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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
|- | ------------------------------------------------------------------------------



For the quarterly period ended December 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 0-23335



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MPW INDUSTRIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Ohio                                                           |  | 31-1567260                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)
|                                                               | 
|9711 Lancaster Road, S.E., Hebron, Ohio                        |  | 43025                               
|(Address of principal executive offices)                       |  | (Zip code)                          



(740) 927-8790

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈No  x



APPLICABLE ONLY TO CORPORATE
ISSUERS:



Indicate the number of shares outstanding of the issuers
classes of common stock, as of the latest practicable date.



As of January 31,
2005, 10,708,707 shares of the issuers common stock, without par value, were outstanding.



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##### Table of Contents

MPW INDUSTRIAL SERVICES GROUP, INC.



INDEX



|              |  |                                                                                                                 |  |     
|------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                 |  | PAGE
|PART I.       |  | FINANCIAL INFORMATION                                                                                           |  |     
|              |  |                                                                                                                
|Item 1.       |  | Financial Statements                                                                                            |  |     
|              |  |                                                                                                                
|              |  | Consolidated Balance Sheets as of December 31, 2004 (unaudited) and June 30, 2004                               |  | 3   
|              |  |                                                                                                                
|              |  | Consolidated Statements of Operations for the three and six months ended December 31, 2004 and 2003 (unaudited) |  | 4   
|              |  |                                                                                                                
|              |  | Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003 (unaudited)           |  | 5   
|              |  |                                                                                                                
|              |  | Notes to Consolidated Financial Statements (unaudited)                                                          |  | 6   
|              |  |                                                                                                                
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 11  
|              |  |                                                                                                                
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 15  
|              |  |                                                                                                                
|Item 4.       |  | Controls and Procedures                                                                                         |  | 16  
|              |  |                                                                                                                
|PART II.      |  | OTHER INFORMATION                                                                                               |  |     
|              |  |                                                                                                                
|Item 1.       |  | Legal Proceedings                                                                                               |  | 17  
|              |  |                                                                                                                
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                     |  | 17  
|              |  |                                                                                                                
|Item 3.       |  | Defaults Upon Senior Securities                                                                                 |  | 17  
|              |  |                                                                                                                
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 17  
|              |  |                                                                                                                
|Item 5.       |  | Other Information                                                                                               |  | 17  
|              |  |                                                                                                                
|Item 6.       |  | Exhibits                                                                                                        |  | 17  
|              | 
|SIGNATURES    |  | 18                                                                                                             
|              | 
|EXHIBIT INDEX |  | 19                                                                                                             





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PART I.  FINANCIAL INFORMATION



Item 1.Financial Statements



MPW INDUSTRIAL SERVICES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ------------ | - | ------ | -
|                                                                                                                                                        |  | December 31,2004 |        |   | June 30,2004 |  
|                                                                                                                                                        |  | (unaudited)      |        |   |              |  
|ASSETS                                                                                                                                                  |  |                  |        |   |              |   |        |  
|Cash                                                                                                                                                    |  | $                | 725    |   |              | $ | 2,237  |  
|Accounts receivable, net                                                                                                                                |  |                  | 15,771 |   |              |   | 14,866 |  
|Inventories                                                                                                                                             |  |                  | 2,351  |   |              |   | 2,119  |  
|Deferred income taxes                                                                                                                                   |  |                  | 1,813  |   |              |   | 1,679  |  
|Prepaid expenses                                                                                                                                        |  |                  | 1,128  |   |              |   | 1,070  |  
|Other current assets                                                                                                                                    |  |                  | 73     |   |              |   | 2      |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Total current assets                                                                                                                                    |  |                  | 21,861 |   |              |   | 21,973 |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Property and equipment, net                                                                                                                             |  |                  | 29,093 |   |              |   | 30,198 |  
|Goodwill                                                                                                                                                |  |                  | 6,044  |   |              |   | 6,044  |  
|Other intangibles, net                                                                                                                                  |  |                  | 6,904  |   |              |   | 6,284  |  
|Other assets                                                                                                                                            |  |                  | 194    |   |              |   | 192    |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Total assets                                                                                                                                            |  | $                | 64,096 |   |              | $ | 64,691 |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|LIABILITIES                                                                                                                                             |  |                  |        |   |              |   |        |  
|Accounts payable                                                                                                                                        |  | $                | 3,926  |   |              | $ | 3,513  |  
|Accrued compensation and related taxes                                                                                                                  |  |                  | 1,981  |   |              |   | 1,902  |  
|Current maturities of long-term debt                                                                                                                    |  |                  | 1,237  |   |              |   | 1,261  |  
|Other accrued liabilities                                                                                                                               |  |                  | 5,552  |   |              |   | 5,608  |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Total current liabilities                                                                                                                               |  |                  | 12,696 |   |              |   | 12,284 |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Long-term debt                                                                                                                                          |  |                  | 17,017 |   |              |   | 17,631 |  
|Deferred income taxes                                                                                                                                   |  |                  | 2,871  |   |              |   | 3,447  |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Total liabilities                                                                                                                                       |  |                  | 32,584 |   |              |   | 33,362 |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|SHAREHOLDERS EQUITY                                                                                                                                    |  |                  |        |   |              |   |        |  
|Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding                                                         |  |                  |       |   |              |   |       |  
|Common stock, no par value; 30,000,000 shares authorized; 10,708,707 shares issued and outstanding at December 31, 2004 and June 30, 2004,
respectively |  |                  | 107    |   |              |   | 107    |  
|Additional paid-in capital                                                                                                                              |  |                  | 40,921 |   |              |   | 40,921 |  
|Accumulated deficit                                                                                                                                     |  |                  | (9,616 | ) |              |   | (9,690 | )
|Accumulated other comprehensive income (loss)                                                                                                           |  |                  | 100    |   |              |   | (9     | )
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Total shareholders equity                                                                                                                              |  |                  | 31,512 |   |              |   | 31,329 |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  
|Total liabilities and shareholders equity                                                                                                              |  | $                | 64,096 |   |              | $ | 64,691 |  
|                                                                                                                                                        |  |                  |        |   |              |   |        |  



The accompanying
notes are an integral part of these consolidated financial statements.



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MPW INDUSTRIAL SERVICES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)



|                                                            |  |                                |        |   |                              |   |        |      |  |      |        |  |   |        |  
|----------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                            |  | Three Months EndedDecember 31, |        |   | Six Months EndedDecember 31, |  
|                                                            |  | 2004                           |        |   | 2003                         |   |        | 2004 |  | 2003 |       
|                                                            |  | (unaudited)                    |       
|Revenues                                                    |  | $                              | 23,035 |   |                              | $ | 22,315 |      |  | $    | 45,860 |  | $ | 41,975 |  
|Cost of services (including depreciation)                   |  |                                | 18,366 |   |                              |   | 18,090 |      |  |      | 36,404 |  |   | 35,107 |  
|                                                            |  |                                |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Gross profit                                                |  |                                | 4,669  |   |                              |   | 4,225  |      |  |      | 9,456  |  |   | 6,868  |  
|Selling, general and administrative expenses                |  |                                | 4,458  |   |                              |   | 4,254  |      |  |      | 8,799  |  |   | 9,128  |  
|                                                            |  |                                |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Income (loss) from operations                               |  |                                | 211    |   |                              |   | (29    | )    |  |      | 657    |  |   | (2,260 | )
|Interest expense, net                                       |  |                                | 263    |   |                              |   | 278    |      |  |      | 547    |  |   | 561    |  
|                                                            |  |                                |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Income (loss) from operations before income taxes (benefit) |  |                                | (52    | ) |                              |   | (307   | )    |  |      | 110    |  |   | (2,821 | )
|Provision (benefit) for income taxes                        |  |                                | (29    | ) |                              |   | 263    |      |  |      | 36     |  |   | (818   | )
|                                                            |  |                                |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Net income (loss)                                           |  | $                              | (23    | ) |                              | $ | (570   | )    |  | $    | 74     |  | $ | (2,003 | )
|                                                            |  |                                |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Net income (loss) per share, basic and diluted              |  | $                              |       |   |                              | $ | (0.05  | )    |  | $    | 0.01   |  | $ | (0.18  | )
|                                                            |  |                                |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Weighted average shares outstanding                         |  |                                | 10,709 |   |                              |   | 10,951 |      |  |      | 10,709 |  |   | 10,947 |  
|Weighted average shares outstanding, assuming dilution      |  |                                | 10,709 |   |                              |   | 10,951 |      |  |      | 10,786 |  |   | 10,947 |  



The accompanying
notes are an integral part of these consolidated financial statements.



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MPW INDUSTRIAL SERVICES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                         |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                         |  | Six Months EndedDecember 31, |       
|                                                                                         |  | 2004                         |        |   | 2003 |  
|                                                                                         |  | (unaudited)                  |       
|Cash flows from operating activities:                                                    |  |                              |        |   |      |   |        |  
|Net income (loss)                                                                        |  | $                            | 74     |   |      | $ | (2,003 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                              |        |   |      |   |        |  
|Depreciation                                                                             |  |                              | 3,746  |   |      |   | 4,221  |  
|Amortization                                                                             |  |                              | 286    |   |      |   | 308    |  
|Loss on disposal of assets                                                               |  |                              | 38     |   |      |   | 44     |  
|Change in deferred income taxes                                                          |  |                              | (718   | ) |      |   | (20    | )
|Changes in operating assets and liabilities, net of assets acquired:                     |  |                              |        |   |      |   |        |  
|Accounts receivable                                                                      |  |                              | (905   | ) |      |   | 3,635  |  
|Inventories                                                                              |  |                              | (158   | ) |      |   | (52    | )
|Prepaid expenses and other assets                                                        |  |                              | (111   | ) |      |   | 375    |  
|Accounts payable                                                                         |  |                              | 510    |   |      |   | (3,049 | )
|Other accrued liabilities                                                                |  |                              | (177   | ) |      |   | (2,562 | )
|                                                                                         |  |                              |        |   |      |   |        |  
|Net cash provided by operating activities                                                |  |                              | 2,585  |   |      |   | 897    |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Cash flows from investing activities:                                                    |  |                              |        |   |      |   |        |  
|Purchases of property and equipment                                                      |  |                              | (2,496 | ) |      |   | (2,336 | )
|Purchases of businesses                                                                  |  |                              | (990   | ) |      |   |       |  
|Proceeds from the disposal of property and equipment                                     |  |                              | 27     |   |      |   | 29     |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                                    |  |                              | (3,459 | ) |      |   | (2,307 | )
|                                                                                         |  |                              |        |   |      |   |        |  
|Cash flows from financing activities:                                                    |  |                              |        |   |      |   |        |  
|Proceeds from exercise of stock options                                                  |  |                              |       |   |      |   | 37     |  
|Proceeds from revolving credit facility                                                  |  |                              |       |   |      |   | 3,850  |  
|Payments on revolving credit facility                                                    |  |                              | (600   | ) |      |   | (4,450 | )
|Payments on notes payable                                                                |  |                              | (38    | ) |      |   | (62    | )
|                                                                                         |  |                              |        |   |      |   |        |  
|Net cash used in financing activities                                                    |  |                              | (638   | ) |      |   | (625   | )
|                                                                                         |  |                              |        |   |      |   |        |  
|Decrease in cash                                                                         |  |                              | (1,512 | ) |      |   | (2,035 | )
|Cash at beginning of year                                                                |  |                              | 2,237  |   |      |   | 2,726  |  
|                                                                                         |  |                              |        |   |      |   |        |  
|Cash at end of period                                                                    |  | $                            | 725    |   |      | $ | 691    |  
|                                                                                         |  |                              |        |   |      |   |        |  



The accompanying
notes are an integral part of these consolidated financial statements.



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MPW INDUSTRIAL SERVICES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(unaudited)



Note 1. Summary of Significant Accounting Policies



Basis of Presentation and Description of Business MPW Industrial
Services Group, Inc. and its subsidiaries (the Company) provide technically-based services, including industrial cleaning, facility maintenance, industrial container cleaning and industrial process water purification. Such services are
primarily provided at customer facilities. The Company serves customers in numerous industries including automotive, utility, manufacturing, pulp and paper, steel and chemical primarily throughout the United States and Canada.



The accompanying unaudited consolidated financial statements presented herein
have been prepared by the Company and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of financial results for the three and six months ended December 31, 2004 and 2003,
respectively, in accordance with U.S. generally accepted accounting principles for interim financial reporting and pursuant to Article 10 of Regulation S-X. Certain footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the Companys Annual Report
on Form 10-K for the year ended June 30, 2004 (Annual Report). The results of operations for the three and six months ended December 31, 2004 and 2003, respectively, are not necessarily indicative of the results for the full year.



Property and EquipmentProperty and equipment is net of
accumulated depreciation of $67.2 million and $64.8 million at December 31, 2004 and June 30, 2004, respectively.



Comprehensive Income (Loss)Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, requires
that an enterprise report the change in its equity during the period from non-owner sources as other comprehensive income (loss). The Company has evaluated the statement and determined that the only items in addition to net income (loss) that would
be included in comprehensive income (loss) are the foreign currency translation adjustment and the mark-to-market adjustment on interest rate swaps. Comprehensive income (loss) for the three months ended December 31, 2004 and 2003 was $0.1 million
and $(0.5) million, respectively. Comprehensive income (loss) for the six months ended December 31, 2004 and 2003 was $0.2 million and $(1.8) million, respectively.



Stock Options As of December 31, 2004, the Company has two stock-based compensation plans, which are described in
detail in the annual report on Form 10-K for the year ended June 30, 2004. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based compensation cost is reflected in the Companys net income (loss), as all options granted under these plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, in accordance with the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure:



|                                                                                                                   |  |                                       |     |   |                              |   |       |      |  |   |      |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------- | --- | - | ---------------------------- | - | ----- | ---- |  | - | ---- | - |  | - | ------ | -
|                                                                                                                   |  | Three Months EndedDecember 31,        |     |   | Six Months EndedDecember 31, |  
|                                                                                                                   |  | 2004                                  |     |   | 2003                         |   |       | 2004 |  |   | 2003 |  
|                                                                                                                   |  | (in thousands, except per share data) |    
|Net income (loss):                                                                                                 |  |                                       |     |   |                              |   |       |      |  |   |      |   |  |   |        |  
|As reported                                                                                                        |  | $                                     | (23 | ) |                              | $ | (570  | )    |  | $ | 74   |   |  | $ | (2,003 | )
|Less: Stock-based compensation determined under fair value based method for all awards, net of related tax effects |  |                                       | (18 | ) |                              |   | (13   | )    |  |   | (31  | ) |  |   | (39    | )
|                                                                                                                   |  |                                       |     |   |                              |   |       |      |  |   |      |   |  |   |        |  
|Pro forma net income (loss)                                                                                        |  | $                                     | (41 | ) |                              | $ | (583  | )    |  | $ | 43   |   |  | $ | (2,042 | )
|                                                                                                                   |  |                                       |     |   |                              |   |       |      |  |   |      |   |  |   |        |  
|Net income (loss) per share, basic and diluted:                                                                    |  |                                       |     |   |                              |   |       |      |  |   |      |   |  |   |        |  
|As reported                                                                                                        |  | $                                     |    |   |                              | $ | (0.05 | )    |  | $ | 0.01 |   |  | $ | (0.18  | )
|                                                                                                                   |  |                                       |     |   |                              |   |       |      |  |   |      |   |  |   |        |  
|Pro forma                                                                                                          |  | $                                     |    |   |                              | $ | (0.05 | )    |  | $ | 0.01 |   |  | $ | (0.19  | )
|                                                                                                                   |  |                                       |     |   |                              |   |       |      |  |   |      |   |  |   |        |  



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MPW INDUSTRIAL SERVICES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(unaudited)



Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. Actual results could differ from those estimates.



Effect of Recent Accounting PronouncementsIn November 2004, the FASB issued SFAS No. 151, Inventory Costs.
SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing,to clarify the accounting for abnormal amounts of idle facility expense, freight, handling cost, and wasted material (spoilage). In addition, this Statement
requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not expect the adoption of this Statement to have a material impact on the Companys financial position or results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.APB Opinion No. 29 is
based on the principle that exchanges of nonmonetary assets should be measured on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends APB Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this Statement to have a material impact on its financial position or results of operations.



In December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment. SFAS
No. 123 (revised) is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes
standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the
fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based
payment transactions.For public entities that do not file as small business issuers, the Statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The potential impact
to the Company related to the adoption of this Statement is quantified in the Stock Options of Note 1.



In December 2004, the FASB issued proposed FASB Staff Position (FSP) FIN 46(R)-b, Implicit Variable Interests Resulting from Related Party
Relationships Under FASB Interpretation No. 46 (revised December2003), Consolidation of Variable Interest Entities. The proposed FSP addresses whether a reporting enterprise should consider whether it has an implicit variable interest in a
variable interest entity due to the existence of specific conditions of related parties. For entities to which FIN 46(R) has been applied, the guidance in this FSP shall be applied in the first reporting period beginning after the date the FSP is
finalized. For entities to which FIN 46(R) has not been applied, the guidance in this FSP shall be applied in accordance with the effective date and transition provisions of FIN 46(R). The Company is still evaluating the potential impact of the
proposed FSP on its financial position or results of operations.



Note 2.
Acquisitions



On November 22, 2004, the Company purchased
substantially all of the net assets of Hubbells Cleaning Systems, Inc. and Fairbanks Mobile Wash, Inc. (Hubbells and Fairbanks) for $860,000 in cash. Hubbells and Fairbanks specialize in environmental cleaning and
facility management services, low-pressure hydroblasting and industrial wet and dry vacuum services. The purchase price has been allocated to the acquired assets based on their estimated fair value at the date of the acquisition with $640,000 being
recorded to other intangibles. The other intangibles include a non-compete agreement and non-contractual customer relationship and are being amortized over five years. The Hubbells and Fairbanks assets are included in the Companys
Industrial Cleaning segment as of November 22, 2004. Pro forma results, including the acquired business since the beginning of the earliest period presented, would not be materially different than actual results.



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MPW INDUSTRIAL SERVICES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(unaudited)



On December 27, 2004, the Company purchased substantially all of the net assets of the jacket water cleaning business of Blasters, Inc.
(Blasters) for $130,000 in cash, with a maximum of $200,000 of contingent consideration payable over a three-year period which is included in other accrued liabilities. Blasters provides jacket water cleaning services to gas transmission
companies. The purchase price has been allocated to the acquired assets based on their estimated fair value at the date of the acquisition with $265,000 being recorded to other intangibles. The other intangibles include a customer contract and
non-contractual customer relationship and are being amortized over three to five years. The Blasters assets are included in the Companys Industrial Cleaning segment as of December 27, 2004. Pro forma results, including the acquired business
since the beginning of the earliest period presented, would not be materially different than actual results.



Note 3. Long Term Debt



In June 2002, the Company entered into a credit agreement with its principal banks (the Credit Facility). The Credit Facility provides the Company with $35.0 million of revolving credit availability for a three-year period and a
$6.0 million three-year term loan to be repaid in quarterly installments of $0.3 million. As of December 31, 2004, excluding outstanding borrowings and letters of credit, there was $13.1 million available under the Credit Facility. The Credit
Facility is subject to two one-year extensions by the banks at the request of the Company. Subsequent to December 31, 2004, the Credit Facilitys expiration was extended to January 1, 2006.



Note 4. Earnings per Share



The following table sets forth the computation of basic and diluted net
income (loss) per share:



|                                                                                                                    |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                                                                    |  | Three Months EndedDecember 31,        |        |   | Six Months EndedDecember 31, |  
|                                                                                                                    |  | 2004                                  |        |   | 2003                         |   |        | 2004 |  | 2003 |       
|                                                                                                                    |  | (in thousands, except per share data) |       
|Numerator for basic and diluted net income (loss) per share:                                                        |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Net income (loss)                                                                                                   |  | $                                     | (23    | ) |                              | $ | (570   | )    |  | $    | 74     |  | $ | (2,003 | )
|                                                                                                                    |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Denominator for basic net income (loss) per share:                                                                  |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Weighted average common shares                                                                                      |  |                                       | 10,709 |   |                              |   | 10,951 |      |  |      | 10,709 |  |   | 10,947 |  
|Effect of dilutive securities:                                                                                      |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Dilutive employee stock options                                                                                     |  |                                       |       |   |                              |   |       |      |  |      | 77     |  |   |       |  
|                                                                                                                    |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Denominator for diluted net income (loss) per share-adjusted weighted average common shares and assumed conversions |  |                                       | 10,709 |   |                              |   | 10,951 |      |  |      | 10,786 |  |   | 10,947 |  
|                                                                                                                    |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  
|Net income (loss) per share, basic and diluted                                                                      |  | $                                     |       |   |                              | $ | (0.05  | )    |  | $    | 0.01   |  | $ | (0.18  | )
|                                                                                                                    |  |                                       |        |   |                              |   |        |      |  |      |        |  |   |        |  



Options to purchase
532,250 and 444,650 shares of common stock at a weighted average price of $6.62 and $8.98 per share were outstanding during the three months ended December 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings
per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 415,000 and 945,000 shares of common stock at a weighted average price
of $2.28 and $2.02 per share were outstanding during the three months ended December 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because the Company reported a net loss for the three months
ended December 31, 2004 and 2003 and, therefore, the effect would be antidilutive.



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##### Table of Contents

MPW INDUSTRIAL SERVICES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(unaudited)



Options to purchase 532,250 and 466,650 shares of common stock at a weighted average price of $6.62 and $8.67 per share were outstanding during the six
months ended December 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect
would be antidilutive. Options to purchase 923,000 shares of common stock at a weighted average price of $2.01 per share were outstanding during the six months ended December 31, 2003 but were not included in the computation of diluted earnings per
share because the Company reported a net loss for the six months ended December 31, 2003 and, therefore, the effect would be antidilutive.



Note 5. Related Party Transactions



The Company rents certain land, property, buildings and an aircraft from entities controlled by its principal shareholder and Chief Executive Officer (CEO)
under long-term lease agreements. The Company also periodically uses a ranch, which is owned by an entity controlled by the CEO, for business meetings, entertainment and overnight lodging of customers and other business associates. Total expenses
related to these leases and to the ranch were $0.5 million and $0.6 million for the three months ended December 31, 2004 and 2003, respectively. Total expenses related to these leases and to the ranch were $1.0 million and $1.1 million for the six
months ended December 31, 2004 and 2003, respectively. These transactions are approved and reviewed quarterly by the Companys Audit Committee. Based on such review, the Company believes that these transactions are on terms at least as
favorable as those that could be obtained from an independent third party.



The Company provides, from time to time, certain fabrication-type services to Pro-Kleen Industrial Services, Inc. (Pro-Kleen), a portable sanitation services company wholly-owned by the Companys
principal shareholder and Chief Executive Officer. The Company charges Pro-Kleen for the cost of services it renders plus a markup. The amounts of such charges were approximately $17,000 and $21,000 for the three months ended December 31, 2004 and
2003, respectively, and approximately $112,000 and $27,000 for the six months ended December 31, 2004 and 2003, respectively. These charges are for the use of parts and supplies and the use of certain of the Companys employees on certain
projects as requested by Pro-Kleen. These charges are generally treated as an offset to supplies, repairs and maintenance or labor expense.



Note 6. Commitments and Contingencies



In fiscal 1999, the Company entered into a guaranty of a lease agreement related to a facility operated by its former subsidiary, Pentagon Technologies
Group, Inc. (Pentagon). The lease, on which rent is approximately $30,000 per month, expires in October 2009. As of December 31, 2004, the Company believes its maximum potential liability is $1.7 million, payable only if Pentagon fails
to comply with the lease terms, and subject to many factors, including the landlords duty to mitigate, the validity of the guarantee and the like.



The Company is subject to various claims and lawsuits in the ordinary course of its business. In the opinion of management, the outcome of all claims and
lawsuits, which is not clearly determinable at the present time, is either adequately covered by insurance, or will not, in the aggregate, have a material adverse effect upon the financial position or the results of future operations of the Company.



Note 7. Segment Reporting



Summarized financial information for the Companys reportable segments
is set forth below. Expenses associated with the Companys corporate headquarters are fully allocated to the segments. Corporate staff support services that are attributable to the operating segments are allocated based on each segments
percentage of total revenues. General corporate expenses not specifically attributable to the operating segments are allocated to each reportable segment equally.





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MPW INDUSTRIAL SERVICES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(unaudited)



Commencing in the first quarter of fiscal 2005, the Company changed its internal reporting structure to better align the operations with customer needs.
As a result of this change, the Facility Maintenance and Support Services business unit, previously reported under the Industrial Cleaning and Facility Maintenance segment, is now separately reported. In addition, the Chemical Cleaning business
unit, previously reported under the Industrial Water Process Purification segment, is being reported in the Industrial Cleaning segment and the Recovery Technologies business unit, previously reported under the Industrial Cleaning segment, is being
reported in the Other category. The amounts presented for prior periods have been reclassified to reflect this change in segments.



|                                          |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                          |  | Three Months EndedDecember 31, |        |   | Six Months EndedDecember 31, |  
|                                          |  | 2004                           |        |   | 2003                         |   |        | 2004 |  |   | 2003   |  
|                                          |  | (in thousands)                 |       
|Revenue                                   |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Industrial Cleaning                       |  | $                              | 13,877 |   |                              | $ | 13,770 |      |  | $ | 27,755 |   |  | $ | 24,857 |  
|Facility Maintenance and Support Services |  |                                | 4,594  |   |                              |   | 3,987  |      |  |   | 8,902  |   |  |   | 8,069  |  
|Industrial Container Cleaning             |  |                                | 2,280  |   |                              |   | 2,813  |      |  |   | 4,857  |   |  |   | 5,566  |  
|Industrial Water Process Purification     |  |                                | 1,852  |   |                              |   | 1,625  |      |  |   | 3,591  |   |  |   | 3,354  |  
|Other                                     |  |                                | 432    |   |                              |   | 120    |      |  |   | 755    |   |  |   | 129    |  
|                                          |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total                                     |  | $                              | 23,035 |   |                              | $ | 22,315 |      |  | $ | 45,860 |   |  | $ | 41,975 |  
|                                          |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income (Loss) from Operations             |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Industrial Cleaning                       |  | $                              | (560   | ) |                              | $ | (918   | )    |  | $ | (1,062 | ) |  | $ | (4,068 | )
|Facility Maintenance and Support Services |  |                                | 653    |   |                              |   | 579    |      |  |   | 1,332  |   |  |   | 1,398  |  
|Industrial Container Cleaning             |  |                                | 251    |   |                              |   | 514    |      |  |   | 652    |   |  |   | 869    |  
|Industrial Water Process Purification     |  |                                | (151   | ) |                              |   | (100   | )    |  |   | (259   | ) |  |   | (222   | )
|Other                                     |  |                                | 18     |   |                              |   | (104   | )    |  |   | (6     | ) |  |   | (237   | )
|                                          |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total                                     |  | $                              | 211    |   |                              | $ | (29    | )    |  | $ | 657    |   |  | $ | (2,260 | )
|                                          |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  



|                                          |  |                  |        |              |   |       
|----------------------------------------- |  | ---------------- | ------ | ------------ | - | ------
|                                          |  | December 31,2004 |        | June 30,2004
|Total Assets                              |  |                  |        |              |   |       
|Industrial Cleaning                       |  | $                | 30,469 |              | $ | 29,359
|Facility Maintenance and Support Services |  |                  | 3,523  |              |   | 2,425 
|Industrial Container Cleaning             |  |                  | 11,558 |              |   | 12,329
|Industrial Water Process Purification     |  |                  | 9,274  |              |   | 9,336 
|Other (1)                                 |  |                  | 9,272  |              |   | 11,242
|                                          |  |                  |        |              |   |       
|Total                                     |  | $                | 64,096 |              | $ | 64,691
|                                          |  |                  |        |              |   |       

---

|(1) | Other consists of assets related to the Recovery Technologies business unit and corporate.
|--- | ------------------------------------------------------------------------------------------





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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations



Except for historical information, certain statements in this Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) are forward-looking. These forward-looking statements are based on current expectations that are subject to a number of uncertainties and risks and actual results may differ materially. The uncertainties and risks
include, but are not limited to, competitive and other market factors, customer purchasing behavior, general economic conditions and other facets of business operations as well as other risk factors identified in Investment
Considerations in the Companys Annual Report. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release the result of any revisions to these forward-looking statements that may be made to
reflect future events or circumstances.



The following
information should be read in conjunction with the Unaudited Consolidated Financial Statements and related notes included elsewhere in this Form 10-Q. The following information should also be read in conjunction with the Audited Consolidated
Financial Statements and related notes and MD&A for the year ended June 30, 2004 as contained in the Companys Annual Report on Form 10-K.



Overview



MPW is a leading provider of integrated, technically-based industrial cleaning and related facilities support services to a broad array of industries in
North America on a daily recurring basis, a project-by-project basis, as well as pursuant to longer-term arrangements. The Company has over 35 branch locations in 13 states and Canada and operates principally under four reportable segments:
Industrial Cleaning, Facility Maintenance and Support Services, Industrial Container Cleaning and Industrial Process Water Purification.



The results of our operations are mainly driven by two factors, customer demand and pricing. Many of our significant customers operate in industries, such
as the automotive, steel, manufacturing, pulp and paper and utility industries, which are subject to work stoppages and slowdowns and have historically shown sensitivity to recessions and other adverse conditions in the general economy. During the
second quarter of fiscal 2005, we saw improvement in customer demand with higher volumes of both base and outage work, primarily in the Industrial Cleaning segment. However, we also saw a decrease in volume in our Industrial Container Cleaning
segment due to a slow down in the auto industry. In addition, the industrial services industry is highly competitive and fragmented, resulting in continuous pressure to reduce prices. In some cases, this pressure has caused us to either reduce
pricing or lose business.



Our focus in the prior year and
going forward is to minimize the peaks and valleys associated with the variability in customer demand by increasing our cross-marketing efforts to offer our diversified services to all existing and new customers, seeking additional long-term
contractual arrangements and creating new service lines to complement our current offerings.



We also continue to look for additional opportunities where we can bring together complementary skill sets, manage our risk and effectively invest our capital. The following are recent examples of this activity:



| |  | On November 22, 2004, the Company purchased substantially all of the net assets of Hubbells Cleaning Systems, Inc. and Fairbanks Mobile Wash, Inc. (Hubbells and
Fairbanks) for $860,000 in cash. Hubbells and Fairbanks specialize in environmental cleaning and facility management services, low-pressure hydroblasting and industrial wet and dry vacuum services. The Hubbells and Fairbanks assets
are included in the Companys Industrial Cleaning segment as of November 22, 2004.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On December 27, 2004, the Company purchased substantially all of the net assets of the jacket water cleaning business of Blasters, Inc. (Blasters) for $130,000 in cash,
with a maximum of $200,000 of contingent consideration payable over a three-year period. Blasters provides jacket water cleaning services to gas transmission companies. The Blasters assets are included in the Companys Industrial Cleaning
segment as of December 27, 2004.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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##### Table of Contents

Results of Operations



The following table sets forth revenue and income (loss) from operations by segment for the three and six months ended December 31, 2004 and 2003.
Expenses associated with the Companys corporate headquarters are fully allocated to the segments. Corporate staff support services that are attributable to the operating segments are allocated based on each segments percentage of total
revenues. General corporate expenses not specifically attributable to the operating segments are allocated to each reportable segment equally.



Commencing in the first quarter of fiscal 2005, the Company changed its internal reporting structure to better align the operations with customer needs.
As a result of this change, the Facility Maintenance and Support Services business unit, previously reported under the Industrial Cleaning and Facility Maintenance segment, is now separately reported. In addition, the Chemical Cleaning business
unit, previously reported under the Industrial Water Process Purification segment, is being reported in the Industrial Cleaning segment and the Recovery Technologies business unit, previously reported under the Industrial Cleaning segment, is being
reported in the Other category. The amounts presented for prior periods have been reclassified to reflect this change in segments.



|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | ----- | -- | ------ | - | ------ | ----------- |  | ----- | ------ |  | - | ----------- | - |  | ------ | - |  | ----------- | ------ | - |  | ------ | --
|                                                  |  | Three Months Ended December 31, |        |   | Six Months Ended December 31, |      
|                                                  |  | 2004                            |        |   | 2003                          |       |    | 2004   |   |        | 2003        | 
|                                                  |  | Actual                          |        |   | % ofRevenue                   |       |    | Actual |   |        | % ofRevenue |  |       | Actual |  |   | % ofRevenue |   |  | Actual |   |  | % ofRevenue |       
|                                                  |  | (unaudited; in thousands)       |       
|Revenue                                           |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Industrial Cleaning                               |  | $                               | 13,877 |   |                               | 60.3  | %  |        | $ | 13,770 |             |  | 61.7  | %      |  | $ | 27,755      |   |  | 60.6   | % |  | $           | 24,857 |   |  | 59.2   | % 
|Facility Maintenance and Support Services         |  |                                 | 4,594  |   |                               | 19.9  |    |        |   | 3,987  |             |  | 17.9  |        |  |   | 8,902       |   |  | 19.4   |   |  |             | 8,069  |   |  | 19.2   |   
|Industrial Container Cleaning                     |  |                                 | 2,280  |   |                               | 9.9   |    |        |   | 2,813  |             |  | 12.6  |        |  |   | 4,857       |   |  | 10.6   |   |  |             | 5,566  |   |  | 13.3   |   
|Industrial Water Process Purification             |  |                                 | 1,852  |   |                               | 8.0   |    |        |   | 1,625  |             |  | 7.3   |        |  |   | 3,591       |   |  | 7.8    |   |  |             | 3,354  |   |  | 8.0    |   
|Other                                             |  |                                 | 432    |   |                               | 1.9   |    |        |   | 120    |             |  | 0.5   |        |  |   | 755         |   |  | 1.6    |   |  |             | 129    |   |  | 0.3    |   
|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Total revenue                                     |  |                                 | 23,035 |   |                               | 100.0 |    |        |   | 22,315 |             |  | 100.0 |        |  |   | 45,860      |   |  | 100.0  |   |  |             | 41,975 |   |  | 100.0  |   
|                                                  |  |                                 |        |   |                               |       |    |       
|Cost of services (including depreciation)         |  |                                 | 18,366 |   |                               | 79.7  |    |        |   | 18,090 |             |  | 81.1  |        |  |   | 36,404      |   |  | 79.4   |   |  |             | 35,107 |   |  | 83.6   |   
|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Gross profit                                      |  |                                 | 4,669  |   |                               | 20.3  |    |        |   | 4,225  |             |  | 18.9  |        |  |   | 9,456       |   |  | 20.6   |   |  |             | 6,868  |   |  | 16.4   |   
|                                                  |  |                                 |        |   |                               |       |    |       
|Selling, general and administrative expenses      |  |                                 | 4,458  |   |                               | 19.4  |    |        |   | 4,254  |             |  | 19.0  |        |  |   | 8,799       |   |  | 19.2   |   |  |             | 9,128  |   |  | 21.8   |   
|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Income (loss) from operations                     |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Industrial Cleaning                               |  |                                 | (560   | ) |                               | (4.0  | )  |        |   | (918   | )           |  | (6.7  | )      |  |   | (1,062      | ) |  | (3.8   | ) |  |             | (4,068 | ) |  | (16.4  | ) 
|Facility Maintenance and Support Services         |  |                                 | 653    |   |                               | 14.2  |    |        |   | 579    |             |  | 14.5  |        |  |   | 1,332       |   |  | 15.0   |   |  |             | 1,398  |   |  | 17.3   |   
|Industrial Container Cleaning                     |  |                                 | 251    |   |                               | 11.0  |    |        |   | 514    |             |  | 18.3  |        |  |   | 652         |   |  | 13.4   |   |  |             | 869    |   |  | 15.6   |   
|Industrial Water Process Purification             |  |                                 | (151   | ) |                               | (8.2  | )  |        |   | (100   | )           |  | (6.2  | )      |  |   | (259        | ) |  | (7.2   | ) |  |             | (222   | ) |  | (6.6   | ) 
|Other                                             |  |                                 | 18     |   |                               | 4.2   |    |        |   | (104   | )           |  | (86.7 | )      |  |   | (6          | ) |  | (0.8   | ) |  |             | (237   | ) |  | (183.7 | ) 
|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Total income (loss) from operations               |  |                                 | 211    |   |                               | 0.9   |    |        |   | (29    | )           |  | (0.1  | )      |  |   | 657         |   |  | 1.4    |   |  |             | (2,260 | ) |  | (5.4   | ) 
|                                                  |  |                                 |        |   |                               |       |    |       
|Interest expense, net                             |  |                                 | 263    |   |                               | 1.1   |    |        |   | 278    |             |  | 1.2   |        |  |   | 547         |   |  | 1.2    |   |  |             | 561    |   |  | 1.3    |   
|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Income (loss) from operations before income taxes |  |                                 | (52    | ) |                               | (0.2  | )  |        |   | (307   | )           |  | (1.3  | )      |  |   | 110         |   |  | 0.2    |   |  |             | (2,821 | ) |  | (6.7   | ) 
|Provision (benefit) for income taxes              |  |                                 | (29    | ) |                               | (0.1  | )  |        |   | 263    |             |  | 1.2   |        |  |   | 36          |   |  | 0.1    |   |  |             | (818   | ) |  | (1.9   | ) 
|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   
|Net income (loss)                                 |  | $                               | (23    | ) |                               | (0.1  | )% |        | $ | (570   | )           |  | (2.5  | )%     |  | $ | 74          |   |  | 0.1    | % |  | $           | (2,003 | ) |  | (4.8   | )%
|                                                  |  |                                 |        |   |                               |       |    |        |   |        |             |  |       |        |  |   |             |   |  |        |   |  |             |        |   |  |        |   



Three Months Ended December 31,
2004 Compared to Three Months Ended December 31, 2003



Revenues. Revenues increased 3.2% to $23.0 million in the second quarter of fiscal 2005 from $22.3 million in the same prior year period. The increase in revenues in the Industrial Cleaning and Facility Maintenance and Support
Services segments was primarily due to increased base load work from new and existing customers combined with new business from the Hubbells and Fairbanks acquisition. The decrease in revenues in the Industrial Container Cleaning segment was
primarily due to lower volumes due to slower sales in the automotive industry.



12



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##### Table of Contents

Cost of Services. Total cost of services was $18.4 million for the three months ended December 31,
2004 compared to $18.1 million for the three months ended December 31, 2003. Cost of services as a percentage of revenue decreased to 79.7% in the second quarter of fiscal 2005 from 81.1% in the prior year period. This decrease was primarily driven
by decreased operating supply costs due to better inventory utilization, lower workers compensation costs and lower depreciation, slightly offset by higher labor costs due to more labor intensive project work, combined with higher fuel costs
primarily in the Industrial Cleaning and Industrial Water Process Purification segments.



Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $4.5 million, or 19.4% as a percentage of revenue, in the second quarter of fiscal 2005 from $4.3 million,
or 19.0% as a percentage of revenue, in the same prior year period. The increase was primarily due to increased incentive compensation expense, administrative personnel costs and commissions, slightly offset by decreased professional fees.



Income (Loss) from Operations.Income (loss) from
operations was $0.2 million for the three months ended December 31, 2004 compared to $(29) thousand for the three months ended December 31, 2003. As a percentage of revenue, income from operations increased to 0.9% in the second quarter of fiscal
2005 from (0.1)% in the prior year period primarily related to the factors discussed above.



Provision(Benefit) for Income Taxes. The provision (benefit) for income taxes for the three months ended December 31, 2004 and 2003 reflects an effective annual income tax rate of 56% and 86%,
respectively. The income tax expense for the three months ended December 31, 2004 and 2003 reflects a reduction in the effective annual income tax rate from 40% to 33% and from 43% to 29%, respectively, due to changes in expected income levels. The
change in the tax rate did not significantly impact the net loss for the three months ended December 31, 2004. The change in the tax rate increased the net loss for the three months ended December 31, 2003 by approximately $0.4 million, or $0.03 per
share.



Six Months Ended December 31, 2004 Compared to Six Months Ended
December 31, 2003



Revenues. Revenues increased
9.3% to $45.9 million in the first six months of fiscal 2005 from $42.0 million in the same prior year period. The increase in revenues in the Industrial Cleaning segment was primarily the result of several non-recurring projects, increased base
load work from existing customers and new business from acquisitions. The increase in revenues in the Facility Maintenance and Support Services segment was primarily due to increased base load work from existing customers. The decrease in revenues
in the Industrial Container Cleaning segment was primarily due to lower volumes due to slower sales in the automotive industry.



Cost of Services. Total cost of services was $36.4 million for the six months ended December 31, 2004 compared to $35.1 million for the six months
ended December 31, 2003. Cost of services as a percentage of revenue decreased to 79.4% in the first six months of fiscal 2005 from 83.6% in the prior year period. This decrease was primarily driven by decreased operating supply costs due to better
management of inventory levels, less reliance on subcontract services, lower workers compensation costs and lower depreciation expense, slightly offset by higher fuel costs primarily in the Industrial Cleaning and Industrial Water Process
Purification segments.



Selling, General and Administrative
Expenses. Selling, general and administrative expenses decreased to $8.8 million, or 19.2% as a percentage of revenue, in the first six months of fiscal 2005 from $9.1 million, or 21.8% as a percentage of revenue, in the same prior year period.
The decrease was primarily due to decreased bad debt expense as the prior year included a $1.1 million charge related to a customer that filed bankruptcy, offset by increased incentive compensation expense, selling costs due to increased focus on
business development, repair and maintenance costs, various administrative costs and a favorable sales tax refund received in the prior year.



Income (Loss) from Operations.Income (loss) from operations was $0.7 million for the six months ended December 31, 2004 compared to $(2.3) million
for the six months ended December 31, 2003. As a percentage of revenue, income from operations increased to 1.4% in the first six months of fiscal 2005 from (5.4)% in the prior year period primarily related to the factors discussed above.



Provision(Benefit) for Income Taxes. The
provision (benefit) for income taxes for the six months ended December 31, 2004 and 2003 reflects an effective annual income tax rate of 33% and 29%, respectively.



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Related Party Transactions



The Company rents certain land, property, buildings and an aircraft from entities controlled by its principal shareholder
and Chief Executive Officer (CEO) under long-term lease agreements. The Company also periodically uses a ranch, which is owned by an entity controlled by the CEO, for business meetings, entertainment and overnight lodging of customers
and other business associates. Total expenses related to these leases and to the ranch were $0.5 million and $0.6 million for the three months ended December 31, 2004 and 2003, respectively. Total expenses related to these leases and to the ranch
were $1.0 million and $1.1 million for the six months ended December 31, 2004 and 2003, respectively. These transactions are approved and reviewed quarterly by the Companys Audit Committee. Based on such review, the Company believes that these
transactions are on terms at least as favorable as those that could be obtained from an independent third party.



The Company provides, from time to time, certain fabrication-type services to Pro-Kleen Industrial Services, Inc. (Pro-Kleen), a portable
sanitation services company wholly-owned by the Companys principal shareholder and Chief Executive Officer. The Company charges Pro-Kleen for the cost of services it renders plus a markup. The amount of such charges were approximately $17,000
and $21,000 for the three months ended December 31, 2004 and 2003, respectively, and approximately $112,000 and $27,000 for the six months ended December 31, 2004 and 2003, respectively. These charges are for the use of parts and supplies and the
use of certain of the Companys employees on certain projects as requested by Pro-Kleen. These charges are generally treated as an offset to supplies, repairs and maintenance or labor expense.



Commitments and Contingencies



In fiscal 1999, the Company entered into a guaranty of a lease agreement
related to a facility operated by its former subsidiary, Pentagon Technologies Group, Inc. (Pentagon). The lease, on which rent is approximately $30,000 per month, expires in October 2009. As of December 31, 2004, the Company believes
its maximum potential liability is $1.7 million, payable only if Pentagon fails to comply with the lease terms, and subject to many factors, including the landlords duty to mitigate, the validity of the guarantee and the like.



The Company is subject to various claims and lawsuits in the ordinary course
of its business. In the opinion of management, the outcome of all claims and lawsuits, which is not clearly determinable at the present time, is either adequately covered by insurance, or will not, in the aggregate, have a material adverse effect
upon the financial position or the results of future operations of the Company.



Liquidity and Capital Resources



During
the first six months of fiscal 2005, the Company generated $2.6 million in cash from operating activities, representing a $1.7 million increase from the same prior year period. The increase was primarily the result of higher earnings from
operations. Working capital of $9.2 million at December 31, 2004 decreased from $9.7 million at June 30, 2004 due to the use of cash for capital expenditures, acquisitions and quarterly payments of debt, slightly offset by increased accounts
payable.



The Companys primary investing and financing
activities during the six months of fiscal 2005 included spending $2.5 million on capital projects, $1.0 million on purchases of two businesses and paying $0.6 million on long-term debt. These transactions were funded by the cash flows from the
Companys operations.



The Companys short-term and
long-term liquidity needs are primarily served by a credit agreement with its principal banks (the Credit Facility). The Credit Facility provides the Company with $35.0 million of revolving credit availability for a three-year period and
a $6.0 million three-year term loan to be repaid in quarterly installments of $0.3 million. As of December 31, 2004, excluding outstanding borrowings and letters of credit, there was $13.1 million available under the Credit Facility. The Credit
Facility is subject to two one-year extensions by the banks at the request of the Company. Subsequent to December 31, 2004, the Credit Facilitys expiration was extended to January 1, 2006.



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The Credit Facility is secured by substantially all of the Companys assets and is available for
general corporate purposes, including working capital, capital expenditures and acquisitions. Borrowings under the Credit Facility currently bear interest at the Eurodollar market rate plus the applicable margin rate of 2.00%. The Company also pays
a commitment fee of 0.40% for unused portions of the Credit Facility. The interest rate is subject to change based on interest rate formulas tied to the ratio of consolidated funded debt to earnings before interest, taxes, depreciation and
amortization. Availability of borrowing is subject to the maintenance of a minimum level of tangible net worth, certain levels of debt service coverage and maintenance of a specific ratio of funded debt to earnings before interest, taxes,
depreciation and amortization. The Credit Facility also contains covenants that prohibit the payment of cash dividends. As of December 31, 2004, outstanding borrowings under the Credit Facility were $18.2 million.



The Company has two pay-fixed interest rate swap agreements as a hedge
against the interest rate risk associated with borrowing at a variable rate, which mature in June 2006. The objective of the hedge is to eliminate the variability of cash flows related to interest rate payments on the Companys variable rate
debt. As of December 31, 2004, the swap agreements have a notional amount of $9.0 million and $10.0 million and effectively lock in a portion of the Companys variable rate revolving credit liability at fixed rates of 2.61% and 2.80%,
respectively, plus the Companys applicable margin. These swap agreements are accounted for as cash flow hedges, as defined under SFAS No. 133, Accounting for Derivative and Hedging Activities. The Company adjusts the pay-fixed interest
rate swaps to current market values through other comprehensive income (loss). The Company anticipates that these contracts will continue to be effective. The gain/(loss) deferred in accumulated comprehensive income (loss) will be recognized
immediately in earnings if the contracts are no longer effective or the forecasted transactions are not expected to occur.



Critical Accounting Policies



Financial Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies (FR 60), suggests companies provide
additional disclosure and commentary on those accounting policies considered most critical. FR 60 considers an accounting policy to be critical if it is important to the Companys financial condition and results, and requires significant
judgment and estimates on the part of management in its application. The Companys critical accounting policies are described in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
within the Annual Report on Form 10-K for the year ended June 30, 2004. In addition, a summary of all of the Companys significant accounting policies, including critical accounting policies, is included in Note 1 of the Notes to Consolidated
Financial Statements in the Annual Report on Form 10-K for the year ended June 30, 2004. No changes were made to the Companys critical accounting policies during the six months ended December 31, 2004.



Inflation



The effects of inflation on the Companys operations were not significant during the periods presented in the
Consolidated Financial Statements.



Item 3.Quantitative and Qualitative Disclosures About Market Risk



The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered
into derivative financial instruments for trading purposes. The Companys primary market risk exposure relates to interest rate risk. At December 31, 2004, the balance on the Credit Facility was $18.2 million, which is subject to a variable
rate of interest based on the Eurodollar rate. The Company has hedged its exposure to changes in interest rates by fixing its rate of interest on $19.0 million of its variable rate credit facility through two interest rate swap agreements. Assuming
borrowings at December 31, 2004, any change in interest rates would not impact net interest expense.



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Item 4.Controls and Procedures



| | (a) | Evaluation of disclosure controls and procedures.
| | --- | -------------------------------------------------



The Companys chief executive officer and chief financial officer, after evaluating the effectiveness of the Companys disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q, have concluded that as of that date, the Companys disclosure
controls and procedures were effective and designed to ensure that material information relating to the Company and the Companys consolidated subsidiaries would be made known to them by others within those entities.



It should be noted that the design of any system of controls is based in
part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless how remote. In addition, a control system,
no matter how well conceived and operated, can provide only reasonable, not absolute, assurances that the objectives of the control system are met. Therefore, the Company does not expect these disclosure controls to prevent all error and fraud.



| | (b) | Changes in internal controls.
| | --- | -----------------------------



There were no significant changes in the Companys internal controls or in other factors that could significantly affect those controls during the
period covered by this quarterly report on Form 10-Q.



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PART II.  OTHER INFORMATION



Item 1.Legal Proceedings



Various legal actions arising in the ordinary course of business are pending against the Company. None of the litigation pending against the Company, individually or collectively, is expected to have a material
adverse effect on the Company.



Item 2.Unregistered Sales of Equity Securities and Use of Proceeds



None.



Item 3.Defaults Upon Senior Securities



Not Applicable.



Item 4.Submission of Matters to a Vote of Security Holders



| | (a) | The Company held its annual meeting of the shareholders on December 1, 2004.
| | --- | ----------------------------------------------------------------------------



| | (b) | Each of the following nominees for election to the Board of Directors of the Company were elected by the shareholders who were present or represented by proxy: Monte R. Black,
Alfred Friedman, Pete A. Klisares, Timothy A. Walsh and Luke Feck.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Of the 10,483,954 shares present in person or represented by proxy at the meeting, the number of shares voted for and the number of shares as to which the authority to vote in the
election was withheld, were as follows with respect to each director nominee:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                 |  |                                |  |                           
|---------------- |  | ------------------------------ |  | --------------------------
|Name             |  | Votes for Election of Director |  | Authority to Vote Withheld
|Monte R. Black   |  | 10,468,308                     |  | 15,646                    
|Alfred Friedman  |  | 10,468,308                     |  | 15,646                    
|Pete A. Klisares |  | 10,468,308                     |  | 15,646                    
|Timothy A. Walsh |  | 10,044,941                     |  | 439,013                   
|Luke Feck        |  | 10,468,308                     |  | 15,646                    



| | (d) | Not Applicable.
| | --- | ---------------



Item 5.Other Information



None.



Item 6.Exhibits



| | (e) | Exhibits.
| | --- | ---------



| | 3(a) | Amended and Restated Articles of Incorporation of the Company effective November 4, 1999 (filed as Exhibit 3(a) to the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by reference).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3(b) | Amended and Restated Code of Regulations of the Company effective November 4, 1999 (filed as Exhibit 3(b) to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10(a) | Fourth Amendment of Credit Agreement, dated February 11, 2005, among the Company and its subsidiaries, Bank One, NA and National City Bank
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------



| | 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | ---- | -----------------------------------------------------------------------



| | 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | ---- | -----------------------------------------------------------------------



| | 32.1 | Certification of Principal Executive Officer, Monte R. Black, Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 | Certification of Principal Financial Officer, Robert Valentine, Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                         |  |                                      |  |                                                 
|------------------------ |  | ------------------------------------ |  | ------------------------------------------------
|                         |  | MPW INDUSTRIAL SERVICES GROUP, INC.,
|                         |  | an Ohio corporation                 
|                         |  |                                     
|Dated: February 14, 2005 |  | By:                                  |  | /s/ Robert Valentine                            
|                         |  |                                      |  | Robert Valentine                                
|                         |  |                                      |  | Vice President, Chief Operating Officer,        
|                         |  |                                      |  | Chief Financial Officer, Secretary and Treasurer





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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                         
|3(a)           |  | Amended and Restated Articles of Incorporation of the Company effective November 4, 1999 (filed as Exhibit 3(a) to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).
|               | 
|3(b)           |  | Amended and Restated Code of Regulations of the Company effective November 4, 1999 (filed as Exhibit 3(b) to the Companys Quarterly Report on Form 10-Q for the quarter ended September
30, 1999, and incorporated herein by reference).      
|               | 
|10(a)          |  | Fourth Amendment of Credit Agreement, dated February 11, 2005, among the Company and its subsidiaries, Bank One, NA and National City Bank                                                                                                     
|               | 
|31.1           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|               | 
|31.2           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|               | 
|32.1           |  | Certification of Principal Executive Officer, Monte R. Black, Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                          
|               | 
|32.2           |  | Certification of Principal Financial Officer, Robert Valentine, Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                        





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