UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION




Washington,
D. C. 20549




FORM
10-K




x           Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For
the fiscal year ended December 31, 2007




o           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934






Commission
file number: 000-52380




MISCOR
GROUP, LTD.


(Exact
name of registrant as specified in its charter)







Indiana
            20-0995245(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





1125
S. Walnut St.


South
Bend, Indiana 46619


(Address
of principal executive offices/zip code)




Registrant’s
telephone number, including area code:   (574)
234-8131




Securities
      registered pursuant to Section 12(g) of the Act:Common
      Stock, no par value







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act.
            
            o Yes   x NoIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act.
            
            o Yes   x NoIndicate
      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.
            
            x Yes   o NoIndicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§ 229.405 of
      this chapter) is not contained herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K.
            
            o












Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer  o
            
            Accelerated
      filer  oNon-accelerated
      filer  o (Do not check if a smaller
      reporting company)
            
            Smaller
      reporting company  x







Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).
            
            o Yes   x No




The
aggregate market value of the registrant’s voting common stock held by
non-affiliates, computed by reference to the average bid and asked price of such
common equity as of June 29, 2007, which was the last business day of the
registrant’s most recently completed second fiscal quarter, was $20,217,473. The
registrant does not have any non-voting common equity securities.




As
of March 24, 2008, there were 11,710,376 shares outstanding of the
registrant’s Common Stock, without par value.




DOCUMENTS
INCORPORATED BY REFERENCE




Certain
information in the registrant’s definitive proxy statement for its 2008 Annual
Meeting of Shareholders, which the registrant will file pursuant to Regulation
14A not later than 120 days after the end of the fiscal year, is incorporated by
reference in Part III of this Annual Report on Form 10-K.










-
INDEX –




PAGEPART
      IItem
      1.
            Business
            1Item
      1A.
            Risk
      Factors
            9Item
      1B.
            Unresolved
      Staff Comments
            9Item
      2.
            Properties
            9Item
      3.
            Legal
      Proceedings
            10Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            10PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            11Item
      6.
            Selected
      Financial Data
            13Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
            13Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            24Item
      8.
            Financial
      Statements and Supplementary DataReport
      of Independent Registered Public Accounting Firm
            25Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            26Consolidated
      Statements of Operations for the Years Ended December 31, 2007 and
      2006
            27Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2007
      and 2006
            28Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and
      2006
            29Notes
      to Consolidated Financial Statements
            30


i





Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            68Item
      9A(T).
            Controls
      and Procedures
            68Item
      9B.
            Other
      Information
            69PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            70Item
      11.
            Executive
      Compensation
            70Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            70Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            70Item
      14.
            Principal
      Accounting Fees and Services
            70PART
      IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            71SIGNATURES
            80


ii





PART
I


ITEM
      1.  BUSINESS




Overview




We
provide electrical and mechanical solutions to industrial, commercial and
institutional customers primarily in the United States. We currently operate in
two business segments:




·
            Repair,
      Remanufacturing and Manufacturing – We provide maintenance and repair
      services to the electric motor industry, repairing, manufacturing, and
      remanufacturing industrial lifting magnets for the steel and scrap
      industries and power assemblies, engine parts, and other components
      related to large diesel engines for the rail, utilities, and offshore
      drilling industries.




·
            Construction
      and Engineering Services – We provide a wide range of electrical and
      mechanical contracting services, mainly to industrial, commercial, and
      institutional customers.




Historically
we operated in three business segments: (1) industrial services, (2) diesel
engine components and (3) electrical contracting services.  However,
in an effort to provide industrial solutions across our diverse end markets and
better serve our customers, effective January 1, 2007, we realigned our business
segments into the two segments described above. The re-alignment clarified our
business model to current and potential customers. The former diesel engine
components segment and substantially all of the former industrial services
segment were combined into the repair, remanufacturing and manufacturing
segment. The former electrical contracting segment and one location of the
former industrial services segment involved in the repair of electrical power
distribution systems within industrial plants and commercial facilities were
combined to form the construction and engineering services segment.




To
supplement our service offerings, we also provide on-site maintenance services
and custom and standardized industrial maintenance training
programs.




We began
operations in July 2000 with the purchase of the operating assets of an electric
motor and magnet shop in South Bend, Indiana. Through acquisitions and internal
growth, we have expanded the nature of our operations as well as our geographic
presence, which now includes additional locations in Indiana and locations in
Alabama, Maryland, New York, Ohio, Washington and West Virginia. In April 2004,
we reorganized our operations into a holding company structure, forming
Magnetech Integrated Services Corp. to act as the parent company. In September
2005, we changed our name from Magnetech Integrated Services Corp. to MISCOR
Group, Ltd.




We
developed our industrial services business to take advantage of certain market
trends that we have observed. First is a shift among industrial companies toward
outsourcing maintenance and other non-core services. These companies are
increasing their use of outside contractors to control their internal labor and
insurance costs and to eliminate the need for maintaining expensive,
under-utilized equipment. Second, the mounting costs of training skilled
employees, maintaining a satisfactory safety record and complying with rapidly
changing government regulations are causing many industrial companies to seek
experienced outsourcing providers. Third, many industrial companies prefer to
simplify vendor management by working with larger providers that have broad
geographic coverage. In response to these trends, we have made certain strategic
business acquisitions to consolidate regionally fragmented service




1


providers
in the Midwest, resulting in significant revenue growth and geographic expansion
of this segment of our business.




We
organized our electrical contracting business in 2001 to take advantage of our
expertise in electrical contracting. In November 2004, we expanded the
geographical presence of our electrical contracting business by acquiring
certain operating assets of Thomson Electric based in Elkhart, Indiana. We
provide a wide range of electrical contracting services, mainly to industrial,
commercial and institutional customers in northern Indiana and southwest
Michigan.




In March
2005, we began our diesel engine components business by acquiring certain assets
related to the diesel engine operations of Hatch & Kirk, Inc. located in
Hagerstown, Maryland and Weston, West Virginia. In June 2005, we opened a sales
office in Seattle, Washington. In this segment of our business, we manufacture,
remanufacture, repair and engineer power assemblies, engine parts and other
components related to large diesel engines for the rail, utilities, marine and
offshore drilling industries.




In May
2006, we acquired substantially all of the assets of E.T. Smith Services of
Alabama, Inc. (“Smith
Alabama”). Smith Alabama provided electric motor repair, preventative
maintenance and refurbishment for industrial companies such as utilities and
manufacturers. The operating results of this business are included with the
repair, remanufacturing and manufacturing segment.




In
October 2007, we acquired 100% of the outstanding shares of Ideal Consolidated,
Inc. (“Ideal”). Ideal is
a provider of mechanical contracting services, including plumbing, HVAC and
industrial piping and provides maintenance services for mechanical
systems.  The financial results of Ideal are included in the
construction and engineering services segment.




In
November 2007, our wholly-owned subsidiary, Magnetech Industrial Services, Inc.
(“Magnetech”), acquired
all of the issued and outstanding units of membership interest in 3-D Service,
Ltd. (“3-D”). 3-D is
engaged in the business of selling, repairing, remanufacturing, and maintaining
industrial electrical and mechanical equipment. The financial results of 3-D are
included in the repair, remanufacturing and manufacturing segment.




In
January 2008, we acquired 100% of the outstanding shares of American Motive
Power, Inc. (“AMP”). AMP
is engaged in the business of repairing, remanufacturing, and rebuilding
locomotives and locomotive engines as well as providing related goods and
services to the railroad industry.  Financial results will be included
in the repair, remanufacturing and manufacturing segment.




Business
Strategy




Our
objective is to be a leading provider of integrated mechanical and electrical
products and services to industry. To achieve that, we intend to grow our
existing business segments and add complimentary businesses, both through
acquisitions and internal sales growth.




Employees




At
February 24, 2008, we had 670 full-time employees, of which 147 were salaried
and 523 were hourly. At that date, approximately 32% of our employees were
covered by collective bargaining agreements with several trade unions. All of
the union employees are currently working under collective bargaining
agreements. We believe our relations with our employees to be good. Two
collective bargaining agreements representing 21% of our employees expire in
2008.




2


Segment
Information




Through
December 31, 2006, we operated in three reportable revenue generating segments:
industrial services; electrical contracting services; and diesel engine
components. See Note O to our consolidated financial statements beginning at
page 62 for a summary of the financial information concerning our three former
reportable segments as of and for the two years ended December 31, 2007 and
2006. As noted earlier in this report, effective January 1, 2007, we combined
our industrial services, diesel engine components and electrical contracting
services segments into (1) the repair, remanufacturing and manufacturing segment
and (2) the construction and engineering services segment. We have not restated
the financial information for our former three business segments for earlier
periods. The following table summarizes financial information concerning our two
new reportable segments as of and for the years ended December 31, 2007 and 2006
(amounts in thousands). Corporate administrative and support services are not
allocated to the segments but are presented separately.







Year
      Ended December 31,2007
            
            
            2006Revenues:Repair, remanufacturing and
      manufacturing
            
            $
            51,734
            
            
            $
            43,220Construction and engineering
      services
            
            
            21,634
            
            
            
            17,800Corporate
            
            
            -0-
            
            
            
            -0-Elimination
            
            
            (118
            )
            
            
            (266
            )Consolidated
            
            $
            73,250
            
            
            $
            60,574Gross
      Profit:Repair, remanufacturing and
      manufacturing
            
            $
            9,631
            
            
            $
            8,444Construction and engineering
      services
            
            
            2,653
            
            
            
            2,782Corporate
            
            
            -0-
            
            
            
            -0-Elimination
            
            
            (118
            )
            
            
            (79
            )Consolidated
            
            $
            12,166
            
            
            $
            11,147Net
      income (loss):Repair, remanufacturing and
      manufacturing
            
            $
            3,332
            
            
            $
            2,295Construction and engineering
      services
            
            
            903
            
            
            
            1,146Corporate
            
            
            (6,258
            )
            
            
            (6,102
            )Consolidated
            
            $
            (2,023
            )
            
            $
            (2,661
            )




As
      of December 31,2007
              
              
              2006Total
      assets:Repair,
      remanufacturing and manufacturing
              
              $
              69,017
              
              
              $
              22,058Construction
      and engineering services
              
              
              10,677
              
              
              
              5,786Corporate
              
              
              3,505
              
              
              
              3,023Elimination
              
              
              (23,652
              )
              
              
              -0-Consolidated
              
              $
              59,547
              
              
              $
              30,867




The
following table summarizes the financial information concerning our three former
reportable segments as of and for the years ended December 31, 2007 and 2006
(amounts in thousands).






3




Year
      Ended December 31,2007
            
            
            2006Revenues:Industrial
      services
            
            $
            38,528
            
            
            $
            37,228Electrical
      contracting
            
            
            21,634
            
            
            
            14,120Diesel
      engine components
            
            
            13,206
            
            
            
            9,672Corporate
            
            
            -0-
            
            
            
            -0-Elimination
            
            
            (118
            )
            
            
            (266
            )Consolidated
            
            $
            73,250
            
            
            $
            60,754Gross
      Profit:Industrial
      services
            
            $
            6,455
            
            
            $
            7,977Electrical
      contracting
            
            
            2,653
            
            
            
            1,942Diesel
      engine components
            
            
            3,176
            
            
            
            1,307Corporate
            
            
            -0-
            
            
            
            -0-Elimination
            
            
            (118
            )
            
            
            (79
            )Consolidated
            
            $
            12,166
            
            
            $
            11,147Net
      Income (loss):Industrial
      services
            
            $
            1,481
            
            
            $
            2,661Electrical
      contracting
            
            
            903
            
            
            
            868Diesel
      engine components
            
            
            1,851
            
            
            
            (88
            )Corporate
            
            
            (6,258
            )
            
            
            (6,102
            )Consolidated
            
            $
            (2,023
            )
            
            $
            (2,661
            )






As
      of December 31,2007
            
            
            2006Total
      assets:Industrial
      services
            
            $
            63,138
            
            
            $
            17,250Electrical
      contracting
            
            
            10,677
            
            
            
            5,352Diesel
      engine components
            
            
            5,879
            
            
            
            5,242Corporate
            
            
            3,505
            
            
            
            3,023Elimination
            
            
            (23,652
            )
            
            
            -0-Consolidated
            
            $
            59,547
            
            
            $
            30,867





Following
is additional information regarding our two new business segments.




Repair,
Remanufacturing and Manufacturing Segment




We have
organized our repair, remanufacturing and manufacturing segment into three
primary business groups: the Motor Group; the Magnet Group; Rail Services Group.
To supplement the services provided by these groups, we provide on-site
equipment maintenance and education and training services.




Principal
Products, Services, Markets and Distribution




Our Motor
Group provides maintenance and repair services for both alternating current (AC)
and direct current (DC) electric motors. Our customers operate in a broad range
of major industries, including steel, railroad, marine, petrochemical, pulp and
paper, wind energy, mining, automotive and power generation.




4


Our
Magnet Group repairs and manufactures industrial lifting magnets. Our customers
include scrap yards, steel mills and steel processing centers. Based on industry
experience and market information, we believe that we are one of the largest
magnet repair operations in the United States and one of the top three
manufacturers of industrial lifting magnets in the United States based on
revenue for 2007.




Our Rail
Services Group manufactures, remanufactures, repairs and engineers power
assemblies, engine parts and other components related to large diesel engines.
These engines typically are used to power railroad locomotives and marine
engines and as back-up power supplies in power and utility plants and in the oil
and gas industries. We provide an integrated approach to help our customers
minimize disruptions to their operations by applying state-of-the-art technology
and up-to-date knowledge and education. Through both proactive programs and
emergency evaluations, our skilled professionals test, analyze, maintain, repair
and replace power distribution equipment to maximize reliable and safe
operation.




The
repair, remanufacturing and manufacturing segment accounted for approximately
71% of total consolidated revenues for the years ended December 31, 2007 and
2006, respectively.




Hatch
& Kirk Acquisition




In March
2005, we acquired certain assets related to the diesel engine operations of
Hatch & Kirk, Inc. located in Hagerstown, Maryland and Weston, West
Virginia. This acquisition launched the Rail Services Group and the diesel
engine components business of our repair, remanufacturing and manufacturing
segment, which is conducted through HK Engine Components, LLC.




Smith
Alabama Acquisition




In May
2006, we acquired substantially all of the assets of Smith
Alabama.  Smith Alabama provided electric motor repair, preventive
maintenance and refurbishment for industrial companies such as utilities and
manufacturers.




3-D
Acquisition




In
November 2007, our wholly-owned subsidiary, Magnetech, acquired all of the
issued and outstanding units of membership interest in 3-D. 3-D is engaged in
the business of selling, repairing, remanufacturing, and maintaining industrial
electrical and mechanical equipment primarily in the steel, utilities and wind
energy industries.




AMP
Acquisition




In
January 2008, we acquired 100% of the outstanding shares of AMP. AMP is engaged
in the business of repairing, remanufacturing and rebuilding locomotives and
locomotive engines as well as providing related goods and services to the
railroad industry.




Marketing
and Customers




The
products and services comprising our repair, remanufacturing and manufacturing
segment are marketed principally by personnel based at our nine locations and
independent sales representatives. We believe that these locations are situated
to facilitate timely response to our customers’ needs, which is an important
feature of our services.




At
December 31, 2007, we had approximately 500 customers in this segment with
active accounts. Our largest customers include International Steel Group, CSX
Transportation, USS Corporation, Mittal Steel, Kansas City Southern Railroad,
and Beta Steel. Our diesel engine components customers include companies that
use, manufacture or distribute diesel engines and related components for the
rail, utilities, maritime and offshore drilling industries. No customer of our
repair, remanufacturing and manufacturing




5




segment
accounted for 10% or more of our consolidated revenues during the years ended
December 31, 2007 or 2006.




Business
Strategy




We seek
to continue to strengthen and broaden our position as a provider of outsourced
maintenance and repair, industrial education and training and complimentary
services to the industries we serve throughout the United States.  In
addition, our strategy is to expand into other geographic markets throughout the
world, particularly with respect to the remanufacture and repair of Electro
Motive Diesel power assemblies, and develop power assembly solutions for
additional engine manufacturers. To achieve these objectives, we are pursuing
the following business strategies:




·
            Strengthen
      Competitive Position in Growing Market for Outsourcing Industrial
      Services. We believe that participants in the steel, power generation and
      other industries we serve, in an effort to remain competitive, will
      increasingly rely on independent contractors to provide maintenance and
      repair services. We intend to expand our capabilities to provide our
      customers an outsourcing solution for their maintenance and repair
      services and other industrial
needs.




·
            Cross-Sell
      Services.  The sales staff, operations managers and business
      development personnel of each of our business segments are familiar with
      the capabilities of the other segment. We train our personnel to identify
      cross-selling opportunities and integrate the breadth of our services into
      each bid proposal. This provides the customer a more comprehensive
      portfolio of services and provides us with the opportunity to increase our
      sales per customer.




·
            Acquire
      Complimentary Service Businesses.  We evaluate, on an ongoing
      basis, potential acquisitions of complimentary businesses in an effort to
      further strengthen and broaden our service offerings, and to expand our
      customer base and geographic
presence.




Raw
Materials




The
principal raw materials used in our Motor and Magnet Groups are steel, aluminum
and various flexible materials. The principal raw materials used in our diesel
engine components business are scrap and raw steel, aluminum, alloys and molds.
Certain raw materials are obtained from a number of commercial sources at
prevailing prices and we do not depend on any single supplier for any
substantial portion of raw materials. However, it is sometimes difficult to
obtain adequate quantities of scrap steel and alloys at competitive prices. The
cost to deliver scrap steel can limit the geographic areas from which we can
obtain this material. We attempt to minimize this risk by stocking adequate
levels of key components. However, we may encounter problems at times in
obtaining the raw materials necessary to conduct our diesel engine components
business.




Competition




The level
of competition we face varies depending on the business group involved. With
respect to our Motor Group, we believe that the largest single supplier of new
motors is General Electric Company, which also operates a national network of
motor repair centers. In addition to General Electric, there are a number of
other regional and local suppliers throughout the United States.




In the
magnet market, there are four other principal suppliers of magnets based in the
United States: Walker Magnetics Group; Ohio Magnetics, Inc.; Winkle Magnetics;
and City Machine Technologies, Inc. We believe that we are one of the largest
magnet repair operations in the United States, and one of the top three
manufacturers of industrial lifting magnets, based on revenues for
2007.




6


Our two
largest competitors in the diesel engine components market are General Electric
and the former Electro Motive Diesel division of General Motors Corporation. We
believe we are the largest supplier of diesel engine components in the United
States that is not an original equipment manufacturer, based on revenues for the
year ended December 31, 2007. There are a number of smaller
competitors.




Participants
in our industry compete primarily on the basis of service, quality, timeliness
and price. In general, competition stems from other outside service contractors
and customers’ in-house maintenance departments. We believe we have a
competitive advantage over most service contractors due to the quality, training
and experience of our technicians, our regional service capability and the broad
range of services we provide, as well as the technical support and manufacturing
capabilities supporting our service network.




Foreign
Sales




Our
diesel engine components business derives a significant portion of its revenues
from foreign customers. Foreign sales for the years ended December 31, 2007 and
2006 were $3.7 million or 7%, and $2.7 million or 6% of the total revenues of
this segment, respectively. Revenues from sales to foreign customers are
denominated in U.S. dollars.




Backlog




At
December 31, 2007, the backlog of our repair, remanufacturing and manufacturing
segment was approximately $9.9 million compared to $4.4 million at December 31,
2006. The increase is due to the acquisition of 3-D on November 30, 2007 and an
increase in the backlog for diesel engine components. Backlog represents the
amount of revenue that we expect to realize from work to be performed on
uncompleted contracts, work in progress, time and material work orders, and from
contractual agreements upon which work has not commenced. Contracts included in
backlog may have provisions which permit cancellation or delay in their
performance by the customer, and there can be no assurance that any work orders
included in backlog will not be modified, canceled or delayed.




Working
Capital




With
respect to our Motor and Magnet Groups, our customers typically compensate us
for services performed upon completion of a given project or on an agreed upon
progress payment schedule for larger projects. In our diesel engine components
group, our customers typically pay within 30 to 60 days from the date of
shipment, while some foreign customers typically pay within 90 days. Therefore,
we must have sufficient working capital to permit us to undertake our services
and to carry the appropriate inventory level of spare parts and equipment
throughout the duration of a project. We believe that our present working
capital position, combined with forecasted cash flows and borrowing capacity as
well as the net proceeds from the recent private offerings of our securities,
will be sufficient to meet our working capital requirements and contractual
obligations for at least the next 12 months. For further discussion of our
borrowing facilities, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources” and Note
F of the notes to our consolidated financial statements.




Seasonality
and Quarterly Fluctuations




Our
revenues from the Motor and Magnet Groups may be affected by the timing of
scheduled outages at our industrial customers’ facilities and by weather
conditions with respect to projects conducted outdoors, but the effects of
seasonality on revenues in our diesel engine components business are
insignificant. The effects of seasonality may be offset by the timing of large
individual contracts, particularly if all or a substantial portion of the
contracts fall within a one- to two-quarter period.




7


Accordingly,
our quarterly results may fluctuate and the results of one fiscal quarter may
not be representative of the results of any other quarter or of the full fiscal
year.




Construction
and Engineering Services Segment




Principal
Products, Services, Markets and Distribution




We
provide electrical and mechanical contracting services to a variety of customers
throughout northern Indiana and southwest Michigan on a contract and fee basis.
These services include maintenance and repair services primarily for industrial,
commercial and institutional operations, and engineering and repair services for
electrical power distribution systems within industrial and commercial
facilities. The segment’s services are intended to assist our customers in
avoiding critical equipment or system downtime.




In
October 2007, we acquired 100% of the outstanding shares of Ideal. Ideal is a
provider of mechanical contracting services, including plumbing, HVAC and
industrial piping and provides maintenance services for mechanical systems. Our
construction and engineering services business accounted for 29% of consolidated
revenues for the years ended December 31, 2007 and 2006,
respectively.




Marketing
and Customers




Our
customers include general contractors, real estate developers, commercial
businesses, government agencies, manufacturers and institutions. No customer of
our construction and engineering services business accounted for 10% or more of
our consolidated revenues during the years ended December 31, 2007 or
2006.




Business
Strategy




Our
strategy is to expand our construction and engineering services business in
northern Indiana and southwest Michigan through competitive advantages realized
from alliances with suppliers, cross-selling opportunities developed from
alliances with or acquisitions of local mechanical, control and integration
contractors, and exploiting opportunities presented in our other business
segments.




Raw
Materials




The
principal raw materials used in our construction and engineering services
segment are steel, copper and petroleum-based materials. Raw materials are
obtained from a number of commercial sources at prevailing prices and we do not
depend on any single supplier for any substantial portion of raw
materials.




Competition




We
believe we are one of the three largest construction and engineering services
providers in our geographic market, based on sales for 2007. In addition, we
compete against several smaller companies that provide similar construction and
electrical engineering services. Certain collective bargaining agreements to
which we are a party limit our ability to compete on price with lower-cost,
non-union contractors.




Backlog




At
December 31, 2007, the backlog of our construction and engineering services
segment was approximately $20.4 million compared to $5.2 million at December 31,
2006. The increase is due to the




8






acquisition
of Ideal in October 2007 and the addition of a few large electrical contracts in
the second half of 2007. Backlog
represents the amount of revenue that we expect to realize from work to be
performed on uncompleted contracts, work in progress, time and material work
orders and contractual agreements upon which work has not commenced. Contracts
included in the backlog may have provisions which permit cancellation or delay
in their performance by the customer and there can be no assurance that any work
orders included in the backlog will not be modified, canceled or
delayed.




Working
Capital




Our
customers typically compensate us for services performed upon completion of a
given project or on an agreed upon progress payment schedule for larger
projects. Most contracts with general contractors and real estate developers
allow the customer to retain generally between 5% and 10% of each progress
billing until the contract is completed, inspected and approved. Therefore, we
must have sufficient working capital to permit us to undertake our services, and
to carry the appropriate inventory level of spare parts and equipment,
throughout the duration of a project. We believe that our present working
capital position, combined with forecasted cash flows and borrowing capacity as
well as the net proceeds from the recent private offerings of our securities,
will be sufficient to meet our working capital requirements and contractual
obligations for at least the next 12 months. For further discussion of our
borrowing facilities, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources” and Note
F of the notes to our consolidated financial statements.




Seasonality
and Quarterly Fluctuations




Our
revenues from our construction and engineering services segment may be affected
by weather conditions with respect to projects conducted outdoors. The effects
of seasonality may be offset by the timing of large individual contracts,
particularly if all or a substantial portion of the contracts fall within a one-
to two-quarter period. Further, our revenues may be affected by the cyclical
nature of the construction industry which is impacted by the local economy and
interest rates. Accordingly, our quarterly results may fluctuate and the results
of one fiscal quarter may not be representative of the results of any other
quarter or of the full fiscal year.




ITEM
1A.   RISK FACTORS




Not
applicable.




ITEM
1B.   UNRESOLVED STAFF COMMENTS




Not
applicable.




ITEM
2.   PROPERTIES




We
conduct our business from fifteen locations in the United States. We lease
facilities in South Bend, Elkhart, Hammond, Indianapolis and Merrillville,
Indiana; Boardman, Cincinnati and Massillon, Ohio; Mobile and Saraland, Alabama;
Little Rock, Arkansas; Hagerstown, Maryland; North Dansville, New York; Seattle,
Washington; and Huntington, West Virginia. Our leases have terms expiring at
various times through November 2017, with annual base rental payments ranging
from $51,000 to $540,000. We own our facilities in Weston, West Virginia and
Saraland, Alabama.




The
Elkhart facility and one of the South Bend facilities are used in the
construction and engineering services segment of our business. The other
facilities are used in the repair, remanufacturing and manufacturing segment of
our business. We maintain our executive offices at our South Bend
facility.




9


We
believe that our existing facilities are adequate to meet current requirements,
and that suitable additional or substitute space would be available on
commercially reasonable terms as needed to accommodate any expansion of our
operations.




We lease
our facilities in South Bend and Hammond, Indiana, Boardman, Ohio and Mobile,
Alabama from several limited liability companies, all of which are indirectly
owned by John A. Martell, our Chairman, Chief Executive Officer and President.
We lease a facility in South Bend for the electrical contracting business from a
limited liability company owned by Mr. Martell’s adult children. We lease our
Hagerstown, Maryland facility from a partnership of which J. Cullen Burdette, a
Vice President of our subsidiary HK Engine Components, LLC, is a partner. We
lease our Massillon, Ohio facility from a limited liability company of which
BDeWees, Inc. is a member. Bernard L. DeWees, President of Magnetech, is a
beneficial owner of BDeWees, Inc. See “Item 13. Certain Relationships and
Related Transactions, and Director Independence” in this report.




ITEM
3.   LEGAL PROCEEDINGS




We are
periodically involved in ordinary routine litigation incidental to our business.
In our opinion, there are no material pending legal proceedings the resolution
of which is expected to have a material adverse effect on our consolidated
results of operations, cash flows or financial position.




ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




No
matters were submitted to a vote of security holders during the fourth quarter
of 2007.




10


PART
II


ITEM
5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




Market
Information and Holders




Our
common stock became eligible to trade on the OTC Bulletin Board on August 1,
2006, under the symbol MCGL. In connection with a 1-for-25 reverse stock split
of our common stock which became effective on January 14, 2008 (the “Reverse Stock Split”), our
common stock now is traded on the OTC Bulletin Board under a new symbol, MIGL.
The following table sets forth the range of reported high and low bid quotations
for our common stock as reported on the OTC Bulletin Board for the periods
indicated, as adjusted to give retroactive effect to the Reverse Stock Split.
Sales price information consists of quotations by dealers making a market in our
common stock and may not necessarily represent actual transactions. As a result,
the sales price information for our common stock reflects inter-dealer prices
without any mark-ups, mark-downs or commissions. In addition, trading in our
common stock is limited in volume and may not be a reliable indication of its
market value.




High
            
            
            LowFiscal
      year 2006:3rd
      quarter ended 10/1/06 *
            
            $
            17.50
            
            
            $
            10.004th
      quarter ended 12/31/06
            
            $
            10.00
            
            
            $
            4.25Fiscal
      year 2007:1st
      quarter ended 4/1/07
            
            $
            14.25
            
            
            $
            4.502nd
      quarter ended 7/1/07
            
            $
            13.50
            
            
            $
            8.753rd
      quarter ended 9/30/07
            
            $
            11.75
            
            
            $
            5.254th
      quarter ended 12/31/07
            
            $
            16.75
            
            
            $
            5.25*beginning
      August 1, 2006





As of
March 24, 2008, there were 11,710,376 shares of common stock outstanding and
approximately 82 shareholders of record. Our common stock was held by
approximately 828 beneficial owners as of such date. In addition, as of
that date we had outstanding:




·
            warrants
      to acquire up to 312,369 shares of our common stock at fixed exercise
      prices ranging from $0.0025 to $8.50 per
share;




·
            a
      subordinated note convertible into 1,200,000 shares of our common stock
      based on aggregate indebtedness of $3,000,000 then outstanding and a fixed
      conversion price of $2.50 per share;
and




·
            options
      issued under our 2005 Stock Option Plan to acquire 60,800 shares of our
      common stock at exercise prices ranging from $5.375 to $8.575 per
      share.




In 2008,
we issued shares of our common stock upon conversion of $2.69 million in
subordinated debentures at a conversion price of $8.512316 per share and
redeemed the remaining outstanding debentures for approximately $0.3 million
cash, including interest.




11


The
number of shares issuable upon exercise of the foregoing warrants and conversion
of the foregoing debentures and notes, as well as the respective fixed exercise
and conversion prices, are subject to adjustment as provided in the applicable
securities and related agreements.




Dividends




We have
never paid cash dividends on our common stock. We presently intend to retain
future earnings, if any, for use in the operation and expansion of the business
and do not anticipate paying any cash dividends in the foreseeable future. Our
subordinated convertible debentures and our senior credit facility contain
restrictions on our ability to pay dividends. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”




Unregistered
Sales of Equity Securities




Effective
January 19, 2007, we issued options under our 2005 Stock Option Plan to acquire
350,000 shares of our common stock to four executive officers and certain key
employees at an exercise price of $0.215 per share (which, after giving effect
to the Reverse Stock Split, was adjusted to 14,000 shares at an exercise price
of $5.375 per share), of which 35,000 have been forfeited (1,400 after giving
effect to the Reverse Stock Split).  The options, which expire five
years after the grant date, are exercisable in 25% cumulative increments on and
after the first four anniversaries of the grant date. Also effective January 19,
2007, we issued 105,000 shares of restricted common stock to two executive
officers and two key employees pursuant to accepted offers to acquire the stock
at a nominal price of $0.001 per share pursuant to our Restricted Stock Purchase
Plan (which, after giving effect to the Reverse Stock Split, was adjusted to
4,200 shares at a price of $0.025 per share). The foregoing grants of options
and purchase offers and the related issuance of shares were exempt from
registration under the Securities Act in reliance on Section 4(2) thereof,
relating to offers of securities by an issuer not involving any public
offering.




Use
of Proceeds




Our
Registration Statement on Form S-1 (Reg. No. 333-129354) was declared effective
by the Securities and Exchange Commission on May 12, 2006. The registration
statement relates to shares of our common stock that may be offered and sold
from time to time by the selling shareholders named in the related prospectus
and to certain shares issuable upon exercise of warrants and conversion of debt
securities. We will not receive any of the proceeds from the sale of the common
stock, but we have agreed to bear all expenses (other than direct expenses
incurred by the selling shareholders, such as selling commissions, brokerage
fees and expenses and transfer taxes) associated with registering such shares
under federal and state securities laws. We will receive the exercise price upon
exercise of the warrants held by selling shareholders. As of December 31, 2007,
we have issued 15,004,992 shares upon the exercise of warrants (600,200 after
giving effect to the Reverse Stock Split), and we have received proceeds of
$88,787 that were used for general working capital purposes. Based on
information provided by our transfer agent, we believe that some selling
shareholders have sold shares pursuant to the offering. However, because many
shares are held in “street” name, we are unable to determine the number of
shares sold or the identity of the selling shareholders. We have incurred total
expenses in connection with the offering of approximately $0.7 million and have
received no offering proceeds other than the proceeds received upon the exercise
of warrants.




12


ITEM
6.   SELECTED FINANCIAL DATA




Not
applicable.




ITEM
7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS




The
following discussion contains forward looking-statements that involve risks and
uncertainties. See “Forward-Looking Statements” below. The following discussion
should be read with our audited consolidated financial statements and the notes
to the financial statements included in “Item 8. Financial Statements and
Supplementary Data.”




Overview




We
provide electrical and mechanical solutions to industrial, commercial and
institutional customers primarily in the United States. We currently operate in
two business segments:




·
            Repair,
      Remanufacturing and Manufacturing – We provide maintenance and repair
      services to the electric motor industry, repairing, manufacturing and
      remanufacturing industrial lifting magnets for the steel and scrap
      industries and power assemblies, engine parts, and other components
      related to large diesel engines for the rail, utilities, and offshore
      drilling industries.




·
            Construction
      and Engineering Services – We provide a wide range of electrical and
      mechanical contracting services, mainly to industrial, commercial, and
      institutional customers.




Through
December 31, 2006, we operated in three segments: industrial services,
electrical contracting services, and diesel engine components. Effective January
1, 2007, we realigned our segment reporting and reduced the number of business
segments from three to two. The former diesel engine components segment and
substantially the entire former industrial services segment were combined into
the repair, remanufacturing and manufacturing segment. The former electrical
contracting segment and one location of the former industrial services segment
involved in the repair of electrical power distribution systems within
industrial plants and commercial facilities were combined to form the
construction and engineering services segment.





In May
2006, we acquired substantially all of the assets of Smith Alabama. Smith
Alabama provided electric motor repair, preventative maintenance and
refurbishment for industrial companies such as utilities and manufacturers. The
operating results of this business are included with the repair, remanufacturing
and manufacturing segment.




On
January 18, 2007 we sold 50,000,000 shares of common stock to Tontine Capital
Partners, L.P. (“TCP”)
(2,000,000 shares after giving effect to the Reverse Stock Split) and 12,500,000
shares of common stock to Tontine Capital Overseas Master Fund, L.P. (“TCOMF,” and collectively with
TCP, “Tontine”) (500,000
shares after giving effect to the Reverse Stock Split) for $0.20 per share
($5.00 per share after giving effect to the Reverse Stock Split) or $12.5
million. We used the proceeds to retire all of the outstanding senior debt due
to our senior lender, Laurus Master Fund, Ltd. (“Laurus”), as of that date in
the amount of approximately $10.0 million, including interest, plus
approximately $0.5 million in prepayment penalties. We used the balance of the
proceeds for working capital and to reduce accounts payable.




13


On March
9, 2007, we obtained financing from MFB Financial in the form of a $5 million
revolving credit facility, secured by accounts receivable. We used borrowings
under the note for capital expenditures, to acquire Ideal and for working
capital purposes. Interest is payable monthly at 1⁄2% over prime as published in
the Wall Street Journal.




In
October 2007, we acquired 100% of the outstanding shares of
Ideal.  Ideal is a provider of mechanical contracting services,
including plumbing, HVAC and industrial piping and provides maintenance services
for mechanical systems.  The financial results of Ideal are included
in the construction and engineering services segment.




In
November 2007, our wholly-owned subsidiary, Magnetech, acquired all of the
issued and outstanding units of membership interest in 3-D. 3-D is engaged in
the business of selling, repairing, remanufacturing, and maintaining industrial
electrical and mechanical equipment.  The financial results of 3-D are
included in the repair, remanufacturing and manufacturing segment.




On
November 30, 2007 we sold 66,666,667 shares of common stock to TCP (2,666,667
shares after giving effect to the Reverse Stock Split) and 16,666,666 shares of
common stock to TCOMF (666,667 shares after giving effect to the Reverse Stock
Split) for $0.24 per share ($6.00 per share after giving effect to the Reverse
Stock Split) or $20.0 million. Proceeds were used to fund the acquisition of 3-D
for $16.7 million and to retire all amounts due to our senior lender under a
revolving credit facility as of that date in the amount of $2.02 million,
including interest. We used the balance of the proceeds for working
capital.




On
January 14, 2008, we entered into a credit facility with Wells Fargo Bank,
National Association (“Wells
Fargo”).  The credit facility is comprised of a $1,250,000 real
estate term note and a $13,750,000 revolving note.  On January 16,
2008, we borrowed $7,500,000 under the revolving note and used the net proceeds
of the loans for working capital and to acquire all of the outstanding shares of
common stock of AMP.





In
January 2008, we acquired all of the issued and outstanding capital stock of
AMP. AMP is engaged in the business of repairing, remanufacturing, and
rebuilding locomotive engines as well as providing related goods and services to
the railroad industry.  Financial results will be included in the
repair, remanufacturing and manufacturing segment.





In 2008,
certain debenture holders exercised their options under the debenture offering
to convert $2,690,000 into 316,013 shares of our common stock at a price of
$8.512316 per share (Notes F and Q). In accordance with the provisions of the
debenture offering, the debenture holders did not receive any payment of accrued
interest.  In 2008, we redeemed the remaining outstanding debentures
in the amount of $342,000 including interest of $52,000.





Critical
Accounting Policies and Estimates




We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.




Principles of consolidation.
The consolidated financial statements for the year ended December 31, 2006
include our accounts and those of our wholly-owned subsidiaries, Magnetech,
Martell Electric, LLC, HK Engine Components, LLC, and Magnetech Industrial
Services of Alabama, LLC. The consolidated financial statements for the year
ended December 31, 2007 also include the accounts of Ideal and 3-D for the three
months and one month ended December 31, 2007, respectively. All significant
intercompany balances and transactions have been eliminated.


14


Use of estimates.The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Significant estimates are required in accounting
for inventory costing, asset valuations, costs to complete and depreciation.
Actual results could differ from those estimates.




Revenue recognition. Revenue
in our repair, remanufacturing and manufacturing segment consists primarily of
product sales and service of industrial magnets, electric motors and diesel
power assemblies. Product sales revenue is recognized when products are shipped
and both title and risk of loss transfer to the customer. Service revenue is
recognized when all work is completed and the customer’s property is returned.
For services to a customer’s property provided at our site, property is
considered returned when the customer’s property is shipped back to the customer
and risk of loss transfers to the customer. For services to a customer’s
property provided at the customer’s site, property is considered returned upon
completion of work. We provide for an estimate of doubtful accounts based on
specific identification of customer accounts deemed to be uncollectible and
historical experience. Our revenue recognition policies are in accordance with
Staff Accounting Bulletin No. 101 and No. 104.




Revenues
from Martell Electric, LLC’s electrical contracting business and Ideal’s
mechanical contracting business are recognized on the percentage-of-completion
method, measured by the percentage of costs incurred to date to estimated total
costs to complete for each contract. Costs incurred on electrical contracts in
excess of customer billings are recorded as part of other current assets.
Amounts billed to customers in excess of costs incurred on electrical and
mechanical contracts are recorded as part of other current
liabilities.




Earnings per share.We
account for loss per common share under the provisions of SFAS No. 128, Earnings Per Share, which
requires a dual presentation of basic and diluted loss per common
share.  Basic loss per common share excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the year.  Diluted loss per
common share is computed assuming the conversion of common stock equivalents,
when dilutive.





Segment information. We
report segment information in accordance with Statement of Financial Accounting
Standards (“SFAS”) No.
131, Disclosures about
Segments of an Enterprise.




Inventory. We value inventory
at the lower of cost or market. Cost is determined by the first-in, first-out
method. We periodically review our inventories and make adjustments as necessary
for estimated obsolescence and excess goods. The amount of any markdown is equal
to the difference between cost of inventory and the estimated market value based
upon assumptions about future demands, selling prices and market
conditions.




Property, plant and
equipment. Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the estimated useful
lives of the related assets using the straight-line method. Useful lives of
property, plant and equipment are as follows:




Buildings
            
            30
      yearsLeasehold
      improvements
            
            Shorter
      of lease term or useful lifeMachinery
      and equipment
            
            5
      to 10 yearsVehicles
            
            3
      to 5 yearsOffice
      and computer equipment
            
            3
      to 10 years






Long-lived assets. We assess
long-lived assets for impairment whenever events or changes in circumstances
indicate that an asset’s carrying amount may not be recoverable.


15




Debt issue costs.We
capitalize and amortize costs incurred to secure senior debt financing over the
term of the senior debt financing, which is three years. We also capitalize and
amortize costs incurred to secure subordinated debenture financing over the term
of the subordinated debentures, which initially was two years. However, in April
2006, the debenture holders agreed to extend the maturity of the debentures from
February 28, 2007 to February 28, 2008. Beginning in April 2006, the unamortized
costs related to the debenture financing are amortized through the extended
maturity date.




Warranty costs. We warrant
workmanship after the sale of our products. We record an accrual for warranty
costs based upon the historical level of warranty claims and our management’s
estimates of future costs.




Income taxes. We account for
income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes.  Additionally, on January 1, 2007, we adopted FASB
Interpretation No. 48.




Stock-based
compensation.Effective January 1, 2006, we adopted SFAS No.
123R, Share-Based
Payments (revised 2004), using the Modified Prospective Approach. SFAS
No. 123R revises SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles Opinion (“APB”) No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123R requires the cost of all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based upon their fair values at grant date, or the date of
later modification, over the requisite service period. In addition, SFAS No.
123R requires unrecognized cost (based on the amounts previously disclosed in
our pro forma footnote disclosure) related to options vesting after the initial
adoption to be recognized in the financial statements over the remaining
requisite service period.




Under the
Modified Prospective Approach, the amount of compensation cost recognized
includes (a) compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, we
accounted for our stock-based compensation plans under the recognition and
measurement provisions of APB No. 25.




New Accounting Standards. In
December 2006, the Financial Accounting Standards Board (“FASB”) issued Staff Position
EITF 00-19-2, Accounting for
Registration Payment Arrangements (“FSP EITF 00-19-2”). FSP EITF
00-19-2 specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured in
accordance with FASB Statement No. 5, Accounting for Contingencies.
FSP EITF 00-19-2 further clarifies that a financial instrument subject to a
registration payment arrangement should be accounted for in accordance with
applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement. In accordance with the provisions of FSP EITF 00-19-2, we
have elected early adoption and have reclassified our warrant liability to
equity.


Warrants
issued in conjunction with our senior debt financing were accounted for under
the Emerging Issues Task Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock
and View A of EITF No. 05-4, The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock. Due to certain factors and the
liquidated damage provision in the registration rights agreements issued in
connection with the senior debt financing, we determined that the warrants are
derivative liabilities. We have elected early adoption of FSP EITF 00-19-2,
which supersedes the guidance under EITF 05-4.









16




In
December 2007, the Securities and Exchange Commission released Staff Accounting
Bulletin (“SAB”) No.
110, Year-end Relief for Stock
Option Expensing,extending the availability of SAB No. 107 beyond its
original deadline of December 31, 2007. SAB No. 107 provides a simplified method
for estimating the expected term of a “plain vanilla” option. SAB No. 110 will
permit eligible public companies to use a simplified method for estimating stock
option expense if they have inadequate historical experience to provide a
reasonable basis for estimating the expected term of an option grant.
Specifically, the Staff will accept the following simplified method for “plain
vanilla” options: expected term = (vesting term + original contractual term)/2.
Under the Financial Accounting Standard that requires the expensing of employee
stock options, companies may rely on algorithms such as the widely used
Black-Scholes-Merton model to determine the amount of stock option expense. This
model, as well as other models used, requires companies to estimate the expected
term of option grants.  The Company adopted the "plain vanilla" option for
estimating the expected term of stock options under SAB 107 and, accordingly,
does not believe the adoption of SAB 110 will have a material impact on the
Company's consolidated financial statements.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“SFAS No. 141(R)”). In SFAS No.
141(R), the FASB retained the fundamental requirements of SFAS No. 141 to
account for all business combinations using the acquisition method (formerly the
purchase method) and for an acquiring entity to be identified in all business
combinations. However, the new standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; requires transaction costs to be expensed as incurred; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. SFAS No. 141(R) is effective for annual periods beginning on or
after December 15, 2008. Accordingly, any business combinations will be recorded
and disclosed following existing GAAP until January 1, 2009. We expect that SFAS
No. 141(R) will have an impact on our consolidated financial statements when
effective, but the nature and magnitude of the specific effects will depend upon
the nature, terms and size of the acquisitions consummated after the effective
date.




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. In February 2007, the FASB issued
SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities–including an amendment of
FASB Statement No. 115(“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
assets at fair value and to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS 157 and SFAS 159 are effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are currently evaluating the
impact that SFAS 157 and SFAS 159 will have on our consolidated financial
statements.


In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes.  FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We adopted this standard
effective January 1, 2007. Adoption of this standard did not have a material
impact on our consolidated financial position, results of operations or cash
flows.






17




In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments — an Amendment of FASB Statements No. 133 and 140(“SFAS 155”).
SFAS 155 allows financial instruments that contain an embedded derivative and
that otherwise would require bifurcation to be accounted for as a whole on a
fair value basis, at the holder’s election. SFAS 155 also clarifies and amends
certain other provisions of SFAS No. 133 and SFAS No. 140. This
statement is effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006. Adoption of this standard
did not have a material impact on our consolidated financial
statements.




Operating
Results




Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006




Revenues. Total revenues
increased by $12.5 million or 21% to $73.3 million in 2007 from $60.8 million in
2006. The increase in revenues resulted from increases in repair,
remanufacturing and manufacturing segment revenue of $8.5 million or 20% and
construction and engineering services segment revenue of $4.0 million or
23%.




The
increase in repair, remanufacturing and manufacturing segment revenue resulted
from an increase in product sales in 2007 to $22.3 million, which was $4.2
million or 23% higher than product sales of $18.1 million in 2006 and to a $4.3
million increase in service revenues in 2007 to $29.4 million, an 18% increase
over service revenues of $25.1 million in 2006. The $4.2 million increase in
product sales was due primarily to a $3.5 million increase in diesel engine
components. The $4.3 million increase in service revenues was due mainly to
increases in motor repair and testing and maintenance services. The acquisition
of 3-D accounted for $0.2 million and $1.3 million of the increase in product
sales and service revenues, respectively.




The
increase in construction and engineering services segment revenue in 2007 of
$4.0 million resulted primarily from a strong local construction market and the
acquisition of Ideal which accounted for $2.8 million of the total
increase.




Cost of Revenues. Total cost
of revenues in 2007 was $61.1 million or 83% of total revenues compared to $49.6
million or 82% of total revenues in 2006. The increase of $11.5 million in cost
of revenues was due primarily to the overall increase in our total revenue. The
increase in cost of revenues as a percentage of revenues was due to lower
margins in motor and magnets product sales and services revenues and
construction and engineering services revenues, offset in part by improved
margins in diesel engine component product sales.




Gross Profit. Total gross
profit in 2007 was $12.2 million or 17% of total revenues compared to $11.1
million or 18% of total revenues in 2006. The increase of $1.1 million was due
to increased revenues.




Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased
to $10.6 million in 2007 from $9.9 million in 2006. Selling expenses increased
13% to $4.3 million in 2007 from $3.8 million in 2006 primarily due to higher
salaries and commissions required to support the growth in total revenues.
Selling expenses were 5.9% and 6.0% of total revenues in 2007 and 2006,
respectively. General and administrative expenses increased 3% to $6.3 million
in 2007 from $6.1 million in 2006. General and administrative expenses were 8.6%
and 9.8% of total revenues for 2007 and 2006, respectively.




Income
from Operations.Income from operations increased $0.3 million and 25%
from $1.2 million in 2006 to $1.5 million in 2007.






18




Loss on Warrant
Liability.  In accordance with EITF 00-19 and EITF 05-4, we
incurred a loss on warrant liability of $0.5 million in 2006, related to the
issuance of warrants as part of the Laurus financings in August 2005 and May
2006, which we further describe below under “Liquidity and Capital
Resources.”




Loss on Debt Extinguishment.
We incurred a loss on extinguishment of debt of $2.3 million in 2007 related to
the payoff of all Laurus senior secured debt in January 2007.





Interest Expense and Other
Income. Interest expense decreased in 2007 to $1.3 million from $3.4
million in 2006. Interest on principal debt decreased to $0.6 million in 2007
from $1.2 million in 2006 due to lower outstanding balances and interest rates.
Amortization of debt issue costs were $0.5 million in 2007 compared to $1.5
million in 2006. Amortization of debt discount costs on debentures and senior
revolving debt was $0.2 million in 2007 compared to $0.7 million in 2006.
Amortization of debt issue costs and debt discount costs decreased due to the
payoff of all Laurus debt and the partial conversion of convertible debentures
in the first quarter of 2007.





Provision for Income Taxes.
We have experienced net operating losses in each year since we commenced
operations. We are uncertain as to whether we will be able to utilize these tax
losses before they expire. Accordingly, we have provided a valuation allowance
for the income tax benefits associated with these net future tax assets which
primarily relates to cumulative net operating losses, until such time
profitability is reasonably assured and it becomes more likely than not that we
will be able to utilize such tax benefits.




Net Loss. Net loss was $2.0
million and $2.7 million in 2007 and 2006, respectively. The decrease in the net
loss of $0.7 million was due primarily to higher sales and lower interest
expense, partially offset by higher selling, general and administrative expenses
and the loss on debt extinguishment.




Liquidity
and Capital Resources for the Years Ended December 31, 2007 and
2006




At
December 31, 2007 we had $2.8 million of cash and approximately $17.8 million of
working capital. Working capital increased $13.7 million from approximately $4.1
million at December 31, 2006. The increase in cash and working capital primarily
resulted from the total sale of common stock to Tontine of $32.5 million less
the payoff of the revolving credit facility and the impact of the acquisitions
of Ideal and 3-D in 2007.




We have
incurred operating losses since we began operations in 2000. The operating
losses were due to start up costs, including start up costs associated with
acquisitions, underutilized operating capacity, the loss on debt extinguishment
and costs incurred to build a corporate infrastructure sufficient to support
increasing sales from existing operations and acquisitions for the foreseeable
future. We funded these accumulated operating losses, increases in working
capital, contractual obligations, acquisitions and capital expenditures with
investments and advances from our majority stockholder ($7.2 million), a private
debt offering ($4.0 million), private equity offerings ($35.2 million), trade
credit and bank loans.


Our net loss
for the year ended December 31, 2007 of $2.0 million included non-cash
expenditures of depreciation and amortization of $1.0 million and amortization
related to debt issue and debt discount costs of $2.6 million.




Net cash
utilized in operating activities was $2.2 million for the year ended December
31, 2007 compared to net cash provided by operating activities of $.5 million in
2006.




In
2007, net cash provided from loss before interest, taxes, depreciation and
amortization of approximately $1.6 million was reduced primarily by an increase
in net inventories of $1.4 million, an






19
 
  increase
in prepaid expenses and other current assets of $0.3 million, a reduction in
accounts payable of $1.2 million and a reduction in accrued expenses and other
current liabilities of $1.1 million. Inventories of long, lead-time items
increased to support increasing revenues from customers in the rail industry.
Past due accounts payable were reduced with proceeds from the sale of common
stock to Tontine.




In 2006,
net cash provided from loss before interest, taxes, loss on warrant liability
and depreciation and amortization of approximately $0.9 million was reduced
primarily from an increase in accounts receivable of $3.7 million, a decrease in
inventories of $1.0 million and an increase in accounts payable and accrued
expenses of $1.5 million and $0.8 million, respectively. Accounts receivable
increased due to higher sales and a slowdown in collections at year end.
Inventory declined, despite higher sales, as a result of improved inventory
turnover. Several of our trade accounts payable have extended beyond the terms
allowed by the applicable vendors.




While we
were able to reduce past due accounts payable in 2007, certain vendors continue
to place us on credit hold or cash in advance which could result in delays in
receipt of necessary materials and parts. Further, in January 2008 we acquired
100% of the common stock of AMP for $7.5 million in cash and $3.5 million in
common stock. AMP had incurred operating losses from inception in 2005 through
2007 and may continue to incur losses and utilize cash in 2008. This may result
in the increase in past due accounts payable and further delays in receipt of
necessary materials and parts. Disruptions of this nature have resulted in
delayed shipments to our customers. We do not believe that these delays have
resulted in the loss of any material amount of sales orders, although future
delays might have an adverse affect on our business.




In 2007
we acquired 100% of the common stock of Ideal for $0.3 million and 100% of the
members’ interest in 3-D for $16.7 million. In addition, we acquired machinery
and equipment totaling $0.6 million. In 2006, we acquired certain assets from
Smith Alabama for $3.6 million and we also acquired machinery and equipment of
$0.4 million.




We
generated $21.7 million from financing activities in 2007 from the sale of
common stock of $32.6 million, less the repayment of the revolving credit
agreement and long-term debt totaling $11.0 million. We generated $3.7 million
from financing activities in 2006 primarily from the Laurus financing of $3.4
million for the acquisition in May 2006.




From
March through May of 2005, we issued $4.0 million aggregate principal amount of
subordinated convertible debentures. The debentures originally were scheduled to
mature on February 28, 2007; however, in April 2006, the debenture holders
agreed to extend the maturity date to February 28, 2008. The debentures bear
interest at a fixed annual rate of 6%, payable in cash upon redemption or at
maturity if the holders do not elect to convert their debentures. Each debenture
holder has the option to convert principal and accrued interest under the
debentures into shares of our common stock at a fixed conversion price of
$8.512316 per share. In 2007, certain debenture holders elected to convert the
principal amount of $1.045 million for 122,764 shares of our common stock. In
2008, debentures in the amount of $2.69 million were converted into 316,013
shares of our common stock. In 2008, we paid off the remaining debenture
holders for $0.3 million, including accrued interest.


In August
2005, we entered into a $10.0 million credit facility with Laurus. At December
31, 2006, we had borrowed an aggregate of $8.2 million under the facility: $2.0
million under a term note, $2.8 million under a minimum borrowing note and $3.4
million under a revolving note. In January 2007, we paid off the Laurus credit
facility with proceeds from an equity financing.






20




The notes
bore interest at an annual rate of 1% over the prime rate as published in The Wall Street Journal.
Interest was payable monthly, in arrears, beginning on September 1, 2005. The
notes were scheduled to mature on August 24, 2008, were convertible into our
common stock, and were secured by a first priority lien in our assets and our
pledge of the equity interests in our subsidiaries. The obligations to Laurus
also were guaranteed by certain subsidiaries. The term note issued to Laurus
required monthly principal payments of $100,000, together with all accrued and
unpaid interest, commencing March 1, 2006.




In May
2006, we entered into a second Security and Purchase Agreement with Laurus. The
agreement provided financing comprised of a $1.6 million revolving note and a
$2.1 million term note. At December 31, 2006 we had borrowed an aggregate of
$2.8 million under the facility: $2.0 million under the term note and $0.8
million under the revolving note. In January 2007, we paid off this indebtedness
with proceeds from an equity financing.




Under the
term loan, we were required to make monthly principal payments of $70,000 with
interest beginning December 2006. Interest was payable monthly at 1.0% over
prime as published in the Wall Street Journal under the term note. The notes
were scheduled to mature in May 2009.




As part
of the financing, we paid Laurus $133,000 in cash and issued Laurus warrants for
15,000 shares of our common stock with an exercise price of $0.25 per
share.




The
provisions of the $7 million and $1.6 million revolving notes included a
lock-box agreement and also allowed Laurus, in its reasonable credit judgment,
to assess additional reserves against, or reduce the advance rate against
accounts receivable used in the borrowing base calculation. These provisions
satisfy the requirements for consideration of EITF Issue No. 95-22, Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that include both a
Subjective Acceleration Clause and a Lock-Box Arrangement. Based on
further analysis of the terms of the revolving note, there were certain
provisions that could potentially be interpreted as a subjective acceleration
clause. More specifically, Laurus, in its reasonable credit judgment, could have
assessed additional reserves to the borrowing base calculation or reduced the
advance rate against accounts receivable to account for changes in the nature of
our business that altered the underlying value of the collateral. The reserve
requirements could have resulted in an over-advance borrowing position that
could have required an accelerated repayment of the over-advance portion. Since
the inception of this revolving note facility, Laurus did not apply any
additional reserves to the borrowing base calculation. We did not anticipate any
changes in our business practices that would have resulted in any material
adjustments to the borrowing base calculation. However, due to the uncertainty
related to Laurus’s ability to assess additional reserves to the borrowing base
calculation, we classified borrowings under the revolving note facilities as
short-term obligations.




In June
2005, the Emerging Issues Task Force released EITF Issue No. 05-4. EITF 05-4
addresses financial instruments, such as convertible notes and stock purchase
warrants, which are accounted for under EITF 00-19 that may be issued at the
same time and in contemplation of a registration rights agreement that includes
a liquidated damages clause. EITF 05-4 specifically provides guidance to issuers
as to how to account for registration rights agreements that require an issuer
to use its “best efforts” to file a registration statement for the resale of
equity instruments and have it declared effective by the end of a specified
grace period and, if applicable, maintain the effectiveness of the registration
statement for a period of time or pay a liquidated damage penalty to the
investor.




21


Under our
registration rights agreement with Laurus, if our common stock is not traded on
the OTC Bulletin Board, NASDAQ or a national exchange for three consecutive
trading days and trading does not resume within 30 days, then, subject to
certain exceptions, for each day that any of those events is occurring, we are
required to pay Laurus an amount in cash equal to 1/30th of the product of the
outstanding principal amount owed to Laurus, multiplied by 0.01 (or
approximately 1% per month). In addition, the embedded conversion rights under
our prior senior secured facility with Laurus may have been considered
non-conventional under the guidance of paragraph 4 of EITF No. 00-19 because,
subject to certain exceptions, the conversion price of the notes issued to
Laurus could have been adjusted. As a result, warrants issued in conjunction
with the Laurus financing were accounted for under EITF Issue No. 00-19 Accounting for Derivative Financial
Instruments Index to, and Potentially Settled in, a Company’s Own Stock
and View A of EITF No.05-4.Due to the liquidated
damage provision in the registration rights agreements, we determined that the
warrants were derivative liabilities. In December 2006, we adopted the
accounting prescribed under Staff Position EITF 00-19-2, Accounting for Registration Payment
Arrangements, which resulted in the derivative liabilities being
reclassified to equity.




On
January 18, 2007 we sold 2,000,000 shares of common stock to TCP and 500,000
shares of common stock to TCOMF for $5.00 per share or $12.5 million (amounts
stated after giving effect to the Reverse Stock Split). Proceeds were used to
retire all of the outstanding senior debt due to Laurus as of that date in the
amount of approximately $10.0 million, including interest, plus approximately
$0.5 million in prepayment penalties. We used the balance of the proceeds for
working capital and to reduce past due accounts payable.




On March
9, 2007, we obtained financing from MFB Financial in the form of a $5 million
revolving credit facility, secured by accounts receivable. We used borrowings
under the note for capital expenditures, to acquire Ideal and for working
capital purposes. Interest is payable monthly at 1⁄2% over prime as published in
the Wall Street Journal. The facility contains annual financial covenants,
including minimum tangible net worth, current ratio and debt coverage ratio, and
maximum debt to equity ratio. An event of default under the facility will occur
if , among other things, we fail to make a required payment on time or when due,
we fail to keep the secured property insured, we default under any other
agreements we have with MFB Financial, we are involved in any legal proceeding
by a creditor for the collection of debt, we become insolvent, or make any
misrepresentation in financial information we provide to MFB Financial, or we do
or fail to do something that causes MFB Financial to believe that it will have
difficulty collecting the debt. In December 2007, we paid off the revolving
credit facility in the amount of $2.0 million, including interest, with proceeds
from the November 30, 2007 equity financing described below.




On
November 30, 2007, we sold 2,666,667 shares of common stock to TCP and 666,666
shares of common stock to TCOMF for $6.00 per share or $20.0 million (amounts
stated after giving effect to the Reverse Stock Split). Proceeds were used to
fund the acquisition of 3-D for $16.7 million and to retire all amounts due to
our senior lender under a revolving credit facility as of that date in the
amount of $2,020,000 including interest of $5,000. We used the balance of the
proceeds for working capital.




On
January 14, 2008, we entered into a credit facility with Wells Fargo. The
credit facility is comprised of a $1,250,000 real estate term note and a
$13,750,000 revolving note. On January 16, 2008, we borrowed $7,500,000
million under the revolving note and used the net proceeds of the loans for
working capital and to acquire all of the outstanding shares of common stock of
AMP.





The
original maturity date of the notes is January 1, 2011, at which time the notes
will automatically renew for one-year periods until terminated.  The
notes are secured by (1) a first priority lien on our assets; (2) a mortgage on
certain real property; and (3) the pledge of the equity interests in our
subsidiaries. The term note bears interest at an annual rate equal to the
rate of interest most recently announced by Wells Fargo at its principal office
as its prime rate (the “Prime Rate”), subject to certain minimum annual interest
payments. The revolving note bears interest at an annual rate of either (i)
the


22






Prime
Rate, or (ii) Wells Fargo’s LIBOR rate plus 2.8%, depending on the nature of the
advance.  Interest is payable monthly, in arrears, under the revolving
note beginning on February 1, 2008.  The term note requires monthly
principal payments of $10,000, plus interest, beginning on the first day of the
month following receipt of the advance.




We have
promissory notes outstanding to BDeWees, Inc., XGen III, Ltd., and John A.
Martell, in the original principal amounts of $2.0 million, $2.0 million and
$3.0 million, respectively, and secured convertible debentures issued to various
investors (together, the “Subordinated Indebtedness”). Subordination
agreements have been executed that subordinate our obligations under the
Subordinated Indebtedness to the Wells Fargo credit facility.




If we
default under our obligations to Wells Fargo, then the interest on the
outstanding principal balance of each note will increase by 3% until the default
is cured or waived.  Other remedies available to Wells Fargo upon an
event of default include the right to accelerate the maturity of all
obligations, the right to foreclose on the assets securing the obligations, all
rights of a secured creditor under applicable law, and other rights set forth in
the loan documents.




We may
prepay the term note at any time, subject to certain prepayment
penalties.  With respect to the revolving note, we may borrow, pay
down and re-borrow under the note until the maturity date.  The
maximum aggregate principal amount that may be borrowed under the revolving note
is the lesser of (1) the sum of 40% of our eligible construction related trade
receivables up to $2,000,000 and 85% of certain remaining eligible trade
accounts receivable less any reserves established by Wells Fargo from time to
time and (2) $13,750,000 less any reserves established by Wells
Fargo.




We
believe that our existing working capital, cash provided by operations and our
existing credit facility with Wells Fargo, under which we had all $1.5 million
available as of March 12, 2007, should be sufficient to fund our working capital
needs, capital requirements and contractual obligations for at least the next 12
months. We also believe that we will be able to improve relationships with our
vendors and ensure a more steady supply of parts and materials. We may, however,
need to raise additional debt or equity capital to fund certain future business
acquisitions. As of December 31, 2007, we did not have any material commitments
for capital expenditures.




Our
future working capital needs and capital-expenditure requirements will depend on
many factors, including our rate of revenue growth, the rate and size of future
business acquisitions, the expansion of our marketing and sales activities, and
the rate of development of new products and services. To the extent that funds
from the sources described above are not sufficient to finance our future
activities, we will need to improve future cash flows and/or raise additional
capital through debt or equity financing or by entering into strategic
relationships or making other arrangements. Any effort to improve cash flows,
whether by increasing sales, reducing operating costs, collecting accounts
receivable at a faster rate, reducing inventory and other means, may not be
successful. Further, any additional capital we seek to raise might not be
available on terms acceptable to us, or at all.




Off-Balance
Sheet Transactions




As of
December 31, 2007 and 2006, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.




23






Forward-Looking
Statements




Certain
matters described in the foregoing “Management’s Discussion and Analysis of
Results of Operations and Financial Condition,” as well as other statements
contained in this Annual Report on Form 10-K are forward-looking statements,
which include any statement that is not an historical fact, such as statements
regarding our future operations, future financial position, business strategy,
plans and objectives. A “safe harbor” for forward-looking statements is provided
by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995).
The Reform Act of 1995 was adopted to encourage such forward-looking statements
without the threat of litigation, provided those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause the actual results to differ
materially from those projected in the statement.




Without
limiting the generality of the foregoing, words such as “may,” “intend,”
“expect,” “believe,” “anticipate,” “could,” “estimate” or “plan” or the negative
variations of those words or comparable terminology are intended to identify
forward-looking statements. Management has based the forward-looking statements
largely on its current expectations and perspectives about future events and
financial trends that management believes may affect our financial condition,
results of operations, business strategies, short-term and long-term business
objectives, and financial needs. These forward-looking statements are subject to
a number of risks, uncertainties and assumptions that may cause our actual
results to differ materially from those anticipated or implied in the
forward-looking statements.




ITEM
7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
applicable.











24





ITEM
8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA









Report of Independent
Registered Public Accounting Firm









The
Board of Directors


MISCOR
Group, Ltd. and Subsidiaries


South
Bend, Indiana









We have
audited the accompanying consolidated balance sheets of MISCOR Group, Ltd. and
Subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
each of the years in the two-year period ended December 31, 2007. The Company’s
management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MISCOR Group,
Ltd. and Subsidiaries as of December 31, 2007 and 2006, and the consolidated
results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.










/s/
      ASHER & COMPANY, Ltd.







Philadelphia,
Pennsylvania


March
28, 2008









25


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands, except share and per share data)








December
      31,2007
            
            
            2006ASSETSCURRENT
      ASSETSCash
            
            $
            2,807
            
            
            $
            297Accounts
      receivable, net of allowance for doubtful accounts of $669 for 2007 and
      $428 for 2006
            
            
            17,233
            
            
            
            13,275Inventories,
      net
            
            
            10,884
            
            
            
            7,640Prepaid
      expenses
            
            
            299
            
            
            
            204Other
      current assets
            
            
            1,707
            
            
            
            1,022Total
      current assets
            
            
            32,930
            
            
            
            22,438PROPERTY
      AND EQUIPMENT, net
            
            
            10,125
            
            
            
            6,320OTHER
      ASSETSDeposits
      and other assets
            
            
            182
            
            
            
            90Goodwill
            
            
            8,003
            
            
            
            -Debt
      issue costs, net
            
            
            40
            
            
            
            2,017Customer
      relationships, net
            
            
            7,568
            
            
            
            -Other
      intangible assets, net
            
            
            699
            
            
            
            2Total
      other assets
            
            
            16,492
            
            
            
            2,109Total
      Assets
            
            $
            59,547
            
            
            $
            30,867LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESRevolving
      credit line, net of discount of $-0- in 2007 and $438 in
    2006
            
            $
            -
            
            
            $
            6,500Current
      portion of long term debt, net of discount of $15 in 2007 and $-0- in
      2006
            
            
            3,036
            
            
            
            2,081Accounts
      payable
            
            
            7,530
            
            
            
            7,237Accrued
      expenses
            
            
            3,903
            
            
            
            2,152Other
      current liabilities
            
            
            655
            
            
            
            380Total
      current liabilities
            
            
            15,124
            
            
            
            18,350LONG
      TERM LIABILITIESLong-term
      debt, net of discount of $-0- in 2007 and $229 in 2006
            
            
            4,195
            
            
            
            5,824Long-term
      debt, Stockholder
            
            
            3,000
            
            
            
            3,000Total long term liabilities
            
            
            7,195
            
            
            
            8,824Total
      liabilities
            
            
            22,319
            
            
            
            27,174Commitments
      and ContingenciesSTOCKHOLDERS'
      EQUITYMISCOR
      Preferred stock, no par value; 800,000 shares authorized; no shares issued
      and outstanding
            
            
            -
            
            
            
            -MISCOR
      Common stock, no par value; 12,000,000 shares authorized;issued and
      outstanding 11,129,012 shares at December 31, 2007 and 4,691,410 at
      December 31, 2006
            
            
            43,967
            
            
            
            8,459Additional
      paid in capital
            
            
            9,019
            
            
            
            8,961Deferred
      compensation
            
            
            (55
            )
            
            
            (47
            )Accumulated
      deficit
            
            
            (15,703
            )
            
            
            (13,680
            )Total
      stockholders' equity
            
            
            37,228
            
            
            
            3,693Total
      Liabilities and Stockholders' Equity
            
            $
            59,547
            
            
            $
            30,867





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





26


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Amounts
in thousands, except share and per share data)





Years
      Ended December 31,2007
            
            
            2006REVENUESProduct
      sales
            
            $
            22,270
            
            
            $
            18,083Service
      revenue
            
            
            50,980
            
            
            
            42,671Total
      revenues
            
            
            73,250
            
            
            
            60,754COST
      OF REVENUESProduct
      sales
            
            
            16,316
            
            
            
            13,891Service
      revenue
            
            
            44,768
            
            
            
            35,716Total
      cost of revenues
            
            
            61,084
            
            
            
            49,607Gross
      profit
            
            
            12,166
            
            
            
            11,147Selling,
      general and administrative expenses
            
            
            10,649
            
            
            
            9,900Income
      from operations
            
            
            1,517
            
            
            
            1,247Other
      income (expense)Loss
      on warrant liability
            
            
            -
            
            
            
            (508
            )Loss
      on debt extinguishment
            
            
            (2,300
            )
            
            
            -Interest
      expense
            
            
            (1,259
            )
            
            
            (3,404
            )Other
      income
            
            
            19
            
            
            
            4(3,540
            )
            
            
            (3,908
            )NET
      LOSS
            
            $
            (2,023
            )
            
            $
            (2,661
            )Basic
      and diluted loss per common share
            
            $
            (0.26
            )
            
            $
            (0.61
            )Weighted
      average number of common shares
            
            
            7,652,061
            
            
            
            4,370,570





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





27


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(Amounts
in thousands, except share and per share data)





MISCORAdditionalCommon
            
            
            Paid-in-
            
            
            Deferred
            
            
            AccumulatedShares
            
            
            Stock
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            TotalBalances,
      December 31, 2005
            
            
            4,184,358
            
            
            $
            7,659
            
            
            $
            8,840
            
            
            $
            (57
            )
            
            $
            (11,436
            )
            
            $
            5,006Issuance
      of MISCOR common stock in connection exercise of stock
      warrants
            
            
            341,596
            
            
            
            8
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8Issuance
      of MISCOR common stock in connection exercise of stock
    options
            
            
            10,000
            
            
            
            63
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            63Conversion
      of Senior debt into MISCOR common stock
            
            
            153,456
            
            
            
            729
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            729Issuance
      of MISCOR common stock in connection with 2005 Restricted Stock
      Plan
            
            
            2,000
            
            
            
            
            
            
            
            12
            
            
            
            (12
            )
            
            
            
            
            
            
            -Amortization
      of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22
            
            
            
            
            
            
            
            22Stock
      based compensation
            
            
            
            
            
            
            
            
            
            
            18
            
            
            
            
            
            
            
            
            
            
            
            18Reclassify
      warrant liability to equity per adoption of FSP EITF
    00-19-2
            
            
            
            
            
            
            
            
            
            
            91
            
            
            
            
            
            
            
            417
            
            
            
            508Loss
      - 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,661
            )
            
            
            (2,661
            )Balances,
      December 31, 2006
            
            
            4,691,410
            
            
            $
            8,459
            
            
            $
            8,961
            
            
            $
            (47
            )
            
            $
            (13,680
            )
            
            $
            3,693Issuance
      of MISCOR common stock in connection exercise of stock
      warrants
            
            
            215,456
            
            
            
            9
            
            
            
            (8
            )
            
            
            
            
            
            
            
            
            
            
            1Issuance
      of MISCOR common stock in connection exercise of stock
    options
            
            
            2,000
            
            
            
            13
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13Conversion
      of Subordinate debentures into MISCOR common stock
            
            
            122,764
            
            
            
            979
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            979Issuance
      of MISCOR common stock in connection with 2005 Restricted Stock
      Plan
            
            
            6,200
            
            
            
            -
            
            
            
            40
            
            
            
            (40
            )
            
            
            
            
            
            
            -Amortization
      of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            32
            
            
            
            
            
            
            
            32Stock
      based compensation
            
            
            
            
            
            
            
            
            
            
            26
            
            
            
            
            
            
            
            
            
            
            
            26Issuance
      of MISCOR common stock in connection with acquisition of 3-D Services,
      Ltd.
            
            
            247,678
            
            
            
            2,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,000Sale
      of MISCOR common stock, net of issuance costs of $75
            
            
            5,833,333
            
            
            
            32,425
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            32,425Issuance
      of MISCOR common stock in connection with 2005 Employee Stock Purchase
      Plan
            
            
            10,171
            
            
            
            82
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            82Loss
      - 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,023
            )
            
            
            (2,023
            )Balances,
      December 31, 2007
            
            
            11,129,012
            
            
            $
            43,967
            
            
            $
            9,019
            
            
            $
            (55
            )
            
            $
            (15,703
            )
            
            $
            37,228





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





28


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousands, except share and per share data)





Years
      ended December 31,2007
            
            
            2006OPERATING
      ACTIVITIESNet
      loss
            
            $
            (2,023
            )
            
            $
            (2,661
            )Adjustments
      to reconcile net loss to net cash provided by (utilized in) operating
      activities:Fair
      value of warrant liability
            
            
            -
            
            
            
            508Depreciation
      and amortization
            
            
            1,028
            
            
            
            862Bad
      debts
            
            
            150
            
            
            
            251Inventory
      reserve
            
            
            264
            
            
            
            195Loss
      (gain) on sale of assets
            
            
            (3
            )
            
            
            1Amortization
      of stock-based compensation plans
            
            
            58
            
            
            
            40Amortization
      of debt issuance costs and debt discount
            
            
            2,579
            
            
            
            2,195Changes
      in:Accounts
      receivable
            
            
            (124
            )
            
            
            (3,733
            )Inventories
            
            
            (1,447
            )
            
            
            804Prepaid
      expenses and other current assets
            
            
            (334
            )
            
            
            (176
            )Deposits
      and other non-current assets
            
            
            (78
            )
            
            
            (1
            )Accounts
      payable
            
            
            (1,175
            )
            
            
            1,497Accrued
      expenses and other current liabilities
            
            
            (1,123
            )
            
            
            761Net
      cash provided by (utilized in) operating activities
            
            
            (2,228
            )
            
            
            543INVESTING
      ACTIVITIESAcquisition
      of business assets, net of cash acquired
            
            
            (16,384
            )
            
            
            (3,569
            )Acquisition
      of property and equipment
            
            
            (567
            )
            
            
            (449
            )Proceeds
      from disposal of property and equipment
            
            
            4
            
            
            
            11Net
      cash utilized in investing activities
            
            
            (16,947
            )
            
            
            (4,007
            )FINANCING
      ACTIVITIESShort
      term repayments, net
            
            
            (6,938
            )
            
            
            -Payments
      on capital lease and installment obligations
            
            
            (33
            )
            
            
            (18
            )Proceeds
      from the issuance of shares and exercise of warrants
            
            
            2
            
            
            
            8Payments
      of stock issuance costs
            
            
            (75
            )
            
            
            -Repayment
      of long term debt, bank
            
            
            (4,065
            )
            
            
            (1,080
            )Proceeds
      from the issuance of term notes
            
            
            200
            
            
            
            2,100Proceeds
      from the issuance of revolving note, net
            
            
            -
            
            
            
            2,821Debt
      issuance costs - term and revolving notes
            
            
            -
            
            
            
            (156
            )Proceeds
      from sale of common stock
            
            
            32,594
            
            
            
            63Net
      cash provided by financing activities
            
            
            21,685
            
            
            
            3,738INCREASE
      IN CASH
            
            
            2,510
            
            
            
            274Cash,
      beginning of year
            
            
            297
            
            
            
            23Cash,
      end of year
            
            $
            2,807
            
            
            $
            297SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the year for:Interest
            
            $
            1,009
            
            
            $
            933





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


29
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Nature of
business




Magnetech
Integrated Services Corp. (the “Company” or “MISCOR”), an Indiana Corporation,
was organized in April 2004 as a holding company for Magnetech Industrial
Services, Inc. (“MIS”) and its wholly owned subsidiary Martell Electric,
LLC.  Upon the Company’s formation in April 2004, the sole stockholder
of MIS contributed all 40 issued and outstanding shares of MIS common stock in
exchange for 3,178,000 shares of MISCOR common stock.  The exchange of
shares has been accounted for as a recapitalization of the Company
(“Recapitalization”). In September 2005, the Company changed its name to MISCOR
Group, Ltd. In 2006, Martell Electric, LLC became a wholly owned subsidiary of
MISCOR.




As
discussed in Note Q, on November 30, 2007, the Company’s board of directors
approved a 1 for 25 reverse stock split of the Company’s common stock. The
reverse stock split became effective on January 14, 2008 by the filing of
articles of amendment to the Company’s Amended and Restated Articles of
Incorporation.  Under Indiana state law, the reverse stock split did
not require shareholder approval.  The effect of this reverse stock
split has been retroactively reflected throughout the consolidated financial
statements, including these notes to the consolidated financial
statements.




MIS, an
Indiana corporation, is an industrial services company which through its nine
operating facilities, provides maintenance and repair services to the electric
motor industry, repairs and manufactures industrial lifting magnets, provides
engineering and repair services for electrical power distribution systems within
industrial plants and commercial facilities, provides on-site services related
to all services offered by MIS, and provides custom and standardized training in
the area of industrial maintenance.




Martell
Electric, LLC, provides electrical contracting services to institutions, and
commercial business.




In May
2006, MIS acquired certain operating assets of Smith Services of Alabama, Inc.
from Smith Services, Inc. and formed a subsidiary, Magnetech Industrial Services
of Alabama, LLC (“Magnetech of Alabama”). Magnetech of Alabama provides
maintenance and repair services to the electric motor industry, and engineering
and repair services for electrical power distribution systems within industrial
plants and commercial facilities. In January 2007, Magnetech of Alabama was
merged into MIS.




In
October 2007, MISCOR acquired 100% of the outstanding shares of Ideal
Consolidated, Inc. (“Ideal”). Ideal is a provider of mechanical contracting
services, including plumbing, HVAC and industrial piping and provides
maintenance services for mechanical systems.




In
November 2007, MIS acquired all of the issued and outstanding units of
membership interest in 3-D Service, Ltd. (“3-D”). 3-D is engaged in the business
of selling, repairing, remanufacturing, and maintaining industrial electrical
and mechanical equipment.




The
Company’s customers are primarily located throughout the United States of
America.  The Company operates from sixteen locations in Alabama,
Indiana, Ohio, West Virginia, Washington and Maryland.




30
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Principles of
consolidation




The
consolidated financial statements for the year ended December 31, 2006 include
the accounts of MISCOR and its wholly owned subsidiaries, Magnetech Industrial
Services, Inc., Martell Electric, LLC, HKEC and Magnetech of
Alabama.   The consolidated financial statements for the year
ended December 31, 2007 also include the accounts of Ideal and 3-D for the three
months and one month ended December 31, 2007, respectively. All significant
intercompany balances and transactions have been eliminated.




Reclassifications




Certain
amounts from the prior year financial statements have been reclassified to
conform to the current year presentation.  Costs of $732 for the year
ended December 31, 2006 were reclassified from selling, general and
administrative expenses to cost of revenues – service.  This
reclassification had no effect on net loss or stockholders’ equity.




Concentration of credit
risk




The
Company maintains its cash primarily in bank deposit accounts.  The
Federal Deposit Insurance Corporation insures these balances up to $100 per
bank. The Company has not experienced any losses on its bank deposits and
management believes these deposits do not expose the Company to any significant
credit risk.




Inventory




The
Company values inventory at the lower of cost or market.  Cost is
determined by the first-in, first-out method. The Company periodically reviews
its inventories and makes provisions as necessary for estimated obsolescence and
slow-moving goods. The amount of such markdown is equal to the difference
between cost of inventory and the estimated market value based upon assumptions
about future demands, selling prices and market conditions.




Property and
equipment




Property
and equipment are stated at cost less accumulated
depreciation.  Depreciation is computed over the estimated useful
lives of the related assets using the straight-line method.  Useful
lives of property and equipment are as follows:





Building
            30
      yearsLeasehold
      improvements
            Shorter
      of lease term or useful lifeMachinery
      and equipment
            5
      to 10 yearsVehicles
            3
      to 5 yearsOffice
      and computer equipment
            3
      to 10 years


31
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Debt issue
costs




Costs
incurred by the Company to secure senior debt financing are capitalized and
amortized over the term of the senior debt financing agreement which is three
years. In January 2007, the Company paid off all senior debt financing and
recorded the unamortized debt issue costs of $1,354 as loss on extinguishment of
debt. (Note F).




Costs
incurred by the Company to secure subordinated debenture financing are
capitalized and amortized over the term of the subordinated debentures which
initially was two years. However, in April 2006, the debenture holders agreed to
extend the maturity date one year from February 28, 2007 to February 28, 2008.
Accordingly, the balance of debt issue costs is being amortized through February
28, 2008. During 2007, debenture holders converted $1,045 of the aggregate
principal of the subordinated debt. In addition, $137 in debt issue costs was
written off against common stock in conjunction with the conversion (Note
F).




Amortization
of debt issue costs, recorded as a charge to interest expense, was $486 and
$1,492 for the years ended December 31, 2007 and 2006,
respectively.  As of December 31, 2007 and 2006, accumulated
amortization of deferred financing fees was $1,510 and $2,536,
respectively.




Segment
information




The
Company reports segment information in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise.




Patents and
trademarks




The costs
of successful registrations for patents and trademarks are amortized over the
estimated useful lives of the assets, which is generally ten years, using the
straight-line method.  The costs of unsuccessful registrations are
charged to expense.




Long-lived
assets




The
Company assesses long-lived assets for impairment whenever events or changes
in  circumstances indicate that an asset’s carrying amount may not be
recoverable.




Revenue
recognition




Revenue
consists primarily of sales and service of industrial magnets, electric motors,
electrical power distribution systems, and power assemblies.  Product
sales revenue is recognized when products are shipped and both title and risk of
loss transfer to the customer. Service revenue is recognized when all work is
completed and the customer’s property is returned. For services to a customer’s
property provided at the Company’s site, property is considered returned when
the customer’s property is shipped back to the customer and risk of loss
transfers to the customer. For service to a customer’s property provided at the
customer’s site, property is considered returned upon completion of
work.  The Company provides for an estimate of doubtful accounts,
based on specific identification of customer accounts deemed to be uncollectible
and historical experience.  The Company’s revenue recognition policies
are in accordance with Staff Accounting Bulletin (“SAB”) No. 101 and SAB No.
104.




32
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Revenue recognition
(continued)




Revenues
from Martell Electric, LLC’s electrical contracting business and Ideal’s
mechanical contracting business are recognized on the percentage-of-completion
method, measured by the percentage of cost incurred to date to estimated total
costs to complete for each contract.  Costs incurred on electrical and
mechanical contracts in excess of customer billings are recorded as part of
other current assets.  Amounts billed to customers in excess of costs
incurred on electrical and mechanical contracts are recorded as part of other
current liabilities.




Advertising
costs




Advertising
costs are expensed when incurred, except for costs associated with
direct-response advertising, which are capitalized and amortized over the
expected period of future benefits.  Advertising expense was $141 and
$138 for the years ended December 31, 2007 and 2006
respectively.  There were no direct-response advertising costs
reported as assets at December 31, 2007 and 2006.




Warranty
costs




The
Company warrants workmanship after the sale of its products and
services.  An accrual for warranty costs is recorded based upon the
historical level of warranty claims and management’s estimates of future
costs.




Income
taxes




The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Additionally, on January 1, 2007, the Company adopted FASB Interpretation No. 48
(see New Accounting Standards in Note A).




Stock based
compensation




In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payments (revised
2004) (“SFAS 123R”). This statement eliminates the option to apply the
intrinsic value measurement provisions of APB Board Opinion No. 25, "Accounting
for Stock Issued to Employees", to stock compensation awards issued to
employees. Rather, the Statement requires companies to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant date fair value of the award. That cost will be recognized over the
period during which an employee is required to provide services in exchange for
the award -- the requisite service period (usually the vesting period). In March
2005, the SEC staff expressed their views with respect to SFAS 123R in Staff
Accounting Bulletin No. 107, Share-Based Payment, (“SAB
107”). SAB 107 provides guidance on valuing options. SFAS 123R became effective
for the Company's fiscal year beginning January 1, 2006. Effective January 1,
2006, the Company adopted SFAS 123R, Share-Based Payment, using the Modified
Prospective Approach. See Note G for further detail regarding the adoption of
this standard.




33
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Earnings per
share




The
Company accounts for loss per common share under the provisions of SFAS No. 128,
Earnings Per Share,
which requires a dual presentation of basic and diluted loss per common
share.  Basic loss per common share excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the year.  Diluted loss per
common share is computed assuming the conversion of common stock equivalents,
when dilutive.




For the
year ended December 31, 2007, the Company’s common stock equivalents, consisting
of warrants to purchase 326,461 shares of common stock, senior and subordinated
debt convertible into 1,550,081 common shares, and options to purchase 61,600
shares of common stock issued to employees under the 2005 Stock Option Plan,
were not included in computing diluted loss per share because their effects were
anti-dilutive.




For the
year ended December 31, 2006, the Company’s common stock equivalents, consisting
of warrants to purchase 550,450 shares of common stock, senior and subordinated
debt convertible into 2,992,151 common shares, and options to purchase 47,400
shares of common stock issued to employees under the 2005 Stock Option Plan,
were not included in computing diluted loss per share because their effects were
anti-dilutive.




Use of
estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Significant estimates are required in
accounting for inventory costing, asset valuations, costs to complete and
depreciation.  Actual results could differ from those
estimates.




Variable Interest
Entities




In
January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest
Entities.  FIN 46 addresses consolidation by business
enterprises of variable interest entities, which are entities that either (a) do
not have equity investors with vesting rights or (b) have equity investors that
do not provide sufficient financial resources for the entity to support its
activities.  The interpretation is effective immediately for variable
interest entities created after February 1, 2003.  In December 2003,
the FASB published FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities (“FIN-46(R)”). FIN 46(R), among other things, deferred the
effective date of implementation for certain entities. The Company adopted FIN
46(R) in 2004.




34
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Variable Interest Entities
(continued)




The
Company is involved with JAM Fox Investments LLC, which qualifies as a variable
interest entity. The variable interest entity is 100% owned by the CEO of the
Company. The Company’s involvement with the entity began on August 3, 2001, and
is limited to lease agreements for the use of four of its facilities. The entity
was formed for the purpose of acquiring real estate, and its activities
primarily relate to the leasing of such real estate to the Company. Management
has determined that the Company is not the primary beneficiary, thus no
consolidation is required. As of December 31, 2007, total assets and liabilities
of JAM Fox Investments LLC were $1,507 and $988, respectively. Management does
not believe that the Company has any exposure to loss resulting from its
involvement with JAM Fox Investments LLC as of December 31, 2007.




New Accounting
Standards




FSP EITF
00-19-2




In
December 2006, the Financial Accounting Standards Board (“FASB”) issued Staff
Position EITF 00-19-2, Accounting for Registration Payment
Arrangements. FSP EITF 00-19-2 specifies that the contingent obligation
to make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with FASB Statement No. 5 Accounting for Contingencies.
This FSP further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with applicable
generally accepted accounting principles without regard to the contingent
obligation to transfer consideration pursuant to the registration payment
arrangement. In accordance with the provisions of this FSP, the Company has
elected early adoption and has reclassified its warrant liability to equity (See
Note F).




SAB 110





In
December 2007, the SEC released new SAB No. 110, Year-end Relief for Stock Option
Expensing, extending the availability of Staff Accounting Bulletin No.
107 beyond its original deadline of December 31, 2007. SAB 107 provides a
simplified method for estimating the expected term of a “plain vanilla” option.
SAB 110 will permit eligible public companies to use a simplified method for
estimating stock option expense if they have inadequate historical experience to
provide a reasonable basis for estimating the expected term of an option grant.
Specifically, the Staff will accept the following simplified method for “plain
vanilla” options: expected term = (vesting term + original contractual term)/2.
Under the Financial Accounting Standard that requires the expensing of employee
stock options, companies may rely on algorithms such as the widely used
Black-Scholes-Merton model to determine the amount of stock option expense. This
model, as well as other models used, requires companies to estimate the expected
term of option grants. The Company adopted the “plain vanilla” option for
estimating the expected term of stock options under SAB 107 and, accordingly,
does not believe the adoption of SAB 110 will have a material impact on the
Company’s consolidated financial statements.







35
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




New Accounting Standards
(continued)




SFAS No.
141(R)





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“SFAS
No. 141(R)”). In SFAS No. 141(R), the FASB retained the fundamental requirements
of SFAS No. 141 to account for all business combinations using the acquisition
method (formerly the purchase method) and for an acquiring entity to be
identified in all business combinations. However, the new standard requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; requires transaction costs to be expensed as incurred;
and requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination. SFAS No. 141(R) is effective for annual periods
beginning on or after December 15, 2008. Accordingly, any business combinations
will be recorded and disclosed following existing GAAP until January 1, 2009.
The Company expects that SFAS No. 141(R) will have an impact on its consolidated
financial statements when effective, but the nature and magnitude of the
specific effects will depend upon the nature, terms and size of the acquisitions
consummated after the effective date.




SFAS
No. 155





In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments — an Amendment of FASB Statements No. 133 and
140. SFAS No. 155 allows financial instruments that contain an
embedded derivative and that otherwise would require bifurcation to be accounted
for as a whole on a fair value basis, at the holder’s election. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS
No. 133 and SFAS No. 140. This statement is effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The adoption of SFAS No. 155 did not have a
material impact on the Company’s consolidated financial statements.




SFAS No. 157and SFAS No.
159




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. In February 2007, the FASB
issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities—including an
amendment of FASB Statement No. 115(“SFAS 159”).SFAS 159
permits entities to choose to measure many financial instruments and certain
other assets at fair value and to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.SFAS
No. 157 and SFAS No. 159 are effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The Company is currently evaluating the impact that SFAS No. 157
and SFAS No. 159 will have on its consolidated financial
statements.










36
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)





NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




New Accounting Standards
(continued)




FIN 48





In June
2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109. FIN 48 the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. This
Interpretation is effective for fiscal years beginning after December 15, 2006.
The adoption of FIN 48 did not have a material impact on the Company’s
consolidated financial statements.




NOTE
B – ACQUISITIONS




On
October 19, 2007 the Company acquired 100% of the outstanding shares of common
stock of Ideal in a transaction accounted for using the purchase method. Ideal
is a provider of mechanical contracting services, including plumbing, HVAC and
industrial piping and provides maintenance services for mechanical systems. The
effective date of the acquisition was October 1, 2007 and, accordingly, the
results of operations are included in the Company’s consolidated financial
statements from that date forward. The aggregate purchase price of $1,025, which
included $952 paid in cash at closing plus costs of acquisition of $73, was
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the effective date of acquisition. The excess purchase price over
those fair values was recorded as goodwill. The fair value assigned to assets
acquired and liabilities assumed are based on valuations using management’s
estimates and assumptions. The allocation of the purchase price was as
follows:







Current
      assets
            
            $
            2,509Property,
      plant and equipment
            
            
            213Other
      assets
            
            
            12Goodwill
            
            
            633Current
      liabilities
            
            
            (2,333
            )Long-term
      liabilities
            
            
            (9
            )$
            1,025










37
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
B – ACQUISITIONS (CONTINUED)




On
November 30, 2007 the Company acquired 100% of the outstanding shares of common
stock of 3-D in a transaction accounted for using the purchase method of
accounting. Accordingly, the results of operations are included in the Company’s
consolidated financial statements from that date forward. 3-D is engaged in the
business of selling, repairing, remanufacturing, and maintaining industrial
electrical and mechanical equipment. The aggregate purchase price was $22,812,
including $16,700 paid in cash at closing plus costs of acquisition of $112,
$4,000 in notes payable on November 30, 2010 and 247,678 shares of MISCOR common
stock valued at $8.075 per share, or $2,000.




The
purchase price was allocated to assets acquired and liabilities assumed based on
their estimated fair value at the date of acquisition. The excess purchase price
over those fair values was recorded as goodwill. The fair value assigned to
assets acquired and liabilities assumed are based on valuations using
management’s estimates and assumptions and an independent valuation of the
property, plant and equipment and intangible assets. The allocation of the
purchase price was as follows:







Current
      assets
            
            $
            5,250Property,
      plant and equipment
            
            
            4,020Other
      assets
            
            
            3Goodwill
            
            
            7,370Customer
      relationships
            
            
            7,600Technical
      libarary
            
            
            700Current
      liabilities
            
            
            (2,131
            )$
            22,812








In May
2006, the Company acquired certain business assets of Smith Services of Alabama,
Inc. in a transaction accounted for using the purchase method. Accordingly, the
results of operations from these net assets acquired are included in the
Company’s consolidated financial statements from that date forward. The
acquisition of net assets was made for the purpose of expanding the Company’s
market penetration into the industrial services segment. The aggregate purchase
price was $3,569, and was allocated to assets acquired based on their estimated
fair values at the date of acquisition. The purchase price consideration
consisted of cash of $2,987 at closing, which paid for all inventory, property,
plant and equipment. The balance of $582, representing the accounts receivable
purchased less accounts payable assumed, was paid in July 2006.




The
allocation of the purchase price was as follows:





Accounts
      receivable
            
            $
            1,116Inventory
            
            
            224Property,
      plant and equipment
            
            
            2,613Accounts
      payable
            
            
            (384
            )$
            3,569





38
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
B – ACQUISITIONS (CONTINUED)




The
following table presents the unaudited results of operations of the Company as
if all of the acquisitions had been consummated as of January 1,
2006.







Years
      ended December 31,2007
            
            
            2006Revenues
            
            $
            97,829
            
            
            $
            90,150Net
      income (loss)
            
            $
            (221
            )
            
            $
            508Basic
      earnings (loss) per share
            
            $
            (0.03
            )
            
            $
            0.12Diluted
      earnings (loss) per share
            
            $
            (0.03
            )
            
            $
            0.11










NOTE
C - INVENTORY


Inventory
consists of the following:




December
      31,2007
            
            
            2006Raw
      materials
            
            $
            5,197
            
            
            $
            2,861Work-in-process
            
            
            4,846
            
            
            
            2,761Finished
      goods
            
            
            1,608
            
            
            
            2,33011,651
            
            
            
            7,952Less:
      allowance for slow moving and obsolete inventories
            
            
            (767
            )
            
            
            (312
            )$
            10,884
            
            
            $
            7,640





39
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
D - PROPERTY AND EQUIPMENT




Property
and equipment consists of the following:







December
      31,2007
            
            
            2006Land
      and building
            
            $
            1,800
            
            
            $
            1,800Leasehold
      improvements
            
            
            414
            
            
            
            343Machinery
      and equipment
            
            
            8,626
            
            
            
            4,819Construction
      in progress
            
            
            259
            
            
            
            220Vehicles
            
            
            1,475
            
            
            
            939Office
      and computer equipment
            
            
            1,052
            
            
            
            71413,626
            
            
            
            8,835Less
      accumulated depreciation
            
            
            (3,501
            )
            
            
            (2,515
            )$
            10,125
            
            
            $
            6,320








Depreciation
expense was $993 and $861 for years ended December 31, 2007 and 2006,
respectively.






NOTE
E – INTANGIBLE ASSETS




Intangible
assets consist of patents and trademarks, technical library and customer
relationships, and are reported net of accumulated amortization. The Company
amortizes the cost of intangible assets over the term of the patents and
trademarks, or the expected life of the technical library and customer
relationships which range from 10 to 20 years. As a result of the Company’s
acquisition of 3-D on November 30, 2007, the Company acquired a technical
library for $700 and customer relationships for $7,600, which have 20 year
useful lives. Amortization of intangible assets was $35 and $1 for the years
ending December 31, 2007 and 2006, respectively. We do not believe there is any
significant residual value associated with intangible assets. Intangible assets
consist of the following:




December
      31, 2007
            
            
            December
      31, 2006Accumulated
            
            
            
            
            
            
            
            
            AccumulatedGross
            
            
            Amortization
            
            
            Net
            
            
            Gross
            
            
            Amortization
            
            
            NetPatents
      and trademarks
            
            $
            4
            
            
            $
            (2
            )
            
            $
            2
            
            
            $
            4
            
            
            $
            (2
            )
            
            $
            2Technical
      library
            
            
            700
            
            
            
            (3
            )
            
            
            697
            
            
            
            -
            
            
            
            -
            
            
            
            -Customer
      relationships
            
            
            7,600
            
            
            
            (32
            )
            
            
            7,568
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      intangible assets
            
            $
            8,304
            
            
            $
            (37
            )
            
            $
            8,267
            
            
            $
            4
            
            
            $
            (2
            )
            
            $
            2




40
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
E – INTANGIBLE ASSETS (CONTINUED)




The
estimated future amortization expense related to intangible assets at December
31, 2007 is as follows:





Years
      Ending December 31,
            
            Amount2008
            
            $
            4162009
            
            
            4162010
            
            
            4152011
            
            
            4152012
            
            
            415Thereafter
            
            
            6,190Total
            
            $
            8,267


NOTE
F - DEBT




Line of
credit




In March
2007, the Company obtained a $5 million revolving credit facility from a bank
secured by accounts receivable. Proceeds were used for capital expenditures,
working capital and the acquisition of 100% of the common stock of Ideal for
$952 in October 2007. Interest is payable monthly at 1⁄2% over the Wall Street
Journal prime rate. The facility contains annual financial covenants, including
minimum tangible net worth, current ratio and debt coverage ratio, and maximum
debt to equity ratio. The line was paid off in full in December 2007 with
proceeds from the sale of MISCOR common stock in November 2007.




Long-term
debt




Long-term
debt consists of the following:




41
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share data)




NOTE
F - DEBT (CONTINUED)




December
      31,2007
            
            
            2006Note
      payable to stockholder, due December 2008, plus interest at prime rate
      less 1% (6.25% and 7.25% at December 31, 2007 and December 31, 2006,
      respectively) secured by a subordinated interest in substantially all
      assets owned by the Company
            
            $
            3,000
            
            
            $
            3,000Long-term
      debt, debentures (net of discount of $15 and $229 at December 31, 2007 and
      December 31, 2006, respectively) (see note below)
            
            
            2,965
            
            
            
            3,796Note
      payable to former employee in annual principal payments of
      $10,  unsecured and without interest, due March 7,
      2008
            
            
            10
            
            
            
            20Notes
      payable to former  stockholders of 3-D Service, Ltd. due
      November 30, 2010, plus interest at prime rate (7.25% at December 31,
      2007) secured by a subordinated interest in machinery and equipment of 3-D
      Service, Ltd.
            
            
            4,000
            
            
            
            -Note
      payable to bank in monthly installments of $3 through November 16, 2014,
      plus interest at 8% secured by a security interest in certain
      equipment
            
            
            197
            
            
            
            -Revolving
      note payable in August 2008 (net of discount of $438 at December 31, 2006)
      with interest payable monthly at 1% over the Wall Street Journal prime
      rate (9.25%  at December 31, 2006) secured by substantially all
      assets owned by the Company paid off in January 2007
            
            
            -
            
            
            
            5,759Term
      note payable in monthly principal payments of $100 plus interest at 1%
      over the Wall Street Journal prime rate (9.25% at December 31, 2006)
      secured by substantially all assets owned by the Company paid off in
      January 2007
            
            
            -
            
            
            
            2,000Revolving
      note payable in May 2009  with interest payable monthly at 1.5%
      over the Wall Street Journal prime rate (9.75%  at December 31,
      2006) secured by substantially all assets owned by the Company paid off in
      January 2007
            
            
            -
            
            
            
            741Term
      note payable in monthly principal payments of $70 plus interest at 1% over
      the Wall Street Journal prime rate (9.25% at December 31, 2006) secured by
      substantially all assets owned by the Company paid off in January
      2007
            
            
            -
            
            
            
            2,030Notes
      payable to bank in monthly principal payments of $1 through June 2009,
      without interest secured by certain vehicles
            
            
            18
            
            
            
            -Notes
      payable to bank in monthly principal payments of $1 through June 2009,
      without interest secured by certain vehicles
            
            
            15
            
            
            
            -Capital
      lease obligations
            
            
            26
            
            
            
            5910,231
            
            
            
            17,405Less:
      current portion
            
            
            3,036
            
            
            
            8,581$
            7,195
            
            
            $
            8,824





42
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
F - DEBT (CONTINUED)




Long-term debt,
debentures




In
January 2005, the Company commenced a private offering (the “Debenture
Offering”) of a maximum of $4,025 principal amount of subordinated secured
convertible debentures.  The debentures, which were payable on
February 28, 2007, bear interest at the rate of 6% per year, payable upon
conversion or at redemption or maturity.  The Company reserved 472,844
shares of common stock for issuance upon conversion of the debentures. The
Company issued the maximum $4,025 principal amount of debentures as of May 5,
2005. The debentures are secured by a second lien on substantially all of the
Company’s assets which is subordinate to the lien of the Company’s primary
lender.




In April
2006, the debenture holders agreed to extend the maturity from February 28, 2007
to February 28, 2008.  Investors will receive interest in cash only if
they elect not to convert their debentures. Each holder has the option any time
prior to the redemption date to convert principal and accrued interest under the
debentures into shares of MISCOR common stock at a fixed conversion price of
$8.512315 per share. In 2007 certain debenture holders converted debentures
totaling $1,045 into 122,764 shares of MISCOR common stock. Also, in 2008
certain debenture holders converted debentures totaling $2,740 into 321,887
shares of MISCOR common stock. The Company redeemed the remaining debentures
totaling $240 plus interest of $42 at maturity (See Note Q).




Each
purchaser of debentures received common stock purchase warrants for no
additional consideration.  Each warrant entitled its holder to
purchase one share of common stock for a five year period at an exercise price
of $0.025 per share. The Company has allocated 170,224 five-year common stock
purchase warrants among all purchasers of the debentures. The Company used the
Black-Scholes valuation model in estimating the fair value of common stock
purchase warrants.  The following assumptions were used for such
estimates:  no dividend yield, no expected volatility, risk-free
interest rate of 3.3% and an expected life of the common stock purchase warrants
of one year. The estimated fair value of these warrants was $836. This debt
discount is amortized to interest expense over the term of the debentures.
Interest expense was $164 and $255 for the years ended December 31, 2007 and
2006, respectively. In addition, for the year ended December 31, 2007, $50 in
debt discount was written off against common stock in conjunction with the
conversion of $1,045 of the aggregate principal amount of the debentures. Net
debt issue discount at December 31, 2007 and 2006 related to this instrument was
$15 and $229, respectively.




For its
services as placement agent in the Debenture Offering, MISCOR issued to its
placement agent, ten-year common stock purchase warrants to purchase 247,319
shares of MISCOR common stock at an exercise price of $0.025 per
share.  The Company used the Black-Scholes valuation model in
estimating the fair value of common stock purchase warrants.  The
following assumptions were used for such estimates:  no dividend
yield, no expected volatility, risk-free interest rate of 3.3% and an expected
life of the common stock purchase warrants of one year.  The estimated
fair value of the warrants issued to the placement agent was
$1,546.




43
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
F - DEBT (CONTINUED)




Long-term debt, debentures
(continued)




The
Company also paid the placement agent a fee of 10% of the amount raised in the
offerings, or $403. In addition, for its services as securities counsel in the
Debenture Offering, MISCOR issued 2,000 shares of its common stock to its
securities counsel, the fair value of these shares was $12. The summation of
these debt issue costs was $2,095. Interest expense was $445 and $695 for the
years ended December 31, 2007 and 2006, respectively. In addition, $137 in debt
issue costs was written off against common stock in conjunction with the
conversion of $1,045 of the aggregate principal amount of the debentures for the
year ended December 31, 2007. Net debt issue cost at year ended December 31,
2007 and 2006 related to these instruments was $40 and $622,
respectively.




Senior Debt
Financing




In August
2005, the Company entered into a Security and Purchase Agreement with Laurus
Master Fund, LTD. (“Laurus”). The Agreement provided financing comprised of a
$7,000 Revolving Note and a $3,000 Term Note. The Notes mature in August 2008.
Laurus agreed to advance funds under the Revolving Note in amounts up to 90% of
eligible trade accounts receivable. Interest is payable monthly under the
Revolving and Term Notes at 1% over prime as published in the Wall Street
Journal. The Notes are collateralized by a blanket security interest covering
substantially all assets owned by the Company. Proceeds from the financing were
used to repay the Company’s previous lender and for working
capital.




Laurus
had the option to convert all or any portion of the outstanding principal amount
and/or accrued interest under the Revolving Note into shares of MISCOR common
stock at the Fixed Conversion Price. Fixed Conversion Price means (i) with
respect to the first $3,500 of the aggregate principal amount converted, $4.75
per share or 736,842 shares and (ii) with respect to the remaining principal
amount converted, $8.00 per share or 437,500 shares. In August, 2005, the
Company borrowed $4,000 under the Revolving Note which was convertible into
799,342 shares of common stock at an average price of $5.005 per share. Since
the shares were valued at $6.25 per share, the intrinsic value of the beneficial
conversion feature for the difference between the fair value per share and the
conversion price per share was $996. The Company is accreting this debt discount
to interest expense over the term of the Revolving Note in accordance with
Emerging Issues Task Force Consensus (“EITF”) 98-5 and 00-27.




Up to
$4,000 of the Revolving Note may be segregated into a Minimum Borrowing Note to
facilitate the conversion into the Company’s common stock. The Company may
prepay all or a portion of the Minimum Borrowing Note by paying to Laurus one
hundred fifteen percent (115%) of the principal amount of this Note together
with interest. On September 29, 2006, Laurus converted $729 of the Revolving
Note due in August 2008 at a conversion rate of $4.75 per share for a total of
153,456 shares of the Company’s common stock. A prorata portion of the
unamortized debt discount related to the conversion totaling $132 was expensed
as interest at the time of the conversion. Total interest expense related to the
beneficial conversion feature was $10 and $447 for the years ended December 31,
2007 and 2006, respectively. In addition, for the year ended December 31, 2007,
$428 of the debt discount was written off in conjunction with the pay off of the
Laurus senior debt. Net debt issue discount at December 31, 2007 and 2006
related to this instrument was $-0- and $438, respectively.




44
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
F - DEBT (CONTINUED)




Senior Debt Financing
(continued)




As part
of the financing, Laurus received $360 in cash and was issued 246,544 shares of
the Common Stock at closing and warrants for 294,117 shares of the Common Stock
with an exercise price of $8.50 per share. The 246,544 shares were valued at
$6.25 per share or $1,541. The Company used the Black-Scholes valuation model in
estimating the fair value of the common stock purchase warrants.  The
following assumptions were used for such estimates:  no dividend
yield, no expected volatility, risk-free interest rate of 4.11% and an expected
life of the common stock purchase warrants of seven years.  The
Company also granted registration rights with respect to the shares issuable
upon exercise of the warrants (Note G). Total debt issue costs were $2,303. In
addition, for the year ended December 31, 2007, $1,232 of debt issue costs were
written off in conjunction with the pay off of the  Laurus senior
debt. Interest expense was $38 and $767 for the years ended December 31, 2007
and 2006, respectively.




Under the
registration rights agreement with Laurus, if the Company’s common stock is not
traded on the OTC Bulletin Board, Nasdaq or a national exchange for three
consecutive trading days and trading does not resume within 30 days, then,
subject to certain exceptions, for each day that any of those events is
occurring, we are required to pay Laurus an amount in cash equal to 1/30th of the
product of the outstanding principal amount owed to Laurus, multiplied by 0.01
(or approximately 1% per month).  As a result, the Company accounted
for these warrants as a liability in accordance with EITF No. 00-19 and View A
of EITF No. 05-4. The Company used the Black-Scholes valuation model in
estimating the fair value of the common stock purchase warrants. At December 31,
2006, the following assumptions were used for such estimates: no dividend yield,
expected volatility of 41.2%, risk-free interest rate of 4.7% and an expected
term of the common stock purchase warrants of 5.7 years. The Company recorded a
loss on warrant liability of $436 for year ended December 31, 2006.




As
described in Note A, the Company elected to early adopt FSP EITF 00-19-2, which
superceded the guidance under EITF No. 05-4, effective December 31,
2006.  Under this FSP, the warrants issued subject to a registration
rights agreement are accounted for in accordance with applicable generally
accepted accounting principles without regard to the contingent obligation to
transfer consideration pursuant to the registration rights
agreement.  As of December 31, 2006, the Company reclassified the
warrant liability of $436 to equity since the only provision which caused the
warrants issued to be accounted for as a derivative liability was the liquidated
damages provision in the registration rights agreement.  In recording
the reclassification entry, the Company credited $436 to retained earnings since
these warrants had no estimated fair value on the date of issuance. In addition,
the Company determined that no separate liability needed to be recorded related
to the registration rights agreement as of December 31, 2006, since the
registration rights penalty is based on a percentage of outstanding Laurus debt
and all outstanding debt due Laurus was subsequently paid in full in January
2007.




45
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
F - DEBT (CONTINUED)




Senior Debt Financing
(continued)




In May
2006, the Company entered into a second Security and Purchase Agreement with
Laurus. The Agreement provided financing comprised of a $1,600 Revolving Note
and a $2,100 Term Note. The Notes mature in May 2009. Laurus agreed to advance
funds under the Revolving Note in amounts up to 90% of eligible trade accounts
receivable. Interest is payable monthly at 2.5% and 1.5% over prime (9.75% at
December 31, 2006) as published in the Wall Street Journal for the first $.3
million and the remaining $1.3 million under the Revolving Note, respectively.
The maximum outstanding balance allowable under the Revolving Note decreases $10
per month beginning December 2006.




Under the
Term Loan, the Company must make monthly principal payments of $70 with interest
beginning December 2006. Interest is payable monthly at 1.0% over
prime (9.25% at December 31, 2006) as published in the Wall Street Journal
under the Term Note.




The Notes
are collateralized by a blanket security interest covering substantially all
assets owned by the Company. Proceeds from the financing were used to acquire
substantially all of the assets of E. T. Smith Services of Alabama, Inc., an
Alabama corporation (“Smith Alabama”) pursuant to the terms and subject to the
conditions included in an Asset Purchase Agreement dated May 31,
2006.




As part
of the financing, Laurus received $133 in cash and was issued warrants for
15,000 shares of the Common Stock with an exercise price of $0.25 per share.
Total debt issue costs were $156. In addition, for the year ended December 31,
2007, $123 of debt issue costs were written off in conjunction with the pay off
of the Laurus senior debt. Interest expense was $3 and $30 for the years ended
December 31, 2007 and 2006.




Under the
registration rights agreement with Laurus, , if the Company’s common stock is
not traded on the OTC Bulletin Board, Nasdaq or a national exchange for three
consecutive trading days and trading does not resume within 30 days, then,
subject to certain exceptions, for each day that any of those events is
occurring, the Company is required to pay Laurus an amount in cash equal to
1/30th of the
product of the outstanding principal amount owed to Laurus, multiplied by 0.01
(or approximately 1% per month).  As a result, the Company accounted
for these warrants as a liability in accordance with EITF No. 00-19 and View A
of EITF No. 05-4. The Company used the Black-Scholes valuation model in
estimating the fair value of the common stock purchase warrants. The following
assumptions were used for such estimates: no dividend yield, expected volatility
of 41.2%, risk-free interest rate of 4.7% and an expected term of the common
stock purchase warrants of 6.4 years. The Company recorded a loss on warrant
liability of $72 for the year ended December 31, 2006.




As
described in Note A, the Company elected to early adopt FSP EITF 00-19-2, which
supercedes the guidance under EITF No. 05-4, effective December 31,
2006.  Under this FSP, the warrants issued subject to a registration
rights agreement are accounted for in accordance with applicable generally
accepted accounting principles without regard to the contingent obligation to
transfer consideration pursuant to the registration rights
agreement.




46
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
F - DEBT (CONTINUED)




Senior Debt Financing
(continued)




As of
December 31, 2006, the Company reclassified the warrant liability of $72 to
equity since the only provision which caused the warrants issued to be accounted
for as a derivative liability was the liquidated damages provision in the
registration rights agreement.   In recording the
reclassification entry, the Company credited $91 to additional paid-in capital
which represents the estimated fair value of these warrants on the date of
issuance, offset by a debit to retained earnings of $19 which represents the
difference between the estimated fair value of these warrants at the date of
issuance and the estimated fair value as of December 31, 2006. In addition, the
Company determined that no separate liability needed to be recorded related to
the registration rights agreement as of December 31, 2006,  since the
registration rights penalty is based on a percentage of outstanding Laurus debt
and all outstanding debt due Laurus was subsequently paid in full in January
2007.




The
provisions of the $7,000 and $1,600 Revolving Notes include a lock-box
agreement and also allow Laurus, in its reasonable credit judgment, to assess
additional reserves against, or reduce the advance rate against accounts
receivable used in the borrowing base calculation. These provisions satisfy the
requirements for consideration of EITF Issue No. 95-22, "Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that
include both a Subjective Acceleration Clause and a Lock-Box Arrangement" ("EITF
95-22"). Based on further analysis of the terms of the Revolving Notes, there
are certain provisions that could potentially be interpreted as a subjective
acceleration clause. More specifically, Laurus, in its reasonable credit
judgment, can assess additional reserves to the borrowing base calculation or
reduce the advance rate against accounts receivable to account for changes in
the nature of the Company's business that alters the underlying value of the
collateral. The reserve requirements may result in an overadvance borrowing
position that could require an accelerated repayment of the overadvance portion.
Since the inception of these Revolving Note facilities, Laurus has not applied
any additional reserves to the borrowing base calculation. The Company does not
anticipate any changes in its business practices that would result in any
material adjustments to the borrowing base calculation. However, management
cannot be certain that additional reserves will not be assessed by Laurus to the
borrowing base calculation. As a result, the Company classifies borrowings under
the Revolving Note facilities as short-term obligations.




In
January 2007, the Company paid off all outstanding senior debt financing,
accrued interest and prepayment penalties of $9,921, $42 and $517, respectively,
upon the issuance of 2,500,000 shares of its common stock at a price of $5.00
per share for a total of $12,500. The remaining proceeds of $2,040 were used to
pay for related legal costs, for general working capital purposes and to reduce
accounts payable. The Company recorded a loss on the extinguishment of debt of
$2,300 in the year ended December 31, 2007.




Capital Lease
Obligations




The
Company leases certain equipment under agreements that are classified as capital
leases. The following is a summary of capital leases:









47
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
F - DEBT (CONTINUED)




Senior Debt Financing
(continued)







December
      31,2007
            
            
            2006Machinery
      & Equipment
            
            $
            83
            
            
            $
            83Less
      accumulated depreciation
            
            
            (27
            )
            
            
            (12
            )$
            56
            
            
            $
            71








Minimum
future lease payments required under capital leases as of December 31, 2007 for
each of the next two years and in the aggregate are:




Years
      Ending2008
            
            $
            172009
            
            
            11Total
      minimum lease payments
            
            
            28Less
      imputed interest
            
            
            (2
            )Present
      value of net minimum lease payments
            
            $
            26








Aggregate
maturities of long-term debt for the five years subsequent to December 31, 2007
are as follows:




Years Ending December 31,
            
            Amount2008
            
            $
            3,0512009
            
            
            442010
            
            
            4,0262011
            
            
            292012
            
            
            31





48
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
F - DEBT (CONTINUED)




Senior Debt Financing
(continued)




Following
is a summary of interest expense for the years ended December 31, 2007 and
2006:







Years
      Ended December 31,2007
            
            
            2006Interest
      expense on principal
            
            $
            600
            
            
            $
            1,209Amortization
      of debt issue costs - debentures and revolving notes
    payable
            
            
            486
            
            
            
            1,493Amortization
      of debt discount -debentures and revolving notes payable
            
            
            173
            
            
            
            702Total
      interest expense
            
            $
            1,259
            
            
            $
            3,404







NOTE
G – EQUITY ISSUANCES




Common Stock
Issuance




On
January 18, 2007, the Company sold 2,000,000 shares of common stock to Tontine
Capital Partners, L.P. (“TCP”) and 500,000 shares of common stock to Tontine
Capital Overseas Master Fund, L.P. (“TCOMF,” and collectively with TCP referred
to herein as “Tontine”) for $5.00 per share or $12,500. Proceeds were used to
cover related legal fees of approximately $75 and to retire all of the
outstanding senior debt due to Laurus as of that date in the amount of $10,480,
including interest of $42 and $517 in prepayment penalties. The Company used the
balance of the proceeds for working capital and to reduce past due accounts
payable.




The
Company did not register the issuance of the shares of common stock to Tontine
with the SEC under the Securities Act of 1933, as amended (the “Securities
Act”), in reliance on exemptions from the registration requirements of the
Securities Act. The Company and Tontine entered into a registration rights
agreement, dated January 18, 2007, pursuant to which the Company agreed to
register for resale the shares issued to Tontine. The Company filed a
registration statement on Form S-1 with the Securities and Exchange Commission
(“SEC”) on July 13, 2007, covering the shares issued to Tontine.  This
registration statement has not yet been declared effective by the
SEC.




Under the
January 18, 2007 registration rights agreement, the Company agreed to use its
reasonable best efforts to cause the registration statement to be declared
effective under the Securities Act on or before January 18, 2008 and to keep the
registration statement continuously effective until such time as the common
stock is no longer deemed to be registrable securities. However, there are no
specific penalty provisions in connection with the registration rights agreement
and, therefore, the investors in the private placement are not entitled to
receive any additional benefit if the registration does not occur.




49
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
G – EQUITY ISSUANCES (CONTINUED)




Common Stock Issuance
(Continued)




On
November 30, 2007, the Company sold 2,666,667 shares of common stock to TCP and
666,666 shares of common stock to TCOMF for $6.00 per share or $20,000. Proceeds
were used to fund the acquisition of 3-D for $16,700 and to retire all amounts
due to bank under the revolving credit facility as of that date in the amount of
$2,020, including interest of $5. The Company used the balance of the proceeds
for working capital.




The
Company did not register the issuance of the shares of common stock to Tontine
with the SEC under the Securities Act of 1933, as amended (the “Securities
Act”), in reliance on exemptions from the registration requirements of the
Securities Act. The Company and Tontine entered into a registration rights
agreement, dated November 30, 2007, pursuant to which the Company agreed to
register for resale the shares issued to Tontine. The Company has not filed a
registration statement on Form S-1 with the SEC covering the shares issued to
Tontine.




Equity Incentive
Plans




2005 Stock Option
Plan





In August
2005, the board of directors adopted the 2005 Stock Option Plan (“the Plan”).
The Plan provides for the grant of up to 80,000 shares of Incentive Stock
Options (“ISO”), within the meaning of Section 422 of the Internal Revenue Code,
or non-statutory stock options (“NQSO”) to the Company’s executive employees who
are materially responsible for the management and operation of its business, and
to the Company’s directors. The exercise price of the ISOs and NQSOs granted
under the Plan must be at least equal to 100% of the fair market value of the
common stock of the Company at the date of grant. Also, ISOs may be granted to
persons owning more than 10% of the voting power of all classes of stock, at a
price no lower than 110% of the fair market value of the common stock at the
date of grant.




On
September 30, 2005, the Company granted stock options to certain executives to
acquire a total of 20,000 shares of the Company’s common stock at an exercise
price of $6.25 per share under the Plan. The options, which expire in five
years, are exercisable in 25% cumulative increments on and after the first four
anniversaries of their grant date. At the time of issuance of the stock options
to acquire 20,000 shares of the Company’s common stock, the estimated fair value
of the Company’s common stock was $6.25 per share. The fair value of the
Company’s common stock was determined contemporaneously and based upon the most
recent sale of the Company’s common stock. As a result, such stock options had
no intrinsic value at the time of issuance.




Effective
January 1, 2006, the Company adopted SFAS No. 123R using the Modified
Prospective Approach.  SFAS No. 123R revises SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles Opinion (“APB”) No. 25,
Accounting for Stock Issued to
Employees.  SFAS No. 123R requires the cost of all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based upon their fair values at grant
date, or the date of later modification, over the requisite service
period.  In addition, SFAS No. 123R requires unrecognized cost (based
on the amounts previously disclosed in the Company’s pro forma footnote
disclosure) related to options vesting after the initial adoption to be
recognized in the financial statements over the remaining requisite service
period.




50
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
G – EQUITY ISSUANCES (CONTINUED)




Equity Incentive Plans
(Continued)




2005 Stock Option Plan
(Continued)







Under the
Modified Prospective Approach, the amount of compensation cost recognized
includes (a) compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123R.  Prior to the adoption of SFAS No. 123R,
the Company accounted for its stock-based compensation plans under the
recognition and measurement provisions of APB No. 25.




As a
result of adopting SFAS No. 123R on January 1, 2006, the Company recorded
compensation cost of $5 for the year ended December 31, 2006 based on the grant
date fair value of the award of 20,000 shares at $6.25 per share. The total cost
of the grant in the amount of $18 will be recognized over the four year period
during which the employees are required to provide services in exchange for the
award -- the requisite service period (usually the vesting period).




On August
3, 2006, the Company granted stock options to acquire 47,400 shares of the
Company’s common stock at an exercise price of $6.25 per share under the
Plan.  Of the 47,400 total options, 20,000 shares were granted to
outside Directors.  These options expired in 30 days from the date of
grant.  Options for 10,000 of these shares were exercised in August
2006 at $6.25 per share and the remaining options expired.  The fair
value of the options was estimated using the Black-Scholes valuation model,
straight-line amortization and the following assumptions: expected term of 1
month, risk-free interest rate of 5.18%, volatility of 41.72%, no dividend yield
and fair value of grant of $6.25. The total cost of the grant in the amount of
$6 was recognized in the year ended December 31, 2006, over the 30 day period
during which the directors were required to provide services in exchange for the
award.




The
remaining 27,400 options were granted to an executive, outside directors, and
certain key employees.  These options, which expire in five years, are
exercisable in 25% cumulative increments on and after the first four
anniversaries of their grant date.  At the time of issuance of the
stock options, the estimated fair value of the Company’s common stock was $6.25
per share. The fair value of the Company’s common stock was determined
contemporaneously and based upon the most recent sale of the Company’s common
stock. The fair value of the options was estimated using the Black-Scholes
valuation model and the following assumptions: expected term of 3.75 years,
risk-free interest rate of 4.91%, volatility of 41.72% and no dividend yield.
The Company recorded compensation cost based on the grant date fair value of the
award of 27,400 shares at $6.25 per share.  The total cost of the
grant in the amount of $67 will be recognized over the four year period during
which the employees are required to provide services in exchange for the award -
the requisite service period.




51
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
G – EQUITY ISSUANCES (CONTINUED)




Equity Incentive Plans
(continued)




2005 Stock Option Plan
(continued)







On
January 19, 2007, the Company granted stock options to certain executives and
key employees to acquire 14,000 shares of the Company’s common stock at an
exercise price of $5.375 per share under the Plan.  These options,
which expire in five years, are exercisable in 25% cumulative increments on and
after the first four anniversaries of their grant date. At the time of issuance
of the stock options, the estimated fair value of the Company’s common stock was
$5.375 per share. The fair value of the Company’s common stock was determined
based upon the average of the high and low sale prices of the Company’s common
stock on the date of grant.




The fair
value of the options was estimated using the Black-Scholes valuation model and
the following assumptions:  expected term of 4 years, risk-free
interest rate of 4.81%, volatility of 41.27% and no dividend
yield.  The Company recorded compensation cost based on the grant date
fair value of the award of 14,000 shares at $5.375 per share. The total cost of
the grant in the amount of $29 will be recognized over the four year period
during which the employees are required to provide services in exchange for the
award - the requisite service period.




On
November 19, 2007, the Company granted stock options to certain executives and
key employees to acquire 2,400 shares of the Company’s common stock at an
exercise price of $8.575 per share under the Plan.  These options,
which expire in five years, are exercisable in 25% cumulative increments on and
after the first four anniversaries of their grant date. At the time of issuance
of the stock options, the estimated fair value of the Company’s common stock was
$8.575 per share. The fair value of the Company’s common stock was determined
based upon the average of the high and low sale prices of the Company’s common
stock on the date of grant.




The fair
value of the options was estimated using the Black-Scholes valuation model and
the following assumptions:  expected term of 4 years, risk-free
interest rate of 3.37%, volatility of 42.36% and no dividend
yield.  The Company recorded compensation cost based on the grant date
fair value of the award of 2,400 shares at $8.575 per share. The total cost of
the grant in the amount of $8 will be recognized over the four year period
during which the employees are required to provide services in exchange for the
award.




On
November 30, 2007, the Company granted stock options to one executive to acquire
4,000 shares of the Company’s common stock at an exercise price of $8.375 per
share under the Plan.  These options, which expire in five years, are
exercisable in 25% cumulative increments on and after the first four
anniversaries of their grant date. At the time of issuance of the stock options,
the estimated fair value of the Company’s common stock was $8.375 per share. The
fair value of the Company’s common stock was determined based upon the average
of the high and low sale prices of the Company’s common stock on the date of
grant.




52
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
G – EQUITY ISSUANCES (CONTINUED)




Equity Incentive Plans
(continued)




2005 Stock Option Plan
(continued)







The fair
value of the options was estimated using the Black-Scholes valuation model and
the following assumptions:  expected term of 4 years, risk-free
interest rate of 3.25%, volatility of 42.36% and no dividend
yield.  The Company recorded compensation cost based on the grant date
fair value of the award of 4,000 shares at $8.375 per share. The total cost of
the grant in the amount of $13 will be recognized over the four year period
during which the employees are required to provide services in exchange for the
award.




The
expected term used in the Black-Scholes valuation model represents the period
that stock-based awards are expected to be outstanding, giving consideration to
the contractual terms of the stock-based awards, vesting schedules and
expectations of future employee behavior as influenced by changes to the terms
of our stock-based awards. We have elected to use the simplified method of
determining the expected term, as permitted by SEC Staff Accounting Bulletin 107
and 110. The computation of expected volatility for stock-based awards is based
on the historical volatility of comparable companies from a representative peer
group selected based on industry and market capitalization data. As required by
SFAS No. 123(R), management estimates expected forfeitures and is recognizing
compensation costs only for those equity awards expected to vest.




The
Company recorded compensation expense related to all stock options of $26 and
$18 for years ended December 31, 2007 and 2006, respectively.









53
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share data)




NOTE
G – EQUITY ISSUANCES (CONTINUED)




Equity Incentive Plans
(continued)




2005 Stock Option Plan
(continued)







Following
is a summary of the activity in the option plan:




WeightedAverageNumber
      of
            
            
            ExerciseShares
            
            
            PriceOutstanding
      at January 1, 2006
            
            
            20,000
            
            
            $
            6.25Granted
            
            
            47,400
            
            
            $
            6.25Exercised
            
            
            (10,000
            )
            
            $
            6.25Forfeited
            
            
            (10,000
            )
            
            $
            6.25Outstanding
      at December 31, 2006
            
            
            47,400
            
            
            $
            6.25Granted
            
            
            20,400
            
            
            $
            6.38Exercised
            
            
            (2,000
            )
            
            $
            6.25Forfeited
            
            
            (4,200
            )
            
            $
            5.96Outstanding
      at December 31, 2007
            
            
            61,600
            
            
            $
            6.30Exercisable
      at December 31, 2007
            
            
            14,150
            
            
            $
            6.25Weighted
      average fair value of options granted during 2006
            
            $
            1.55Weighted
      average fair value of options granted during 2007
            
            $
            2.42










54
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
G – EQUITY ISSUANCES (CONTINUED)




Equity Incentive Plans
(continued)




2005 Restricted Stock
Purchase Plan







Following
is a summary of the status of fixed options outstanding at December 31,
2007:







Outstanding
      Options
            
            Exercisable
      OptionsPrice Range
            
            Number
            
            WeightedAverage Remaining Contractual
      Life
            
            WeightedAverage Exercise Price
            
            Number
            
            WeightedAverage Exercise Price$
      6.25
            
            18,000
            
            2.75
      years
            
            $   6.25
            
            8,000
            
            $    6.25$
      6.25
            
            24,600
            
            3.58
      years
            
            $   6.25
            
            6,150
            
            $    6.25$
      5.38
            
            12,600
            
            4.04
      years
            
            $   5.38
            
            -
            
            -$
      8.58
            
            2,400
            
            4.88
      years
            
            $   8.58
            
            -
            
            -$
      8.38
            
            4,000
            
            4.92
      years
            
            $   8.38
            
            -
            
            -








In August
2005, the board adopted the 2005 Restricted Stock Purchase Plan. The Plan
provides for the grant of offers to purchase 100,000 shares of restricted stock
to the Company’s directors, officers and key employees. A participant may not
transfer shares acquired under the Plan except in the event of the sale or
liquidation of the Company. If within three years after shares are acquired
under the Plan, a participant terminates employment for any reason other than
death, disability, retirement or good reason, the Company is required to
purchase the participant’s shares for the same price the participant paid. If
the participant terminates employment after three years or as a result of death,
disability or retirement or for good reason, the Company is required to purchase
the shares for a price equal to their fair market value.




On August
3, 2006, the Company issued offers to purchase 2,000 shares of common stock at a
nominal price of $0.025 per share to certain key employees.  The fair
value of the restricted stock issued was estimated using the Black-Scholes
valuation model and the following assumptions: expected term of 3 years,
risk-free interest rate of 4.92%, volatility of 41.72% and no dividend
yield. The Company charged deferred compensation and credited additional
paid-in capital in the amount of $12.  The issuance of the restricted
stock was intended to lock-up key employees for a three year
period.  As a result, the Company is recording compensation expense
over the three year restriction period.




55
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share data)




NOTE
G – EQUITY ISSUANCES (CONTINUED)




Equity Incentive Plans
(continued)




On
January 19, 2007, the Company issued offers to purchase 4,200 shares of common
stock at a nominal price of $0.025 per share to certain key
employees.  The fair value of the restricted stock issued was
estimated using the Black-Scholes valuation model and the following
assumptions:  expected term, representing the restriction period of 3
years, risk-free interest rate of 4.83%, volatility of 41.27% and no dividend
yield. The Company charged deferred compensation and credited additional paid-in
capital in the amount of $22.  The issuance of the restricted stock
was intended to lock-up key employees for a three year period.  As a
result, the Company is recording compensation expense over the three year
restriction period.




On
November 30, 2007, the Company issued offers to purchase 2,000 shares of common
stock at a nominal price of $0.025 per share to one key employee.  The
fair value of the restricted stock issued was estimated using the Black-Scholes
valuation model and the following assumptions:  expected term,
representing the restriction period of 3 years, risk-free interest rate of
3.09%, volatility of 42.36% and no dividend yield. The Company charged deferred
compensation and credited additional paid-in capital in the amount of
$17.  The issuance of the restricted stock was intended to lock-up the
key employee for a three year period.  As a result, the Company is
recording compensation expense over the three year restriction
period.




Compensation
expense related to all restricted stock offers of $32 and $22 was recorded for
the years ended December 31, 2007 and 2006, respectively.




EmployeeStockPurchasePlan




In
December 2006, the Corporation's Board of Directors and stockholders approved
the MISCOR Group, Ltd. Employee Stock Purchase Plan (the "ESPP") under which
eligible employees may purchase the Company's common stock at a price per share
equal to 90% of the lower of the fair market value of the common stock at the
beginning or end of each offering period. Each offering period of the ESPP lasts
three months, with the first offering period commencing on April 1, 2007.
Participation in the offering may range from 2% to 8% of an employee's base
salary (not to exceed $5,000 annually or amounts otherwise allowed under Section
423 of the Internal Revenue Code). Participation may be terminated at any time
by the employee, and automatically ends on termination of employment with the
company. A total of 640,000 shares of common stock have been reserved for
issuance under the ESPP. The common stock to satisfy the stock purchases under
the ESPP will be newly issued shares of common stock. During the year ended
December 31, 2007, 10,171 shares were purchased under the ESPP. As of December
31, 2007 there were 629,829 shares available for future offerings. The Company
recorded compensation expense of $20 for the year ended December 31,
2007.




56
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)





NOTE
H - INCOME TAXES




Deferred
income taxes result primarily from temporary differences in the bases of certain
assets and liabilities for financial and income tax reporting purposes.
Significant components of the Company’s deferred tax assets and liabilities are
as follows:







December
      31,2007
            
            
            2006Deferred
      tax assets:Net
      operating losses carryforwards
            
            $
            1,870
            
            
            $
            1,934Accounts
      receivable
            
            
            268
            
            
            
            141Inventory
            
            
            1
            
            
            
            1Warranty
      reserve
            
            
            229
            
            
            
            72Accrued
      interest on debentures
            
            
            228
            
            
            
            -Accrued
      expenses and
      other
            
            
            127
            
            
            
            53Total
      gross deferred tax assets
            
            
            2,723
            
            
            
            2,201Valuation
      allowance
            
            
            (931
            )
            
            
            (1,841
            )1,792
            
            
            
            360Deferred
      tax liabilities:Property,  equipment
      and intangibles
            
            
            (1,792
            )
            
            
            (360
            )Net
      deferred tax asset
            
            $
            -
            
            
            $
            -








The
valuation allowance has been established due to the uncertainty of realizing the
benefits of tax loss carryforwards.  The allowance decreased $152
during the year ended December 31, 2007 and increased $208 in the year ended
December 31, 2006, respectively, due primarily to decreases and increases in the
loss carryforwards for 2007 and 2006, respectively. At December 31, 2007, net
operating loss carryforwards of $4,546 were available to be applied against
future taxable income.  A portion of the net operating loss carryforward is
subject to certain annual limitations imposed under Section 382 of the Internal
Revenue Code of 1986.




As
discussed in Note A, the Company adopted the provisions of FIN 48 on January 1,
2007. As a result of this adoption, the Company did not identify any uncertain
tax positions taken or expected to be taken in a tax return which would require
adjustment to the consolidated financial statements.




57
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
I - LEASE COMMITMENTS




The
Company leases its Mobile, Alabama; South Bend, Indiana; Hammond, Indiana; and
Boardman, Ohio facilities from companies controlled by its CEO under agreements
expiring between February 2009 and December 2014.  The Company leases
its main Martell Electric facility from Martell Properties, LLC under an
agreement expiring in December 2011. The facility is owned by the children of
the CEO. The Company leases the Hagerstown, Maryland facility from a
Partnership, one partner of which is an officer of HKEC, under an agreement
expiring in July 2011. The Company leases the Massillon, Ohio facility from a
partnership, one partner of which is an officer of MIS, under an agreement
expiring in November 2017. The Company leases its Indianapolis, Indiana;
Merrillville, Indiana; Seattle, Washington; Huntington, West Virginia; Little
Rock, Arkansas; Cincinnati, Ohio and Elkhart, Indiana facilities from unrelated
parties under agreements expiring between June 2007 and December 2010. Total
rent expense for all facility leases was approximately $868 and $732 for the
years ended December 31, 2007 and 2006, respectively.




The
Company also leases other manufacturing and office equipment under operating
leases with varying terms expiring through April 2011.  Total rent
expense under these leases was approximately $242 and $164 for the years ended
December 31, 2007 and 2006, respectively.




Future
minimum lease payments required under the operating leases in effect in excess
of one year as of December 31, 2007 are as follows:







Years Ending December 31,
            
            Amount2008
            
            $
            1,6062009
            
            
            1,4572010
            
            
            1,3622011
            
            
            9852012
            
            
            681Thereafter
            
            
            2,898$
            8,989


NOTE
J - RELATED PARTY TRANSACTIONS




Long-term debt,
other




The
Company was indebted to the estate of a former employee for a note payable with
a balance of $10 and $20 at December 31, 2007 and 2006, respectively. The
unsecured note is payable in annual principal installments of $10 and is
non-interest bearing. The note was paid off in 2008 (see Note F).




58
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share data)


NOTE
J - RELATED PARTY TRANSACTIONS (CONTINUED)




Long-term debt,
stockholders




The
Company was indebted to its CEO for a note payable with a balance of $3,000 at
December 31, 2007 and 2006 (see Note F).  Interest is payable monthly
at prime less 1%. The loan matures on December 31, 2008, except that the Company
can extend the maturity for five years upon 60 days’ prior written notice at an
interest rate of prime plus 1%.   It is the Company’s intention
to extend the maturity in the event the note is not converted into shares of
MISCOR common stock. Accordingly, the note has been classified as long-term
debt. Interest expense on the note was $212 and $210 for the years ended
December 31, 2007 and 2006, respectively.




The
Company was indebted to the former shareholders of 3-D, both of whom are
shareholders of MISCOR and one of whom is President of MIS, for notes payable
with a balance of $2,000 each at December 31, 2007 (see Note
F).  Interest is payable monthly at prime. The loan matures on
November 30, 2010.




Leases




As
discussed in Note I, the Company leases its South Bend, Indiana; Hammond,
Indiana; Mobile, Alabama; and Boardman, Ohio facilities from its
CEO.  Total rent expense under these agreements was approximately $330
and $326 for the years ended December 31, 2007 and 2006,
respectively.




In 2005,
the Company leased a manufacturing facility in Hagerstown, Maryland from a
Partnership, one partner of which is an officer of HKEC, under an agreement
expiring in July 2011. Rent expense under the lease was approximately $153 and
$150 for the years ended December 31, 2007 and 2006, respectively.




In
January 2007, the Company leased a facility in South Bend, Indiana from Martell
Properties, LLC under an agreement expiring in December 2011. The facility is
owned by the children of the CEO. Rent expense under the lease was approximately
$89 for the year ended December 31, 2007.




In
November 2007, The Company leased a facility in Massillon, Ohio from a
partnership, one partner of which is an officer of MIS, under an agreement
expiring in November 2017. Rent expense under the lease was $45 for the year
ended December 31, 2007.






NOTE
K - RETIREMENT PLANS




In
connection with its collective bargaining agreements with various unions, the
Company participates with other companies in the unions’ multi-employer pension
plans.  These plans cover all of the Company’s employees who are
members of such unions.  The Employee Retirement Income Security Act
of 1974, as amended by Multi-Employer Pension Plan Amendments Act of 1980,
imposes certain liabilities upon an employer’s withdrawal from, or upon
termination of, such plans.  The Company has no plan to withdraw from
these plans.




59
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share data)


NOTE
K - RETIREMENT PLANS (CONTINUED)




The plans
do not maintain information of net assets, and the actuarial present value of
the accumulated share of the plan’s unfunded vested benefits allocable to the
Company, and amounts, if any, for which the Company may be contingently liable,
are not ascertainable at this time.  Total contributions to the plans
were $1,027 and $706 for the years ended December 31, 2007 and 2006,
respectively.




In 2002,
the Company adopted two defined contribution profit-sharing plans covering
substantially all of its full-time employees.  The plans contain
deferred-salary arrangements under Internal Revenue Code Section
401(k).  One plan is for all employees not covered under collective
bargaining agreements. Employer contributions may be made at the discretion of
the Board of Directors.  Under the second plan, which is for all
employees covered by collective bargaining agreements, there is no provision for
employer contributions. 3-D Services adopted a defined contribution
profit-sharing plan covering substantially all of its full-time
employees.  The plan contains deferred-salary arrangements under
Internal Revenue Code Section 401(k). Employer contributions may be made at the
discretion of the Board of Directors. Employer contributions to the plans were
$82 and $44 for the years ended December 31, 2007 and 2006,
respectively.




The
Company has a simple retirement plan covering certain full-time non-union
employees of Ideal. The Company contributes to the plan at its
discretion.  Currently the Company contributes 100% of employee
contributions to the plan up to a maximum of 3% per year per
employee.  Contributions to the plan for the year ended December 31,
2007 were $2.




NOTE
L - CONCENTRATIONS OF CREDIT RISK




The
Company grants credit, generally without collateral, to its customers, which are
primarily in the steel, metal working, and scrap
industries.  Consequently, the Company is subject to potential credit
risk related to changes in economic conditions within those
industries.  However, management believes that its billing and
collection policies are adequate to minimize the potential credit
risk.  At December 31, 2007 and 2006, approximately 14% and 21% of
gross accounts receivable were due from entities in the steel, metal working and
scrap industries, respectively, and 18% and 19% of gross receivables were due
from entities in the railroad industry. No single customer accounted for more
than 10% of gross accounts receivable at December 31, 2007 and
2006.  Additionally, no single customer accounted for more than 10% of
sales for the years ended December 31, 2007 and 2006.


NOTE
M - COMMITMENTS AND CONTINGENCIES




Collective bargaining
agreements




At
December 31, 2007 and 2006, approximately 37% of the Company’s employees were
covered by multi-employer collective bargaining agreements.  Two of
the collective bargaining agreements expire in 2008 representing 21% of the
Company’s employees at December 31, 2007.




60
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
M - COMMITMENTS AND CONTINGENCIES (CONTINUED)




Potential
lawsuits




The
Company is involved in disputes or legal actions arising in the ordinary course
of business.  Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company’s financial position
or results of operations.




Employment
Agreements




On
September 30, 2005, the Company entered into employment agreements with its
executive officers. Each agreement is for an initial three-year term, subject to
earlier termination as provided in the agreement. The term will automatically
renew for successive one-year periods unless either party, at least three months
before the end of the initial term or any renewal term, requests termination or
renegotiation of the agreement. Each employment agreement provides for certain
benefits to the executive if employment is terminated by the Company for cause,
by the executive without good reason, or due to death or disability. The
benefits include continuation of a multiple of the executive’s base salary for
one to three years depending on the executive, any earned but unpaid
profit-sharing or incentive bonus, and company-paid health insurance for one
year.




On
November 30, 2007, the Company entered into an employment agreement with an
executive officer for an initial three-year term, subject to earlier termination
as provided in the agreement. The term will automatically renew for successive
one-year periods unless terminated by either party thirty days prior to the
effective date of termination. The Company is not obligated to pay any
compensation or benefits should the officer terminate for any
reason.






NOTE
N - FAIR VALUE OF FINANCIAL INSTRUMENTS




The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:




Cash, accounts receivable,
accounts payable and accrued expenses




The
carrying amounts of these items are a reasonable estimate of their fair values
because of the current maturities of these instruments.




Debt and stockholder
guarantees




The fair
value of debt differs from the carrying amount due to guarantees by the
Company’s CEO.  At December 31, 2007 and 2006, the aggregate fair
value of debt, with an aggregate carrying value of $10,231 and $17,405,
respectively, is estimated at $11,336 and $20,633, respectively, and is based on
the estimated future cash flows discounted at terms at which the Company
estimates it could borrow such funds from unrelated parties and without
guarantees from the Company’s CEO.




61
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share data)




NOTE
O – SEGMENT INFORMATION




The
Company reports segment information in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise.  Through December 31, 2006, the Company operated
primarily in three segments; industrial services, electrical contracting
services and engine components.




These
three segments are managed separately because they offer different products and
services and each segment requires different technology and marketing
strategies.  The Company intends to integrate the selling efforts of
HK Engine Components and MIS to further penetrate the rail
industry.




Effective
January 1, 2007, the Company realigned its segment reporting and reduced the
number of business segments from three to two. The former diesel engine
components segment and substantially the entire former industrial services
segment were combined into the repair, remanufacturing and manufacturing
segment. The former electrical contracting segment and one location of the
former industrial services segment, involved in the repair of electrical power
distribution systems within industrial plants and commercial facilities, were
combined to form the construction and engineering services segment.




The
repair, remanufacturing and manufacturing segment is primarily engaged in
providing maintenance and repair services to the electric motor industry,
repairing, remanufacturing and manufacturing industrial lifting magnets for the
steel and scrap industries  and power assemblies, engine parts, and
other components related to large diesel engines for the rail, utilities and
offshore drilling industries. The construction and engineering services segment
provides a wide range of electrical contracting services, mainly to industrial,
commercial and institutional customers. The realignment was necessary to better
serve the market and to reflect the revised manner in which the Company manages
its business resources.




The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note A.  The Company
evaluates the performance of its business segments based on net income or loss.
Corporate administrative and support services for MISCOR are not allocated to
the segments but are presented separately.




Summarized
financial information concerning the Company’s reportable segments as of and for
the years ended December 31, 2007 and 2006 is shown in the following
tables:














62
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
O – SEGMENT INFORMATION (CONTINUED)




2007
            
            Repair,
      Manfacturing &Remanufacturing
            
            
            Construction& EngineeringServices
            
            
            Corporate
            
            
            IntersegmentEliminations
            
            
            December
      31,2007ConsolidatedExternal
      revenue:Product
      sales
            
            $
            22,270
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            22,270Service
      revenue
            
            
            29,464
            
            
            
            21,516
            
            
            
            -
            
            
            
            -
            
            
            
            50,980Intersegment
      revenue:Product
      sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Service
      revenue
            
            
            -
            
            
            
            118
            
            
            
            -
            
            
            
            (118
            )
            
            
            -Depreciation
      included in cost of revenues
            
            
            747
            
            
            
            133
            
            
            
            -
            
            
            
            -
            
            
            
            880Gross
      profit
            
            
            9,631
            
            
            
            2,653
            
            
            
            -
            
            
            
            (118
            )
            
            
            12,166Other
      depreciation & amortization
            
            
            79
            
            
            
            28
            
            
            
            43
            
            
            
            -
            
            
            
            150Interest
      expense
            
            
            255
            
            
            
            -
            
            
            
            1,004
            
            
            
            -
            
            
            
            1,259Net
      income (loss)
            
            
            3,332
            
            
            
            903
            
            
            
            (6,258
            )
            
            
            -
            
            
            
            (2,023
            )Total
      assets
            
            
            69,017
            
            
            
            10,677
            
            
            
            3,505
            
            
            
            (23,652
            )
            
            
            59,547Capital
      expenditures
            
            
            428
            
            
            
            94
            
            
            
            45
            
            
            
            -
            
            
            
            567





2006
            
            Repair,
      Manfacturing & Remanufacturing
            
            
            Construction& Engineering Services
            
            
            Corporate
            
            
            IntersegmentEliminations
            
            
            December
      31,2006 ConsolidatedExternal
      revenue:Product
      sales
            
            $
            18,083
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            18,083Service
      revenue
            
            
            25,118
            
            
            
            17,553
            
            
            
            -
            
            
            
            -
            
            
            
            42,671Intersegment
      revenue:Product
      sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Service
      revenue
            
            
            19
            
            
            
            247
            
            
            
            -
            
            
            
            (266
            )
            
            
            -Depreciation
      included in cost of revenues
            
            
            595
            
            
            
            146
            
            
            
            -
            
            
            
            -
            
            
            
            741Gross
      profit
            
            
            8,444
            
            
            
            2,782
            
            
            
            -
            
            
            
            (79
            )
            
            
            11,147Other
      depreciation & amortization
            
            
            36
            
            
            
            30
            
            
            
            55
            
            
            
            -
            
            
            
            121Interest
      expense
            
            
            407
            
            
            
            -
            
            
            
            2,997
            
            
            
            -
            
            
            
            3,404Net
      income (loss)
            
            
            2,295
            
            
            
            1,146
            
            
            
            (6,102
            )
            
            
            -
            
            
            
            (2,661
            )Total
      assets
            
            
            22,058
            
            
            
            5,786
            
            
            
            3,023
            
            
            
            -
            
            
            
            30,867Capital
      expenditures
            
            
            2,915
            
            
            
            134
            
            
            
            33
            
            
            
            -
            
            
            
            3,082





63
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
P – SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES




Year
      Ended December 31,2007
            
            
            2006Conversion
      of subordinated debt
            
            $
            979
            
            
            $
            -Issuance
      of restricted stock
            
            $
            40
            
            
            $
            12Cashless
      exercise of warrants
            
            $
            7
            
            
            $
            -Assumption
      of accounts payable and accrued liabilities in conjuction with
      acquisitions
            
            $
            4,657
            
            
            $
            384Issuance
      of notes payable in conjunction with acquisition
            
            $
            4,000
            
            
            $
            -Issuance
      of common stock in conjunction with acquisition
            
            $
            2,000
            
            
            $
            -Obligation
      under capital lease
            
            $
            -
            
            
            $
            21Conversion
      of revolving note to common stock
            
            $
            -
            
            
            $
            729Reclassification
      of warrant liability to equity per adoption of FSP EITF
      00-19-2
            
            $
            -
            
            
            $
            508







NOTE
Q – SUBSEQUENT EVENTS




Reverse Stock
Split




On
November 30, 2007, the Company’s board of directors approved a reverse stock
split of the Company’s common stock.  The board concluded that the
transaction was in the best interests of the Company and its
stockholders.  The reverse stock split became effective on January 14,
2008.  In the reverse stock split, each 25 shares of common stock,
whether issued or outstanding, were combined into one share of common
stock.  Any shareholder that would hold a fractional interest in a
share of common stock following the reverse stock split received cash in lieu of
any fractional interest in the amount of $0.566 multiplied by 25 multiplied by
the fractional share.  As a result, the Company paid $1 to fractional
interest shareholders in January 2008 to repurchase 31 shares. The effect of
this reverse stock split has been retroactively reflected throughout these
consolidated financial statements.




Bank
Financing




On
January 14, 2008, MISCOR entered into a credit facility with Wells Fargo Bank,
National Association (“Wells Fargo”).  The credit facility is
comprised of a $1,250 real estate term note and a $13,750 revolving
note.  On January 16, 2008, MISCOR borrowed $7,500 under the revolving
note and used the net proceeds of the loans for working capital and to acquire
all of the outstanding shares of common stock of American Motive Power,
Inc.




64
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
Q – SUBSEQUENT EVENTS (CONTINUED)




Bank Financing
(continued)




The
original maturity date of the notes is January 1, 2011, at which time the notes
will automatically renew for one-year periods until terminated.  The
notes are secured by (1) a first priority lien on the assets of the Company; (2)
a mortgage on certain real property; and (3) the pledge of the equity interests
in MISCOR’s subsidiaries.  The term note bears interest at an annual
rate equal to the rate of interest most recently announced by Wells Fargo at its
principal office as its prime rate (the “Prime Rate”), subject to certain
minimum annual interest payments.  The revolving note bears interest
at an annual rate of either (i) the Prime Rate, or (ii) Wells Fargo’s LIBOR rate
plus 2.8%, depending on the nature of the advance.  Interest is
payable monthly, in arrears, under the revolving note beginning on February 1,
2008.  The term note requires monthly principal payments of $10, plus
interest, beginning on the first day of the month following receipt of the
advance.




MISCOR
has promissory notes outstanding to BDeWees, Inc., XGen III, Ltd., and John A.
Martell, in the original principal amounts of $2,000,000, $2,000,000 and
$3,000,000, respectively, and secured convertible debentures issued to various
investors (together, the “Subordinated Indebtedness”) (Note
F).  Subordination agreements have been executed that subordinate the
obligations of MISCOR under the Subordinated Indebtedness to the Wells Fargo
credit facility.




If the
Company defaults under its obligations to Wells Fargo, then the interest on the
outstanding principal balance of each note will increase by 3% until the default
is cured or waived.  Other remedies available to Wells Fargo upon an
event of default include the right to accelerate the maturity of all
obligations, the right to foreclose on the assets securing the obligations, all
rights of a secured creditor under applicable law, and other rights set forth in
the loan documents.




The
Borrowers may prepay the term note at any time, subject to certain prepayment
penalties.  With respect to the revolving note, the Borrowers may
borrow, pay down and re-borrow under the note until the maturity
date.  The maximum aggregate principal amount that may be borrowed
under the revolving note is the lesser of (1) The sum of 40% of the Borrowers’
eligible construction related trade receivables up to $2,000,000 and 85% of
certain remaining eligible trade accounts receivable less any reserves
established by Wells Fargo from time to time and (2) $13,750,000 less any
reserves established by Wells Fargo.




Acquisition of American
Motive Power, Inc.




On
January 16, 2008, MISCOR Group, Ltd., an Indiana corporation (“MISCOR”),
acquired all of the issued and outstanding capital stock of American Motive
Power, Inc., a Nevada Corporation (“AMP”), pursuant to the AMP Stock Purchase
Agreement dated January 16, 2008 (the “AMP Purchase Agreement”).  AMP
is engaged in the business of repairing, remanufacturing, and rebuilding
locomotive engines as well as providing related goods and services to the
railroad industry.




65
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share
data)


NOTE
Q – SUBSEQUENT EVENTS (CONTINUED)




Acquisition of American
Motive Power, Inc. (continued)




The
purchase price for the capital stock of AMP was $11,000, payable as follows: (i)
$7,500 was paid in cash at closing directly to various creditors of AMP, and by
the issuance of 253,623 shares of MISCOR common stock on February 20, 2008 to
AMP’s majority shareholder valued for purposes of the transaction at $13.80 per
share (which is the average of the closing prices reported for the five trading
days immediately preceding the closing of the transaction).




The AMP
Purchase Agreement provides for an adjustment to the purchase price in the event
that the closing working capital of AMP is above or below certain
benchmarks.  Under this adjustment, the purchase price may be
decreased up to $350 or increased up to $500 based on the closing working
capital of AMP.  Any working capital adjustment to the purchase price
would be payable in cash.  At closing, the purchase price was reduced
$135 based on the estimated working capital at that time. Further adjustments
may be made in accordance with the AMP Purchase Agreement.




MISCOR
financed the cash portion of the purchase price through borrowings under its $15
million credit facility with Wells Fargo.




As part
of the acquisition transaction described above, AMP entered into a Lease
Agreement   dated January 16, 2008, with Dansville Properties,
LLC, which is controlled by AMP’s former majority shareholder.  The
initial term of the Lease Agreement expires December 31, 2014, and AMP has the
option to renew the term of the Lease Agreement for two consecutive five-year
terms.  Monthly rentals under the lease are $32 in 2008, $53 in 2009
and 2010, $68 in 2011 and $79 in 2012 through 2014.




Also as
part of the acquisition transaction, AMP entered into a Mutual Services
Agreement dated January 16, 2008 (the “Mutual Services Agreement”) with
Dansville Properties, LLC and two other affiliated entities (collectively with
Dansville Properties, the “LMC Companies”).  Under the terms of the
Mutual Services Agreement, the parties have agreed to provide each other certain
services for a period of three years.  The Mutual Services Agreement
also provides that the LMC Companies will provide AMP with a $100 credit toward
services to be performed by the LMC Companies for AMP.  Additionally,
certain amounts owed by AMP to the LMC Companies were forgiven in accordance
with the Prior Contract Termination Agreement dated January 16,
2008.




As a
condition to MISCOR’s entering into the AMP Purchase Agreement, each of the AMP
shareholders entered into separate Non-Compete Agreements with MISCOR, each
dated January 16, 2008.




Debt Conversion and
Redemption




In 2008,
certain debenture holders exercised their options under the debenture offering
to convert $2,690 into 316,013 shares of MISCOR common stock at a price of
$8.512316 per share (Note F). In accordance with the provisions of the debenture
offering, the debenture holders did not receive any payment of accrued interest.
The Company redeemed the remaining outstanding debentures in the amount of $342,
including interest of $52.




66
 MISCOR
GROUP, LTD. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 TWO
YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
 (Amounts
in thousands, except share and per share data)


NOTE
Q – SUBSEQUENT EVENTS (CONTINUED)




Increase in Authorized
Shares




On
February 8, 2008, the shareholders approved an amendment to the Company’s
Amended and Restated Articles of Incorporation increasing the number of
authorized shares of common stock from 12,000,000 to 20,000,000
shares.






NOTE
R – SUMMARIZED QUARTERLY DATA (UNAUDITED)




The
following is a summary of the unaudited results of operations for each quarter
in 2007 and 2006:







QuarterFirst
            
            
            Second
            
            
            Third
            
            
            FourthYear
      ended December 31, 2007Sales
            
            $
            16,146
            
            
            $
            16,764
            
            
            $
            17,670
            
            
            $
            22,670Gross
      profit
            
            
            2,847
            
            
            
            2,912
            
            
            
            2,982
            
            
            
            3,425Net
      income (loss)
            
            
            (2,589
            )
            
            
            213
            
            
            
            64
            
            
            
            289Earnings
      (loss) per common share, basic and diluted
            
            $
            (0.38
            )
            
            $
            0.03
            
            
            $
            0.01
            
            
            $
            0.03Year
      ended December 31, 2006Sales
            
            $
            13,251
            
            
            $
            14,486
            
            
            $
            15,537
            
            
            $
            17,480Gross
      profit
            
            
            2,493
            
            
            
            2,846
            
            
            
            3,162
            
            
            
            2,646Net
      income (loss)
            
            
            (786
            )
            
            
            (1,122
            )
            
            
            (1,205
            )
            
            
            452Earnings
      (loss) per common share, basic and diluted
            
            $
            (0.19
            )
            
            $
            (0.27
            )
            
            $
            (0.28
            )
            
            $
            0.10














67





ITEM
9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE




Not
applicable.






ITEM
9A(T).   CONTROLS AND PROCEDURES




Evaluation
of Effectiveness of Disclosure Controls and Procedures




Our
disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e)
under the Exchange Act) are designed to ensure that information we are required
to disclose in our reports filed under the Exchange Act, such as this Annual
Report on Form 10-K, is recorded, processed, summarized and reported within the
time periods specified in the rules of the Securities and Exchange Commission.
Our disclosure controls and procedures also are designed to ensure that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.




In order
to monitor compliance with this system of controls, our Board of Directors,
which performs the audit committee function for the company, oversees
management’s discharge of its financial reporting responsibilities. The Board of
Directors meets regularly with MISCOR’s independent registered public accounting
firm, Asher & Company, Ltd., and representatives of management to review
accounting, auditing, internal control, and financial reporting matters. The
Board of Directors is responsible for the engagement of our independent
registered public accounting firm.  The consolidated financial
statements in this Annual Report on Form 10-K have been audited by Asher &
Company, Ltd., for the purpose of determining that the consolidated financial
statements are presented fairly, in all material respects, in conformity with
accounting principles generally accepted in the United States of
America.  Asher & Company, Ltd.’s, report on the financial
statements is set forth in “Item 8. Financial Statements and Supplementary Data”
of this Annual Report on Form 10-K.




Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures in effect as of December 31, 2007. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2007, our disclosure controls and procedures
were effective to provide reasonable assurance that material information
relating to MISCOR and its consolidated subsidiaries required to be included in
our Exchange Act reports, including this Annual Report on Form 10-K, is
recorded, processed, summarized, and reported as required, and is made known to
management, including the Chief Executive Officer and Chief Financial Officer,
on a timely basis.




Internal
Control Over Financial Reporting




Management’s
Annual Report on Internal Control Over Financial Reporting




The
management of MISCOR is responsible for the preparation of the financial
statements and related financial information appearing in this Annual Report on
Form 10-K. The financial statements and notes have been prepared in conformity
with accounting principles generally accepted in the United States of
America.




68


The
management of MISCOR also is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. A company’s internal control
over financial reporting is defined as a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of MISCOR; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the issuer are being made only in accordance with
authorizations of management and directors of MISCOR; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of MISCOR’s assets that could have a material effect on the
financial statements.




Management,
including the Chief Executive Officer and Chief Financial Officer, does not
expect that MISCOR’s disclosure controls and internal controls will prevent all
error and all fraud. Because of its inherent limitations, a system of internal
control over financial reporting can provide only reasonable, not absolute,
assurance that the objectives of the control system are met and may not prevent
or detect misstatements.  Further, over time control may become
inadequate because of changes in conditions or the degree of compliance with the
policies or procedures may deteriorate.




With the
participation of the Chief Executive Officer and Chief Financial Officer, our
management evaluated the effectiveness of MISCOR’s internal control over
financial reporting as of December 31, 2007. In making this evaluation,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated
Framework. Based on that evaluation, our management has concluded that,
as of December 31, 2007, MISCOR’s internal control over financial reporting was
effective.




This
annual report does not include an attestation report of MISCOR’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by
MISCOR’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this Annual Report on Form 10-K.




Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2007, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.






ITEM
9B.   OTHER INFORMATION




Not
applicable.




69


PART
III


ITEM
10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




Directors
and Executive Officers




Information
contained under the captions “Proposal 1: Election of Director,” “Executive
Officers,” “Corporate Governance – Section 16(a) Beneficial Ownership Reporting
Compliance,” and “Other Business – Director Nominations by Shareholders” in our
proxy statement for the 2008 annual meeting of shareholders (the “Proxy Statement”) is
incorporated by reference in this Item 10.




Code
of Ethics




We
have adopted the MISCOR Group, Ltd. Code of Business Conduct and Ethics, a code
of ethics that applies to the President and Chief Executive Officer and the
Chief Financial Officer. The code of ethics is filed as Exhibit 14.1 to this
Annual Report on Form 10-K.




Audit
Committee Information




The
information contained under the caption “Corporate Governance – Committees of
the Board of Directors” in the Proxy Statement is incorporated by reference in
this Item 10.






ITEM
11.   EXECUTIVE
COMPENSATION




Information
contained under the captions “Executive Compensation” and “Compensation of
Directors” in the Proxy Statement is incorporated by reference in this Item
11.






ITEM
12.   SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




Information
contained under the captions “Security Ownership of Principal Holders and
Management,” “Equity Compensation Plan Information,” and “Executive Compensation
– Restricted Stock Purchase Plan” in the Proxy Statement is incorporated by
reference in this Item 12.






ITEM
13.   CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




Information
contained under the captions “Transactions with Certain Related Persons” and
“Corporate Governance – Director Independence” in the Proxy Statement is
incorporated by reference in this Item 13.






ITEM
14.   PRINCIPAL
ACCOUNTING FEES AND SERVICES




Information
contained under the caption “Independent Registered Public Accounting Firm” in
the Proxy Statement is incorporated by reference in this
Item 14.




70


PART
IV


ITEM
15.   EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES




Financial
Statements




The
consolidated financial statements of MISCOR Group, Ltd. and its subsidiaries and
the independent auditors’ report are included in Part II (Item 8) of this Form
10-K.




Financial
Statement Schedules




Not
applicable.




Exhibits




The
following documents are included or incorporated by reference in this Annual
Report on Form 10-K:




Exhibit
      Number
            
            Description2.1*
            
            AMP
      Stock Purchase Agreement dated January 16, 2008, among MISCOR Group, Ltd.,
      Lawrence Mehlenbacher, Joseph Fearon, Thomas Coll, Richard Rizzieri, and
      Gary Walsh (incorporated by reference to Exhibit 2.1 to the registrant’s
      Current Report on Form 8-K filed by the registrant on January 23,
      2008)2.2*
            
            3-D
      Membership Interest Purchase Agreement dated November 30, 2007, by and
      among Magnetech Industrial Services, Inc., BDeWees, Inc., and XGen III,
      Ltd. (incorporated by reference to Exhibit 2.1 to the registrant’s Current
      Report on Form 8-K filed by the registrant on December 5,
      2007)2.3*
            
            Stock
      Purchase Agreement dated October 19, 2007, by and among MISCOR Group,
      Ltd., and Darrell L. Graf, Mary A. LaPlace and Kenneth D. Wiegand
      (incorporated by reference to Exhibit 2.1 to the registrant’s Current
      Report on Form 8-K filed by the registrant on October 22,
      2007)2.4*
            
            Asset
      Purchase Agreement dated May 31, 2006 among Magnetech Industrial Services
      of Alabama, LLC, Magnetech Industrial Services, Inc., E. T. Smith Services
      of Alabama, Inc. and Smith Services, Inc. (incorporated by reference to
      Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed by the
      registrant on June 1, 2006)2.5
            
            Asset
      Purchase Agreement dated as of March 4, 2005 among HK Machined Parts, LLC,
      HK Weston Properties, LLC and Hatch & Kirk, Inc. (incorporated by
      reference to Exhibit 10.31 to the registrant’s Registration Statement on
      Form S-1 (Reg. No. 333-129354))2.6
            
            Asset
      Purchase Agreement dated as of March 4, 2005 between HK Cast Products, LLC
      f/k/a HK Engineered Castings, LLC and HK Castings, Inc. (incorporated by
      reference to Exhibit 10.32 to the registrant’s Registration Statement on
      Form S-1 (Reg. No. 333-129354))3.1a
            
            Amended
      and Restated Articles of Incorporation of the registrant (incorporated by
      reference to Exhibit 3.1 to the registrant’s Registration Statement on
      Form S-1 (Reg No. 333-129354))3.1b
            
            Articles
      of Amendment to the registrant’s Amended and Restated Articles of
      Incorporation, effective January 14, 2008 (incorporated by reference to
      Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed by the
      registrant on January 14, 2008)3.1c
            
            Articles
      of Amendment to the registrant’s Amended and Restated Articles of
      Incorporation, effective February 8, 2008 (incorporated by reference to
      Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed by the
      registrant on February 13, 2008)





71





Exhibit
      Number
            
            Description3.2
            
            Amended
      and Restated Code of By-Laws of the registrant (incorporated by reference
      to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed by the
      registrant on November 21, 2007)4.1
            
            Specimen
      certificate of common stock4.2
            
            Warrant
      Agreement, form of Joinder Agreement and form of common stock purchase
      warrant issued to designees of Strasbourger Pearson Tulcin Wolff
      Incorporated pursuant to Placement Agency Agreement dated April 26, 2004
      (incorporated by reference to Exhibit 4.2 to the registrant’s Registration
      Statement on Form S-1 (Reg. No. 333-129354))4.3
            
            Form
      of common stock purchase warrant issued to designees of Strasbourger
      Pearson Tulcin Wolff Incorporated pursuant to Placement Agency Agreement
      dated January 25, 2005 (incorporated by reference to Exhibit 4.3 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.4
            
            Form
      of common stock purchase warrant issued to purchasers of the registrant’s
      subordinated convertible debentures pursuant to Convertible Debenture
      Purchase Agreements with the registrant (incorporated by reference to
      Exhibit 4.4 to the registrant’s Registration Statement on Form S-1 (Reg.
      No. 333-129354))4.5
            
            Common
      Stock Purchase Warrant dated August 24, 2005 issued to Laurus Master Fund,
      Ltd. (incorporated by reference to Exhibit 4.5 to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))4.6
            
            Form
      of common stock purchase warrant issued to persons designated by Vertical
      Capital Partners, Inc. (incorporated by reference to Exhibit 4.6 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.7a
            
            Form
      of subordinated convertible debenture issued to purchasers pursuant to
      Convertible Debenture Purchase Agreements with the registrant
      (incorporated by reference to Exhibit 4.7a to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))4.7b
            
            Letter
      Agreement dated April 16, 2006, to extend maturity date of subordinated
      convertible debentures (incorporated by reference to Exhibit 4.7b to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.8
            
            Secured
      Revolving Note dated August 24, 2005 issued to Laurus Master Fund, Ltd.
      (incorporated by reference to Exhibit 4.8 to the registrant’s Registration
      Statement on Form S-1 (Reg. No. 333-129354))4.9
            
            Secured
      Convertible Minimum Borrowing Note dated August 24, 2005 issued to Laurus
      Master Fund, Ltd. (incorporated by reference to Exhibit 4.9 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.10
            
            Secured
      Convertible Term Note dated August 24, 2005 issued to Laurus Master Fund,
      Ltd.  (incorporated by reference to Exhibit 4.10 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.11
            
            Promissory
      Note dated January 1, 2004 issued by Magnetech Industrial Services, Inc.
      to John A. Martell (incorporated by reference to Exhibit 4.11 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.12
            
            Conversion
      Option dated September 12, 2005 among John A. Martell, Magnetech
      Industrial Services, Inc. and the registrant (incorporated by reference to
      Exhibit 4.12 to the registrant’s Registration Statement on Form S-1 (Reg.
      No. 333-129354))4.13
            
            Amendment
      to Conversion Option dated November 28, 2007, by and among MISCOR Group,
      Ltd., Magnetech Industrial Services, Inc., and John A. Martell
      (incorporated by reference to Exhibit 4.1 to the registrant’s Current
      Report on Form 8-K filed by the registrant on December 5,
      2007)





72





Exhibit
      Number
            
            Description4.14
            
            Form
      of Registration Rights Agreement between the registrant and the purchasers
      scheduled therein, made pursuant to Stock Purchase Agreement with the
      registrant (incorporated by reference to Exhibit 4.13 to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))4.15
            
            Form
      of Registration Rights Agreement between the registrant and the purchasers
      scheduled therein, made pursuant to Subordinated Convertible Debenture
      Purchase Agreements (incorporated by reference to Exhibit 4.14 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.16
            
            Registration
      Rights Agreement dated August 24, 2005 between the registrant and Laurus
      Master Fund, Ltd. (incorporated by reference to Exhibit 4.15 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))4.17
            
            Common
      Stock Purchase Warrant dated May 31, 2006 issued by registrant to Laurus
      Master Fund, Ltd. (incorporated by reference to Exhibit 4.1 to the
      registrant’s Current Report on Form 8-K filed by the registrant on
      June 6, 2006)4.18
            
            Secured
      Non-convertible Revolving Note dated May 31, 2006 issued by Magnetech
      Industrial Services of Alabama, LLC to Laurus Master Fund, Ltd.
      (incorporated by reference to Exhibit 4.2 to the registrant’s Current
      Report on Form 8-K filed by the registrant on June 6,
      2006)4.19
            
            Secured
      Term Note dated May 31, 2006 issued by Magnetech Industrial Services of
      Alabama, LLC to Laurus Master Fund, Ltd. (incorporated by reference to
      Exhibit 4.3 to the registrant’s Current Report on Form 8-K filed by the
      registrant on June 6, 2006)4.20a
            
            Registration
      Rights Agreement dated May 31, 2006 between the registrant and Laurus
      Master Fund, Ltd. (incorporated by reference to Exhibit 4.4 to the
      registrant’s Current Report on Form 8-K filed by the registrant on
      June 6, 2006)4.20b
            
            Amendment
      dated July 31, 2006, to Registration Rights Agreement dated May 31, 2006,
      between the registrant and Laurus Master Fund, Ltd. (incorporated by
      reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
      filed by the registrant on August 4, 2006)4.20c
            
            Amendment
      dated August 30, 2006, to Registration Rights Agreement dated May 31,
      2006, between the registrant and Laurus Master Fund, Ltd. (incorporated by
      reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
      filed by the registrant on August 31, 2006)4.21*
            
            Securities
      Purchase Agreement, dated January 18, 2007, by and among MISCOR Group,
      Ltd., Tontine Capital Partners, L.P. and Tontine Capital Overseas Master
      Fund, L.P. (incorporated by reference to Exhibit 10.1 to the registrant’s
      Current Report on Form 8-K filed by the registrant on January 22,
      2007)4.22
            
            Registration
      Rights Agreement, dated January 18, 2007, by and among MISCOR Group, Ltd.,
      Tontine Capital Partners, L.P. and Tontine Capital Overseas Master Fund,
      L.P. (incorporated by reference to Exhibit 10.2 to the registrant’s
      Current Report on Form 8-K filed by the registrant on January 22,
      2007)4.23
            
            Irrevocable
      Proxy of John Martell (incorporated by reference to Exhibit 99.1 to the
      registrant’s Current Report on Form 8-K filed by the registrant on January
      22, 2007)4.24
            
            Restated
      Irrevocable Proxy of John A. Martell (incorporated by reference to Exhibit
      99.2 to the registrant’s Current Report on Form 8-K filed by the
      registrant on December 5, 2007)10.1
            
            Placement
      Agency Agreement, dated April 26, 2004 between Magnetech Industrial
      Services, Inc. and Strasbourger Pearson Tulcin Wolff Incorporated
      (incorporated by reference to Exhibit 10.1 to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))





73





Exhibit
      Number
            
            Description10.2
            
            Placement
      Agency Agreement dated January 25, 2005 between the registrant and
      Strasbourger Pearson Tulcin Wolff Incorporated (incorporated by reference
      to Exhibit 10.2 to the registrant’s Registration Statement on Form S-1
      (Reg. No. 333-129354))10.3
            
            Form
      of Convertible Redeemable Preferred Stock Purchase Agreement between
      Magnetech Industrial Services, Inc. and the purchasers scheduled therein
      (incorporated by reference to Exhibit 10.3 to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))10.4
            
            Form
      of Stock Purchase Agreement between the registrant and the purchasers
      scheduled therein (incorporated by reference to Exhibit 10.4 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.5
            
            Form
      of Subordinated Convertible Debenture Purchase Agreement among the
      registrant, Strasbourger Pearson Tulcin Wolff, Inc. and the purchasers
      scheduled therein (incorporated by reference to Exhibit 10.5 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.6
            
            Escrow
      Agreement dated April 26, 2004 among the registrant, Wilmington Trust
      Company and Strasbourger Pearson Tulcin Wolff Incorporated (incorporated
      by reference to Exhibit 10.6 to the registrant’s Registration Statement on
      Form S-1 (Reg. No. 333-129354))10.7a
            
            Funds
      Escrow Agreement dated August 24, 2005 among the registrant, Loeb &
      Loeb LLP and Laurus Master Fund, Ltd. (incorporated by reference to
      Exhibit 10.7a to the registrant’s Registration Statement on Form S-1 (Reg.
      No. 333-129354))10.7b
            
            Funds
      Escrow Disbursement Letter/Joint Instructions dated August 24, 2005
      (incorporated by reference to Exhibit 10.7b to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))10.8
            
            Security
      Agreement dated as of March 3, 2005 between the registrant and
      Strasbourger Pearson Tulcin Wolff Incorporated, as agent for purchasers of
      subordinated convertible debentures (incorporated by reference to Exhibit
      10.8 to the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.9a
            
            Security
      and Purchase Agreement dated August 24, 2005 among Laurus Master Fund,
      Ltd., the registrant and subsidiaries of the registrant identified therein
      (incorporated by reference to Exhibit 10.9a to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))10.9b
            
            Amendment
      to Security and Purchase Agreement, dated October 19, 2005 among Laurus
      Master Fund, Ltd., the registrant and subsidiaries of the registrant
      identified therein (incorporated by reference to Exhibit 10.9b to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.9c
            
            Amendment
      to Security and Purchase Agreement, dated January 31, 2006 among Laurus
      Master Fund, Ltd., the registrant and subsidiaries of the registrant
      identified therein (incorporated by reference to Exhibit 10.9c to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.9d
            
            Amendment
      to Security and Purchase Agreement dated July 14, 2006 among Laurus Master
      Fund, Ltd., the registrant and subsidiaries of the registrant identified
      therein, amending the Security and Purchase Agreement and related
      agreements and instruments (incorporated by reference to Exhibit 10.1 to
      the registrant’s Current Report on Form 8-K filed by the registrant on
      July 20, 2006)10.10
            
            Pledge
      Agreement dated August 24, 2005 among Laurus Master Fund, Ltd., the
      registrant and certain subsidiaries of the registrant identified therein
      (incorporated by reference to Exhibit 10.10 to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))10.11
            
            Guaranty
      dated August 24, 2005 made by certain subsidiaries of the registrant
      identified therein in favor of Laurus Master Fund, Ltd. (incorporated by
      reference to Exhibit 10.11 to the registrant’s Registration Statement on
      Form S-1 (Reg. No. 333-129354))





74





Exhibit
      Number
            
            Description10.12
            
            Form
      of Subordination Agreement made among John Martell, Patricia Minehardt and
      Strasbourger Pearson Tulcin Wolff, Inc., as agent for the holders of
      subordinated convertible debentures, in favor of Laurus Master Fund,
      Ltd.  (incorporated by reference to Exhibit 10.13 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.13
            
            Lease,
      commencing August 3, 2001, between JAM Summer Properties, LLC and
      Magnetech Industrial Services, Inc. (incorporated by reference to Exhibit
      10.14 to the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.14
            
            Lease,
      commencing May 5, 2003, between JAM Bev Properties, LLC and Magnetech
      Industrial Services, Inc.  (incorporated by reference to Exhibit
      10.15 to the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.15
            
            Lease,
      commencing May 5, 2003, between JAM Walnut Properties, LLC and Magnetech
      Industrial Services, Inc. (incorporated by reference to Exhibit 10.16 to
      the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.16
            
            Lease,
      commencing March 1, 2002, between JAM Hutson Properties, LLC and Magnetech
      Industrial Services, Inc. (incorporated by reference to Exhibit 10.17 to
      the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.17@
            
            2005
      Stock Option Plan of the registrant (incorporated by reference to Exhibit
      10.18 to the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.18@
            
            Form
      of Stock Option Agreement under 2005 Stock Option Plan (incorporated by
      reference to Exhibit 10.19 to the registrant’s Registration Statement on
      Form S-1 (Reg. No. 333-129354))10.19a@
            
            2005
      Restricted Stock Purchase Plan of the registrant (incorporated by
      reference to Exhibit 10.20 to the registrant’s Registration Statement on
      Form S-1 (Reg. No. 333-129354))10.19b@
            
            Amendment
      to the MISCOR 2005 Restricted Stock Purchase Plan, effective February 7,
      2008 (incorporated by reference to Exhibit 10.1 to the registrant’s
      Current Report on Form 8-K filed by the registrant on February 13,
      2008)10.20@
            
            MISCOR
      Group, Ltd. Employee Stock Purchase Plan (incorporated by reference to
      Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 (Reg.
      No. 333-141537))10.21@
            
            Employment
      Agreement dated September 30, 2005 between the registrant and John A.
      Martell (incorporated by reference to Exhibit 10.21 to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))10.22@
            
            Employment
      Agreement dated September 30, 2005 between the registrant and James M.
      Lewis (incorporated by reference to Exhibit 10.22 to the registrant’s
      Registration Statement on Form S-1 (Reg. No.
  333-129354))10.23@
            
            Employment
      Agreement dated September 30,  2005 between the registrant and
      Richard J. Mullin (incorporated by reference to Exhibit 10.23 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.24@
            
            Employment
      Agreement dated September 30, 2005 between Magnetech Industrial Services,
      Inc. and William Wisniewski (incorporated by reference to Exhibit 10.24 to
      the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.25@
            
            Employment
      Agreement dated September 30, 2005 between Martell Electric, LLC and
      Anthony Nicholson (incorporated by reference to Exhibit 10.25 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.26
            
            Asset
      Purchase Agreement dated August 9, 2000 between Magnetech Industrial
      Services, Inc.,  Trans Tech Electric, Inc. and Delta Star
      Electric, Inc. (incorporated by reference to Exhibit 10.28 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))10.27
            
            Asset
      Purchase Agreement dated as of November 26, 2004 between Martell Electric,
      LLC and Thompson, Inc. (incorporated by reference to Exhibit 10.30 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))





75





Exhibit
      Number
            
            Description10.28
            
            Security
      and Purchase Agreement dated May 31, 2006 among Laurus Master Fund, Ltd.
      and Magnetech Industrial Services of Alabama, LLC (incorporated by
      reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
      filed by the registrant on June 6, 2006)10.29
            
            Stock
      Pledge Agreement dated May 31, 2006 among Laurus Master Fund, Ltd., the
      registrant and certain subsidiaries of the registrant identified therein
      (incorporated by reference to Exhibit 10.2 to the registrant’s Current
      Report on Form 8-K filed by the registrant on June 6,
      2006)10.30
            
            Master
      Security Agreement among Laurus Master Fund, Ltd., the registrant and
      certain subsidiaries of the registrant identified therein (incorporated by
      reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K
      filed by the registrant on June 6, 2006)10.31
            
            Mortgage
      granted by Magnetech Industrial Services of Alabama, LLC in favor of
      Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.4 to the
      registrant’s Current Report on Form 8-K filed by the registrant on
      June 6, 2006)10.32
            
            Guaranty
      dated May 31, 2006 made by the registrant and certain subsidiaries of the
      registrant identified therein in favor of Laurus Master Fund, Ltd.
      (incorporated by reference to Exhibit 10.5 to the registrant’s Current
      Report on Form 8-K filed by the registrant on June 6,
      2006)10.33
            
            Amended
      and Restated Subordination Agreement dated May 31, 2006 made among John
      Martell and Strasbourger Pearson Tulcin Wolff, Inc., as agent for the
      holders of subordinated convertible debentures, in favor of Laurus Master
      Fund, Ltd. (incorporated by reference to Exhibit 10.6 to the registrant’s
      Current Report on Form 8-K filed by the registrant on June 6,
      2006)10.34
            
            Overadvance
      Side Letter Agreement dated May 31, 2006 between Magnetech Industrial
      Services of Alabama, LLC and Laurus Master Fund, Ltd. (incorporated by
      reference to Exhibit 10.7 to the registrant’s Current Report on Form 8-K
      filed by the registrant on June 6, 2006)10.35
            
            Funds
      Escrow Agreement dated May 31, 2006 among the registrant, Loeb & Loeb
      LLP and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
      10.8 to the registrant’s Current Report on Form 8-K filed by the
      registrant on June 6, 2006)10.36
            
            Funds
      Escrow Disbursement Letter/Joint Instructions dated May 31, 2006
      (incorporated by reference to Exhibit 10.9 to the registrant’s Current
      Report on Form 8-K filed by the registrant on June 6,
      2006)10.37
            
            Commercial
      Lease effective January 1, 2007, between Martell Electric, LLC and Martell
      Properties LLC (incorporated by reference to Exhibit 10.37 to the
      registrant’s Registration Statement on Form S-1 (Reg. No.
      333-137940))10.38
            
            Line
      of Credit Agreement, dated March 9, 2007, by and among MISCOR Group, Ltd.,
      HK Engine Components, LLC, Magnetech Industrial Services, Inc., Magnetech
      Power Services, LLC, Martell Electric LLC and MFB Financial (incorporated
      by reference to Exhibit 10.1 to the registrant’s Current Report on Form
      8-K filed by the registrant on March 15, 2007)10.39
            
            Promissory
      Note dated March 9, 2007, made by MISCOR Group, Ltd., HK Engine
      Components, LLC, Magnetech Industrial Services, Inc., Magnetech Power
      Services, LLC and Martell Electric LLC for MFB Financial (incorporated by
      reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K
      filed by the registrant on March 15, 2007)10.40
            
            Form
      of Commercial Security Agreement dated March 9, 2007, entered into between
      each of MISCOR Group, Ltd., HK Engine Components, LLC, Magnetech
      Industrial Services, Inc., Magnetech Power Services, LLC, and Martell
      Electric LLC, on the one hand, and MFB Financial, on the other hand
      (incorporated by reference to Exhibit 10.3 to the registrant’s Current
      Report on Form 8-K filed by the registrant on March 15,
    2007)





76





Exhibit
      Number
            
            Description10.41
            
            Form
      of Guaranty dated March 9, 2007, entered into between each of MISCOR
      Group, Ltd., HK Engine Components, LLC, Magnetech Industrial Services,
      Inc., Magnetech Power Services, LLC, and Martell Electric LLC, on the one
      hand, and MFB Financial, on the other hand (incorporated by reference to
      Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed by the
      registrant on March 15, 2007)10.42
            
            Insider
      Subordination Agreement dated March 9, 2007, by and among MISCOR Group,
      Ltd., HK Engine Components, LLC, MFB Financial and John A. Martell
      (incorporated by reference to Exhibit 10.5 to the registrant’s Current
      Report on Form 8-K filed by the registrant on March 15,
    2007)10.43
            
            Subordination
      Agreement dated March 9, 2007, by and among MISCOR Group, Ltd., MFB
      Financial, and the holders of certain subordinated secured convertible
      debentures (incorporated by reference to Exhibit 10.6 to the registrant’s
      Current Report on Form 8-K filed by the registrant on March 15,
      2007)10.44
            
            Promissory
      Note dated November 30, 2007, issued by Magnetech Industrial Services,
      Inc., to BDeWees, Inc. (incorporated by reference to Exhibit 10.1 to the
      registrant’s Current Report on Form 8-K filed by the registrant on
      December 5, 2007)10.45
            
            Promissory
      Note dated November 30, 2007, issued by Magnetech Industrial Services,
      Inc., to XGen III, Ltd. (incorporated by reference to Exhibit 10.2 to the
      registrant’s Current Report on Form 8-K filed by the registrant on
      December 5, 2007)10.46
            
            Lease
      between 3D3E Ltd., Landlord, and 3-D Service, Ltd., Tenant, and Guaranty
      of MISCOR Group, Ltd., dated November 30, 2007 (incorporated by reference
      to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed by
      the registrant on December 5, 2007)10.47*
            
            Securities
      Purchase Agreement dated November 30, 2007, by and among Tontine Capital
      Partners, L.P., Tontine Capital overseas Master Fund, L.P., and MISCOR
      Group, Ltd. (incorporated by reference to Exhibit 10.4 to the registrant’s
      Current Report on Form 8-K filed by the registrant on December 5,
      2007)10.48
            
            Amended
      and Restated Registration Rights Agreement dated November 30, 2007, by and
      between MISCOR Group, Ltd., Tontine Capital Partners, L.P., and Tontine
      Capital Overseas Master Fund, L.P. (incorporated by reference to Exhibit
      10.5 to the registrant’s Current Report on Form 8-K filed by the
      registrant on December 5, 2007)10.49
            
            Commercial
      Security Agreement dated November 30, 2007, between 3-D Service, Ltd., and
      BDeWees, Inc. (incorporated by reference to Exhibit 10.6 to the
      registrant’s Current Report on Form 8-K filed by the registrant on
      December 5, 2007)10.50
            
            Commercial
      Security Agreement dated November 30, 2007, between 3-D Service, Ltd., and
      XGen III, Ltd. (incorporated by reference to Exhibit 10.7 to the
      registrant’s Current Report on Form 8-K filed by the registrant on
      December 5, 2007)10.51@
            
            Employment
      Agreement dated November 30, 2007, between Magnetech Industrial Services,
      Inc., and Bernard L. DeWees (incorporated by reference to Exhibit 10.8 to
      the registrant’s Current Report on Form 8-K filed by the registrant on
      December 5, 2007)10.52
            
            Guaranty
      of Thomas J. Embrescia dated November 30, 2007 (incorporated by reference
      to Exhibit 10.9 to the registrant’s Current Report on Form 8-K filed by
      the registrant on December 5, 2007)10.53
            
            Guaranty
      of Bernard L. DeWees dated November 30, 2007 (incorporated by reference to
      Exhibit 10.10 to the registrant’s Current Report on Form 8-K filed by the
      registrant on December 5, 2007)10.54
            
            Non-Compete
      Agreement dated November 30, 2007, between Magnetech Industrial Services,
      Inc., and Bernard L. DeWees (incorporated by reference to Exhibit 10.11 to
      the registrant’s Current Report on Form 8-K filed by the registrant on
      December 5, 2007)





77





Exhibit
      Number
            
            Description10.55
            
            Non-Compete
      Agreement dated November 30, 2007, between Magnetech Industrial Services,
      Inc., and Thomas J. Embrescia (incorporated by reference to Exhibit 10.12
      to the registrant’s Current Report on Form 8-K filed by the registrant on
      December 5, 2007)10.56*
            
            Credit
      and Security Agreement dated January 14, 2008, among Wells Fargo Bank, the
      registrant and certain subsidiaries of the registrant identified therein
      (incorporated by reference to Exhibit 10.1 to the registrant’s Current
      Report on Form 8-K filed by the registrant on January 18,
      2008)10.57
            
            Revolving
      Note dated January 14, 2008, among Wells Fargo Bank, the registrant and
      certain subsidiaries of the registrant identified therein (incorporated by
      reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K
      filed by the registrant on January 18, 2008)10.58
            
            Real
      Estate Note dated January 14, 2008, among Wells Fargo Bank, the registrant
      and certain subsidiaries of the registrant identified therein
      (incorporated by reference to Exhibit 10.3 to the registrant’s Current
      Report on Form 8-K filed by the registrant on January 18,
      2008)10.59
            
            Real
      Estate Mortgage, Security Agreement and Assignment of Rents and Leases
      dated January 14, 2008, between Wells Fargo Bank and Magnetech Industrial
      Services, Inc. (incorporated by reference to Exhibit 10.4 to the
      registrant’s Current Report on Form 8-K filed by the registrant on January
      18, 2008)10.60
            
            Collateral
      Pledge Agreement dated January 14, 2008, between Wells Fargo Bank and the
      registrant (incorporated by reference to Exhibit 10.5 to the registrant’s
      Current Report on Form 8-K filed by the registrant on January 18,
      2008)10.61
            
            Patent
      and Trademark Security Agreement dated January 14, 2008, between Wells
      Fargo Bank and 3-D Service, Ltd. (incorporated by reference to Exhibit
      10.6 to the registrant’s Current Report on Form 8-K filed by the
      registrant on January 18, 2008)10.62
            
            Patent
      and Trademark Security Agreement dated January 14, 2008, between Wells
      Fargo Bank and Magnetech Industrial Services, Inc. (incorporated by
      reference to Exhibit 10.7 to the registrant’s Current Report on Form 8-K
      filed by the registrant on January 18, 2008)10.63
            
            Standby
      Letter of Credit Agreement dated January 14, 2008, among Wells Fargo Bank,
      the registrant and certain subsidiaries of the registrant identified
      therein (incorporated by reference to Exhibit 10.8 to the registrant’s
      Current Report on Form 8-K filed by the registrant on January 18,
      2008)10.64
            
            Subordination
      Agreement between Wells Fargo Bank and John A. Martell (incorporated by
      reference to Exhibit 10.9 to the registrant’s Current Report on Form 8-K
      filed by the registrant on January 18, 2008)10.65
            
            Subordination
      Agreement between Wells Fargo Bank and Strasbourger, Pearson, Tulcin,
      Wolffe, Inc. (incorporated by reference to Exhibit 10.10 to the
      registrant’s Current Report on Form 8-K filed by the registrant on January
      18, 2008)10.66
            
            Subordination
      Agreement among Wells Fargo Bank, BDeWees, Inc., and XGen III, Ltd.
      (incorporated by reference to Exhibit 10.11 to the registrant’s Current
      Report on Form 8-K filed by the registrant on January 18,
      2008)10.67
            
            Lease
      Agreement dated January 16, 2008, between Dansville Properties, LLC and
      American Motive Power, Inc. (incorporated by reference to Exhibit 10.1 to
      the registrant’s Current Report on Form 8-K filed by the registrant on
      January 23, 2008)10.68
            
            Non-Compete
      Agreement dated January 16, 2008, between American Motive Power, Inc., and
      Lawrence Mehlenbacher (incorporated by reference to Exhibit 10.2 to the
      registrant’s Current Report on Form 8-K filed by the registrant on January
      23, 2008)10.69
            
            Non-Compete
      Agreement dated January 16, 2008, between American Motive Power, Inc., and
      Richard Rizzieri (incorporated by reference to Exhibit 10.3 to the
      registrant’s Current Report on Form 8-K filed by the registrant on January
      23, 2008)





78





Exhibit
      Number
            
            Description10.70
            
            Non-Compete
      Agreement dated January 16, 2008, between American Motive Power, Inc., and
      Thomas Coll (incorporated by reference to Exhibit 10.4 to the registrant’s
      Current Report on Form 8-K filed by the registrant on January 23,
      2008)10.71
            
            Non-Compete
      Agreement dated January 16, 2008, between American Motive Power, Inc., and
      Gary Walsh (incorporated by reference to Exhibit 10.5 to the registrant’s
      Current Report on Form 8-K filed by the registrant on January 23,
      2008)10.72
            
            Non-Compete
      Agreement dated January 16, 2008, between American Motive Power, Inc., and
      Joseph Fearon (incorporated by reference to Exhibit 10.6 to the
      registrant’s Current Report on Form 8-K filed by the registrant on January
      23, 2008)10.73
            
            Mutual
      Services Agreement dated January 16, 2008, among American Motive Power,
      Inc., LMC Power Systems, Inc., LMC Industrial Contractors, Inc., and
      Dansville Properties, LLC (incorporated by reference to Exhibit 10.7 to
      the registrant’s Current Report on Form 8-K filed by the registrant on
      January 23, 2008)10.74
            
            Prior
      Contract Termination Agreement dated January 16, 2008, among Lawrence
      Mehlenbacher, Joseph Fearon, Thomas Coll, Richard Rizzieri, Gary Walsh,
      LMC Industrial Contractors, Inc., LMC Power Systems, Inc., Dansville
      Properties, LLC and American Motive Power, Inc. (incorporated by reference
      to Exhibit 10.8 to the registrant’s Current Report on Form 8-K filed by
      the registrant on January 23, 2008)14.1
            
            Code
      of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to
      the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-129354))21.1
            
            Subsidiaries
      of the registrant23.1
            
            Consent
      of Asher & Company, Ltd.31.1
            
            Certification
      by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the
      Exchange Act31.2
            
            Certification
      by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the
      Exchange Act32.1
            
            Section
      1350 Certifications





*
            MISCOR
      has omitted schedules and similar attachments to the subject agreement
      pursuant to Item 601(b) of Regulation S-K. MISCOR will furnish a copy of
      any omitted schedule or similar attachment to the Commission upon
      request.


@   Denotes
a management contract or compensatory plan.




79


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




MISCOR
      GROUP, LTD.March
      31, 2008
            By:
            /s/
      RICHARD J. MULLINRichard
      J. Mullin, Vice President, Treasurer and Chief Financial
      Officer












Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
            
            Title
            
            Date/s/
      JOHN A. MARTELL
            
            
            
            March
      31, 2008John
      A. Martell
            
            Chairman
      of the Board, Chief Executive Officer and President
              (Principal
      Executive Officer)/s/
      RICHARD J. MULLIN
            
            
            
            March
      31, 2008Richard
      J. Mullin
            
            Vice
      President, Treasurer and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)/s/
      WILLIAM J. SCHMUHL, JR.
            
            
            
            March
      31, 2008William
      J. Schmuhl, Jr.
            
            Director/s/
      RICHARD A. TAMBORSKI
            
            
            
            March
      31, 2008Richard
      A. Tamborski
            
            Director






80