(FORTUNE Small Business) – To Daniel Morris, it will always be "the Corp." And like his father and grandfather before him, he never gave a thought to working anywhere else. But now as he stands inside the empty building, it is so quiet that he can almost make out the droning bellow of the auctioneer as it echoed inside these walls the last time he was here. That cry, Morris says now, was "the saddest noise I heard."

He's in a dim, stuffy, cavernous void--what used to be the Blackhawk Works in Rockton, Ill., formerly owned by the Beloit Corp., once the world's largest maker of paper-mill machinery. Morris, 49, worked at Beloit Corp. for 27 years--part of that time as foreman on the assembly line at Blackhawk. A sign says, "Caution: Hearing Protection Required," but the warning no longer applies. The only noises left are the buzzing of the factory lights high overhead (the few that are lit), and the sound of his own footsteps on the woodblock-paved factory floor.

In June 1999, Beloit Corp.'s owner--multibillion-dollar industrial-equipment manufacturer Harnischfeger of Milwaukee--declared bankruptcy. Within a year, Beloit Corp. had ceased operations. Its assets were divided and sold, its 500 remaining employees (down from a high of 10,000 worldwide) sent home for the last time. The death of Beloit Corp. ultimately deprived Beloit--a Wisconsin city of 35,000, straddling the Rock River on the Illinois border--of what for decades was its largest private employer, and helped send the local jobless rate soaring above 10%.

These days, the story of Beloit and its factory is achingly common across America, where there's been a marked surge recently in the number of cities that have endured the agony of losing a major plant. Just to name a few, there were Bellingham, Wash. (a Georgia-Pacific pulp mill); Bloomington, Ind. (an RCA TV factory that moved to Mexico, a GE refrigerator plant that slashed its work force); Sterling, Ill. (Northwestern Steel & Wire); and Osceola, Ark. (Fruit of the Loom). According to the National Association of Manufacturers, the current U.S. manufacturing recession--the fifth such slowdown since 1969--began in September 2000. Since then, industrial production has declined 5%, while factory employment is down 5% since July 2000. Put another way, more than a million people have lost their jobs. And those figures were compiled before the events of Sept. 11, which greatly increased the risk of the U.S. economy tumbling into a full-scale recession, if indeed it hasn't already (see Part One, page 18).

Such swift closings are most immediately--and obviously--a tragedy for those who lose their jobs. But beyond that, there's the rarely examined ripple effect: the entrepreneurs who suddenly find themselves scrambling to make sense of unexpected economic turmoil. As cobweb-covered and stiff in the hinges as it may be, the door that opens into the abandoned Blackhawk factory provides a peek at what many small businesses across America may find themselves up against in the wake of the attacks on the World Trade Center and the Pentagon. Examine the aftermath of the shutdown of Beloit Corp., and you see that it quickly splinters into a collection of local dramas played out on a small-business stage. The cast is made up of formerly contented employees who suddenly find themselves in thrilling new roles as accidental entrepreneurs; as well as merchants, suppliers, and business-to-business service providers, struggling with the sudden loss of their biggest customer.

The evidence is all over town: In the shadowy traces of the old Wagner's sign above an empty storefront on East Grand. "I'm not a guy who looks back over my shoulder," says John Schooff, who owned the office-supply store for almost 40 years. "I have no sour grapes. It happened, it happened! Frankly, it's a sad state of affairs." Also in the empty parking lot outside the Works ("Booze, Burgers & Boogie"), which shut down four months after Beloit Corp. did. "We just got done painting the whole inside," moans former owner Marvin Hoekman. And in the languid pace around Thoreson Shell, a car-repair shop across 4th Street from Beloit Corp.'s old downtown plant and headquarters. "You miss the people," says Matt Thoreson. "There is a lot less traffic than what it used to be."

Merchants suffer in public. Suppliers suffer behind the scenes, but the shock is just as great. "When you're going along and business is kicking, you'll never see that all of a sudden it's going over the edge," warns Pierce Barker III, vice president of Barker Rockford, a longtime supplier to Beloit Corp. "[Beloit Corp.] gave us no indication of what was happening on the financial side of the business. None."

Once a major supplier that was happily (yet overwhelmingly) dependent on Beloit Corp., Barker Rockford now finds itself just barely getting by. Only three years ago it was a $12 million company with 50 employees. This year the maker of fluid-power subsystems ("We're old-time heavy industry," Barker says proudly) hopes to hit $4 million, and now employs just 18 people. When Beloit Corp. closed, it took half of the company's business with it; the recession took the rest.

Barker Rockford was founded nearly 50 years ago by the current VP's father, Pierce Barker Jr., a former Illinois Small Businessman of the Year, whose stolid image hangs in the lobby. The father is still around, hoping to take part in the company's revival as it battles through tough times, but lately it's the son and the son-in-law, Steve Stutsman, who've been running the show.

On a walking tour of the shop floor, Barker comes to a halt in front of "the 811 and 812 jobs," two SUV-sized boxes teeming with hoses, gauges, and pumps and tagged with green Beloit Corp. nameplates. "That one is 100% complete," Barker says. "This one is 98%." Impressive, but they're not supposed to be here. Both were built as part of larger installations destined for Indonesia, part of a $600 million sale by Beloit Corp. to Asia Pulp & Paper. In 1997 the deal collapsed in a heap of cost overruns and unconsummated financing on the part of the buyer. Analysts believe it was the straw that broke Beloit Corp.'s back. But what of the havoc it wreaked on Beloit's network of suppliers? "We were so far into it. We had already made our investment," says Barker, who formerly served as chairman of Beloit's supplier council. "There was nothing we could have done to stop it."

Were there signs of trouble? Warnings they should have picked up on? Absolutely. Payments that used to arrive like clockwork within 30 days started stretching out toward 60 days, and that caused some concern. "We sat around many times and talked about it," says Barker, "and we all said, 'No, let's keep working with them, because we think it's going to work out.'" Adds the older Barker: "We said to ourselves, 'Are they or aren't they [going to file for Chapter 11 bankruptcy protection]?' We decided they were not going to go under. The bankruptcy came as a surprise."

The Barkers weren't the only ones to be blind-sided. The common denominator among factory closings everywhere is denial, right up to the end. Hope trumps reason.

Paul Van Marter, who runs a technical staffing agency in Beloit, got the shock of his life the day the bank called with the news that Beloit Corp.'s checks were bouncing. "We had just talked to them the week before," he says, still incredulous. " The top management. Everything was fine." Mark Sorenson, an engineer and fourth-generation Beloit Corp. employee (his great-grandfather was a foundryman, his grandfather an estimator, his father an engineer), had a front-row seat as the whole thing was unraveling but says he "always believed that a white knight was going to ride in at the last minute and buy the company"; no matter what, he assumed "there would always be a Beloit Corp." Even Elbert Neese Jr., scion of the Beloit family that owned Beloit Corp. for three generations before the sale to Harnischfeger in 1986 (which he says he vigorously opposed), insists, "I had no idea it was coming."

What's more, people were putting their money where their illusions were throughout the final days, snapping up Harnischfeger stock at three dollars a share, two dollars, a buck-fifty (it peaked at $50 in 1997). Van Marter invested $10,000 and lost it all. "I had that much faith in them," he says. The older Barker "bought some at two bucks and sold it at a buck and a half." Stutsman got in at 1 5/16. "I kept it to the end," he says.

But the loss of the money they invested in Beloit Corp. has meant comparatively little to the Barkers compared with how they've struggled since losing their biggest customer. They're doing work now for Metso, the big Finnish paper-machinery manufacturer that bought some of Beloit Corp.'s assets and maintains an office in Beloit Corp.'s old headquarters building; and for Paperchine, a new company that has picked up pieces of Beloit Corp.'s business. But neither is giving Barker Rockford the big capital orders that sustained it for so many years. "In both cases, it's rebuilds or replacements," says the younger Barker. "It's not brand-new equipment."

Barker has never done the math that would tell him exactly how big a hit his company took when Beloit Corp. went down. A final tally would include orders, finished and shipped, for which Barker Rockford was left holding the receivables; plus unfinished orders; plus orders all ready to go that have been gathering dust for more than two years on Barker Rockford's shop floor, unsold and probably unsellable. "Steve and Dad know the numbers," Barker says. "I don't even want to look at them." But he knows, more or less, of course he knows. "The number I have in mind," he says tightly, "is a million-six."

Smaller suppliers have an obvious advantage over the Barker Rockfords of this world: They can move more quickly, act more dramatically, in response to crisis. They can match a big loss with a bigger gamble--if they want to. "I'm not sure this was the smartest thing to do," confides John Jensen. But it's too late to turn back now. "All we're doing is taking a gamble," adds partner Steve Meade. "Got to gamble on something. Can't sit here and wave your arms and starve to death."

The co-owners of Beloit Special Machining, a company whose original business both partners describe, speaking in unison, as "making parts for Beloit Corp.," were left holding $240,000 in worthless receivables when the customer that had represented 80% of their business disappeared. Meade, whose desktop is still outfitted with a Beloit Corp. calendar blotter, remembers hearing from a friend that the grand old company might go under. "I said, 'Can't happen! It's a 150-year-old company,'" he recalls. "'How can it go bankrupt?'"

Given the accuracy of his prognosticating, maybe he should be more worried about the move he and his partner have made since Beloit Corp. turned their $4.5 million company into what is now a barely $2 million business. Boldly--or maybe just foolishly, it's not yet clear--the two have undertaken a million-dollar expansion of their physical plant, part of a daring plan to position themselves to compete for new business. In the past, Beloit Special thrived making smaller parts for big manufacturers like Beloit Corp. Now it's hoping to pick up more business doing full assemblies for a different set of customers, and for that it needs more room and expensive new machines.

"We're basically going to double our size," says Meade, leading the way through the crowded plant and out the back door into what used to be a parking lot, now freshly excavated. If all goes well, he says, Beloit Special will have a finished shell on this site with a roof overhead by the time the snow hits. At the moment, however, there's not much to see, except for that one wall over there. A massive concrete retaining wall, carved into the side of a hill, that wound up costing $100,000. A friend who's heard them complain calls it "the wailing wall."

In truth, the company owners could be complaining much more than they do. The past two years have been an ongoing struggle. They've picked up a few new customers, but are troubled by the ailing economy and stiff new competition from Canada, for which they blame nafta. "All of a sudden the thing we hear is, 'We can get it done in other countries cheaper than we can do it in Beloit, Wis.,' " says Meade. Life's hardly the same. Before, they needed two full drawers in the filing cabinet just for pending orders; now half a drawer is plenty.

To top it all off, one day last spring they got a letter from Harnischfeger's lawyers demanding the return of $154,000 in so-called "preferential payments." It turns out that under federal law, any payments you receive from a customer within 90 days of that customer's declaring bankruptcy is money you may not be allowed to keep. (As screwy as it sounds, the law's intent is to make sure all creditors get equal treatment. The money that's collected goes back into the pot, at which point you're invited to get in line with everybody else and hope for the best.) All over town former Beloit Corp. suppliers were discovering frightening liabilities they never knew they had. And for most of them, as for Beloit Special, it was a double whammy: the money they now owed Beloit Corp., plus the money Beloit Corp. owed them. Eventually Meade and Jensen found a lawyer who managed to whittle the amount down to under $100,000--on a few technicalities. They ended up agreeing to pay $50,000.

The hits just keep coming, reminding them from time to time of an option they once considered: liquidation. Meade is 49, Jensen, 53. "I ain't going to say I didn't think about it a little bit," says Jensen. "But heck, I do have brothers working here. I got nephews working here."

"And the community," says Meade. "There aren't any jobs." They decided to keep going, Jensen says, because they could change that. Or so they hoped then--and still hope now.

In a situation like this, it's not surprising that entrepreneurs appear to pick up the pieces. What is surprising, though, is who these entrepreneurs often turn out to be: the same folks who were there all along. "I loved the job I had at Beloit Corp.," says Tom Rogers, an engineer who worked 18 years at the Corp. and expected to be there until the day he retired. "I remember sitting there one day saying, 'I got the best damn job in the world.'" Gene Neill, a 27-year veteran, felt the same way. Though "in a lot of ways," he now says, "I think we're probably a little better off than we were at Beloit Corp. [Losing our jobs] might have been the best thing that ever happened to us."

He's not just rationalizing; he's probably right. Within days after they became former Beloit Corp. employees, the two founded GT Flow Technology. Working side by side in what amounts to a large garage in nearby Roscoe, Ill., they manufacture just one product: a clear plastic component called a headbox sheet that is both critical to the paper-making process and--this is the beautiful part, from a sales standpoint--certain to need replacing every six months. After Beloit Corp. cut them loose, reasons Neill, "we had two choices. We could go out and find other jobs with big companies, or we could try this."

The pair figured they needed about $80,000 to finance the launch. They went to the bank but were turned down on the basis of their track record. (They had no track record.) The two men might have pooled their severance checks, but in the end Harnischfeger denied severance to all but a handful of top executives. (That remains a source of bitterness among former Beloit Corp. employees. The state of Wisconsin has since brought suit against Harnischfeger on behalf of 397 of them, seeking $4.89 million in severance plus double penalties.) So they mortgaged their houses, which was hairy but not for long. Sales for the first nine months were $360,000, enough to pay back everything they owed and even put a few dollars in their pockets. This year they'll top half a million, more than enough to persuade them that going into business for themselves was the right thing to do.

It's fair to say many folks at Paperchine are feeling the same way these days, possibly all 76 of them. The entire company--all four founders, the 25 engineers who came along, the plant workers, the sales staff, even Gloria Marino, who answers the phone--is made up of former Beloit Corp. employees. Most of them are doing pretty much the same work they did at Beloit Corp., only with a different logo on their shirts. And they seem to be enjoying themselves more.

Ron Radke, a production worker who just turned 60, worked 37 years at the Corp. He was out of work three weeks when he was recruited by Paperchine. It's a "different atmosphere," he says. "You're more on your own. They give you a job, and you do it right." The pay is "real good," plus, with seven shares of company stock--one he was given along with every other employee, and six he bought for $1,000 apiece--he's a part owner of the company.

So, how did Paperchine leap from a standing start to a projected $10 million in sales this year? By the time Beloit Corp. finally went out of business, 60% of the paper equipment in North America carried a Beloit Corp. nameplate. Most of that machinery is still in the field, still producing (as it will be for decades), and therefore constantly in need of parts, maintenance, and repairs. From that opportunity, Paperchine was born.

Other ventures were born too-- shaped from the experience and expertise that their founders had acquired at the Corp. That's a hopeful sign.

That activity can't compensate for all the genuine hardship that people and companies endure when the center of their economic universe collapses. But it shows that when a factory shuts down--sadly, a phenomenon that more and more communities are bound to experience--the minds around it open up. That's why Beloit today is teeming with consultants who are selling the knowledge they acquired at Beloit Corp. And it's why the small companies that once fed off the Corp. aren't, for the most part, content to preside over their own deterioration. Whatever drove those entrepreneurs to start companies in the first place now drives them to take risks to ensure their future prosperity.

In the end, the evidence of that search is what's so heartening to see in a place like Beloit: As wounded as they may be by factory closings and layoffs, entrepreneurs don't stop moving. They may be confused about what steps to take (see Business America, page 20)--or they may even take the entirely wrong step--but they keep at it. They try new strategies, start new businesses, and even embark on new careers.

Which brings us back to Daniel Morris, the Beloit Corp. veteran. After spending nearly three decades at the company, he's now Paperchine's vice president of operations. He's also one of its founders. And the sad sound of the auctioneer's bellow? For him--and for many others--it's finally starting to fade.