture of 90,000 shares of the August 2005 stock grant thatwere granted to employees of the business, which reduced stock compensationexpense by $82 for the three- and six-month periods ended December 31,2006.  Subsequent to the divestiture, theCompany announced the relocation of its corporate offices from Chatsworth,California to Menomonee Falls, Wisconsin, which resulted in the termination ofseveral corporate officers.  The Companyaccelerated the vesting of 175,000 shares of the August 2005 stock grant thatwere granted to these officers which increased stock compensation expense by$218 for the three- and six-month periods ended December 31, 2006.  Total net compensation expense related to theAugust 2005 stock grant in the three-month period ended December 31, 2006 was$184.  As of December 31, 2006, there wasapproximately $0.4 million of total unrecognized compensation cost related tothe grant, to be amortized ratably over a weighted-average period of 2.0 years.

** **

11

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In July 2006, the Company granted a bonus equal to 200,000 shares ofstock to its former CEO who elected to defer the shares pursuant to the termsof the Director Compensation and Deferral Investment Plan (“DDIP”) pendingapproval of an amendment to the DDIP by the Company’s shareholders.  Suchamendment was approved at the annual meeting of the shareholders on October 25,2006.  Accordingly, the Company recorded compensation expense of $952related to the bonus in the three-month period ended December 31, 2006.

Compensation expense related to all stock-based awards for the three-and six-month periods ended December 31, 2006 was as follows:

|                                         | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Three months**           | ** ** | **Six months** | ** ** |
| ** **                              | ** ** | **ended**                       | ** ** | **ended** | ** ** |
| Bonus to the Company’s  former CEO |       | $                               | 952        |   | $ | 952 |   |
| August 2005 restricted  stock grant     |       | 184                             |       | 287 |   |
| Director stock options                  |       | 52                              |       | 75 |   |
|                                    |       | $                               | 1,188      |   | $ | 1,314 |   |

 

4.                                      **Inventories**

Inventories at December 31, 2006 and July 2, 2006 consist of thefollowing:

|                                | ** ** | **December 31,** | ** ** | **July 2,** | ** ** |
|--------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2006**         | ** ** |
| Raw materials and stock  parts |       | $                     | 9,632      |             | $          | 10,210 |   |
| Work-in-process                |       | 1,636                 |       | 1,637            |       |
| Finished goods                 |       | 1,408                 |       | 1,287            |       |
|                           |       | $                     | 12,676     |             | $          | 13,134 |   |

 

5.                                      **Commitments and Contingencies**

*Litigation—Product Liability*

The Company has settled or otherwise resolved all of the productliability lawsuits associated with its discontinued business operations. Thelast remaining limited obligation to defend and indemnify the purchaser of adiscontinued business operation against new product liability claims expired inDecember 2003 and the Company believes that any new claims would eitherqualify as an assumed liability, as defined in the various purchase agreements,or would be barred by an applicable statute of limitations.   The Company is also a named party in two product liability lawsuitsrelated to the Telemotive Industrial Controls business acquired inDecember 2002 through the purchase of the stock of MXT Holdings, Inc.  Both claims were tendered to the insurance companies that providedcoverage for MXT Holdings, Inc., against such claims and the defense andindemnification has been accepted by the carriers, subject to a reservation ofrights.  Management believes that the insurers will bear all liability, ifany, with respect to both cases and that the proceedings, individually orin the aggregate, will not have a material adverse effect on the Company’sresults of operations or financial position.

In August 2006, Pamela L. Carney, Administrator of the Estate ofMichael J. Carney, filed a lawsuit in the Court of Common Pleas of WestmorelandCounty, Pennsylvania, against the Company and other defendants, alleging that aproduct manufactured by the Telemotive Industrial Controls business acquired bythe Company in December 2002 contributed to an accident that resulted in thedeath 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 for damages is unknown atthis time, but management believes that the Company’s insurer will bear allliability for the claim, if any.

The Company has been named, along with multiple other defendants, inasbestos-related lawsuits associated with business operations previouslyacquired by the Company, but which are no longer owned. During the Company’sownership, none of the businesses produced or sold asbestos-containingproducts. With respect to these claims, the Company is either contractuallyindemnified against liability for asbestos-related claims or believesthat it has no liability for such claims. The Company aggressively seeksdismissal from these proceedings, and has also tendered the defense of thesecases to the

12

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insurers of the previously acquired businesses and is awaiting theirresponse.  The Company has also filed alate 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 asbestosproceedings, individually or in the aggregate, will have a material adverseeffect on its financial position or results of operations.

*Litigation—Patent Infringement*

In April 1998, Ole K. Nilssen (“Nilssen”) filed a lawsuit in theU.S. District Court for the Northern District of Illinois alleging infringementby the Company of seven of his patents pertaining to electronic ballasttechnology, and seeking unspecified damages and injunctive relief to precludethe Company from making, using or selling products allegedly infringing hispatents. The Company denied that its products infringed any valid patent andfiled a response asserting affirmative defenses, as well as a counterclaim fora judicial declaration that its products do not infringe the patents assertedby Mr. Nilssen and also that the asserted patents are invalid. InJune 2001, the Company sold its lighting business to Universal LightingTechnologies, Inc. (“ULT”), and agreed to provide a limitedindemnification against certain claims of infringement that Nilssen mightallege against ULT. In April 2003, Nilssen’s lawsuit and the counterclaimswere dismissed with prejudice and both parties agreed to submit limited issuesin dispute to binding arbitration before an arbitrator with a relevanttechnical background. The arbitration occurred in November, 2004 and a decisionawarding Nilssen $23.4 million was issued on May 3, 2005, to be paid within tendays 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 Magnetek filed acounter-motion to vacate the award for a number of reasons, including that theaward was fraudulently obtained.  Magnetek’s request for oral argument wasgranted and the hearing took place on October 19, 2005.  A decision 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 Northern District of Illinois alleging infringement byULT of twenty-nine of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude ULT frommaking, using or selling products allegedly infringing his patents. ULT made aclaim for indemnification, which the Company accepted, subject to thelimitations set forth in the sale agreement. The case is now pending in the Central District of Tennessee.  Nilssen voluntarily dismissed all but four ofthe patents from the lawsuit.  The Company denies that the products forwhich it has an indemnification obligation to ULT infringe any valid patent andresponded on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the patents are unenforceable andinvalid and that the products do not infringe Nilssen’spatents.   ULT requested a re-examination of the patents atissue by the Patent and Trademark Office and the request was granted.  Meanwhile, the case against ULT has beenstayed pending Nilssen’s appeal of an unfavorable decision against him inanother case that could influence the outcome of his lawsuits against ULT.  The Company will continue to aggressivelydefend the claims against ULT that are subject to defense and indemnification;however, an unfavorable decision could have a material adverse effect on theCompany’s financial position, cash flows and results of operations.

*Environmental Matters - General*

From time to time, Magnetek has taken action to bring certainfacilities associated with previously owned businesses   intocompliance with applicable environmental laws and regulations. Upon thesubsequent sale of certain businesses, the Company agreed to indemnify thebuyers against environmental claims associated with the divested operations,subject to certain conditions and limitations. Remediation activities,including those related to the Company’s indemnification obligations, did notinvolve material expenditures during the three and six months ended December31, 2006 and January 1, 2006.

The Company has also been identified by the United States EnvironmentalProtection Agency and certain state agencies as a potentially responsible partyfor cleanup costs associated with alleged past waste disposal practices atseveral previously owned facilities and offsite locations. Its remediationactivities as a potentially responsible party were not material in the secondquarter of fiscal years 2007 and 2006. Although the materiality of future expenditures for environmentalactivities may be affected by the level and type of contamination, the extentand nature of cleanup activities required by governmental authorities, thenature of the Company’s alleged connection to the contaminated sites, thenumber and financial resources of other potentially responsible parties, theavailability of indemnification rights against third parties and theidentification of additional contaminated sites, the Company’s estimated shareof liability, if any, for environmental remediation, including itsindemnification obligations, is not expected to be material.

13

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*Century Electric (McMinnville,Tennessee)*

Prior to the Company’s purchase of Century Electric, Inc. (“CenturyElectric”) in 1986, Century Electric acquired a business from Gould Inc. (“Gould”)in May 1983 that included a leasehold interest in a fractional horsepowerelectric motor manufacturing facility located in McMinnville, Tennessee. Gouldagreed to indemnify Century Electric from and against liabilities and expensesarising out of the handling and cleanup of certain waste materials, includingbut not limited to cleaning up any polychlorinated biphenyls (“PCBs”) at theMcMinnville facility (the “1983 Indemnity”). The presence of PCBs and othersubstances, including solvents, in the soil and in the groundwater underlyingthe facility and in certain offsite soil, sediment and biota samples has beenidentified. The McMinnville plant is listed as a Tennessee Inactive HazardousWaste Substance Site and plant employees were notified of the presence ofcontaminants at the facility. Gould has completed an interim remedialexcavation and disposal of onsite soil containing PCBs and a preliminaryinvestigation and cleanup of certain onsite and offsite contamination. TheCompany believes the cost of further investigation and remediation (includingancillary costs) is covered by the 1983 Indemnity. The Company sold itsleasehold interest in the McMinnville plant in August 1999 and while theCompany believes that Gould will continue to perform substantially under itsindemnity obligations, Gould’s substantial failure to perform such obligationscould have a material adverse effect on the Company’s financial position, cashflows and results of operations.

*Effect of Fruit of the LoomBankruptcy (Bridgeport, Connecticut)*

In 1986, the Company acquired the stock of Universal ManufacturingCompany (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and thepredecessor agreed to indemnify the Company against certain environmentalliabilities arising from pre-acquisition activities at a facility inBridgeport, Connecticut. Environmental liabilities covered by theindemnification agreement include completion of additional cleanup activities,if any, at the Bridgeport facility (sold in connection with the sale of thetransformer business in June 2001) and defense and indemnification againstliability for potential response costs related to offsite disposal locations.FOL, the successor to Universal’s indemnification obligation, filed a petitionfor Reorganization under Chapter 11 of the Bankruptcy Code in 1999 and theCompany filed a proof of claim in the proceeding for obligations related to theenvironmental indemnification agreement. The Company believes that FOL hadsubstantially completed the clean-up obligations required by theindemnification agreement prior to the bankruptcy filing. InNovember 2001, the Company and FOL entered into an agreement involving theallocation of certain potential tax benefits and Magnetek withdrew its claimsin the bankruptcy proceeding. FOL’s obligation to the state of Connecticut wasnot discharged in the reorganization proceeding.  In October 2006, the owner of the Bridgeportfacility filed a lawsuit in Superior Court, J.D. of Fairfield, Connecticutalleging that the Company is obligated to remediate environmental contaminationat the facility.  The Company has filed aMotion to Stay and Remand the matter to the Connecticut Department ofEnvironmental Protection (“DEP”) on the basis that DEP has primary jurisdictionto determine the need and responsibility for any further remediation.  FOL’s inability to satisfy its remainingobligations related to the Bridgeport facility and any offsite disposallocations, or an unfavorable ruling in the lawsuit with the owner of theBridgeport facility, or the discovery of additional environmental contaminationat the Bridgeport facility could have a material adverse effect on the Company’sfinancial position, cash flows or results of operations.

6.             **ComprehensiveLoss**

For the fiscal periods ended December 31, 2006 andJanuary 1, 2006, comprehensive loss consisted of the following:

|                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **December 31,**            | ** ** | **January 1,**            | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2006**                       | ** ** | **2006** | ** ** | **2006** | ** ** |
| Net loss                         |       | $                                | (6,215     | )                              | $          | (1,725 | ) | $ | (9,409 | ) | $ | (2,779 | ) |
| Currency translation  adjustment |       | (161                             | )          | 2                              |       | (177 | ) | 245 |   |
| Comprehensive loss               |       | $                                | (6,376     | )                              | $          | (1,723 | ) | $ | (9,586 | ) | $ | (2,534 | ) |

 

7.             **Earnings (Loss) Per Share**

The following table setsforth the computation of basic and diluted earnings (loss) per share for thethree- and six-months ended December 31, 2006 and January 1, 2006:

14

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|                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **December 31,  2006**      | ** ** | **January 1,  2006**      | ** ** | **December 31,  2006** | ** ** | **January 1,  2006** | ** ** |
| Numerator:                                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from  continuing operations                        |       | $                                | (4,568     | )                              | $          | (1,555 | ) | $ | (6,828 | ) | $ | (2,814 | ) |
| Income (loss)  from discontinued operations             |       | (1,647                           | )          | (170                           | )          | (2,581 | ) | 35 |   |
| Net loss                                                |       | $                                | (6,215     | )                              | $          | (1,725 | ) | $ | (9,409 | ) | $ | (2,779 | ) |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Denominator:                                            |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares for basic earnings per share   |       | 29,264                           |       | 28,890                         |       | 29,138 |   | 28,888 |   |
| Add dilutive  effective of stock options outstanding    |       | —                           |       | —                         |       | — |   | 385 |   |
| Weighted average  shares for diluted earnings per share |       | 29,264                           |       | 28,890                         |       | 29,138 |   | 29,273 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Basic & Diluted:                                    |       |                             |       |                           |       |   |   |   |   |
| Loss per share from  continuing operations              |       | $                                | (0.16      | )                              | $          | (0.05 | ) | $ | (0.23 | ) | $ | (0.10 | ) |
| Earnings (loss) per  share from discontinued operations |       | $                                | (0.06      | )                              | $          | (0.01 | ) | $ | (0.09 | ) | $ | 0.00 |   |
| Net loss per share                                      |       | $                                | (0.21      | )                              | $          | (0.06 | ) | $ | (0.32 | ) | $ | (0.10 | ) |

 

Due to the loss from continuing operations, theloss from discontinued operations, and the net loss for the three- andsix-months ended December 31, 2006, the effect of 0.9 million shares and 0.8million shares respectively of stock options outstanding was excluded from thecalculation of diluted loss per share, as their impact would beanti-dilutive.  Similarly, the dilutive effect of 0.5 million shares ofstock options outstanding was not included in the calculation of diluted lossper share from continuing operations, loss per share from discontinuedoperations or net loss per share for the three-months ended January 1, 2006, asinclusion of these shares would be anti-dilutive; nor was the dilutive effectof 0.4 million shares of stock options outstanding included in the calculationof diluted loss per share from continuing operations or net loss per share forthe six-months ended January 1, 2006, as inclusion of these shares would alsobe anti-dilutive.

8.                                   **Warranties**

The Company offerswarranties for certain products that it manufactures, with the warranty termgenerally ranging from one to two years. Warranty reserves are established for costs expected to be incurredafter the sale and delivery of products under warranty, based mainly on knownproduct failures and historical experience. Actual repair costs incurred for products under warranty are chargedagainst the established reserve balance as incurred.  Changes in the warranty reserve for thesix-month periods ended December 31, 2006 and January 1, 2006 were as follows:

|                                                       | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **December 31,**          | ** ** | **January 1,** | ** ** |
| ** **                                            | ** ** | **2006**                       | ** ** | **2006** | ** ** |
| Balance, beginning of  fiscal year                    |       | $                              | 430        |   | $ | 310 |   |
| Additions charged to  earnings for product warranties |       | 233                            |       | 300 |   |
| Use of reserve for  warranty obligations              |       | (253                           | )          | (279 | ) |
| Balance, end of period                                |       | $                              | 410        |   | $ | 331 |   |

 

Warranty reserves are included in accruedliabilities in the condensed consolidated balance sheets.

9.                                      **Restructuring Costs**

As a result of the divestiture of the Company’s power electronicsbusiness on October 23, 2006, the Company downsized and relocated its corporateoffice to Menomonee Falls, Wisconsin from Chatsworth, California.  In addition, the Company was not successfulin divesting its telecom power business and decided to retain and restructurethe business, including relocating the manufacturing operations of the businessfrom Dallas, Texas to Menomonee Falls.

The condensed consolidated statements of operations for the three- andsix-month periods ended December 31, 2006, include severance costs of $1.9million related to downsizing the corporate office, of which $0.6 million isincluded in research and development expense and $1.3 million is included inselling, general and administrative expense. Of the total

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severance cost recorded in the period ended December 31, 2006,approximately $1.2 million is included in accrued liabilities in the condensedconsolidated balance sheet for the period then ended and is expected to be paidin the Company’s third fiscal quarter of 2007.

Costs incurred related to the restructuring and relocation of thetelecom power business, including inventory charges and duplicate facility andlabor costs, of $0.9 million are included in cost of sales in the condensedconsolidated statements of operations for the three- and six-month periodsended December 31, 2006.

The Company expects to complete these restructuring activities duringthe third quarter of fiscal 2007 (March 2007), and as a result the Company’sresults for that period will also be impacted by restructuring costs, estimatedat $0.3 million.

10.                               **Pension Expense**

For the three- and six-month periods ended December 31, 2006 andJanuary 1, 2006, pension expense related to the Company’s defined benefitpension plan consisted of the following:

|                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **December 31,**            | ** ** | **January 1,**            | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2006**                       | ** ** | **2006** | ** ** | **2006** | ** ** |
| Interest Cost                    |       | $                                | 2,420      |                           | $          | 2,440 |   | $ | 4,882 |   | $ | 4,880 |   |
| Expected return on plan  assets  |       | (2,186                           | )          | (2,552                         | )          | (4,864 | ) | (5,104 | ) |
| Recognized net  actuarial losses |       | 658                              |       | 1,062                          |       | 1,644 |   | 2,124 |   |
|                             |       |                             |       |                           |       |   |   |   |   |
| Total net pension expense        |       | $                                | 892        |                           | $          | 950 |   | $ | 1,662 |   | $ | 1,900 |   |

 

Pension expense is included in selling,general and administrative expense in the accompanying condensed consolidatedstatements of operations.

As a result of the divestiture of thepower electronics business (as discussed in Note 13 of Notes to CondensedConsolidated Financial Statements), the Company used a portion of the proceedsto make a contribution in December 2006 of $30.0 million to its defined benefitpension fund.  This contribution was notcontemplated in the Company’s original fiscal year 2007 estimate of periodicnet benefit cost.  As a result of thesignificant contribution relative to the plan assets, the related impact onpension expense, and the divestiture of the power electronics business, theCompany performed a remeasurement of its pension assets, liabilities and expenseas of December 31, 2006.  Theremeasurement resulted in an increase of $8.6 million to the Company’s pensionbenefit obligation and minimum pension liability due to a reduction in thediscount rate from 6.38% to 5.88%, and the Company’s pension expense will be$0.2 million per quarter for the remainder of fiscal 2007. The reduction in theCompany’s net pension benefit obligation from $45.5 million at July 2, 2006 to$25.8 million at December 31, 2006 was due to the contribution of $30.0 millionrecorded as a reduction in the obligation, partially offset by theremeasurement impact of $8.6 million, and pension expense of $1.7 million forthe six months ended December 31, 2006, both of which were recorded as anincrease in the obligation.

11.                               **Income Taxes**

Due to historical netlosses, the Company provides valuation reserves against its U.S. deferred taxassets that result in a zero net deferred tax position (net deferred assetsequal to deferred tax liabilities).  A portionof the Company’s deferred tax liability relates to tax-deductible amortizationof goodwill that is no longer amortized for financial reporting purposes. Thesedeferred tax liabilities are considered to have an indefinite life and aretherefore ineligible to be considered as a source of future taxable income inassessing the realization of deferred tax assets.

The Company’s provisionfor income taxes for the three- and six-months ended December 31, 2006 includesan amount of $225 and $450, respectively, to increase the Company’s deferred taxliability related to tax-deductible amortization of goodwill.   The remaining tax provision is comprised ofincome taxes of the Company’s foreign subsidiary in Canada.

12.                               **Bank BorrowingArrangements**

On September 30, 2005, the Company entered intoan agreement with Ableco Finance LLC (“Ableco”) providing for an $18 millionterm loan and an agreement with Wells Fargo Foothill, Inc. (“WFF”) providingfor a $13 million revolving credit facility. Borrowings under the term loan bore interest at the lender’s referencerate plus 5%, or, at the Company’s option, the London Interbank Offering Rate (“LIBOR”)plus 7.5%.  Such rates could be increasedby up to one percentage point depending upon the level of U.S. funded debt toEBITDA as defined in the agreement.  Theterm loan required quarterly principal payments of $1 million beginning inSeptember, 2006.  Borrowings under therevolving credit facility bear interest at the bank’s prime lending rate plus2.5% or, at the Company’s option, LIBOR plus 4%.  Borrowing levels under the revolving creditfacility are determined by a borrowing base formula as defined in the agreement,based on the level of

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eligible domestic accounts receivable andinventory.  The revolving credit facilityalso supports the issuance of letters of credit.  Borrowings under the term loan and revolvingcredit facility are secured by substantially all of the Company’s domesticassets.  The Company used the proceedsfrom the revolving credit facility to fully repay all outstanding obligationsunder its previous financing agreement with Chase Bank.

In November 2005, under terms of the financing agreements with WFF andAbleco, the Company deposited $22.6 million into an escrow account to fund theNilssen arbitration award in the event that its appeal of the award is notsuccessful (see Note 5 of Notes to Condensed Consolidated FinancialStatements). The deposit was funded by the $18.0 million term loan andborrowings of $4.6 million from the revolving credit facility, and is reportedas restricted cash in the accompanying condensed consolidated balance sheets asof December 31, 2006 and July 2, 2006.

As discussed in Notes 2 and 13 of the Notes to Condensed ConsolidatedFinancial Statements, on October 23, 2006, the Company completed thedivestiture of its power electronics business. The Company used a portion of the proceeds from the divestiture to repayall borrowings outstanding under its term loan and revolving creditfacility.    In accordance withprovisions of the agreement with Ableco, the agreement was terminated prior tothe December 2007 expiration date in exchange for a $325 prepayment penalty bythe Company.  The prepayment penalty isincluded in other expense in the consolidated statements of operations for thethree- and six-month periods ended December 31, 2006.  In addition, the write-off of deferredfinancing costs of $670 related to the term loan is included in interestexpense for the three- and six-month periods ended December 31, 2006.  The revolving credit facility remains inplace and the Company is currently in default under certain covenants of therevolving credit agreement.  The Companyis in the process of obtaining a waiver and expects to modify the terms of theagreement with WFF to reflect changes in the Company’s domestic asset base andexpected future performance.  There wereno borrowings outstanding under the revolving credit facility as of December31, 2006.

13.                               **Divestiture of Power Electronics Business**

On October 23, 2006, the Company completed thesale of its power electronics business to Power-One, Inc. (“Power-One”).  The transaction, which satisfied allapplicable regulatory approvals and other customary closing conditions,included payment by Power-One to the Company of $68.0 million in cash and theassumption by Power-One of approximately $16.0 million of the Company’s debt,representing the total debt balances outstanding of the Company’s subsidiaryMagnetek, S.p.A.  The Company usedapproximately $29.0 million of the proceeds to repay all its remainingoutstanding debt and in December 2006 made a contribution of $30.0 million toits defined benefit pension fund.  TheCompany intends to use the remainder of the proceeds from the sale of thebusiness primarily to fund ongoing operations.

Pursuant to the purchase and sale agreement by andbetween the Company and Power-One., Power-One purchased the business throughthe acquisition of all of the outstanding shares of Magnetek, S.p.A., asubsidiary of the Company, and of the assets and liabilities of the U.S.division of the business.  The terms ofthe agreement were negotiated at arms-length. The agreement provides for a final purchase price adjustment tobe negotiated primarily based on changes in tangible net assets of the businessfrom September 28, 2006 to the October 23, 2006 closing date.  The agreement also provides indemnificationfor breaches of representations and warranties and other customary matters thatthe Company believes are typical for this type of transaction, includingindemnifications for certain tax, legal, environmental and warranty issues.

The condensed consolidated balance sheet as of December 31, 2006includes a total of $3.8 million in accrued liabilities, representing theCompany’s best estimate of remaining closing costs, the final purchase priceadjustment, and contingent liabilities related to the indemnificationprovisions of the purchase and sale agreement. While management has used its best judgment in assessing the potentialliability for these items, given the uncertainty regarding future events, it isdifficult to estimate the possible timing or magnitude of any payments that maybe required for liabilities subject to indemnification.  The Company expects to complete negotiationsregarding the final purchase price adjustment prior to the end of fiscal2007.  In the event the actual finalpurchase price adjustment differs from the currently recorded best estimate,the Company would record any such adjustment in the period resolved as a gainor loss on the sale of the business in discontinued operations.  Similarly, any future adjustment to currentlyrecorded closing costs estimates or contingencies related to indemnificationsbased upon changes in circumstances would also be recorded as a gain or loss onthe sale of the business in discontinued operations.

**Item 2 — Management’s Discussion and Analysis ofOperations and Financial Condition**

**Overview**

Magnetek is global provider of digital powercontrol systems and we operate solely in this product category.  Our systems are used primarily in materialhandling, motion control, telecommunications (telecom) and energyapplications.  We believe

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that with our technical and productive resourceswe are well positioned to respond to increasing demand in our servedmarkets.  Our power control systems consistprimarily of programmable motion control and power conditioning systems used inthe following applications:  cranes andhoists; elevators; wireless telecom; mining; fuel cell and wind markets.  Our operations are located in North America,predominantly in Menomonee Falls, Wisconsin, the location of our Companyheadquarters.

During fiscal year 2005, we reclassified theassets and liabilities of our telecom power business as held for sale, and theresults of operations of this business as discontinued operations.  Over the past 18 months we have entered intovarious stages of negotiations with several interested buyers, however, we werenot able to reach an agreement to sell the business.  In October 2006, we decided to retain thebusiness and initiated restructuring actions in order to improve its operatingresults.  The accompanying financialstatements reflect the reclassification of the assets and liabilities of ourtelecom power business as held and used, and the results of this business ascontinuing operations for all periods presented.

During the fourth quarter of fiscal 2006, wecompleted a review of various cash raising alternatives to enable us to addresspending pension and debt repayment obligations, as well as provide funds forfuture growth initiatives, and we decided to divest our power electronicsbusiness.  This business is engaged inthe manufacture of embedded power electronic products, used primarily intelecom, data processing and storage, semiconductor equipment, medicalinstrumentation and home appliances.  Thebusiness has manufacturing and administrative facilities in Italy, China,Hungary and Chatsworth, California.  During the fourth quarterof fiscal year 2006, we reclassified the assets and liabilities of our powerelectronics business as held for sale, and the results of operations of thisbusiness as discontinued operations (see Note 2 of Notes to CondensedConsolidated Financial Statements).

In October 2006, we sold the business to Power-One, Inc. which includedpayment by Power-One to Magnetek of $68 million in cash and the assumption byPower-One of approximately $16 million of Magnetek’s debt, subject to postclosing adjustments (see Note 13 of Notes to Condensed Consolidated FinancialStatements).  We used a portion of the proceedsfrom the divestiture of the business to repay all of our outstanding bank debt,approximately $29 million, and also made a $30 million contribution to ourdefined benefit pension plan in December 2006.

Our results of continuing operations reflectedin the accompanying consolidated financial statements include the results ofpower control systems (including our telecom power business) and corporateoperating expenses for all periods presented. The divestiture of our power electronics business has resulted in asmaller company in terms of sales with revenue expected to exceed $100 millionin our current fiscal year, but our gross margins in power control systems havehistorically exceeded 30%.  We have alsofurther consolidated our manufacturing operations and administrative facilitiesduring the second quarter of fiscal 2007, relocating both our telecommanufacturing from Dallas, Texas, and our corporate office functions fromChatsworth, California, to Menomonee Falls. We believe that the resulting cost savings, together with a reduction inpension expense from the recent contribution to our pension plan and lowerinterest expense from reduced borrowings, should enable us to return toprofitability and positive cash generation in the second half of fiscal 2007.

**ContinuingOperations**

Demand in certain of ourkey markets, mainly material handling, remained strong during the secondquarter of fiscal 2007 and our sales increased to $27.6 million, an increase of6% from second quarter fiscal 2006 sales of $26.1million.  Gross profit in the second quarter of fiscal2007 was lower than the same period in fiscal 2006, due mainly to restructuringcosts from the relocation of our telecom manufacturing operations and to a lesserextent sales mix in our elevator product line. Our research and development (“R&D”) expense increased in the secondquarter of fiscal 2007 compared to the second quarter of fiscal 2006, duemainly to severance costs from downsizing and relocating our corporate officefunctions.  We will continue to invest inR&D going forward, mainly in new product offerings for alternative energyapplications and radio control for material handling, however the rate ofgrowth in R&D spending may slow in fiscal 2007.  Second quarter fiscal 2007 selling, generaland administrative (“SG&A”) expense increased by $2.1 million compared tothe second quarter of fiscal 2006, due mainly to severance and stockcompensation costs related to the downsizing, relocation and reorganization ofour corporate office functions and board of directors (see Notes 3 and 9 ofNotes to Condensed Consolidated Financial Statements).  Our second quarter fiscal 2007 results werealso negatively impacted by prepayment penalties related to early debtrepayment and accelerated amortization of deferred financing assets.

Our total long-term debtdecreased during the second quarter of fiscal 2007 from $28.4 million atSeptember 2006 to effectively zero at December 2006, as we used a portion ofthe proceeds from the divestiture of our power electronics business to repayall of our outstanding domestic bank debt, and our European debt was assumed byPower-One upon the purchase of the business. We contributed $30 million to our defined benefit pension plan in fiscal2007, and under current funding regulations, no contributions are expecteduntil April 2008.  Future requiredcontributions will depend on future interest rate levels, values in equity andfixed income markets, and the level and timing of interim contributions we maymake to the plan, and could still be significant.  Pension expense recorded for financial reportingpurposes is also dependent

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upon these factors, butis expected to be substantially lower in future periods as compared to recenthistorical recorded expense due primarily to the impact of the recentcontribution on pension expense calculated under accounting rules.

We intend to focus our development and marketing capabilities oninternal sales growth opportunities across all product lines, with a near-termemphasis on wind and elevator products, and intend to complete our telecomrelocation in our third fiscal quarter (ending March 2007) and focus onimproving our manufacturing flow and related efficiency in that business   to improve our margins.  We also plan to complete the consolidation ofour administrative operations during the third quarter of fiscal 2007, and willcontinue to review further administrative cost reduction actions.  However future sustained profitability isdependent upon increasing sales revenue, improvement in gross margins,successful implementation of our strategy to penetrate higher margin markets,and successful introduction of new product offerings.

**Discontinued Operations**

The results of our power electronics business, as well as certainexpenses related to previously divested businesses, have been classified asdiscontinued operations in the accompanying condensed consolidated financialstatements and footnotes for all periods presented.   The assets and liabilities of our powerelectronics business are classified as held for sale in the accompanyingcondensed consolidated balance sheet as of July 1, 2006.

Our second quarter fiscal 2007 loss from discontinued operations was$1.6 million, due mainly to losses incurred in our power electronics business of$1.3 million prior to its divestiture in October 2006.  The loss from discontinued operations for theperiods ended December 31, 2006 does not include any gain or loss on thedivestiture of the power electronics business (see Note 13 of Notes to CondensedConsolidated Financial Statements). Costs associated with other previously owned business were $0.3 millionin the period.  These costs have historically included charges for anarbitration award in a patent infringement claim and related legal fees (seeNote 5 of Notes to Consolidated Financial Statements), as well as certainexpenses for product liability claims, environmental issues, and asbestosclaims.   All of these issues relate to businesses we no longer ownand most relate to indemnification agreements we provided when we divestedthose businesses.

Going forward, our discontinued operations will include additionalcosts we may incur related to businesses no longer owned and may includeadditional costs above those currently estimated and accrued related to thedivestiture of our power electronics business.

**Critical Accounting Policies**

The following discussion and analysis of our financial condition andresults of operations is based upon our condensed consolidated financialstatements.  In preparing financialstatements in conformity with accounting principles generally accepted in theUnited States, we must make estimates and assumptions that affect the reportedamount of assets and liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities at the date of our financialstatements.  Such estimates are basedupon historical experience and other assumptions believed to be reasonablegiven known circumstances.  Actualresults could differ from those estimates. On an ongoing basis, we evaluate and update our estimates, includingthose related to accounting for inventories, goodwill, pension benefits andreserves for litigation and environmental issues.  We consider the following policies criticalto understanding our financial position and results of operations.

*Accounts Receivable*

Accounts receivable represent amounts due fromcustomers in the ordinary course of business. We are subject to losses from uncollectible receivables in excess of ourallowances.  We maintain allowances fordoubtful accounts for estimated losses from customers’ inability to makerequired payments.  In order to estimatethe appropriate level of this allowance, we analyze historical bad debts,customer concentrations, current customer creditworthiness, current economictrends and changes in customer payment patterns.  Our total allowance includes a specificallowance based on identification of customers where we feel full payment is indoubt, as well as a general allowance calculated based on our historical losseson accounts receivable as a percentage of historical sales.  We believe that our methodology has beeneffective in accurately quantifying our allowance for doubtful accounts and donot anticipate changing our methodology in the future.  However, if the financial conditions of anyof our customers were to deteriorate and impair their ability to make payments,additional allowances may be required in future periods.  We believe that all appropriate allowanceshave been provided.

*Inventories*

Our inventories arestated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, includingmaterial, labor and factory overhead.  Weidentify potentially obsolete and excess inventory by evaluating overall inventorylevels in relation to expected future requirements and market conditions, andprovisions for excess and obsolete

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inventory and inventoryvaluation are recorded accordingly. Items with no usage for the past twelve months and no expected futureusage are considered obsolete, and are disposed of or fully reserved.  Reserves for excess inventory are determinedbased upon historical and anticipated usage as compared to quantities on hand.  Excess inventory is defined as inventoryitems with on-hand quantities in excess of one year’s usage and specifiedpercentages are applied to the excess inventory value in determining thereserve.  Our assumptions have notchanged significantly in the past, and we believe they are not likely to changein the foreseeable future.  We feel thatour assumptions regarding inventory valuation have been accurate in the past.

*Long-Lived Assets and Goodwill*

We periodically evaluatethe recoverability of our long-lived assets, including property, plant andequipment.  Impairment charges arerecorded in operating results when the undiscounted future expected cash flowsderived from an asset are less than the carrying value of the asset.  We are required to perform annual impairmenttests of our goodwill, and may be required to test more frequently in certaincircumstances.  We have elected toperform our annual impairment test in the fourth quarter of our fiscalyear.  Our power controls systemsbusiness is our only reporting unit under SFAS No. 142.

In assessing potentialimpairment, we make significant estimates and assumptions regarding thediscounted future cash flows of our reporting units to determine the fair valueof those reporting units.    Suchestimates include, but are not limited to, projected future operating results,working capital ratios, cash flow, terminal values, market discount rates andtax rates.  We review the accuracy of ourprojections by comparing them to our actual results annually, and havedetermined that, historically, our cash flow estimates used in determining thefair value of our reporting units have been reasonably accurate.  We use the results of this analysis as wellas projected operating results to modify our estimates annually.  However, if circumstances cause theseestimates to change in the future, or if actual circumstances varysignificantly from these assumptions, this could result in additional goodwillimpairment charges.  We cannot predictthe occurrence of future events that may adversely affect our reported goodwillbalance.

*Pension Benefits*

Wesponsor a defined benefit plan that covers a number of current and formeremployees in the U.S.  The valuation ofour pension plan requires the use of assumptions and estimates that attempt toanticipate future events to develop actuarial valuations of expenses, assetsand liabilities.  These assumptionsinclude discount rates, expected rates of return on plan assets and mortalityrates.  We consider market conditions,including changes in investment returns and interest rates, in making theseassumptions.  Our plan assets arecomprised mainly of common stock and bond funds.  The expected rate of return on plan assets isa long-term assumption and is generally not changed on an annual basis.  The discount rate reflects the market forhigh-quality fixed income debt instruments and is subject to change eachyear.  Changes in assumptions typicallyresult in actuarial gains or losses that are amortized in accordance with themethods specified in FAS Statement No. 87. Significant differences between our assumptions and actual futureinvestment return or discount rates could have a material impact on ourfinancial position or results of operations and related funding requirements.

Following the divestiture of our powerelectronics business, we contributed $30 million to our defined benefit pensionfund in December 2006.  The contributionwas not contemplated in our original fiscal 2007 estimate of periodic netbenefit cost.  As a result of thesignificant contribution and the related impact on pension expense, as well asthe divestiture of our power electronics business, we performed a remeasurementof pension assets, liabilities and periodic net benefit cost as of December 31,2006.  Our pension benefit obligation andminimum pension liability were increased by $8.6 million, due mainly to areduction in our discount rate assumption to 5.9% from a rate of 6.4% in theoriginal estimate for fiscal 2007 prepared in June 2006.  Our pension expense will be reduced to $0.2million per quarter for the remainder of fiscal 2007 beginning in our thirdfiscal quarter.

*Reservesfor Contingencies*

We periodically recordthe estimated impacts of various conditions, situations or circumstancesinvolving uncertain outcomes.  Theaccounting for such events is prescribed under SFAS No. 5, *Accountingfor Contingencies*.  SFAS No. 5defines a contingency as an existing condition, situation, or set ofcircumstances 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.

SFASNo. 5 does not permit the accrual of gain contingencies under anycircumstances.  For loss contingencies,the loss must be accrued if (1) information is available that indicates it isprobable that the loss has been incurred, given the likelihood of uncertainevents; and (2) that the amount of the loss can be reasonably estimated.

Theaccrual of a contingency involves considerable judgment on our part.  We use our internal expertise, and outsideexperts as necessary, to help estimate the probability that a loss has beenincurred and the amount or range of the loss.

** **

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*Income Taxes*

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

Werecord deferred income tax assets in tax jurisdictions where we generate lossesfor income tax purposes.  We also recordvaluation allowances against these deferred tax assets in accordance with SFASNo. 109, *Accounting for Income Taxes*, when, inour judgment, the deferred income tax assets will likely not be realized in theforeseeable future.

**Results of Operations - Three Months EndedDecember 31, 2006 and January 1, 2006**

NetSales and Gross Profit

Net sales for the three months endedDecember 31, 2006 were $27.6 million, an increase of 5.7% from the three monthsended January 1, 2006 sales of $26.1 million. The increase was mainly due to higher sales of material handlingproducts of $1.0 million.   Net sales byproduct line were as follows, in millions:

|                         | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **December 31, 2006**  | ** ** | **January 1, 2006** | ** ** |
| Material handling       |       | $                                | 15.9       |   | 58 | % | $ | 14.9 |   | 57 | % |
| Elevator motion control |       | 5.1                              |       | 18 | % | 4.5 |   | 17 | % |
| Telecom power systems   |       | 4.9                              |       | 18 | % | 4.3 |   | 17 | % |
| Energy systems          |       | 1.7                              |       | 6 | % | 2.4 |   | 9 | % |
|                    |       |                             |       |   |   |   |   |   |   |
| Total net sales         |       | $                                | 27.6       |   | 100 | % | $ | 26.1 |   | 100 | % |

 

Gross profit for the three months endedDecember 31, 2006 was $7.1 million, or 25.6% of sales, versus $7.9 million, or30.4% of sales, in the three months ended January 1, 2006.  The reduction in gross profit as a percentageof sales in the three months ended December 31, 2006 as compared to the threemonths ended January 1, 2006 was due to restructuring costs of $0.9 millionrelated to the relocation of our telecom manufacturing operations, unfavorablesales mix within our elevator product line, and lower sales in our energysystems business due to the divestiture of our residential solar power inverterproduct line.

Researchand Development, Selling, General and Administrative

R&D expense was $1.6 million, or 5.8%of sales, in the three months ended December 31, 2006, compared to the R&Dexpense of $1.3 million, or 5.0% of sales, for the three months ended January1, 2006.  R&D expense in the threemonths ended December 31, 2006 includes $0.6 million in severance related torestructuring of our corporate office functions.  We continue to invest in product developmentfor new markets and applications such as alternative energy products for windapplications.

SG&A expense was $9.2 million (33.3% of sales) in the three monthsended December 31, 2006 versus $7.1 million (27.3% of sales) in the threemonths ended January 1, 2006.  Sellingexpenses in the three months ended December 31, 2006 were $2.7 million,comparable to $2.6 million in the three months ended January 1, 2006, due tohigher volume related commissions. General and administrative (“G&A”)expense was $6.5 million in the three months ended December 31, 2006 comparedto $4.5 million in the three months ended January 1, 2006, due to higherstock-based compensation expense of $1.1 million (see Note 3 of Notes toCondensed Consolidated Financial Statements) and $1.3 million in severancecosts in the three months ended December 31, 2006 (see Note 9 of Notes toCondensed Consolidated Financial Statements).

Loss from Operations

Our loss from operations for the threemonths ended December 31, 2006 was $3.7 million compared to a loss fromoperations of $0.5 million for the three months ended January 1, 2006.  The increase in loss from operations in thethree months ended December 31, 2006 as compared to the three months endedJanuary 1, 2006 was mainly due to restructuring and relocation costs of $3.9million included in our loss from operations for the three months endedDecember 31, 2006.

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Interest Income andExpense and Other Expense 

Interest income was $0.9 million andinterest expense was $1.1 million in the three months ended December 31,2006.  Interest income was $0.1 millionand interest expense was $0.8 million in the three months ended January 1,2006.  The increase in interest income inthe three months ended December 31, 2006 was due to higher cash balances heldin short-term investments and $0.3 million in interest income related to aprevious tax settlement.

The increase in interest expense in thethree-month period ended December 31, 2006 was mainly due to the write-off ofdeferred financing assets of $0.7 million from the early retirement ofdebt.  Interest expense in the threemonths ended January 1, 2006 reflects outstanding borrowings associated with apatent arbitration award (see Note 5 of Notes to Condensed ConsolidatedFinancial Statements).  In November 2005,we deposited $22.6 million into escrow to satisfy payment of the award in theevent our appeal is not successful.  Thedeposit was funded mainly by an $18.0 million term loan, which bore interest atrates of 11% while we received interest on the escrow deposit at a rate of4%.  The term loan was repaid in October2006, and as a result, our other expense of $0.3 million in the three monthsended December 31, 2006 is comprised entirely of a prepayment penalty relatedto the early repayment of that debt.

Provision for IncomeTaxes

Despite the pretax loss of $4.2 millionin the three months ended December 31, 2006 and the pretax loss of $1.2 millionin the three months ended January 1, 2006, we recorded tax provisions in thoseperiods of $0.4 million and $0.3 million respectively, due to non-cash taxprovisions related to goodwill amortization and to a lesser extent, provisionsfor income taxes on our pretax income in Canada (see Note 11 of Notes toCondensed Consolidated Financial Statements).

Loss from ContinuingOperations

We recorded a loss from continuingoperations of $4.6 million in the three months ended December 31, 2006, or$0.16 loss per share on both a basic and diluted basis, compared to a loss fromcontinuing operations of $1.6 million in the three months ended January 1,2006, or $0.05 loss per share on both a basic and diluted basis.

Loss from DiscontinuedOperations

Our loss from discontinued operations for the three months endedDecember 31, 2006 was $1.6 million, or $0.06 loss per share on both a basic anddiluted basis, compared to a loss from discontinued operations of $0.2 million,or $0.01 loss per share on both a basic and diluted basis, for the three monthsended January 1, 2006.  Loss fromdiscontinued operations in the three months ended December 31, 2006 wascomprised mainly of losses in our discontinued power electronics business of$1.3 million and expenses related to previously divested businesses of $0.3million, mainly legal fees and other costs associated with the patentinfringement claim and asbestos claims. Loss from discontinued operations of $0.2 million in the three monthsended January 1, 2006 was comprised of net income from our discontinued powerelectronics business of $0.7 million, partially offset by expenses related topreviously divested businesses of $0.9 million, mainly legal fees and othercosts associated with the patent infringement claim.

NetLoss

Our net loss was $6.2 million in thethree months ended December 31, 2006, or $0.21 loss per share, basic anddiluted, compared to a net loss of $1.7 million in the three months endedJanuary 1, 2006, or $0.06 loss per share on both a basic and diluted basis.

**Results of Operations - Six Months Ended December31, 2006 and January 1, 2006**

NetSales and Gross Profit

Net sales for the six months endedDecember 31, 2006 were $53.5 million, an increase of 7.8% from the six monthsended January 1, 2006 sales of $49.7 million. The increase was mainly due to higher sales of material handlingproducts of $1.9 million and higher sales of elevator products of $1.7million.   Net sales by product line wereas follows, in millions:

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|                         | ** ** | **Six Months Ended**  | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **December 31, 2006** | ** ** | **January 1, 2006** | ** ** |
| Material handling       |       | $                               | 31.4       |   | 59 | % | $ | 29.5 |   | 59 | % |
| Elevator motion control |       | 10.0                            |       | 19 | % | 8.3 |   | 17 | % |
| Telecom power systems   |       | 8.3                             |       | 16 | % | 7.8 |   | 16 | % |
| Energy systems          |       | 3.8                             |       | 7 | % | 4.1 |   | 8 | % |
|                    |       |                            |       |   |   |   |   |   |   |
| Total net sales         |       | $                               | 53.5       |   | 100 | % | $ | 49.7 |   | 100 | % |

 

Gross profit for the six months endedDecember 31, 2006 was $14.5 million, or 27.0% of sales, versus $15.2 million,or 30.6% of sales, in the six months ended January 1, 2006.  The reduction in gross profit as a percentageof sales in the six months ended December 31, 2006 as compared to the sixmonths ended January 1, 2006 was due to unfavorable sales mix of $1.0 millionand restructuring costs of $0.9 million related to the relocation of ourtelecom manufacturing operations, partially offset by increased margin onhigher sales of $1.1 million.

Researchand Development, Selling, General and Administrative

R&D expense was $2.8 million, or 5.2%of sales, in the six months ended December 31, 2006, compared to the R&Dexpense of $2.5 million, or 5.0% of sales, for the six months ended January 1,2006.  R&D expense in the six monthsended December 31, 2006 includes $0.6 million in severance related torestructuring of our corporate office functions.  We continue to invest in product developmentfor new markets and applications such as alternative energy products for windapplications and expect our R&D expense to approximate $1.0 to $1.2 millionper quarter for the remainder of the fiscal year.

SG&A expense was $16.6 million (31.0% of sales) in the six monthsended December 31, 2006 versus $13.7 million (27.7% of sales) in the six monthsended January 1, 2006.  Selling expensesin the six months ended December 31, 2006 were $5.4 million, an increase of$0.5 million compared to $4.9 million in the six months ended January 1, 2006,due to higher volume related commissions. G&A expense was $11.2 million in the six months ended December 31,2006 compared to $8.8 million in the six months ended January 1, 2006, due tohigher stock-based compensation expense of $1.1 million (see Note 3 of Notes toCondensed Consolidated Financial Statements) and $1.3 million in severancecosts in the six months ended December 31, 2006 (see Note 9 of Notes toCondensed Consolidated Financial Statements).

Loss from Operations

Our loss from operations for the sixmonths ended December 31, 2006 was $4.9 million compared to a loss fromoperations of $1.0 million for the six months ended January 1, 2006.  The increase in loss from operations in thesix months ended December 31, 2006 as compared to the six months ended January1, 2006 was mainly due to restructuring and relocation costs of $3.9 millionincluded in our loss from operations for the six months ended December 31,2006.

InterestIncome and Expense and Other Expense 

Interest income was $1.2 million andinterest expense was $2.1 million in the six months ended December 31,2006.  Interest income was $0.1 millionand interest expense was $1.3 million in the six months ended January 1, 2006.  The increase in interest income in the sixmonths ended December 31, 2006 was due to higher cash balances held inshort-term investments during November and December 2006 and $0.3 million ininterest income related to a previous tax settlement.

The increase in interest expense in thesix-month period ended December 31, 2006 was mainly due to the write-off ofdeferred financing assets of $0.7 million from the early retirement ofdebt.  Interest expense in the six monthsended January 1, 2006 reflects outstanding borrowings associated with a patentarbitration award (see Note 5 of Notes to Condensed Consolidated FinancialStatements).  In November 2005, wedeposited $22.6 million into escrow to satisfy payment of the award in theevent our appeal is not successful.  Thedeposit was funded mainly by an $18.0 million term loan, which bore interest atrates of 11% while we received interest on the escrow deposit at a rate of4%.  The term loan was repaid in October2006, and as a result, our other expense of $0.3 million in the six monthsended December 31, 2006 is comprised entirely of a prepayment penalty relatedto the early repayment of that debt.

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Provision for IncomeTaxes

Despite the pretax loss of $6.2 millionin the six months ended December 31, 2006 and the pretax loss of $2.1 millionin the six months ended January 1, 2006, we recorded tax provisions in thoseperiods of $0.6 million and $0.7 million respectively, due to non-cash taxprovisions related to goodwill amortization and to a lesser extent, provisionsfor income taxes on our pretax income in Canada (see Note 11 of Notes toCondensed Consolidated Financial Statements).

Loss from ContinuingOperations

We recorded a loss from continuingoperations of $6.8 million in the six months ended December 31, 2006, or $0.23loss per share on both a basic and diluted basis, compared to a loss fromcontinuing operations of $2.8 million in the six months ended January 1, 2006,or $0.10 loss per share on both a basic and diluted basis.

Income (Loss) fromDiscontinued Operations

Our loss from discontinued operations for the six months ended December31, 2006 was $2.6 million, or $0.09 loss per share on both a basic and dilutedbasis, compared to a slight income from discontinued operations, or $0.00income per share on both a basic and diluted basis, for the six months ended January1, 2006.  Loss from discontinuedoperations in the six months ended December 31, 2006 was comprised mainly oflosses in our discontinued power electronics business of $2.3 million andexpenses related to previously divested businesses of $0.3 million, mainlylegal fees and other costs associated with the patent infringement claim andasbestos claims.  Income fromdiscontinued operations in the six months ended January 1, 2006 was comprisedof net income from our discontinued power electronics business of $1.4 million,partially offset by expenses related to previously divested businesses of $1.3million, mainly legal fees and other costs associated with the patentinfringement claim.

NetLoss

Our net loss was $9.4 million in the sixmonths ended December 31, 2006, or $0.32 loss per share, basic and diluted,compared to a net loss of $2.8 million in the six months ended January 1, 2006,or $0.10 loss per share on both a basic and diluted basis.

**Liquidity and Capital Resources**

Our cash balance, excluding restricted cash, increased $7.2 millionduring the six months ended December 31, 2006, from $0.1 million at July 2,2006 to $7.3 million at December 31, 2006. During the six months ended December 31, 2006, our accounts receivablebalances increased $2.8 million, while accounts payable increased $2.0 millionand inventories decreased $0.5 million. Our capital expenditures in the six months ended December 31, 2006 wereless than $0.3 million; however we currently plan to add capacity for theproduction of wind inverters.  Includingexpenditures for this capacity, we do not anticipate capital expenditures infiscal 2007 will exceed $2.0 million. The expected amount of capital expenditures could change depending uponchanges in revenue levels, our financial condition and the general economy.

As discussed in Notes 2 and 13 of the Notes to Condensed ConsolidatedFinancial Statements, on October 23, 2006, we sold our power electronicsbusiness to Power-One for $68.0 million in cash and the assumption of approximately$16.0 million in outstanding debt in Europe. We used approximately $29.0 million of the proceeds from the divestitureto repay all borrowings outstanding under our term loan with Ableco andrevolving credit facility with WFF in October 2006.  Pursuant to the terms of the loan agreementwith Ableco, the agreement was terminated prior to the December 2007 expirationdate in exchange for our payment to Ableco of $325.  The revolving credit facility remains in placeand we are currently in default under certain covenants of the revolving creditagreement.  We are in the process ofobtaining a waiver and expect to modify the terms of the agreement with WFF toreflect changes in our domestic asset base and expected futureperformance.  There were no borrowingsoutstanding under the revolving credit facility as of December 31, 2006.

Primarily as a result of the decline in interest rates over the pastseveral years, the accumulated benefit obligation of our defined benefitpension plan currently exceeds plan assets. We used a portion of the proceeds from the divestiture of our powerelectronics business to contribute $30.0 million to our pension fund inDecember 2006 and under current funding regulations, actuarial projectionsindicate no contributions to the plan would be required before April 2008.  Future required contributions will depend onfuture interest rate levels, values in equity and fixed income markets, and thelevel and timing of interim contributions we may make to the plan, and couldstill be significant.

We are subject to certain potentialenvironmental and legal liabilities associated primarily with past divestitures(see Note 5 of Notes to Condensed Consolidated Financial Statements).   In the fourth quarter of

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fiscal 2005, a decision was rendered in apatent infringement action brought against us by Ole K. Nilssen.  In settlement of pending litigation, weagreed to submit the matter to binding arbitration, and in May 2005, thearbitrator awarded damages to Mr. Nilssen of $23.4 million, to be paid withinten days of the award.  Nilssen’s counselfiled a motion to enter the award in U.S. District Court for the NorthernDistrict of Illinois, and we filed a counter-motion to vacate the award ongrounds that it was fraudulently obtained.  Our request for oral argumentwas granted and the hearing was held on October 19, 2005.  The judge is expected to render his decisionby mail after further consideration.  Anunfavorable decision by the Court could result in payment of the award of $22.6million, net of previously paid amounts, to Nilssen, which would have amaterial adverse effect on our cash flows during the period in which paymentwould be made.  We have adequateresources to support payment of the award if such a payment is necessary, as wecurrently have $22.6 million cash in an interest-earning escrow account.

We did not haveany off-balance sheet arrangements or variable interest entities as of December31, 2006.

Based upon current plans and business conditions, we believe thatcurrent cash balances, borrowing capacity under our revolving credit facilityand internally generated cash flows will be sufficient to fund anticipatedoperational needs, capital expenditures and other commitments over the next 12months.

**Caution Regarding Forward-LookingStatements and Risk Factors**

This document, including documents incorporated herein by reference,contains “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 are inherently subject to risksand uncertainties which in many cases are beyond our control and which cannotbe predicted or quantified.  As a result, future events and actual resultscould differ materially from those set forth in, contemplated by, or underlyingforward-looking statements.  Forward-looking statements contained in thisdocument speak only as of the date of this document or, in the case of anydocument incorporated by reference from another document, the date of thatdocument.  We do not have any obligation to publicly update or revise anyforward-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.

Our future results of operations and the other forward-lookingstatements contained in this filing, including this section titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,involve a number of risks and uncertainties.  In particular, thestatements regarding future economic conditions, our goals and strategies, newproduct introductions, penetration of new markets, projections of salesrevenues, manufacturing costs and operating costs, pricing of our products andraw materials required to manufacture our products, gross margin expectations,relocation and outsourcing of production capacity, capital spending, researchand development expenses, the outcome of pending legal proceedings andenvironmental matters, tax rates, sufficiency of funds to meet our needsincluding contributions to our defined benefit pension plan, and our plans forfuture operations, as well as our assumptions relating to the foregoing, areall subject to risks and uncertainties.

A number of factors could cause our actualresults to differ materially from our expectations.  We are subject to allof the business risks facing public companies, including business cycles andtrends in the general economy, financial market conditions, changes in interestrates, demand variations and volatility, potential loss of key personnel,supply chain disruptions, government legislation and regulation, and naturalcauses.  Additional risks and uncertainties include but are not limited toindustry conditions, competitive factors such as technology and pricingpressures, business conditions in our served markets, dependence on significantcustomers, increased material costs, risks and costs associated with acquisitionsand divestitures, environmental matters and the risk that our ultimate costs ofdoing business exceed present estimates. This list of risk factors is not all-inclusive, as other factors andunanticipated events could adversely affect our financial position or resultsof operations.  Further information onfactors that could affect our financial results can be found in our Form 10-Kfiling with the Securities and Exchange Commission for the year ended July 2,2006, under the heading “Risk Factors Affecting the Company’s Outlook”.

**Item3 — Quantitative and Qualitative Disclosures about Market Risk**

Weare exposed to market risks in the areas of foreign exchange and interestrates.  To mitigate the effect of suchrisks, from time to time we selectively use specific financial instruments.Hedging transactions can be entered into under Company policies and proceduresand are monitored monthly. Company policy prohibits the use of such financialinstruments for

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tradingor speculative purposes. There have been no material changes in the marketrisks that we reported in our Annual Report on Form 10-K dated July 2,2006.  A discussion of our accountingpolicies for derivative financial instruments is included in the Summary ofSignificant Accounting Policies under Note 1 in the Notes to CondensedConsolidated Financial Statements.  Ourcontinuing operations did not have any outstanding hedge instruments orcontracts at December 31, 2006, and July 2, 2006.

***Interest Rates***

The fair value of our debt was effectively zero atDecember 31, 2006.  Our debt balance of$37 was comprised entirely of capital lease obligations.  As a result, at December 31, 2006, ahypothetical 10% adverse change in interest rates would have a negligible impacton our annual interest expense, as we have fully repaid all of our debtoutstanding under our term loan and revolving credit facility with proceedsfrom the divestiture of our power electronics business (see Liquidity andCapital Resources and Note 12 of Notes to Condensed Consolidated FinancialStatements).

***Foreign Currency Exchange Rates***

We generally do notenter into foreign exchange contracts to protect against reductions in valueand volatility of future cash flows caused by changes in exchange rates, but wemay selectively enter into foreign exchange contracts to hedge certainexposures.  Gains and losses on thesenon-U.S.-currency investments would generally be offset by corresponding lossesand gains on the related hedging instruments, resulting in negligible netexposure.

We had no foreigncurrency contracts outstanding at December 31, 2006 and July 2, 2006.

**Item4 — Controls and Procedures**

In connection with this Form 10-Q, under the direction of our ChiefExecutive Officer and Chief Financial Officer, we evaluated our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e)of the Securities Exchange Act of 1934, and internal control over financialreporting and concluded that (i) our disclosure controls and procedures wereeffective as of December 31, 2006, and (ii) no change in internal controlover financial reporting occurred during the quarter ended December 31,2006, that has materially affected, or is reasonably likely to materiallyaffect, such internal control over financial reporting.

Attached as exhibits to this Form 10-Q are certifications of theCompany’s Chief Executive Officer and Chief Financial Officer, which arerequired in accordance with Rule 13a-14 of the Securities Exchange Act of1934.  This “Controls and Procedures”section includes information concerning the controls and evaluation thereofreferred to in the attached certifications, and it should be read inconjunction with the attached certifications for a more complete understandingof the topics presented.

**PART II - OTHER INFORMATION**

**Item 1 — Legal Proceedings**

In April 1998, Ole K. Nilssen (“Nilssen”) filed a lawsuit in theU.S. District Court for the Northern District of Illinois alleging infringementby the Company of seven of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude the Companyfrom making, using or selling products allegedly infringing his patents. TheCompany denied that its products infringed any valid patent and filed aresponse asserting affirmative defenses, as well as a counterclaim for ajudicial declaration that its products do not infringe the patents asserted byMr. Nilssen and also that the asserted patents are invalid. InJune 2001, the Company sold its lighting business to Universal LightingTechnologies, Inc. (“ULT”), and agreed to provide a limitedindemnification against certain claims of infringement that Nilssen mightallege against ULT. In April 2003, Nilssen’s lawsuit and the counterclaimswere dismissed with prejudice and both parties agreed to submit limited issuesin dispute to binding arbitration before an arbitrator with a relevanttechnical background. The arbitration occurred in November, 2004 and a decisionawarding Nilssen $23.4 million was issued on May 3, 2005, to be paid within tendays 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 Magnetek filed acounter-motion to vacate the award for a number of reasons, including that theaward was fraudulently obtained.  Magnetek’s request for oral argument wasgranted and the hearing took place on October 19, 2005.  A decision 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 Northern District of Illinois alleging infringement byULT of twenty-nine of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude ULT frommaking, using or selling products allegedly infringing his patents. ULT made aclaim for indemnification, which the Company accepted, subject to thelimitations set forth in the sale agreement.

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The case is now pending in the Central District of Tennessee.  Nilssen voluntarily dismissed all but four ofthe patents from the lawsuit.  The Company denies that the products forwhich it has an indemnification obligation to ULT infringe any valid patent andresponded on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the patents are unenforceable andinvalid and that the products do not infringe Nilssen’spatents.   ULT requested a re-examination of the patents atissue by the Patent and Trademark Office and the request was granted.  Meanwhile, the case against ULT has beenstayed pending Nilssen’s appeal of an unfavorable decision against him inanother case that could influence the outcome of his lawsuits against ULT.  The Company will continue to aggressivelydefend the claims against ULT that are subject to defense and indemnification;however, an unfavorable decision could have a material adverse effect on theCompany’s financial position, cash flows and results of operations.

*Effect of Fruit of the LoomBankruptcy (Bridgeport, Connecticut)*

In 1986, the Company acquired the stock of Universal ManufacturingCompany (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and thepredecessor agreed to indemnify the Company against certain environmentalliabilities arising from pre-acquisition activities at a facility inBridgeport, Connecticut. Environmental liabilities covered by theindemnification agreement include completion of additional cleanup activities, ifany, at the Bridgeport facility (sold in connection with the sale of thetransformer business in June 2001) and defense and indemnification againstliability for potential response costs related to offsite disposal locations.FOL, the successor to Universal’s indemnification obligation, filed a petitionfor Reorganization under Chapter 11 of the Bankruptcy Code in 1999 and theCompany filed a proof of claim in the proceeding for obligations related to theenvironmental indemnification agreement. The Company believes that FOL hadsubstantially completed the clean-up obligations required by theindemnification agreement prior to the bankruptcy filing. InNovember 2001, the Company and FOL entered into an agreement involving theallocation of certain potential tax benefits and Magnetek withdrew its claimsin the bankruptcy proceeding. FOL’s obligation to the state of Connecticut wasnot discharged in the reorganization proceeding.  In October 2006, the owner of the Bridgeportfacility filed a lawsuit in Superior Court, J.D. of Fairfield, Connecticutalleging that the Company is obligated to remediate environmental contaminationat the facility.  The Company has filed aMotion to Stay and Remand the matter to the Connecticut Department ofEnvironmental Protection (“DEP”) on the basis that DEP has primary jurisdictionto determine the need and responsibility for any further remediation.  FOL’s inability to satisfy its remainingobligations related to the Bridgeport facility and any offsite disposallocations, or an unfavorable ruling in the lawsuit with the owner of theBridgeport facility, or the discovery of additional environmental contaminationat the Bridgeport facility could have a material adverse effect on the Company’sfinancial position, cash flows or results of operations.

**Item 1A — Risk Factors**

There have been no material changes to the riskfactors disclosed in our Annual Report on Form 10-K for the year ended July 2,2006.

**Item2 — Unregistered Sales of Equity Securities and Use of Proceeds**

Therewere no unregistered sales of equity securities and there were no repurchasesof equity securities during our second fiscal quarter ended December 31, 2006.

**Item3 — Defaults upon Senior Securities**

None.

**Item 4 — Submission ofMatters to a Vote of  Security Holders**

None.

**Item5 — Other Information**

None.

**Item6 — Exhibits**

(a)                                  Indexto Exhibits

** **

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31.1               Certificationof the Chief Executive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934. *

31.2               Certificationof the Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934. *

32.1               Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. *

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*  Filedwith this Report on Form 10-Q.

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        |   | MAGNETEK, INC.                             |
|------------------------|--------|--------------------------------------------|
|                   |   | (Registrant)                               |
|                   |   |                                       |
|                   |   |                                       |
| Date: February 9, 2007 |   | /s/ David P. Reiland                       |
|                   |   | David P. Reiland                           |
|                   |   | President and Chief Executive Officer      |
|                   |   | (Duly authorized officer of the Registrant |
|                   |   | and principal executive  officer)          |
|                   |   |                                       |
|                   |   |                                       |
| Date: February 9, 2007 |   | /s/ Marty J. Schwenner                     |
|                   |   | Marty J. Schwenner                         |
|                   |   | Vice-President and Chief Financial Officer |
|                   |   | (Duly authorized officer of the Registrant |
|                   |   | and principal financial  officer)          |

 

 

** **

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