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
      1934For
      the fiscal year ended December 31, 2008oro
            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(b) of the Act:


None




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.
                  
                  x




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 27, 2008, which was the last business day of the
registrant’s most recently completed second fiscal quarter, was $22,800,002. The
registrant does not have any non-voting common equity securities.




As
of March 26, 2009, there were 11,749,418 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 2009 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
                  25Item
      8.
                  Financial
      Statements and Supplementary Data
                  26Report
      of Independent Registered Public Accounting Firm
                  26Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  27Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
                  28Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008
      and 2007
                  29Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                  30Notes
      to Consolidated Financial Statements
                  31


i





Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              72Item
      9A.
              Controls
      and Procedures
              72Item
      9B.
              Other
      Information
              73PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              74Item
      11.
              Executive
      Compensation
              74Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              74Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              74Item
      14.
              Principal
      Accounting Fees and Services
              74PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules
              75SIGNATURES
              85


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
three business segments:




·
            Industrial
      Services – We provide maintenance and repair services to several
      industries including electric motor and wind power; repairing,
      manufacturing, and remanufacturing industrial lifting magnets for the
      steel and scrap industries.




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




·
            Rail
      Services – We manufacture and rebuild power assemblies, engine parts, and
      other components related to large diesel engines and provide locomotive
      maintenance, remanufacturing, and repair services for the rail
      industry.




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, West Virginia, California, and
Quebec, Canada. 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 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 Rail Services segment with the launch of HK Engine
Components, LLC (“HKEC”) by acquiring certain assets related to the diesel
engine operations of Hatch & Kirk, Inc. located in Hagerstown, Maryland and
Weston, West Virginia. 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 railroad, utilities, marine
and offshore drilling industries. The financial results of HKEC are included
with the Rail Services segment.




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


1




refurbishment
for industrial companies such as utilities and manufacturers. The financial
results of this business are included with the Industrial Services
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 Industrial Services 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. The financial results of AMP are included in
the Rail Services segment.




In June
2008, we established AMP Rail Services Canada. AMP Canada is engaged in the
business of providing inspections, running repairs, overhaul and modification
programs, as well as upgrades to both freight and passenger locomotives and
transit cars. The financial results of AMP Canada are included in the Rail
Services segment.




In
September 2008, we acquired certain assets of Visalia Electric Motor Shop, Inc.
(“VEMS”). VEMS is engaged in the business
of providing maintenance and
repair services for both alternating current and direct current electric
industrial motors and generators. The financial results of VEMS are
included in the Industrial Services 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
December 31, 2008, we had 683 full-time employees of which 167 were salaried and
516 were hourly. At that date, approximately 26% 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 12% of our employees expire in 2009.




Segment
Information




We
currently operate in three business segments: The Industrial Services segment,
the Construction and Engineering Services segment and the Rail Services segment.
The following table summarizes financial information concerning our three
reportable segments as of and for the years ended December 31, 2008 and 2007
(amounts in thousands). Corporate administrative and support services are not
allocated to the segments but are presented separately.




2


Years
      Ended December 31,2008
                      
                      
                      2007Revenues:Industrial
      services
                      
                      $
                      63,238
                      
                      
                      $
                      41,703Construction
      and Engineering Services
                      
                      
                      34,465
                      
                      
                      
                      18,459Rail
      Services
                      
                      
                      28,818
                      
                      
                      
                      13,206Corporate
                      
                      
                      -
                      
                      
                      
                      -Elimination
                      
                      
                      (3,275
                      )
                      
                      
                      (118
                      )Consolidated
                      
                      $
                      123,246
                      
                      
                      $
                      73,250Gross
      Profit:Industrial
      services
                      
                      $
                      12,520
                      
                      
                      $
                      7,320Construction
      and Engineering Services
                      
                      
                      3,310
                      
                      
                      
                      1,670Rail
      Services
                      
                      
                      2,012
                      
                      
                      
                      3,176Corporate
                      
                      
                      -
                      
                      
                      
                      -Elimination
                      
                      
                      (63
                      )
                      
                      
                      -Consolidated
                      
                      $
                      17,779
                      
                      
                      $
                      12,166Net
      income (loss):Industrial
      services
                      
                      $
                      4,745
                      
                      
                      $
                      1,823Construction
      and Engineering Services
                      
                      
                      1,316
                      
                      
                      
                      561Rail
      Services
                      
                      
                      (2,049
                      )
                      
                      
                      1,851Corporate
                      
                      
                      (5,404
                      )
                      
                      
                      (6,258
                      )Elimination
                      
                      
                      (63
                      )
                      
                      
                      -Consolidated
                      
                      $
                      (1,455
                      )
                      
                      $
                      (2,023
                      )
  As
      of December 31,2008
                          
                          
                          2007Total
      assets:Industrial
      services
                          
                          $
                          41,892
                          
                          
                          $
                          42,017Construction
      and Engineering Services
                          
                          
                          12,113
                          
                          
                          
                          9,098Rail
      Services
                          
                          
                          23,653
                          
                          
                          
                          5,879Corporate
                          
                          
                          1,132
                          
                          
                          
                          2,553Consolidated
                          
                          $
                          78,790
                          
                          
                          $
                          59,547




Following
is additional information regarding our three business segments.




Industrial
Services Segment




We have
organized our Industrial Services segment into two primary business groups: the
Motor Group and the Magnet 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.




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 2008.




The
Industrial Services segment accounted for approximately 51% and 57% of total
consolidated revenues for the years ended December 31, 2008 and 2007,
respectively.


3




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.




VEMS
Acquisition




In
September 2008, we acquired certain assets of Visalia Electric Motor Shop, Inc.
(“VEMS”). VEMS is engaged in the business of providing maintenance and repair
services for both alternating current and direct current electric industrial
motors and generators.




Marketing
and Customers




The
products and services comprising our Industrial Services segment are marketed
principally by personnel based at our eight 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. No customer of our Industrial Services segment accounted for more
than 10% of our consolidated revenue for the year ended December 31,
2008 or 2007.




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 with respect to the
remanufacture and repair services for renewable wind generation facilities and
wind generators. 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 Complementary Service
      Businesses. We evaluate, on an ongoing basis, potential
      acquisitions of complementary 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 scrap and raw
steel, aluminum and various flexible materials. Certain raw materials are
obtained from a number of commercial sources


4




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 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
2008.




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
Industrial Services segment derives a portion of its revenues from foreign
customers. Foreign sales for the years ended December 31, 2008 and 2007 were
approximately $4.6 million or 7%, and $3.5 million or 9%, of the total revenues
of this segment, respectively. Revenues from sales to foreign customers for the
Industrial Services segment are denominated in U.S. dollars.




Backlog




At
December 31, 2008, the backlog of our Industrial Services segment was
approximately $5.2 million compared to $6.2 million at December 31, 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 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. 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. For further discussion of our working capital and
borrowing facilities, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources” and Notes
G and H of the notes to our consolidated financial statements.


5




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. 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.




The
Construction and Engineering Services segment accounted for approximately 28%
and 25% of total consolidated revenues for the years ended December 31, 2008 and
2007, respectively.




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.




Marketing
and Customers




Our
customers include general contractors, real estate developers, commercial
businesses, government agencies, manufacturers and institutions. One customer of
our Construction and Engineering Services business accounted for more than 10%
of our consolidated revenues during the year ended December 31, 2008 and no
customer accounted for more than 10% of our consolidated revenues during the
year ended December 31, 2007.




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 2008. 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 to, limit our ability to compete on price with
lower-cost, non-union contractors.


6




Backlog




At
December 31, 2008, the backlog of our Construction and Engineering Services
segment was approximately $10.5 million compared to $20.4 million at December
31, 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. For further discussion of our working
capital and borrowing facilities, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and Capital Resources”
and Notes G and H 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.






Rail
Services Segment




Principal
Products, Services, Markets and Distribution




Our Rail
Services Group repairs and remanufactures locomotives for the railroad industry
and 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. Our Rail Services segment customers include companies that use,
manufacture or distribute diesel engines and related components for the
railroad, utilities, maritime and offshore drilling industries.




The Rail
Services segment accounted for approximately 23% and 18% of total consolidated
revenues for the years ended December 31, 2008 and 2007,
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


7




Services
Group and the diesel engine components business of our repair, remanufacturing
and manufacturing segment, which is conducted through HK Engine Components,
LLC.




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.




In June
2008, we established AMP Canada. AMP Canada is engaged in the business of
providing inspections, running repairs, overhaul and modification programs, as
well as upgrades to both freight and passenger locomotives and transit
cars.




Marketing
and Customers




The
products and services comprising our Rail Services segment are marketed
principally by personnel based at our three 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. No customer of our Rail Services segment accounted for 10% or more
of our consolidated revenues during the year ended December 31, 2008
or 2007.




Business
Strategy




Our
strategy is to expand our Rail Services business throughout the world. With
respect to HK Engine Components, we remanufacture, manufacture and repair power
assemblies for the railroad and steamship industries. In American Motive Power,
we provide locomotive and engine overhauls to domestic and international
customers in the freight and transit industries.




Raw
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. 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




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, 2008. 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




For the
Rail Services segment for the years ended December 31, 2008 and 2007, foreign
sales were $4.1 million or 14% of total segment revenues, and $3.4 million or
26% of total segment revenues,


8




respectively.
Of the $4.1 million in foreign sales for the Rail Services segment for the year
ended December 31, 2008, approximately $1.2 million or 4% of segment revenues
were denominated in Canadian dollars and $3.0 million or 10% of segment revenues
were denominated in US Dollars. For the year ended December 31, 2007, all
foreign sales were denominated in US dollars.




Backlog




At
December 31, 2008, the backlog of our Rail Services segment was approximately
$17.4 million compared to $4.1 million at December 31, 2007. The increase is due
to the acquisition of AMP 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




For
product sales in the Rail Services segment, our customers typically pay within
30 to 60 days from the date of shipment, while some foreign customers typically
pay within 90 days. 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. 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. For
further discussion of our working capital and borrowing facilities, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources” and Notes G and H of the notes to
our consolidated financial statements.




Seasonality
and Quarterly Fluctuations




The
effects of seasonality on revenues in our Rail Services segment 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. 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 and Canada. We
lease facilities in South Bend, Elkhart, Hammond, and Merrillville, Indiana;
Boardman, Cincinnati and Massillon, Ohio; Hagerstown, Maryland; Dansville, New
York; Seattle, Washington; Huntington, West Virginia; Visalia, California; and
Montreal, Quebec. Our leases have terms expiring at various times through
November 2017, with annual base rental payments ranging from $39,000 to
$540,000. We own our facilities in Weston, West Virginia and Saraland,
Alabama.




The
Elkhart facility and two of the South Bend facilities are used in the
Construction and Engineering Services segment of our business. The
Hagerstown, Maryland, Weston, West Virginia,


9




Dansville,
New York, Seattle, Washington, and Montreal, Quebec facilities are used in the
Rail Services segment. The other facilities are used in the Industrial Services
segment of our business. We maintain our executive offices at our South Bend,
Indiana facility.




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. We lease our Visalia, California facility,
along with substantially all of the equipment used at our Visalia, California
facility from Gene Quesnoy, the former owner of VEMS and a current employee of
MIS. 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 2008.


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.







Fiscal
      Year 2008
                    
                    High
                    
                    
                    Low1st
      quarter ended 3/30/08
                    
                    $
                    17.00
                    
                    
                    $
                    8.002nd
      quarter ended 6/29/08
                    
                    $
                    15.50
                    
                    
                    $
                    9.253rd
      quarter ended 9/28/08
                    
                    $
                    11.00
                    
                    
                    $
                    7.204th
      quarter ended 12/31/08
                    
                    $
                    6.50
                    
                    
                    $
                    1.76Fiscal
      Year 20071st
      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







As of
March 26, 2009, there were 11,749,418 shares of common stock outstanding and
approximately 79 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 310,254 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 82,350 shares of our
      common stock at exercise prices ranging from $2.35 to $11.45 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.




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.


11




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
senior credit facility contains restrictions on our ability to pay dividends.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”




Securities
Authorized for Issuance Under Equity Compensation Plans




The
following table provides certain information as of December 31, 2008, with
respect to our existing equity compensation plans.





Plan
      Category
                
                Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                    (a)
                
                Weighted-average
      exercise price of outstanding options, warrants and rights
                    (b)
                
                Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                    (c)Equity
      compensation plans approved by security holders
                
                
                76,600
                (1)
                
                
                $7.37
                
                
                
                753,897
                (2)Equity
      compensation plans not approved by security holders
                
                
                –
                
                
                
                –
                
                
                
                70,800
                (3)Total
                
                
                76,600
                
                
                
                $7.37
                
                
                
                824,697





(1)
            Consists
      of shares issuable upon the exercise of outstanding options granted under
      our 2005 Stock Option Plan as of December 31, 2008, giving retroactive
      effect to the Reverse Stock Split.


(2)
            Includes
      141,350 and 612,547 shares of common stock remaining available for future
      issuance under our 2005 Stock Option Plan and Employee Stock Purchase
      Plan, respectively, as of December 31, 2008, giving retroactive effect to
      the Reverse Stock Split. For a description of the material features of our
      2005 Stock Option Plan and Employee Stock Purchase Plan, see Note I of the
      notes to our consolidated financial statements set forth in Item 8
      hereof.


(3)
            Consists
      of shares of common stock remaining available for future issuance under
      our Restricted Stock Plan as of December 31, 2008, giving retroactive
      effect to the Reverse Stock Split. For a description of the material
      features of our Restricted Stock Plan, see Note I of the notes to our
      consolidated financial statements set forth in Item 8
    hereof.






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


12




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, 2008, we have issued
616,407 shares upon the exercise of warrants and we have received proceeds of
$131,567 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.






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
three business segments:




·
            Industrial
      Services – We provide maintenance and repair services to several
      industries including electric motor and wind power; repairing,
      manufacturing, and remanufacturing industrial lifting magnets for the
      steel and scrap industries.




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




·
            Rail
      Services – We manufacture and rebuild power assemblies, engine parts, and
      other components related to large diesel engines and provide locomotive
      maintenance, remanufacturing, and repair services for the rail
      industry.




In the
fourth quarter of 2008, we realigned our segment reporting to coincide with
these three reporting segments -- Industrial Services, Construction and
Engineering Services, and Rail Services -- identified through a segment analysis
performed to ensure that our financial reporting adheres to the requirement of
FASB Statement No. 131 Disclosures about Segments of an
Enterprise and Related Information.




On
January 18, 2007 we 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, “Tontine”) for $5.00 per share
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.




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


13




expenditures,
to acquire Ideal and for working capital purposes. Interest was payable monthly
at 1⁄2% over prime as published in the Wall Street Journal. This revolving credit
facility was paid in full in December 2007 and closed in January 2008, when the
Company entered into its credit facility with Wells Fargo Bank, National
Association ("Wells Fargo").




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 (See Note C, Acquisitions, to our consolidated financail
statements set forth in Item 8 hereof).




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 Industrial Services segment (See Note C, Acquisitions, to our
consolidated financial statements set forth in Item 8 hereof).




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. Proceeds
were used to fund the acquisition of 3-D for $16.7 million and to retire all
amounts due to our senior lender, MFB Financial, 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. 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. The financial results of AMP are included in the Rail
Services segment (See Note C, Acquisitions, to our consolidated financial
statements set forth in Item 8 hereof).  As of December 31, 2008 the
outstanding balance on the revolving note is $7,459,946.




On
February 8, 2008 we amended our Amended and Restated Articles of Incorporation
to increase the number of authorized shares of common stock from 12,000,000 to
20,000,000 shares (the “First Stock Increase”). The first stock increase was
approved by our shareholders at a special meeting on February 7, 2008, and
became effective on February 8, 2008, by the filing of articles of amendment to
our Amended and Restated Articles of Incorporation with the Indiana Secretary of
State.




In April
2008, the Company and Wells Fargo amended the credited facility entered into in
January 2008. The amendment revised the formula for the maximum aggregate
principal amount that may be borrowed under the revolving note. Specifically,
the percentage of a portion of the Company’s eligible construction related trade
receivables resulting from time and material services and completed contracts
was increased from 40% to 85% and the related borrowings were removed from the
$2,000 limitation.




The April
2008 amendment also provided a four year equipment term note in the amount of
$1,000, secured by substantially all of the machinery and equipment of the
Company. The note matures June 1, 2012 and is payable in monthly installments of
$21 plus interest at the bank’s prime rate (3.25% at December 31, 2008)
beginning June 1, 2008. The outstanding balance under the equipment term note as
of December 31, 2008 was $854.  Effective January 1, 2009, the
interest rate on the real estate term note was increased to the bank’s prime
rate plus 3% (6.25% at January 1, 2009) (See Note G, Senior Credit Facility, to
our consolidated financial statements set forth in Item 8
hereof).  Effective April 14, 2009, the interest rate on the real
estate term note was increased to the Daily Three Month LIBOR plus 5.25%
(approximately 6.38% as of April 14, 2009) (See Note G, Senior Credit Facility,
to our consolidated financial statements set forth in Item 8
hereof).




On May
20, 2008 we amended our Amended and Restated Articles of Incorporation to
further increase the number of authorized shares of our common stock form
20,000,000 to 30,000,000 shares (the “Second Stock Increase”). The Second Stock
Increase was approved by our shareholders at the annual meeting of shareholders
on May 15, 2008, and became effective on May 20, 2008 by the filing of articles
of amendment to our Amended and Restated Articles of Incorporation with the
Indiana Secretary of State.




In May
2008, AMP formed a subsidiary in Montreal, Canada named AMP Rail Services
Canada, ULC (“AMP Canada”). AMP Canada repairs, remanufactures and rebuilds
locomotives.




In
September 2008, our wholly-owned subsidiary, Magnetech, acquired certain
business assets of Visalia Electric Motor Shop, Inc. (“VEMS”). VEMS is engaged
in the business of providing maintenance and repair services for both
alternating current and direct current electric industrial motors and generators
(See Note C, Acquisitions, to our consolidated financial statements set forth in
Item 8 hereof).




In
September 2008, we amended our credit facility with Wells Fargo. The second
amendment revised a financial covenant which increased the maximum amount of
capital expenditures for 2008 to $2


14




million,
no more than $1.25 million of which could be paid from working capital. The
amendment also limited the investment and loans from American Motive Power, Inc.
to AMP Rail Services Canada, ULC to $1 million.




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. 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.




On March
5, 2009, the Company received a default notification from Wells Fargo, due to
the violation of a financial covenant regarding minimum net income for the year
ended December 31, 2008. Additionally, the Company was in default of the debt
service coverage ratio.  The default resulted in an increase in the
interest rate on the revolving note, the real estate term note and the machinery
and equipment note to the Prime rate plus 3% (6.25% at December 31, 2008). In
addition, due to the covenant violation, Wells Fargo reduced
the availability of credit on the revolving note related to certain
receivable accounts held by Martell Electric and Ideal. The interest rate
increase was made effective retroactively to January 1, 2009 and remained in
effect until the default was subsequently waived on April 14, 2009.




On April
14, 2009, the Company and Wells Fargo signed a Fourth Amendment to the Credit
Facility and waiver of the default notification received on March 5, 2009. The
amendment and waiver amended the Credit Facility as follows:




·
            Waived
      the Company’s noncompliance with the minimum net income and debt service
      coverage ratio covenants for the year ending December 31,
      2008.




·
            Eliminated
      the minimum net income and debt service coverage ratio covenants for the
      year ending December 31, 2009.




·
            Adjusted
      the minimum book net worth covenant to $38,750,000 as of December 31,
      2009.






·
            Incorporated
      a monthly minimum EBITDA covenant commencing in April,
    2009.




·
            Reduced
      the revolving credit line limit to $11,000,000 (from
      $13,750,000).




·
            Reset
      the interest rate on the revolving credit line and term notes to the Daily
      Three Month LIBOR plus 5.25% effective April 14,
  2009.




·
            Suspended
      interest payments on the Company’s subordinated debt to the Company’s CEO,
      John A. Martell.




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, 2007
include our accounts and those of our wholly-owned subsidiaries, Magnetech,
Martell Electric, LLC, HK Engine Components, LLC, Ideal Consolidated, Inc, and
3-D Services, Inc. The consolidated financial statements for the year ended
December 31, 2008 also include the accounts of American Motive Power, Inc. for
the eleven months ended December 31, 2008. All significant intercompany balances
and transactions have been eliminated.




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


15




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 Industrial Services segment consists primarily of product sales and
service of industrial magnets, and electric motors. 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 the Rail Services and Construction and Engineering Services segments 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 contracts in excess of customer billings are recorded as part
of other current assets. Amounts billed to customers in excess of costs incurred
on contracts are recorded as part of other current liabilities.




Cash Equivalents. The Company
considers all highly liquid investments with maturities of three months or less
from the purchase date to be cash equivalents.




Concentration of credit risk.
The Company maintains its cash and cash equivalents primarily in bank deposit
accounts. The Federal Deposit Insurance Corporation insures these balances up to
$250 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.




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.




Foreign Currency Translation.The assets and liabilities of the Company’s Canadian operations are
translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date, except for non-monetary assets and liabilities, which are translated
using the historical exchange rate. Income and expense accounts are translated
into U.S. dollars at the year-to-date average rate of exchange, except for
expenses related to those balance sheet accounts that are translated using
historical exchange rates.




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




Goodwill and Intangibles. Weaccount for goodwill and other
intangible assets in accordance with FASB Statement No. 142 (“SFAS
142”), “Goodwill and Other
Intangible Assets.” Goodwill represents the excess of the cost of
acquired businesses over the fair market value of their net assets at the dates
of acquisition. Goodwill, which is not subject to amortization, is tested for
impairment annually during the fourth quarter. We test goodwill and other
intangible assets for impairment on an interim basis if an event occurs that
might reduce the fair value of a reporting unit below its carrying value.
Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of the fair value of a reporting unit with its carrying
value. If the carrying amount of the reporting unit exceeds its fair value, then
the second step of the process involves a comparison of the implied fair value
and carrying value of the goodwill of that reporting unit. If the carrying value
of the goodwill of a reporting unit exceeds the fair value of that goodwill, an
impairment loss is recognized in an amount equal to the excess. Reporting units
are determined based on the our operating segments. The AMP, MIS, Ideal and
3-D


16




operating
segments, which were also determined to be reporting units under SFAS 142,
contain goodwill and are thus tested for impairment. We re-evaluate our
reporting units and the goodwill and intangible assets assigned to the reporting
units annually, prior to the completion of the impairment testing. The fair
value of our reporting units is determined based upon management’s estimate of
future discounted cash flows and other factors. Management’s estimates of future
cash flows include assumptions concerning future operating performance and
economic conditions and may differ from actual future cash flows.




Other
intangible assets consisting mainly of customer relationships, a technical
library, and non-compete agreements were all determined to have a definite life
and are amortized over the shorter of the estimated useful life or contractual
life of the these assets, which range from 1 to 20 years. Amortization expense
for the other intangible assets was $889 and $35 for the years ended December
31, 2008 and 2007, respectively. Intangible assets with definite useful lives
are periodically reviewed to determine if facts and circumstances indicate that
the useful life is shorter than originally estimated or that the carrying amount
of assets may not be recoverable. If such facts and circumstances do exist, the
recoverability of intangible assets is assessed by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets
over their remaining lives against their respective carrying amounts.
Impairments, if any, are based on the excess of the carrying amount over the
fair value of those assets.




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.




Debt issue costs.We
capitalize and amortize costs incurred to secure senior debt financing and
revolving notes over the term of the 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. 
Accordingly, the balance of debt issue costs were amortized through February 28,
2008.




Advertising costs.
Advertising costs consist mainly of product advertisements and announcements
published in trade publications, and are expensed when incurred.




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”)


17




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 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.


18


In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurement(“SFAS 157”). SFAS 157 defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value
measurements.  SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. In February 2008, the FASB issued FASB Staff
Position No. 157-2, which deferred the effective date of SFAS 157 for
all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) until January 1, 2009. Accordingly, our adoption
of this standard on January 1, 2008 was limited to financial assets and
liabilities. The adoption of SFAS 157 did not have a material effect on our
financial condition or results of operations. We are still in the process of
evaluating this standard with respect to its effect on non-financial assets and
liabilities and therefore has not yet determined the impact that it will have on
our financial statements upon full adoption in 2009. Non-financial assets and
liabilities for which we have not applied the provisions of SFAS 157 include
those measured at fair value in impairment testing and those initially measured
at fair value in a business combination.
  In
February 2007, the FASB issued SFAS No. 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 items
at fair value. Entities that elect the fair value option will report unrealized
gains and losses in earnings at each subsequent reporting date. The fair value
option may be elected on an instrument-by-instrument basis, with few exceptions.
SFAS 159 also establishes presentation and disclosure requirements to facilitate
comparisons between companies that choose different measurement attributes for
similar assets and liabilities. The adoption of SFAS 159 did not have an effect
on our financial condition or results of operations as we did not elect this
fair value option, nor is it expected to have a material impact on future
periods as the election of this option for our financial instruments is expected
to be limited.
  In December 2007, the FASB
issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements — an amendment of Accounting
Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners.
SFAS 160 is effective for fiscal years beginning after December 15, 2008.
The Company does not expect the adoption of this standard on January 1, 2009 to
have a material impact on its consolidated financial
statements.




In
March 2008, the FASB issued SFAS No. 161 , “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS No. 161 changes
the disclosure requirements for derivative instruments and hedging activities.
The Company will be required to provide enhanced disclosures about (a) how
and why derivative instruments are used, (b) how derivative instruments and
related hedged items are accounted for under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Certain
Hedging Activities (“SFAS 133”), and its related interpretations, and
(c) how derivative instruments and related hedged items affects our
financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company is evaluating the impact of
the adoption of SFAS 161 on its consolidated financial statements.




In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets”, (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible
Assets”. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The Company is currently evaluating the impact of FSP 142-3 on its
consolidated financial statements.




In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States. SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company does not expect the adoption of SFAS No.
162 to have a material impact on our financial position or results of
operations.




19


Recent
Developments
  Liquidity Issues. During the
first three quarters of 2008 we experienced significant growth and profitability
compared to 2007. But during the fourth quarter of 2008, specifically December
2008, we incurred significant losses. These losses triggered a default of a
financial covenant contained in the senior secured lender agreement (“Credit
Agreement”) with Wells Fargo. Wells Fargo issued a letter on March 5, 2009
notifying us that, while it was not accelerating the maturity of the
indebtedness under the Credit Agreement, it was altering certain other credit
terms and expressly reserving the rights to exercise all remedies including
acceleration. We then filed a SEC Form 12-25b requesting a delay in filing our
annual report on Form 10-K while bank negotiations were proceeding. On April 14,
2009, we executed an agreement with Wells Fargo through which Wells Fargo waived
the default and amended the Credit Agreement (See Note G, Senior Credit
Facility, in our consolidated financial statements set forth in Item 8
hereof).




Beginning
in October 2008 and continuing into 2009, the Industrial Services and Rail
Services segments have experienced a decline in backlog and revenues driven by
the downturn in the current US economy. As a result, we have experienced severe
cash flow constraints. We have experienced substantial difficulties in meeting
our short-term cash needs, particularly in relation to our vendor
commitments.




Response to Liquidity Issues and
Market Conditions. We initiated a number of actions beginning in
the fourth quarter of 2008 to mitigate the impact on the Company of the
unprecedented deterioration of market conditions. These actions
included:




·
            Downsized
      by the elimination of approximately 200 positions or approximately
      27% of our work force.




·
            Consolidated
      operations in certain groups where customer service would not be
      affected.




·
            Centralized
      human resource and certain other administrative
  functions.




·
            Initiated
      discussions toward selling certain non-strategic
  assets.




·
            Initiated
      efforts to obtain additional equity investment and/or refinance part or
      all of our credit facilities.




·
            Aligned
      core assets with strategic 2009 growth opportunities in wind power,
      transformer, traffic and telecommunication investments expected to result
      from governmental stimulus and energy independence
      initiatives.




Operating
Results




Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007




Revenues. Total revenues
increased by $49.9 million or 68% to $123.2 million in 2008 from $73.3 million
in 2007. Each of our three segments had increases in revenue as follows:
Industrial Services increased $19.8 million or 47%; our Rail Services increased
$14.3 million or 108%; and our Construction and Engineering Services increased
$15.9 million or 86%.




The
increase in the Industrial Services segment came primarily from the acquisition
of 3-D Services. The increase in the Rail Services segment came primarily from
the acquisition of AMP. The increase in the Construction and Engineering
Services came partially from the acquisition of Ideal (51%) and partially from
organic growth due to the continuing strong local construction market
(49%).




Gross Profit. Total gross
profit in 2008 was $17.8 million or 14.3% of total revenues compared to $12.1
million or 16.6% of total revenues in 2007. Our three segments had the following
changes in gross profit: Industrial Services increased $5.2 million or 70%; our
Rail Services decreased $1.1 million or 36%; and our Construction and
Engineering Services increased $1.6 million or 94%.




The
increase in the Industrial Services segment came primarily from the acquisition
of 3-D Services. The decrease in the Rail Services segment came primarily from
the acquisition of AMP. The increase in the Construction and Engineering
Services came primarily from organic growth (73%) and the acquisition of Ideal
(27%).




Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased to $17.4
million in 2008 from $10.7 million in 2007. Selling expenses increased 37% to
$5.9


20




million
in 2008 from $4.3 million in 2007 primarily due to higher salaries and
commissions required to support the growth in total revenues. Selling expenses
were 4.8% and 5.9% of total revenues in 2008 and 2007, respectively. General and
administrative expenses increased 81% to $11.4 million in 2008 from $6.3 million
in 2007. General and administrative expenses were 9.3% and 8.6% of total
revenues for 2007 and 2006, respectively.




Goodwill impairment.As a
result of the completion of step one of our fiscal 2008 annual analysis and test
for impairment of goodwill, as required by SFAS 142, during the fourth quarter
of 2008, it was determined that goodwill related to American Motive Power, a
component of our Rail Services segment, was impaired. As a result, a $0.9
million estimated impairment charge was recorded as a goodwill impairment
expense as shown on our statement of operations for the year ended December 31,
2008. This represents a write down of goodwill in the amount of the excess of
the previous carrying value of goodwill over the implied fair value of goodwill.
The impairment charge is attributed to a decline in the forecasted discounted
cash flows expected by us. We have not yet completed step two of our analysis,
but it is anticipated that step two will be completed during the second quarter
of 2009, at which time any required adjustments to the Company’s estimates will
be recorded. The amount of the impairment charge recognized may change as a
result of the Company’s completion of step two.




Income from Operations.Income from operations decreased $2.0 million from $1.5 million in 2007
to $(0.5) million in 2008.




The
decrease comes primarily from the Rail Services segment which was a positive
$1.2 million in 2007 and decreased to a negative $2.0 million for 2008. The
decrease was caused by issues with the AMP post-acquisition integration, which
have subsequently been rectified, the $.9 goodwill impairment, and the general
rail industry decline in the 3rd and 4th quarters of 2008.




The
Industrial Services segment’s operating income increased $4.7 million to $4.9
million in 2008 from $.2 in 2007. The increase is attributed to the acquisition
of 3-D as well as operational efficiency improvements to the overall Industrial
Services segment.




The
Construction and Engineering Segment’s income from operations increased $1.4
million to $1.7 million in 2008 from $.3 million in 2007. This increase was due,
in approximately equal parts, to the acquisition of Ideal and organic growth
within the segment.




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 2008 to $.9 million from $1.3
million in 2007. Interest on principal debt increased to $0.9 million in 2008
from $0.6 million in 2007 due to higher outstanding balances related to the
notes payable to former 3-D shareholders and the Wells Fargo credit facility,
which was somewhat offset by lower interest rates. Amortization of debt issue
costs and debt discount costs on debentures and senior revolving debt was $0.1
million in 2008 compared to $0.7 million in 2007. 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
2008.




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 $1.5
million and $2.0 million in 2008 and 2007, respectively. The decrease in the net
loss was due primarily to higher sales and lower interest expense in 2008 and
the loss on debt extinguishment in 2007, partially offset by higher selling,
general and administrative expenses in 2008. While we realized three profitable
quarters in 2008, we experienced a sharp downturn in the final quarter of 2008
across all business segments and product groups.


21




The
Industrial Services segment had record revenue in the 4th quarter of 2008,
however, because of the downturn in the economy, the backlog swiftly declined
and the Company had a slow reaction to making the necessary operating cost cuts.
We have made significant reductions in our payroll costs by eliminating
approximately 34% of the positions from October 2008 to March 2009.




The
Construction and Engineering Segment had cost over runs in December involving
the completion of the Blue Chip Casino project.




The Rail
Services segment had the goodwill impairment, and also suffered from a slow
reaction to making necessary operating cost cuts. We have made significant
reductions in our payroll costs by eliminating approximately 29% of the positions from October
2008 to March 2009.




Liquidity and Capital
Resources for the Years Ended December 31, 2008 and 2007.Working
capital decreased $2.7 million from approximately $17.8 million at December 31,
2007 to $15.1 million at December 31, 2008. The decrease in working capital
primarily resulted from funding of the growth of the business and the impact of
the acquisitions of AMP and VEMS in 2008, offset by the redemption of
convertible debentures of $2.9 million.




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 Chief Executive Officer ($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, 2008 of $1.5 million included non-cash
expenditures of $0.9 million for goodwill impairment and depreciation and
amortization expense of $2.9 million.




Net cash utilized in
operating activities was $1.8 million for the year ended December 31,
2008 compared to net cash utilized by operating activities of $2.2 million in
2007.




In 2008,
net cash provided from loss before interest, taxes, depreciation and
amortization of approximately $2.5 million was reduced primarily by an increase
in accounts receivable of $5.8 million, increase in net inventories of $2.2
million, an increase in prepaid expenses and other non current assets of $1.3
million. Net cash was increased by an increase in accounts payable of $3.0
million and an increase in accrued expenses and other current liabilities of
$1.3 million. Inventories of long lead-time items increased to support
increasing revenues from customers in the Rail Services industry.




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 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 Services industry. Past due accounts payable
were reduced with proceeds from the sale of common stock to
Tontine.




While we
were able to reduce past due accounts payable in 2008 through November, 2008,
liquidity issues have since caused us to increase past due accounts payable.
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. 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.




During
the years ended December 31, 2008 and 2007, net cash utilized in investing
activities was $10.0 million and $16.9 million, respectively. In 2008, net cash
utilized consisted of $7.0 million for the acquisition of AMP and $1.1 million
for the acquisition of certain assets of VEMS, net of cash
acquired,


22




and
capital expenditures of $2.0 million. In 2007 net cash utilized consisted of
$16.1 million for the acquisition of 3-D, $0.3 million for the acquisition of
Ideal, and capital expenditures of $0.6 million.




During
the year ended December 31, 2008 we generated $9.0 million from financing
activities, including $7.3 million from our revolving credit facility with Wells
Fargo, $2.3 million from long term notes related to our credit facility with
Wells Fargo and $0.1 million from stock issuances, less principal payments on
long term debt and capital leases of $0.6 million. During the year ended
December 31, 2007 we generated $21.7 million from financing activities 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.




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 bore
interest at a fixed annual rate of 6%, payable in cash upon redemption or at
maturity if the holders did not elect to convert their debentures. Each
debenture holder had 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 316,016
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.




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.




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. 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 was payable monthly at 1⁄2% over prime as published in
the Wall Street Journal. The facility contained annual financial covenants,
including


23




minimum
tangible net worth, current ratio and debt coverage ratio, and maximum debt to
equity ratio. An event of default under the facility would have occured if ,
among other things, we failed to make a required payment on time or when due, we
failed to keep the secured property insured, we defaulted under any other
agreements we have with MFB Financial, we were involved in any legal proceeding
by a creditor for the collection of debt, we became insolvent, or made any
misrepresentation in financial information we provided to MFB Financial, or we
did or failed to do something that caused MFB Financial to believe that it would
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. 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 $2.0 million. 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 $1.3 million real estate term note, $1.0
million machinery and equipment term note, and a $13.8 million revolving
note. On January 16, 2008, we borrowed $7.5 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 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 ten thousand dollars, plus interest, beginning on the
first day of the month following receipt of the advance.




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 $2.0 million and 85% of
certain remaining eligible trade accounts receivable less any reserves
established by Wells Fargo from time to time and (2) $13.8 million less any
reserves established by Wells Fargo.




On March
5, 2009, the Company received a default notification from Wells Fargo, due to
the violation of a financial covenant regarding minimum net income for the year
ended December 31, 2008.  Additionally, the Company was in default of the
debt service coverage ratio.  The defaults resulted in an increase in the
interest rate on the revolving note, the real estate term note and the machinery
and equipment note to the Prime rate plus 3% (6.25% at December 31, 2008). 
In addition, due to the covenant violation, Wells Fargo has reduced the loan
availability on the revolving note related to certain receivable accounts held
by Martell Electric and Ideal.  The interest rate increase was made
effective retroactively to January 1, 2009 and remained in effect until the
default was subsequently waived on April 14, 2009.


On April
14, 2009, the Company and Wells Fargo signed a Fourth Amendment to the Credit
Facility and waiver of the default notification received on March 5, 2009. 
The amendment and waiver amended the credit facility as follows:
  ·
              Waived
      the Company’s noncompliance with the minimum net income and debt service
      coverage ratio covenants for the year ending December 31,
      2008.
  ·
              Eliminated
      the minimum net income and debt service coverage ratio covenants for the
      year ending December 31,
2009.
   24
  ·
              Adjusted
      the minimum book net worth covenant to $38,750 as of December 31,
      2009.
  ·
              Incorporated
      a monthly minimum EBITDA covenant commencing in April,
    2009.
  ·
              Reduced
      the revolving credit line limit to $11,000 (from
  $13,750).
  ·
              Reset
      the interest rate on the revolving credit line and term notes to the Daily
      Three Month LIBOR plus 5.25% effective April 14,
  2009.
  ·
              Suspended
      interest payments on the Company’s subordinated debt to the Company’s CEO,
      John A. Martell.






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”) (See Note L, Related Party
Transactions, to our consolidated financial statements set forth in Item 8
hereof). Subordination agreements have been executed that subordinate our
obligations under the Subordinated Indebtedness to the Wells Fargo credit
facility.




Off-Balance
Sheet Transactions




As of
December 31, 2008 and 2007, 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.




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.


25




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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the consolidated
results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America.







/s/
      ASHER & COMPANY, Ltd.







Philadelphia,
Pennsylvania


April 15,
2009


26


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


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




December
      31,2008
              
              
              2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              76
              
              
              $
              2,807Accounts
      receivable, net of allowance for doubtful accounts of $864 and $669,
      respectively
              
              
              23,549
              
              
              
              17,233Inventories,
      net
              
              
              13,807
              
              
              
              10,884Prepaid
      expenses
              
              
              738
              
              
              
              299Other
      current assets
              
              
              3,173
              
              
              
              1,707Total
      current assets
              
              
              41,343
              
              
              
              32,930PROPERTY
      AND EQUIPMENT, net
              
              
              13,812
              
              
              
              10,125OTHER
      ASSETSDeposits
      and other assets
              
              
              392
              
              
              
              222Goodwill
              
              
              12,966
              
              
              
              8,003Customer
      relationships, net
              
              
              9,059
              
              
              
              7,568Other
      intangible assets, net
              
              
              1,218
              
              
              
              699Total
      other assets
              
              
              23,635
              
              
              
              16,492Total
      Assets
              
              $
              78,790
              
              
              $
              59,547LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESRevolving
      credit line, net of discount of $117 and $0, respectively
              
              $
              7,343
              
              
              $
              -Current
      portion of long-term debt, net of discount of $0 and $15,
      respectively
              
              
              487
              
              
              
              3,036Accounts
      payable
              
              
              12,218
              
              
              
              7,530Accrued
      expenses and other current liabilities
              
              
              6,180
              
              
              
              4,558Total
      current liabilities
              
              
              26,228
              
              
              
              15,124LONG
      TERM LIABILITIESLong-term
      debt
              
              
              4,805
              
              
              
              2,195Long-term
      debt, Officers
              
              
              5,000
              
              
              
              5,000Total
      long-term liabilities
              
              
              9,805
              
              
              
              7,195Total
      liabilities
              
              
              36,033
              
              
              
              22,319Commitments
      and ContingenciesSTOCKHOLDERS'
      EQUITYPreferred
      stock, no par value; 800,000 shares authorized; no shares issued and
      outstanding
              
              
              -
              
              
              
              -Common
      stock, no par value; 30,000,000 shares authorized; 11,748,448 and
      11,129,012 shares issued and outstanding, respectively
              
              
              50,859
              
              
              
              43,967Additional
      paid in capital
              
              
              9,179
              
              
              
              9,019Deferred
      compensation
              
              
              (123
              )
              
              
              (55
              )Accumulated
      deficit
              
              
              (17,158
              )
              
              
              (15,703
              )Total
      Stockholders' equity
              
              
              42,757
              
              
              
              37,228Total
      Liabilities and Stockholders' Equity
              
              $
              78,790
              
              
              $
              59,547










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


27


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


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








Years
      Ended December 31,2008
              
              
              2007RevenuesProduct
      Sales
              
              $
              23,485
              
              
              $
              22,270Service
      Revenue
              
              
              99,761
              
              
              
              50,980Total
      Revenues
              
              
              123,246
              
              
              
              73,250Cost
      of RevenuesCost
      of Product Sales
              
              
              18,387
              
              
              
              16,316Cost
      of Service Revenue
              
              
              87,080
              
              
              
              44,768Total
      Cost of Revenues
              
              
              105,467
              
              
              
              61,084Gross
      Profit
              
              
              17,779
              
              
              
              12,166Selling,
      General and Administrative Expenses
              
              
              17,352
              
              
              
              10,649Goodwill
      Impairment
              
              
              887
              
              
              
              -Income
      (Loss) From Operations
              
              
              (460
              )
              
              
              1,517Other
      Income (Expense)Loss
      on Debt Extinguishment
              
              
              -
              
              
              
              (2,300
              )Interest
      Expense
              
              
              (935
              )
              
              
              (1,259
              )Other
      Income
              
              
              42
              
              
              
              19(893
              )
              
              
              (3,540
              )Loss
      Before Taxes
              
              
              (1,353
              )
              
              
              (2,023
              )Income
      Tax Expense
              
              
              102
              
              
              
              -Net
      Loss
              
              $
              (1,455
              )
              
              $
              (2,023
              )Basic
      and Diluted Loss per Common Share
              
              $
              (0.12
              )
              
              $
              (0.26
              )Weighted
      Average Number of Common Shares
              
              
              11,647,828
              
              
              
              7,652,061










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


28


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


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





Shares
                
                
                Common
      Stock
                
                
                Additional
      Paid In Capital
                
                
                Deferred
      Compensation
                
                
                Accumulated
      Deficit
                
                
                TotalBalances. December31,
      2006
                
                
                4,691,410
                
                
                $
                8,459
                
                
                $
                8,961
                
                
                $
                (47
                )
                
                $
                (13,680
                )
                
                $
                3,693lssuance
      of MISCOR common stock in connection with exercise of stock
      warrants
                
                
                215,456
                
                
                
                9
                
                
                
                (8
                )
                
                
                
                
                
                
                
                
                
                
                1lssuance
      of MISCOR common stock in connection with exercise of stock
      options
                
                
                2.000
                
                
                
                13
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                13Conversion
      of Subordinate Debentures into MISCOR Common Stock
                
                
                122,764
                
                
                
                979
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                979Stock
      based compensation
                
                
                
                
                
                
                
                
                
                
                26
                
                
                
                
                
                
                
                
                
                
                
                26lssuance
      of MISCOR common stock in connection with acquisition of 3-DServices,
      Ltd.
                
                
                247,678
                
                
                
                2,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,000Sale of MISCOR common stock net
      of issuance costs of$75
                
                
                5,833,333
                
                
                
                32,425
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                32,425lssuance
      of MISCOR common stock in connection with 2005Restricted Stock
      Plan
                
                
                6,200
                
                
                
                
                
                
                
                40
                
                
                
                (40
                )
                
                
                
                
                
                
                -Amortization
      of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                32
                
                
                
                
                
                
                
                32lssuance
      of MISCOR common stock in connection with 2005Employee Stock
      Purchase Plan
                
                
                10,171
                
                
                
                82
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                82Loss–2007
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,023
                )
                
                
                (2,023
                )Balances, December31,2007
                
                
                11,129,012
                
                
                $
                43,967
                
                
                $
                9,019
                
                
                $
                (55
                )
                
                $
                (15,703
                )
                
                $
                37,228lssuance
      of MISCOR common stock in connection with acquisition of American Motive
      Power, Inc.
                
                
                253,623
                
                
                
                3.500
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,500lssuance
      of MISCOR common stock in connection with exercise of stock
      warrants
                
                
                13,065
                
                
                
                16
                
                
                
                (16
                )
                
                
                
                
                
                
                
                
                
                
                -Conversion
      of Subordinate Debentures into MISCOR Common Stock
                
                
                316,016
                
                
                
                3,233
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,233lssuance
      of MISCOR common stock in connection with 2005Restricted Stock
      Plan
                
                
                17,000
                
                
                
                
                
                
                
                155
                
                
                
                (155
                )
                
                
                
                
                
                
                -Amortization
      of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                61
                
                
                
                
                
                
                
                61lssuance
      of MISCOR common stock in connection with exercise of stock
      options
                
                
                8,450
                
                
                
                51
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                51Stock
      Based Compensation
                
                
                
                
                
                
                
                
                
                
                47
                
                
                
                
                
                
                
                
                
                
                
                47lssuance
      of MISCOR common stock in connection with 2005Employee Stock
      Purchase Plan
                
                
                17,282
                
                
                
                110
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                110Stock
      Repurchase
                
                
                (6,000
                )
                
                
                (18
                )
                
                
                (26
                )
                
                
                26
                
                
                
                
                
                
                
                (18
                )Loss–2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,455
                )
                
                
                (1,455
                )Balances. December31,2008
                
                
                11,748,448
                
                
                $
                50,859
                
                
                $
                9,179
                
                
                $
                (123
                )
                
                $
                (17,158
                )
                
                $
                42,757







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


29


MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


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





Years
      ended December 31,2008
              
              
              2007OPERATING
      ACTIVITIESNet
      loss
              
              $
              (1,455
              )
              
              $
              (2,023
              )Adjustments
      to reconcile net loss to net cash utilized by operating
      activities:Depreciation
      and amortization
              
              
              2,912
              
              
              
              1,028Goodwill
      impairment
              
              
              887
              
              
              
              -Bad
      debts
              
              
              283
              
              
              
              150Inventory
      reserves
              
              
              349
              
              
              
              264Gain
      on sale of equipment
              
              
              (42
              )
              
              
              (3
              )Amortization
      of stock-based compensation plans
              
              
              108
              
              
              
              58Amortization
      of debt issuance costs and debt discount
              
              
              124
              
              
              
              2,579Changes
      in:Accounts
      receivable
              
              
              (5,779
              )
              
              
              (124
              )Inventories
              
              
              (2,158
              )
              
              
              (1,447
              )Prepaid
      expenses and other current assets
              
              
              (1,149
              )
              
              
              (334
              )Deposits
      and other non-current assets
              
              
              (179
              )
              
              
              (78
              )Accounts
      payable
              
              
              2,960
              
              
              
              (1,175
              )Accrued
      expenses and other current liabilities
              
              
              1,345
              
              
              
              (1,123
              )Net
      cash utilized by operating activities
              
              
              (1,794
              )
              
              
              (2,228
              )INVESTING
      ACTIVITIESAcquisition
      of business assets, net of cash acquired
              
              
              (8,148
              )
              
              
              (16,384
              )Acquisition
      of property and equipment
              
              
              (1,971
              )
              
              
              (567
              )Proceeds
      from disposal of property and equipment
              
              
              157
              
              
              
              4Net
      cash utilized by investing activities
              
              
              (9,962
              )
              
              
              (16,947
              )FINANCING
      ACTIVITIESPayments
      on capital lease obligations
              
              
              (44
              )
              
              
              (33
              )Proceeds
      from sale of common stock
              
              
              -
              
              
              
              32,594Short
      term borrowings (repayments), net
              
              
              7,288
              
              
              
              (6,938
              )Borrowings
      of long-term debt
              
              
              2,250
              
              
              
              200Repayments
      of long-term debt
              
              
              (567
              )
              
              
              (4,065
              )Proceeds
      from the issuance of shares and exercise of warrants
              
              
              143
              
              
              
              2Debt
      issuance costs
              
              
              (45
              )
              
              
              -Payment
      of stock issuance costs
              
              
              -
              
              
              
              (75
              )Net
      cash provided by financing activities
              
              
              9,025
              
              
              
              21,685INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (2,731
              )
              
              
              2,510Cash
      and cash equivalents, beginning of period
              
              
              2,807
              
              
              
              297Cash
      and cash equivalents, end of period
              
              $
              76
              
              
              $
              2,807SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
              
              $
              851
              
              
              $
              1,009







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


30


MISCOR
      GROUP, LTD. AND SUBSIDIARIES


NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008


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




NOTE
      A - BUSINESS OVERVIEW




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.




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 eight
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.


31


MISCOR
      GROUP, LTD. AND SUBSIDIARIES


NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008


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




NOTE
      A - BUSINESS OVERVIEW
(CONTINUED)




In
January 2008, MISCOR acquired 100% of the outstanding shares of American Motive
Power, Inc. (“AMP”). AMP is engaged in the business of repairing,
remanufacturing, and rebuilding locomotive engines as well as providing related
goods and services to the Rail industry.




In
September 2008, MIS acquired certain assets of Visalia Electric Motor Shop, Inc.
(“VEMS”). VEMS is engaged in the business of providing maintenance and repair
services for both alternating current and direct current electric industrial
motors and generators.




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






NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




Principles of
consolidation




The
consolidated financial statements for the year ended December 31, 2007 include
the accounts of MISCOR and its wholly owned subsidiaries, Magnetech Industrial
Services, Inc., Martell Electric, LLC, HKEC, Ideal Magnetech Power Services, LLC
and 3-D. The consolidated financial statements for the year ended December 31,
2008 also includes the accounts of AMP for the eleven months ended December
31, 2008. 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. Long-term debt, Stockholder was
renamed Long-term debt, Officers on the consolidated balance sheets. In
addition, Long-term debt in the amount of $2,000 was reclassified to Long-term
debt, Officers as of December 31, 2007. These reclassifications had no effect on
the Company’s consolidated statements of operations or cash flows.




Cash
Equivalents




The
Company considers all highly liquid investments with maturities of three months
or less from the purchase date to be cash equivalents.




Concentration of credit
risk




The
Company maintains its cash and cash equivalents primarily in bank deposit
accounts. The Federal Deposit Insurance Corporation insures these balances up to
$250 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.


32


MISCOR
      GROUP, LTD. AND SUBSIDIARIES


NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008


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




NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




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







Debt issue
costs




Costs
incurred by the Company to secure senior debt financing are capitalized and
amortized, as a charge to interest expense, over the term of the senior debt
financing agreement which is three years (See Note G, Senior Credit Facility and
Note H, Long Term Debt, to our consolidated financial statements set forth in
Item 8 hereof).




Costs
incurred by the Company to secure subordinated debenture financing were
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 were amortized through February 28,
2008.




As of
December 31, 2008 and 2007, debt issuance costs were $31 and $40, net of
accumulated amortization of $14 and $1,510, 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 and Related Information(See Note Q, Segment Information, to
our consolidated financial statements set forth in Item 8
hereof).


33


MISCOR
      GROUP, LTD. AND SUBSIDIARIES


NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008


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




NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




Goodwill and other
intangible assets




The
Company accounts for goodwill and other intangible assets in accordance with
FASB Statement No. 142 (“SFAS 142”), “Goodwill and Other Intangible
Assets.” Goodwill represents the excess of the cost of acquired
businesses over the fair market value of their net assets at the dates of
acquisition. Goodwill, which is not subject to amortization, is tested for
impairment annually during the fourth quarter. The Company tests Goodwill and
other intangible assets for impairment on an interim basis if an event occurs
that might reduce the fair value of a reporting unit below its carrying value.
Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of the fair value of a reporting unit with its carrying
value. If the carrying amount of the reporting unit exceeds its fair value, then
the second step of the process involves a comparison of the implied fair value
and carrying value of the goodwill of that reporting unit. If the carrying value
of the goodwill of a reporting unit exceeds the fair value of that goodwill, an
impairment loss is recognized in an amount equal to the excess. Reporting units
are determined based on the Company’s operating segments. The AMP, MIS, Ideal
and 3-D operating segments, which were also determined to be reporting units
under SFAS 142, contain goodwill and are thus tested for impairment. The Company
re-evaluates our reporting units and the goodwill and intangible assets assigned
to the reporting units annually, prior to the completion of the impairment
testing. The fair value of our reporting units is determined based upon
management’s estimate of future discounted cash flows and other factors.
Management’s estimates of future cash flows include assumptions concerning
future operating performance and economic conditions and may differ from actual
future cash flows.




Other
intangible assets consisting mainly of customer relationships, a technical
library, and non-compete agreements were all determined to have a definite life
and are amortized over the shorter of the estimated useful life or contractual
life of the these assets, which range from 1 to 20 years. Amortization expense
for the other intangible assets was $889 and $35 for the years ended December
31, 2008 and 2007, respectively. Intangible assets with definite useful lives
are periodically reviewed to determine if facts and circumstances indicate that
the useful life is shorter than originally estimated or that the carrying amount
of assets may not be recoverable. If such facts and circumstances do exist, the
recoverability of intangible assets is assessed by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets
over their remaining lives against their respective carrying amounts.
Impairments, if any, are based on the excess of the carrying amount over the
fair value of those assets (See Note F, Goodwill and Other Intangible
Assets).




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.






34


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)




NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




Revenue
recognition




Revenue
consists primarily of sales and service of industrial magnets, electric motors,
electrical power distribution systems, 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 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.




Revenues
from Martell Electric, LLC’s electrical contracting business, Ideal’s mechanical
contracting business, and long-term contracts from the remanufacturing and
rebuilding of locomotives and locomotive engines at AMP are recognized on the
percentage-of-completion method in accordance with Statement of Position No.
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, measured by the percentage of cost incurred to date
to estimated total costs to complete for each contract. Costs incurred on
contracts in excess of customer billings are recorded as part of other current
assets. Amounts billed to customers in excess of costs incurred on contracts are
recorded as part of other current liabilities.




Advertising
costs




Advertising
costs consist mainly of product advertisements and announcements published in
trade publications, and are expensed when incurred. Advertising expense was $125
and $141 for the years ended December 31, 2008 and 2007,
respectively.




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. Warranty expense was
$268 and $433 for the years ended December 31, 2008 and 2007,
respectively.




Income
taxes




The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
On January 1, 2007, the Company adopted FASB Interpretation No. 48
“Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in financial statements in accordance with SFAS 109.
FIN 48 provides guidance on recognizing, measuring, presenting and disclosing in
the financial statements uncertain tax positions that a company has taken or
expects to take on a tax return. The Company classifies interest and penalties,
if any, associated with its uncertain tax positions as a component of income tax
expense. There were no interest or penalties recorded for the years ended
December 31, 2008 and 2007. (See Note J, Income Taxes).


35


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




Stock based
compensation




Effective
January 1, 2006, the Company adopted SFAS No. 123R (“SFAS 123R”), Share-Based Payments (revised
2004), using the Modified Prospective Approach. SFAS 123R revises SFAS No. 123
(“SFAS 123”), Accounting for
Stock-Based Compensation and supersedes Accounting Principles Opinion
(“APB”) No. 25, Accounting for
Stock Issued to Employees. SFAS 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 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 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
123R. Prior to the adoption of SFAS 123R, we accounted for our stock-based
compensation plans under the recognition and measurement provisions of APB No.
25.




Foreign Currency
Translation




The
assets and liabilities of the Company’s Canadian operations are translated into
U.S. dollars at the rate of exchange in effect at the balance sheet date, except
for non-monetary assets and liabilities, which are translated using the
historical exchange rate. Income and expense accounts are translated into U.S.
dollars at the year-to-date average rate of exchange, except for expenses
related to those balance sheet accounts that are translated using historical
exchange rates. The impact of foreign exchange translation on the Company’s
financial statements was not material for the year ended December 31, 2008. The
Company did not have foreign currency denominated transactions in fiscal year
2007.




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, 2008, the Company’s common stock equivalents, consisting
of warrants to purchase 310,254 shares of common stock, subordinated debt
convertible into 1,200,000 common shares, and options to purchase 76,600 shares
of common stock issued to employees under the 2005 Stock Option Plan were not
included in computing diluted income per share because their effects were
anti-dilutive.


36


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




Earnings
per share (continued)




For the
year ended December 31, 2007, the Company’s common stock equivalents, consisting
of warrants to purchase 326,461 shares of common stock, 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.




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.




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, 2008, total assets and liabilities
of JAM Fox Investments LLC were $1,467 and $922, 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,
2008.


37


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




New Accounting
Standards




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,
the Company will continue to use the simplified method and will do so until more
detailed and relevant information about exercise behavior becomes readily
available.




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.


38


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




New Accounting Standards
(continued)




SFAS 157




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement(“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position No. 157-2, which
deferred the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually) until
January 1, 2009. Accordingly, our adoption of this standard on January 1,
2008 was limited to financial assets and liabilities. The adoption of SFAS 157
did not have a material effect on our financial condition or results of
operations. The Company is still in the process of evaluating this standard with
respect to its effect on non-financial assets and liabilities and therefore has
not yet determined the impact that it will have on its financial statements upon
full adoption in 2009. Non-financial assets and liabilities for which the
Company has not applied the provisions of SFAS 157 include those measured at
fair value in impairment testing and those initially measured at fair value in a
business combination.




SFAS 159




In
February 2007, the FASB issued SFAS No. 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 items at fair value. Entities that elect
the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes
presentation and disclosure requirements to facilitate comparisons between
companies that choose different measurement attributes for similar assets and
liabilities. The adoption of SFAS 159 did not have an effect on the Company’s
financial condition or results of operations as the Company did not elect this
fair value option, nor is it expected to have a material impact on future
periods as the election of this option for the Company’s financial instruments
is expected to be limited.




SFAS No.
160




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company does not expect the adoption of this
standard on January 1, 2009 to have a material impact on its consolidated
financial statements.


39


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (CONTINUED)




New Accounting Standards
(continued)




SFAS161




In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities. The
Company will be required to provide enhanced disclosures about (a) how and
why derivative instruments are used, (b) how derivative instruments and
related hedged items are accounted for under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Certain
Hedging Activities (“SFAS 133”), and its related interpretations, and
(c) how derivative instruments and related hedged items affects our
financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company is evaluating the impact of
the adoption of SFAS 161 on its consolidated financial statements.




FSP FAS
142-3




In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets”, (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible
Assets”. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The Company is currently evaluating the impact of FSP 142-3 on its
consolidated financial statements.




SFAS
No. 162




In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States. SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company does not expect the adoption of SFAS 162 to
have a material impact on the Company’s financial position or results of
operations.






40


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      C – ACQUISITIONS




Fiscal 2008
Acquisitions




AmericanMotive
Power




On
January 16, 2008, the Company acquired 100% of the outstanding shares of common
stock of American Motive Power, Inc. (“AMP”) 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. AMP is engaged in the business of repairing, remanufacturing, and
rebuilding locomotives and locomotive engines and providing related goods and
services to the Rail industry. The acquisition of AMP was made in order to
expand the Company’s presence in the rail industry, and take advantage of
vertical integration opportunities with the Company’s other operating
segments.




The
aggregate purchase price was $10,827, including $7,215 paid in cash at closing,
costs of acquisition of $112, and 253,623 shares of MISCOR common stock valued
at $13.80 per share, or $3,500. 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, which is assigned to the Rail Services segment. No portion of the
goodwill is expected to be deductible for income tax purposes. The fair value
assigned to assets acquired and liabilities assumed are based on valuations
using management’s estimates and assumptions as of January 1, 2008, the
effective date of the acquisition.




The
allocation of the purchase price is as follows:




Current
      assets
                                                    
                                                    $
                                                    2,481Property
      plant and equipment
                                                    
                                                    
                                                    2,758Goodwill
                                                    
                                                    
                                                    5,377Customer
      relationships
                                                    
                                                    
                                                    1,870Non-compete
      agreements
                                                    
                                                    
                                                    790Mutual
      services agreement
                                                    
                                                    
                                                    100Current
      liabilities
                                                    
                                                    
                                                    (2,549
                                                    )$
                                                    10,827




The
intangible assets have an 11-year weighted average useful life and
are comprised of customer relationships (15-years), non-compete agreements
(3-years) and a mutual services agreement (1-year).


41


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      C – ACQUISITIONS (CONTINUED)




Fiscal 2008 Acquisitions
(continued)




VisaliaElectric Motor
Shop




In
September 2008, the Company acquired certain business assets of Visalia Electric
Motor Shop Inc. (“VEMS”) 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. VEMS provides maintenance and repair services for both alternating
current and direct current electric industrial motors and generators. The
acquisition of net assets was made for the purpose of expanding the Company’s
geographic market penetration into the Industrial Services segment. The
aggregate purchase price of $1,094, including $1,000 paid in cash at closing and
costs of acquisition of $94 was financed through borrowings under the credit
facility. Concurrent with this acquisition, the Company leased $804 of equipment
from VEMS which is being accounted for as a capital lease. The purchase price
was allocated to assets acquired based on their estimated fair values at the
date of acquisition, with the residual value allocated to goodwill, which is
assigned to the Industrial Services segment. The goodwill is expected to be
deductible for income tax purposes. The fair value assigned to assets acquired
is based on valuations using management’s estimates and assumptions as of
September 23, 2008, the effective date of the acquisition. The allocation of the
purchase price is as follows:




Inventory
                                  
                                  $
                                  494Customer
      relationships
                                  
                                  
                                  122Non-compete
      agreement
                                  
                                  
                                  17Goodwill
                                  
                                  
                                  461$
                                  1,094




Fiscal 2007
Acquisitions




Ideal Consolidated,
Inc.




On
October 19, 2007 the Company acquired 100% of the outstanding shares of common
stock of Ideal Consolidated, Inc. (“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, which is
assigned to the Construction and Engineering Services segment. No portion of the
goodwill is expected to be deductible for income tax purposes. 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:


42


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      C – ACQUISITIONS (CONTINUED)




Fiscal 2007 Acquisitions
(Continued)




Ideal Consolidated Inc.
(continued)







Current
      assets
                                  
                                  $
                                  2,509Property
      plant and equipment
                                  
                                  
                                  213Goodwill
                                  
                                  
                                  645Current
      liabilities
                                  
                                  
                                  (2,333
                                  )Long-term
      liabilities
                                  
                                  
                                  (9
                                  )$
                                  1,025




3-D
Services, Ltd.




On
November 30, 2007 the Company acquired 100% of the membership interests of 3-D
Services, Ltd. (“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 acquisition of 3-D will
enable the Company to increase its share of the electric motor repair and
remanufacture market, as well as expand its presence in service and repair for
the wind power industry. 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, which is assigned to the Industrial Services segment. The
resulting goodwill is expected to be deductible for income tax purposes. 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
                                      
                                      $
                                      5,250Property
      plant and equipment
                                      
                                      
                                      4,020Other
      assets
                                      
                                      
                                      3Goodwill
                                      
                                      
                                      7,370Customer
      relationships
                                      
                                      
                                      7,600Technical
      library
                                      
                                      
                                      700Current
      liabilities
                                      
                                      
                                      (2,131
                                      )$
                                      22,812







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, 2007 and
includes certain proforma adjustments, including depreciation and amortization
on the assets acquired.




2008
              
              
              2007Revenues
              
              $
              125,426
              
              
              $
              106,326Net
      loss
              
              
              (1,478
              )
              
              
              (4,606
              )Basic
      and diluted earnings (loss) per share
              
              $
              (0.13
              )
              
              $
              (0.60
              )


43


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      D - INVENTORY




Inventory
consists of the following:


December
      31,2008
              
              
              2007Raw
      materials
              
              $
              6,738
              
              
              $
              5,197Work-in-process
              
              
              5,221
              
              
              
              4,846Finished
      goods
              
              
              2,964
              
              
              
              1,608$
              14,923
              
              
              $
              11,651Less:
      allowance for slow moving and obsolete inventories
              
              
              (1,116
              )
              
              
              (767
              )$
              13,807
              
              
              $
              10,884






NOTE
      E - PROPERTY AND EQUIPMENT




Property
and equipment consists of the following:




December
      31,2008
              
              
              2007Land
      and Buildings
              
              $
              1,800
              
              
              $
              1,800Leasehold
      Improvements
              
              
              2,200
              
              
              
              414Machinery
      & Equipment
              
              
              11,592
              
              
              
              8,626Construction
      in Progress
              
              
              404
              
              
              
              259Vehicles
              
              
              1,440
              
              
              
              1,475Office
      & Computer Equipment
              
              
              1,768
              
              
              
              1,05219,204
              
              
              
              13,626Less
      Accumulated Depreciation
              
              
              (5,392
              )
              
              
              (3,501
              )$
              13,812
              
              
              $
              10,125




Depreciation
expense was $2,023 and $993 for years ended December 31, 2008 and 2007,
respectively.




44


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      F –GOODWILL AND OTHER INTANGIBLE
ASSETS




Goodwill




The
Company evaluates its goodwill for impairment during the fourth quarter of each
year. Goodwill is assigned to reporting units within the company based on the
operating and economic characteristics and the management of the various
operating segments and components within those operating segments. The amounts
assigned to the various reporting units within the company are as
follows:


3-D
      Services
                                        
                                        
                                        American
      Motive Power
                                        
                                        
                                        Ideal
      Consolidated
                                        
                                        
                                        Magnetech
      Industrial Services
                                        
                                        
                                        TotalBalances
      as of January 1 2007
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Goodwill
      Acquired During the Year
                                        
                                        
                                        7,370
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        633
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        8,003Balances
      as of December 31, 2007
                                        
                                        
                                        7,370
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        633
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        8,003Settlements
      and Adjustments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12Goodwill
      Acquired During the Year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,377
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        461
                                        
                                        
                                        
                                        5,838Impairment
      Charge
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (887
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (867
                                        )Balances
      as of December 31, 2008
                                        
                                        $
                                        7,370
                                        
                                        
                                        $
                                        4,490
                                        
                                        
                                        $
                                        645
                                        
                                        
                                        $
                                        461
                                        
                                        
                                        $
                                        12,966




The fair
value of each reporting unit was estimated using a discounted cash flow model
and a comparative market analysis for the 3-D Services (“3-D”), American Motive
Power (“AMP”) and Ideal Consolidated (“Ideal”) reporting units. The fair value
of the Magnetech Industrial Services (“MIS”) reporting unit was estimated using
a discounted cash flow model only.




The
comparative market analysis was completed for each reporting unit by comparing
the ratio of revenue, EBITDA and EBIT to total invested capital for three to
five comparable publicly traded companies to develop a multiple for each. These
multiples were then applied to the respective reporting unit’s revenue, EBITDA,
and EBIT to establish an estimated market value for each. Control premiums were
not added to the comparable companies or to multiples applied to the reporting
units for the valuation estimates. Due to the size differences between the
Company’s reporting units and comparable publicly traded companies for which
information was available, management placed lower weight on the comparative
market analysis than the discounted cash flow models when making the final
determination of fair value.




Significant
estimates and assumptions are used in preparing discounted cash flow models for
each of the reporting units. These estimates and assumptions involve future cash
flows, growth rates, and weighted average cost of capital. The cost of capital
for goodwill impairment testing was estimated at 15% for 3-D and MIS, 18% for
AMP and 25% for Ideal, and included risk premiums ranging from 8% to 16%. An
increase in the discount rates used in the analyses of 200 basis points would
have resulted in a determination of impairment for 3-D, however management
believes that the discount rate of 15% for 3-D which was used in its discounted
cash flow model was reasonable.


45


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      F – GOODWILL AND OTHER INTANGIBLE ASSETS
  (CONTINUED)




Goodwill
(Continued)




As a
result of the completion of step one of our fiscal 2008 annual analysis and test
for impairment of goodwill, as required by SFAS 142, during the fourth quarter
of 2008, it was determined that goodwill related to AMP, a component of our Rail
Services segment, was impaired. As a result, an estimated goodwill impairment
charge of $887 was recorded in the Company’s consolidated statement of
operations for the year ended December 31, 2008. This represents a write down of
goodwill in the amount of the excess of the previous carrying value of goodwill
over the implied fair value of goodwill. The impairment charge is attributed to
a decline in American Motive Power’s future discounted cash flows expected by
the Company. The Company has not yet completed step two of its analysis, but it
is anticipated that step two will be completed during the second quarter of
2009, at which time any required adjustments to the Company’s estimates will be
recorded. The amount of the impairment charge recognized may change as a result
of the Company’s completion of step two.




Determining
the fair value of a reporting unit is a matter of judgment and often involves
the use of significant estimates and assumptions. The use of different
assumptions would increase or decrease estimated discounted future cash flows
and could increase or decrease an impairment charge. If the use of these assets
or the projections of future cash flows change in the future, the Company may be
required to record additional impairment charges. An erosion of future business
results in any of the Company’s reporting units could create impairment in
goodwill or other long-lived assets and require a significant impairment charge
in future periods.




The
Company has three reporting segments, the Industrial Services segment, the
Construction and Engineering Services segment and the Rail Services segment. The
following table summarizes the components of goodwill by reporting
segment:




Industrial
      Services
                
                
                Construction
      and Engineering Services
                
                
                Rail
      Services
                
                
                TotalBalances
      as of January 1, 2007
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Goodwill
      Acquired During the Year
                
                
                7,370
                
                
                
                633
                
                
                
                -
                
                
                
                8,003Balances
      as of December 31, 2007
                
                
                7,370
                
                
                
                633
                
                
                
                -
                
                
                
                8,003Settlements
      and Adjustments
                
                
                -
                
                
                
                12
                
                
                
                -
                
                
                
                12Goodwill
      Acquired During the Year
                
                
                461
                
                
                
                -
                
                
                
                5,377
                
                
                
                5,838Impairment
      Charge
                
                
                -
                
                
                
                -
                
                
                
                (887
                )
                
                
                (887
                )Balances
      as of December 31, 2008
                
                $
                7,831
                
                
                $
                645
                
                
                $
                4,490
                
                
                $
                12,966


46


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      F – GOODWILL AND OTHER INTANGIBLE ASSETS
  (CONTINUED)




Goodwill
(Continued)




During
2007, the Company recorded goodwill of $7,370 in the Industrial Services
reporting segment related to its acquisition of 3-D, and $633 in the
Construction and Engineering Services reporting segment related to its
acquisition of Ideal. During 2008, the Company recorded additional goodwill of
$12 in the Construction and Engineering Services reporting segment related to
its acquisition of Ideal, $5,377 in the Rail Services segment related to its
acquisition of AMP and $461 in the Industrial Services segment in relation to
its acquisition of VEMS.




Other intangible
assets




Other
intangible assets consist of patents and trademarks, a mutual services
agreement, a technical library, customer relationships and non-compete
agreements, and are reported net of accumulated amortization. The Company
amortizes the cost of intangible assets over their expected useful lives which
range from 1 to 20 years. The Company acquired customer relationships for $122
and a non-compete agreement for $17 as a result of its acquisition of VEMS in
September of 2008, and customer relationships for $1,870, non-compete agreements
for $790, and a mutual services agreement for $100 as a result of its
acquisition of AMP in January of 2008. As a result of the Company’s acquisition
of 3-D in November 2007, the Company acquired a technical library for $700 and
customer relationships for $7,600. We do not believe there is any significant
residual value associated with intangible assets. Other intangible assets
consist of the following:





December
      31, 2008
                      
                      
                      December
      31, 2007Estimated
      Useful Lives (in Years)
                      
                      
                      Gross
      Carrying Amount
                      
                      
                      Accululated
      Amortization
                      
                      
                      Net
                      
                      
                      Gross
      Carrying Amount
                      
                      
                      Accululated
      Amortization
                      
                      
                      NetPatents
      and Trademarks
                      
                      
                      10
                      
                      
                      $
                      4
                      
                      
                      $
                      (3
                      )
                      
                      $
                      1
                      
                      
                      $
                      4
                      
                      
                      $
                      (2
                      )
                      
                      $
                      2Mutual
      Services Agreement
                      
                      
                      1
                      
                      
                      
                      100
                      
                      
                      
                      (100
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Technical
      Library
                      
                      
                      20
                      
                      
                      
                      700
                      
                      
                      
                      (38
                      )
                      
                      
                      662
                      
                      
                      
                      700
                      
                      
                      
                      (3
                      )
                      
                      
                      697Customer
      Relationships
                      
                      
                      15-20
                      
                      
                      
                      9,592
                      
                      
                      
                      (533
                      )
                      
                      
                      9,059
                      
                      
                      
                      7,600
                      
                      
                      
                      (32
                      )
                      
                      
                      7,568Non-Compete
      Agreements
                      
                      
                      3
                      
                      
                      
                      807
                      
                      
                      
                      (252
                      )
                      
                      
                      555
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      
                      
                      
                      $
                      11,203
                      
                      
                      $
                      (926
                      )
                      
                      $
                      10,277
                      
                      
                      $
                      8,304
                      
                      
                      $
                      (37
                      )
                      
                      $
                      8,267


47


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      F – GOODWILL AND OTHER INTANGIBLE ASSETS
  (CONTINUED)




Other intangible assets
(continued)




Amortization
of intangible assets was $889 and $35 for the years ending December 31, 2008 and
2007, respectively. The estimated future amortization expense related to
intangible assets at December 31, 2008 is as follows:




Years
      Ending December 31 --
              
              Amount2009
              
              $
              8182010
              
              
              8172011
              
              
              5572012
              
              
              5462013
              
              
              546Thereafter
              
              
              6,993Total
              
              $
              10,277






NOTE
      G – SENIOR CREDIT FACILITY




Senior credit facility with
Wells Fargo




On
January 14, 2008, the Company entered into a credit facility with Wells Fargo
Bank, National Association (“Wells Fargo”). The credit facility is comprised of
a 10 year $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 loan for working capital and to acquire all of the
outstanding shares of common stock of American Motive Power, Inc. (See Note C,
Acquisitions). The original maturity date of the note is January 1, 2011, at
which time the note will automatically renew for one-year periods until
terminated. The note is 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. From its inception through December
31, 2008, the revolving note bore 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 outstanding balance on the revolving
note was $7,460 at December 31, 2008. As of December 31, 2008 there was
$1,707 available under the revolving credit line. Effective January 1, 2009, the
interest rate on the revolving credit line was increased to the bank’s prime
rate plus 3% (6.25% at January 1, 2009) as a result of the default notice as
described below. Effective April 14, 2009, the interest rate on the revolving
credit line was reset to the Daily Three Month LIBOR plus 5.25% (approximately
6.38% as of April 14, 2009), as a result of the waiver agreement as described
below.


48


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      G – SENIOR CREDIT FACILITY
(CONTINUED)




Senior credit facility with
Wells Fargo (continued)




The
provisions of the revolving note include a lock-box agreement and also allow
Wells Fargo, 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 note, there are certain
provisions that could potentially be interpreted as a subjective acceleration
clause. More specifically, Wells Fargo, 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 the revolving note, Wells Fargo 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 Wells Fargo to the borrowing base
calculation. As a result, the Company classifies borrowings under the revolving
note as a short-term obligation.




The real
estate term note bore 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
real estate term note requires monthly principal payments of $10, plus interest,
beginning on June 1, 2008, the first day of the month following receipt of the
advance. The outstanding balance under the real estate term note as of December
31, 2008 was $1,177. From its inception through December 31, 2008, the real
estate term note bore interest at an annual rate equal to the banks prime rate
(3.25% at December 31, 2008). Effective January 1, 2009, the interest rate on
the real estate term note was increased to the bank’s prime rate plus 3% (6.25%
at January 1, 2009) as a result of the default notification as described below.
Effective April 14, 2009, the interest rate on the real estate term note was
increased to the Daily Three Month LIBOR plus 5.25% (approximately 6.38% as of
April 14, 2009), as a result of the waiver agreement as described
below.




The
Company may prepay the term notes 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 Company’s eligible construction related trade
receivables up to $2,000 and 85% of certain remaining eligible trade accounts
receivable less any
reserves established by Wells Fargo from time to time and (2) $13,750 less any
reserves established by Wells Fargo.


49


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      G – SENIOR CREDIT FACILITY
(CONTINUED)




Senior credit facility with
Wells Fargo (continued)




In April
2008, the Company and Wells Fargo amended the credited facility entered into in
January 2008. The amendment revised the formula for the maximum aggregate
principal amount that may be borrowed under the revolving note. Specifically,
the percentage of a portion of the Company’s eligible construction related trade
receivables resulting from time and material services and completed contracts
was increased from 40% to 85% and the related borrowings were removed from the
$2,000 limitation.




The April
2008 amendment also provided a four year equipment term note in the amount of
$1,000, secured by substantially all of the machinery and equipment of the
Company. The note matures June 1, 2012 and is payable in monthly installments of
$21 plus interest at the bank’s prime rate (3.25% at December 31, 2008)
beginning June 1, 2008. The outstanding balance under the equipment term note as
of December 31, 2008 was $854. Effective January 1, 2009, the interest rate on
the machinery and equipment term note was increased to the bank’s prime rate
plus 3% (6.25% at January 1, 2009) as a result of the default notification as
described below. Effective April 14, 2009, the interest rate on the machinery
and equipment term note was increased to the Daily Three Month LIBOR plus 5.25%
(approximately 6.38% as of April 14, 2009), as a result of the waiver agreement
as described below.




As part
of the financing, the Company paid debt issue costs of $45 and is amortizing
these costs to interest expense over the three year term of the financing. The
Company also paid fees to Wells Fargo as part of the financing in the amount of
$171. These fees were recorded as a debt discount. The Company is accreting this
debt discount to interest expense over the term of the credit facility. Net debt
discount at December 31, 2008 related to thisinstrument was $117. For the
year ended December 31, 2008 interest expense was $14 and $54 for debt issue
costs and debt discount, respectively.




Interest
expense under the Wells Fargo Credit facility, excluding amortization of debt
issue costs and debt discount, for the year ended December 31, 2008 was
$286.




The
Company has promissory notes outstanding to BDeWees, Inc., XGen III, Ltd., and
John A. Martell, in the original principal amounts of $2,000, $2,000 and $3,000,
respectively (together, the “Subordinated Indebtedness”) (See Note L, Related
Party Transactions). Subordination agreements have been executed that
subordinate the obligations of the Company under the Subordinated Indebtedness
to the Wells Fargo credit facility.




Default and Waiver
Agreements




The Wells
Fargo notes contains certain financial covenants, including limits on capital
expenditures, requirements for minimum book net worth, minimum net income, and
minimum debt service coverage ratios.


50


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      G – SENIOR CREDIT FACILITY
(CONTINUED)




Default and Waiver
Agreements (continued)




During
the second and third quarters of 2008, the company exceeded the limits on
capital expenditures but received waivers from Wells Fargo for these covenant
defaults. In September 2008, the Company amended the credit facility with Wells
Fargo. This second amendment revised the financial covenant limiting capital
expenditures, increasing the maximum amount of capital expenditures for 2008 to
$2 million, no more than $1.25 million of which could be paid for from working
capital. The amendment also limited the investment and loans from AMP to AMP
Canada to $1 million.




During
the fourth quarter of 2008, the Company signed a waiver agreement with Wells
Fargo in regards to the Company’s maximum allowable capital spending for 2008.
The agreement increased the amount of allowable capital expenditures during 2008
to $2,750, of which no more than $2,250 could be from working capital. This
amendment also removed the limit on investment and loans from AMP to AMP Canada
included in the second amendment signed in September, 2008.




On March
5, 2009, the Company received a default notification from Wells Fargo, due to
the violation of a financial covenant regarding minimum net income for the year
ended December 31, 2008. Additionally, the Company was in default of the debt
service coverage ratio covenant.  The defaults resulted in an increase in
the interest rate on the revolving note, the real estate term note and the
machinery and equipment note to the Prime rate plus 3% (6.25% at December 31,
2008). In addition, due to the covenant violation, Wells Fargo has reduced the
loan availability on the revolving note related to certain receivable accounts
held by Martell Electric and Ideal. The interest rate increase was made
effective retroactively to January 1, 2009 and remained in effect until the
default was subsequently waived on April 14, 2009.




On April
14, 2009, the Company and Wells Fargo signed a Fourth Amendment to the Credit
Facility and waiver of the default notification received on March 5, 2009. The
amendment and waiver amended the credit facility as follows:




·
            Waived
      the Company’s noncompliance with the minimum net income and debt service
      coverage ratio covenants for the year ending December 31,
    2008




·
            Eliminated
      the minimum net income and debt service coverage ratio covenants for the
      year ending December 31, 2009.




·
            Adjusted
      the minimum book net worth covenant to $38,750 as of December 31,
      2009





·
            Incorporated
      a monthly minimum EBITDA covenant commencing in April,
  2009




·
            Reduced
      the revolving credit line limit to $11,000 (from
  $13,750)




·
            Reset
      the interest rate on the revolving credit line and term notes to the Daily
      Three Month LIBOR plus 5.25% effective April 14,
  2009




·
            Suspended
      interest payments on the Company’s subordinated debt to the Company’s CEO,
      John A. Martell.


51


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      G – SENIOR CREDIT FACILITY
(CONTINUED)




Other senior credit
facilities




In
January 2007, the Company paid off all principal, accrued interest and
prepayment penalties under the Laurus Master Fund, Ltd. (“Laurus”) senior credit
facility in the amounts of $9,921, $42, and $517, respectively, with proceeds
from 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 $2,020 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 the
Laurus facility in the amount of $2,300 for the year ended December 31,
2007.




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 was payable monthly at 1⁄2% over the Wall Street
Journal prime rate. The line was paid off in full in December 2007 with proceeds
from the sale of MISCOR common stock in November 2007. The revolving credit
agreement was canceled in December 2007.


52


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      H – LONG TERM DEBT




Long-term
debt consists of the following:


December 31,
      2008
                
                
                December 31,
      2007Notes
      payable to former stockholders of 3-D Service, Ltd. due November 30, 2010,
      plus interest at prime rate (3.25% and 7.25% at December 31, 2008 and
      2007, respectively) secured by a subordinated interest in machinery and
      equipment of 3-D Services, Ltd.
                
                $
                4,000
                
                
                $
                4,000Note
      payable to Officer, payable in monthly installments of $50 beginning
      February 1, 2010, plus interest at prime rate less 1% (2.25% and 6.25% at
      December 31, 2008 and 2007, respectively) through December 31, 2008,
      interest rate increases to prime plus 1% beginning on January 1, 2009 and
      was reset to the greater of prime plus 1% or 5% beginning April 14, 2009,
      secured by a subordinated interest in substantially all assets owned by
      the Company
                
                
                3,000
                
                
                
                3,000Note
      payable to bank in monthly installments of $10 through May 2018, plus
      interest at prime rate (3.25% at December 31, 2008) through December 31,
      2009, increased to prime rate +3% through April 13, 2009, reset to Three
      Month Daily LIBOR plus 5.25% beginning April 14, 2009, secured by certain
      real estate (see Note G, Senior Credit Facility)
                
                
                1,177
                
                
                
                -Note
      payable to bank in monthly installments of $21 through May 2012, plus
      interest at prime rate (3.25% at December 31, 2008) through December 31,
      2008, increased to prime plus 3% through April 13, 2009, reset to Three
      Month Daily LIBOR plus 5.25% beginning April 14, 2009, secured by
      inventory and substantially all machinery and equipment (see Note G,
      Senior Credit Facility)
                
                
                854
                
                
                
                -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
                
                
                173
                
                
                
                197Notes
      payable to bank in monthly principal payments of $1 through June 2009,
      without interest secured by certain vehicles
                
                
                6
                
                
                
                18Long-term
      debt, debentures (net of discount of $-0- and $15 at December 31, 2008 and
      2007, respectively)
                
                
                -
                
                
                
                2,965Notes
      payable to bank in monthly principal payments of $1 through June 2009,
      without interest secured by certain vehicles paid off in January
      2008
                
                
                -
                
                
                
                15Note
      payable to former employee in annual principal payments of $10, unsecured
      and without interest, paid in full as of March 7, 2008
                
                
                -
                
                
                
                10Capital
      lease obligations
                
                
                1,082
                
                
                
                2610,292
                
                
                
                10,231Less:
      current portion
                
                
                487
                
                
                
                3,036$
                9,805
                
                
                $
                7,195







53


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      H – LONG TERM 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,
bore 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 were
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. Under the Debenture Offering, investors received interest
in cash only if they elected not to convert their debentures. Each holder had
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 $2,690
into 316,016 shares of MISCOR common stock. As a result, $544 of accrued
interest was forfeited and written off against common stock in conjunction with
the conversion of $2,690 of the aggregate principal amount of the debentures. In
addition the Company redeemed the remaining debentures totaling $342, including
interest of $52.




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 warrants to purchase 170,224 shares of common stock
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 was amortized to interest expense over the
term of the debentures. Interest expense was $30 and $164 for the years ended
December 31, 2008 and 2007, 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, 2008 and 2007 related to
this instrument was $0 and $15, respectively. As of December 31, 2008, warrants
to purchase 169,167 shares of common stock had been exercised.




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.
As of December 31, 2008, warrants to purchase 246,320 shares of common stock had
been exercised.


54


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      H – LONG TERM 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 $40 and $445 for the
years ended December 31, 2008 and 2007, 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 December 31, 2008 and 2007
related to these instruments was $0 and $40, respectively.




Capital Lease
Obligations




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




December 31,
      2008
                                    
                                    
                                    December 31,
      2007Machinery
      & equipment
                                    
                                    $
                                    774
                                    
                                    
                                    $
                                    83Vehicles
      & trailers
                                    
                                    
                                    84
                                    
                                    
                                    
                                    -Computer
      equipment & software
                                    
                                    
                                    240
                                    
                                    
                                    
                                    -Furniture
      & office equipment
                                    
                                    
                                    84
                                    
                                    
                                    
                                    -Less
      accumulated depreciation
                                    
                                    
                                    (108
                                    )
                                    
                                    
                                    (27
                                    )$
                                    1,074
                                    
                                    
                                    $
                                    56




Minimum
future lease payments required under capital leases as of December 31, 2008
are:


Years
      Ending December 31,
                  
                  Amount2009
                  
                  $
                  1982010
                  
                  
                  1822011
                  
                  
                  1602012
                  
                  
                  1602013
                  
                  
                  1.062$
                  1,762Less Imputed Interest
                  
                  
                  (680
                  )Present
      Value of Net Minimum Lease Payments
                  
                  $
                  1,082






55


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)
 NOTE
      H – LONG TERM DEBT
(CONTINUED)
  Maturities of Long Term
Debt
  Aggregate
maturities of long-term debt subsequent to December 31, 2008 are as
follows:
 Years
      Ending December 31,
                    
                    Amount2009
                    
                    $
                    4872010
                    
                    
                    5,0162011
                    
                    
                    1,0522012
                    
                    
                    9132013
                    
                    
                    1,594Thereafter
                    
                    
                    1,230$
                    10,292
  Following
is a summary of interest expense for the years ended December 31, 2008 and
2007:




Years
      Ended December 31,2008
              
              
              2007Interest
      Expense on Principal
              
              $
              811
              
              
              $
              600Amortization
      of Debt Issue Costs -Debentures
      and Revolving Notes
              
              
              69
              
              
              
              486Amortization
      of Debt Discount -Debentures
      and Revolving Notes
              
              
              55
              
              
              
              173$
              935
              
              
              $
              1,259







NOTE
      I – EQUITY ISSUANCES




Common Stock
Issuances




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 became effective on September 2, 2008.




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.


56


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      I – EQUITY ISSUANCES
(CONTINUED)




Common Stock Issuances
(continued)




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 filed a
registration statement on Form S-1 with the SEC on October 22, 2008, covering
the 3,333,333 shares issued to Tontine. This registration statement has not yet
been declared effective by the SEC.




Under the
Amended and Restated Registration Rights Agreement with Tontine dated November
30, 2007, the Company agreed to use its reasonable best efforts to cause the
registration statement to be declared effective 180 days following the date that
the initial registration statement is declared effective by the SEC under the
Securities Act and to keep the registration statement continuously effective
until such time as the common stock is no longer deemed to be registrable
securities. As noted above, the initial registration statement was declared
effective on September 2, 2008. 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.




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. In February 2008 the board of directors adopted an
amendment to the Plan to increase the number of shares available under the Plan
to 200,000. These options, which expire in five years, are exercisable in 25%
cumulative increments on and after the first four anniversaries of their grant
date. 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.




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.


57


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      I – 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. The
Company has elected to use the simplified method of determining the expected
term, as permitted by SEC Staff Accounting Bulletins (“SAB”) 107 and 110 since
it does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term. 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. The risk-free interest rates for the periods
within the contractual life of the option are based on the U.S. Treasury yield
in effect at the date of the option grant. No dividend yield is assumed as the
Company does not expect to pay dividends. The Company recorded compensation cost
based on the grant date fair value of each option award. The total cost of each
grant is recognized on a straight line basis over the four year period during
which the employees are required to provide services in exchange for the award –
the requisite service period.




The
following table summarizes the weighted-average assumptions that were used to
value the Company’s option grants along with the weighted-average fair value of
options awards for 2008 and 2007:




2008
              
              
              2007Expected
      volatility
              
              43.37%
              
              
              41.61%Risk
      free interest rate
              
              2.82%
              
              
              4.33%Expected
      term
              
              3.75
      years
              
              
              3.75
      yearsVesting
      period
              
              4
      Years
              
              
              4
      YearsTerm
              
              5
      Years
              
              
              5
      YearsWeighted
      average fair value
              
              $3.31
              
              
              $2.42




The
company recorded compensation expense related to stock options of $47 and $26
for the years ended December 31, 2008 and 2007, respectively.


58


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      I – EQUITY ISSUANCES
(CONTINUED)




Equity Incentive Plans
(Continued)




2005 Stock Option Plan
(Continued)








2007Number
      of Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic Value ($000)Outstanding
      at beginning of year
              
              
              47,400
              
              
              $
              6.25Granted
              
              
              20,400
              
              
              $
              6.38Exercised
              
              
              (2,000
              )
              
              $
              6.25
              
              
              
              
              
              $
              21Forfeited
              
              
              (4,200
              )
              
              $
              5.96Outstanding
      at end of year
              
              
              61,600
              
              
              $
              6.30
              
              
              
              3.57
              
              
              $
              644Vested
      and Exercisable at end of year
              
              
              14,150
              
              
              $
              6.25
              
              
              
              3.11
              
              
              $
              148





2008Number
      of Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic Value ($000)Outstanding
      at beginning of year
              
              
              61,600
              
              
              $
              6.30Granted
              
              
              27,200
              
              
              $
              9.04Exercised
              
              
              (8,450
              )
              
              $
              6.00
              
              
              
              
              
              $
              42Forfeited
              
              
              (3,750
              )
              
              $
              4.92Outstanding
      at December 31, 2008
              
              
              76,600
              
              
              $
              7.37
              
              
              
              3.21
              
              
              $
              (402
              )Vested
      and Exercisable at end of year
              
              
              25,150
              
              
              $
              6.31
              
              
              
              2.38
              
              
              $
              (105
              )







59


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      I – EQUITY ISSUANCES
(CONTINUED)




Equity Incentive Plans
(Continued)




2005 Restricted Stock
Purchase Plan




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.




Activity
in the Company’s restricted stock plan for the years ended December 31, 2008 and
2007 is as follows:




2008
              
              
              2007Shares
              
              
              Weighted
      Average Grant Date Fair Value
              
              
              Shares
              
              
              Weighted
      Average Grant Date Fair ValueNon-vested
      at Beginning of Year
              
              
              18,200
              
              
              $
              6.30
              
              
              
              12,000
              
              
              $
              6.23Granted
              
              
              17,000
              
              
              $
              9.13
              
              
              
              6,200
              
              
              $
              6.44Vested
              
              
              (10,000
              )
              
              $
              6.23
              
              
              
              -Forfeited
              
              
              (4,000
              )
              
              $
              7.14
              
              
              
              -Non-vested
      at End of Year
              
              
              21,200
              
              
              $
              8.45
              
              
              
              18,200
              
              
              $
              6.30









The total
fair value of restricted stock that vested during 2008 was $62. Fiscal 2008 was
the first year in which restricted stock vested.




The
issuance of restricted stock was intended to lock-up key employees for a three
year period. As a result, restricted stock is valued based on the closing price
of the Company’s common stock on the date of the grant, and is amortized on a
straight line basis over the three year term of the restriction period.
Compensation expense related to all restricted stock offers of $61 and $32 was
recorded for the years ended December 31, 2008 and 2007, respectively. At
December 31, 2008, the total unrecognized restricted stock expense was $123, and
is expected to be recognized over a weighted average period of 15
months.


60


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      I – EQUITY ISSUANCES
(CONTINUED)




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. Purchases totaling 17,282
and 10,171 shares were made under the ESPP during the years ended December 31,
2008 and 2007, respectively. As of December 31, 2008 there were 612,547 shares
available for future offerings. The Company recorded compensation expense of $35
and $20 for the years ended December 31, 2008 and 2007,
respectively.




We
estimated the fair value of employee stock plan purchases using the
black-Scholes option pricing model. The valuation model requires the input of
subjective assumptions including the expected volatility and lives. Actual
values of purchases could vary significantly from the results of the
calculations. The following weighted-average assumptions were used to value
employee stock plan purchases in 2008 and 2007:




2008
                
                2007Expected
      Volatility
                
                
                43.20%
                
                
                42.16%Risk-Free
      Interest Rate
                
                
                1.85%
                
                
                4.64%Expected
      term
                
                0.25
      years
                
                0.25
      yearsDividend
      yield
                
                0%
                
                0%







61


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      J - 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
      31,2008
              
              
              2007Deferred
      Tax Asses:Net
      Operating Loss Carryforwards
              
              $
              2,148
              
              
              $
              1,870Accounts
      Receivable
              
              
              366
              
              
              
              268Inventory
              
              
              497
              
              
              
              1Warranty
      Reserve
              
              
              188
              
              
              
              229Accrued
      Interest on Debentures
              
              
              -
              
              
              
              228Accrued
      Expenses and Other
              
              
              397
              
              
              
              127Total
      Gross Deferred Tax Assets
              
              
              3,596
              
              
              
              2,723Valuation
      Allowance
              
              
              (2,111
              )
              
              
              (931
              )1,485
              
              
              
              1,792Deferred
      Tax Liabilities:Property,
      Equipment and Intangibles
              
              
              (1,485
              )
              
              
              (1,792
              )Net
      Deferred Tax Asset
              
              $
              -
              
              
              $
              -







The
valuation allowance has been established due to the uncertainty of realizing the
benefits of tax loss carryforwards. The allowance increased $1,180 during the
year ended December 31, 2008 and decreased $152 during the year ended December
31, 2007, respectively, due primarily to increases and decreases in the loss
carryforwards for 2008 and 2007, respectively. At December 31, 2008, net
operating loss carryforwards of $5,370 were available to be applied against
future taxable income that expire in various years from 2020 to 2028. 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. In addition, at
December 31, 2008 unused work opportunity tax credits of $125 were available to
be applied against future income tax that expire in future years from 2026 to
2028.




For the
year ended December 31, 2008, current income tax expense of $102 is attributable
to various state and local income taxes. There was no provision for income taxes
for the year ended December 31, 2007.




As
discussed in Note B, 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.


62


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      K - 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,
Elkhart, Indiana, Danville, New York, Visalia California, and Montreal, Quebec
facilities from unrelated parties under agreements expiring between February
2009 and December, 2014. Total rent expense for all facility leases was
approximately $2,121 and $868 for the years ended December 31, 2008 and 2007,
respectively.




The
Company also leases other manufacturing and office equipment and vehicles under
operating leases with varying terms expiring through April 2011. Total rent
expense under these leases was approximately $975 and $242 for the years ended
December 31, 2008 and 2007, respectively.




Future
minimum lease payments required under the operating leases in effect as of
December 31, 2008 are as follows:




Years
      Ending December 31,2009
                                                
                                                $
                                                2,9692010
                                                
                                                
                                                2,6112011
                                                
                                                
                                                2,1632012
                                                
                                                
                                                1,6612013
                                                
                                                
                                                1,608Thereafter
                                                
                                                
                                                3,183$
                                                14,195







63


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      L - 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 $0 and $10 at December 31, 2008 and 2007, 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 H, Long Term
Debt).




Long-term debt,
officers




The
Company is indebted to its CEO for a note payable with a balance of $3,000 at
December 31, 2008 and 2007 (See Note G, Senior Credit Facility and Note H, Long
Term Debt). Interest is payable monthly at prime minus 1% through December 31,
2008. The loan matured 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%. In October 2008 the company elected to extend the
maturity of the note for five years. Under the terms of the note, principal
payments are due monthly in the amount of $50 beginning February 1, 2009.
However, the Company’s CEO signed a subordination agreement in relation to the
senior credit facility with Wells Fargo that prohibits principal payments on
this note as long as there is an outstanding balance on the senior credit
facility. Interest expense on the note was $114 and $212 for the years ended
December 31, 2008 and 2007, respectively. This note also includes a conversion
option whereby outstanding principal and accrued interest under the note may be
converted to common stock at a price of $2.50 per share at any time at the
election of the Company’s CEO (See Note S, Subsequent Events).




The
Company is indebted to the former members of 3-D, one of whom is President of
MIS, for notes payable with a balance of $2,000 at December 31, 2008 and
2007 (See Note G, Senior Credit Facility and Note H, Long Term Debt).
Interest is payable monthly at prime. The loan matures on November 30, 2010.
Interest expense on the note was $111 and $13 for the years ended December 31,
2008 and 2007, respectively.




Leases




As
discussed in Note K, Lease Commitments, 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 $333 and
$330 for the years ended December 31, 2008 and 2007, 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 $155 and
$153 for the years ended December 31, 2008 and 2007, 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 years ended December 31, 2008 and 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 $540 and $45 for the
years ended December 31, 2008 and 2007.


64


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      M - 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.




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 $1,438
and $1,027 for the years ended December 31, 2008 and 2007,
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
$154 and $82 for the years ended December 31, 2008 and 2007,
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
years ended December 31, 2008 and 2007 were $5 and $2. The simple retirement
plan was subsequently terminated in January 2009 when the Company’s other
defined contribution plans were made available to the participants in the Ideal
simple plan.






NOTE
      N - CONCENTRATIONS OF CREDIT
RISK




The
Company grants credit, generally without collateral, to its customers, which are
primarily in the steel, metal working, scrap, rail and construction 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, 2008 and 2007, approximately 9% and 14% of gross
accounts receivable were due from entities in the steel, metal working and scrap
industries, 17% and 18% of gross receivables were due from entities in the rail
industry and 43% and 16% of gross receivables were due from construction
contracts. At December 31, 2008, one customer, of the Construction and
Engineering Services segment, accounted for approximately 13% of gross accounts
receivable.  One customer accounted for more than 10% of sales for the
year ended December 31, 2008, and no customer accounted for more than 10% of
sales for the year ended December 31, 2007.


65


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      O - COMMITMENTS AND
CONTINGENCIES




Collective bargaining
agreements




At
December 31, 2008 and 2007, approximately 26% and 37% of the Company’s employees
were covered by multi-employer collective bargaining agreements. Two of the
collective bargaining agreements expire in 2009 representing 12% of the
Company’s employees at December 31, 2008.




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 was for an initial three-year term, subject
to earlier termination as provided in the agreement. Effective January 1, 2009,
each agreement automatically renewed for a one-year period. At each year-end,
each agreement will again 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.




On August
20, 2008, the Company entered into an employment agreement with an executive
officer for an initial three-year term, effective January 14, 2008, 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. The 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 executive’s base salary for two years, any earned but
unpaid profit-sharing or incentive bonus, and company-paid health insurance for
one year.


66


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      P - 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




As of
December 31, 2008, rates currently available to us for long term borrowings with
similar terms and remaining maturities are used to estimate the fair value of
existing borrowings at the present value of expected cash flows. As of December
31, 2007, the fair value of debt differed from the carrying amount due to
favorable interest terms on the notes with the CEO. At December 31, 2008 and
2007, the aggregate fair value of debt, with an aggregate carrying value of
$16,670 and $10,231, respectively, is estimated at $16,670 and $11,336,
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.






NOTE
      Q – SEGMENT INFORMATION




The
Company reports segment information in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise and Related Information. During the year ended December
31, 2007, the Company operated primarily in two segments: Repair,
Remanufacturing and Manufacturing; and Construction and Engineering Services.
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 the
fourth quarter of 2008, the Company re-aligned its segment reporting into three
segments to more accurately reflect the way the Company’s CEO, the chief
operating decision maker, manages the Company. Two operating segments within the
former Repair, Remanufacturing and Manufacturing reporting segment (American
Motive Power and HK Engine Components, LLC.) that provide diesel engine
components and repair services for the Rail industry were re-aligned into the
Rail Services reporting segment. The remaining operating segments of the former
Repair, Remanufacturing and Manufacturing segment and one operating segment of
the former Construction and Engineering Services segment (Magnetech Power
Systems, LLC), involved in the repair of electrical power distribution systems
within industrial plants and commercial facilities, were combined to form the
new Industrial Services reporting segment. The remaining two operating segments
of the former Construction and Engineering Services reporting segment (Martell
Electric and Ideal Consolidated), involved in providing electrical, plumbing,
and HVAC services for new construction and maintenance of institutional
facilities, were combined into the new Construction and Engineering Services
reporting segment.


67


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      Q – SEGMENT INFORMATION
(CONTINUED)




The
accounting policies of the reporting segments are the same as those described in
the summary of significant accounting policies in Note B. The Company evaluates
the performance of its reporting 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, 2008 and 2007 is shown in the following
tables:





2008
                  
                  Industrial Services
                  
                  
                  Construction & Engineering
      Services
                  
                  
                  Rail Services
                  
                  
                  Corporate
                  
                  
                  Intersegment Eliminations
                  
                  
                  December 31, 2008
    ConsolidatedExternal
      revenue:Product
      sales
                  
                  $
                  10,510
                  
                  
                  $
                  -
                  
                  
                  $
                  12,975
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  23,485Service
      revenue
                  
                  
                  50,989
                  
                  
                  
                  34,295
                  
                  
                  
                  14,477
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  99,761Intersegment
      revenue:Product
      sales
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,196
                  
                  
                  
                  -
                  
                  
                  
                  (1,196
                  )
                  
                  
                  -Service
      revenue
                  
                  
                  1,739
                  
                  
                  
                  170
                  
                  
                  
                  170
                  
                  
                  
                  -
                  
                  
                  
                  (2,079
                  )
                  
                  
                  -Depreciation
      Included in Cost of Revenues
                  
                  
                  1,179
                  
                  
                  
                  85
                  
                  
                  
                  588
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,852Gross
      profit
                  
                  
                  12,520
                  
                  
                  
                  3,310
                  
                  
                  
                  2,012
                  
                  
                  
                  -
                  
                  
                  
                  (63
                  )
                  
                  
                  17,779Other
      depreciation & amortization
                  
                  
                  581
                  
                  
                  
                  22
                  
                  
                  
                  201
                  
                  
                  
                  96
                  
                  
                  
                  -
                  
                  
                  
                  900Interest
      expense
                  
                  
                  273
                  
                  
                  
                  -
                  
                  
                  
                  33
                  
                  
                  
                  629
                  
                  
                  
                  -
                  
                  
                  
                  935Net
      income (loss)
                  
                  
                  4,745
                  
                  
                  
                  1,316
                  
                  
                  
                  (2,049
                  )
                  
                  
                  (5,404
                  )
                  
                  
                  (63
                  )
                  
                  
                  (1,455
                  )Total
      assets
                  
                  
                  41,892
                  
                  
                  
                  12,113
                  
                  
                  
                  23,653
                  
                  
                  
                  1,132
                  
                  
                  
                  -
                  
                  
                  
                  78,790Capital
      expenditures
                  
                  
                  1,209
                  
                  
                  
                  40
                  
                  
                  
                  1,423
                  
                  
                  
                  398
                  
                  
                  
                  
                  
                  
                  
                  3,070





2007
                  
                  Industrial Services
                  
                  
                  Construction & Engineering
      Services
                  
                  
                  Rail Services
                  
                  
                  Corporate
                  
                  
                  Intersegment Eliminations
                  
                  
                  December 31, 2007
    ConsolidatedExternal
      revenue:Product
      sales
                  
                  $
                  9,064
                  
                  
                  $
                  -
                  
                  
                  $
                  13,206
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  22,270Service
      revenue
                  
                  
                  32,639
                  
                  
                  
                  18,341
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  50,980Intersegment
      revenue:Product
      sales
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Service
      revenue
                  
                  
                  -
                  
                  
                  
                  118
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (118
                  )
                  
                  
                  -Depreciation
      Included in Cost of Revenues
                  
                  
                  644
                  
                  
                  
                  88
                  
                  
                  
                  148
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  880Gross
      profit
                  
                  
                  7,320
                  
                  
                  
                  1,670
                  
                  
                  
                  3,176
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,166Other
      depreciation & amortization
                  
                  
                  78
                  
                  
                  
                  24
                  
                  
                  
                  5
                  
                  
                  
                  43
                  
                  
                  
                  -
                  
                  
                  
                  150Interest
      expense
                  
                  
                  163
                  
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  1,093
                  
                  
                  
                  -
                  
                  
                  
                  1,259Net
      income (loss)
                  
                  
                  1,823
                  
                  
                  
                  561
                  
                  
                  
                  1,851
                  
                  
                  
                  (6,258
                  )
                  
                  
                  -
                  
                  
                  
                  (2,023
                  )Total
      assets
                  
                  
                  42,017
                  
                  
                  
                  9,098
                  
                  
                  
                  5,879
                  
                  
                  
                  2,553
                  
                  
                  
                  -
                  
                  
                  
                  59,547Capital
      expenditures
                  
                  
                  342
                  
                  
                  
                  52
                  
                  
                  
                  128
                  
                  
                  
                  45
                  
                  
                  
                  
                  
                  
                  
                  567







68


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      R – SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
    ACTIVITIES







Year
      Ended December 31,2008
              
              
              2007Conversion
      of subordinated debentures
              
              $
              3,233
              
              
              $
              979Issuance
      of restricted stock
              
              $
              155
              
              
              $
              40Assumption
      of accounts payable and accrued liabilities in conjunction with asset
      acquisition
              
              $
              2,549
              
              
              $
              4,657Issuance
      of common stock in conjunction with acquisition
              
              $
              3,500
              
              
              $
              2,000Issuance
      of notes in conjunction with acquisition
              
              $
              -
              
              
              $
              4,000Cashless
      exercise of warrants
              
              $
              16
              
              
              $
              7Equipment
      acquired through capital lease obligation
              
              $
              1,099
              
              
              $
              -






NOTE
      S – SUBSEQUENT EVENTS




Officer
resignation




On
February 6, 2009, Chief Financial Officer Richard J. Mullin, resigned his
positions with MISCOR effective February 15, 2009. In conjunction with Mr.
Mullin’s resignation, the Employment Agreement dated September 30, 2005 between
MISCOR and Mr. Mullin terminated, other than those provisions of the agreement
that by their terms survive termination of employment.




Amendment to senior credit
facility




On March
5, 2009, the Company received a default notification from Wells Fargo, due to
the violation of a financial covenant regarding minimum net income for the year
ended December 31, 2008. Additionally, the Company was in default of the debt
service coverage ratio covenant.  The default resulted in an increase in
the interest rate on the revolving note, the real estate term note and the
machinery and equipment note to the Prime rate plus 3% (6.25% at December 31,
2008). In addition, due to the covenant violation, Wells Fargo has reduced the
loan availability on the revolving note related to certain receivable accounts
held by Martell Electric and Ideal. The interest rate increase was made
effective retroactively to January 1, 2009 and remained in effect until the
default was subsequently waived on April 14, 2009.


69


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      S – SUBSEQUENT EVENTS
(CONTINUED)




Amendment to senior credit
facility (continued)




On April
14, 2009, the Company and Wells Fargo signed a Fourth Amendment to the Credit
Facility and waiver of the default notification received on March 5, 2009. The
amendment and waiver amended the credit facility as follows:




·
            Waived
      the Company’s noncompliance with the minimum net income and debt service
      coverage ratio covenants for the year ending December 31,
    2008




·
            Eliminated
      the minimum net income and debt service coverage ratio covenants for the
      year ending December 31, 2009.




·
            Adjusted
      the minimum book net worth covenant to $38,750 as of December 31,
      2009




·
            Incorporated
      a monthly minimum EBITDA covenant commencing in April,
  2009




·
            Reduced
      the revolving credit line limit to $11,000 (from
  $13,750)




·
            Reset
      the interest rate on the revolving credit line and term notes to the Daily
      Three Month LIBOR plus 5.25% effective April 14,
  2009




·
            Suspended
      interest payments on the Company’s subordinated debt to the Company’s CEO,
      John A. Martell.




Amendment of note payable,
officer




On April
14, 2009, the Company’s $3,000 note payable to the CEO was amended whereby
monthly principal and interest payments under the note were suspended until
February 1, 2010.  Interest will continue to accrue at the new rate of the
greater of 5% or the prime rate plus 1%.  All accrued interest on the note
will be paid on February 1, 2010, and interst will be paid monthly
thereafter.  Monthly principal payments in the amount of $50 will commence
on February 1, 2010.


70


MISCOR
      GROUP, LTD. AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 TWO
      YEARS IN THE PERIOD ENDED DECEMBER 31,
2008
 (Amounts
      in thousands, except share and per share
data)


NOTE
      T – SUMMARIZED QUARTERLY DATA
(UNAUDITED)




The
following is a summary of the unaudited results of operations for each quarter
in 2008 and 2007:




QuarterFirst
              
              
              Second
              
              
              Third
              
              
              FourthYear
      Ended December 31, 2008Sales
              
              $
              29,720
              
              
              $
              30,564
              
              
              $
              31,503
              
              
              $
              31,459Gross
      Profit
              
              
              4,743
              
              
              
              5,069
              
              
              
              5,013
              
              
              
              2,954Net
      Income (Loss)
              
              
              457
              
              
              
              610
              
              
              
              471
              
              
              
              (2,993
              )Earnings
      (Loss) Per Common Share, Basic and Diluted
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.04
              
              
              $
              (0.25
              )Year
      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
              
              
              $
              0.03








71




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




Not
applicable.






ITEM
      9A.   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 Accounting 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 Accounting Officer, evaluated the effectiveness of
our disclosure controls and procedures in effect as of December 31, 2008. Based
on this evaluation, our Chief Executive Officer and Chief Accounting Officer
concluded that, as of December 31, 2008, 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 Accounting 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.




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


72




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 Accounting 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 Accounting Officer, our
management evaluated the effectiveness of MISCOR’s internal control over
financial reporting as of December 31, 2008. 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, 2008, 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, 2008, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.






ITEM
      9B.   OTHER
INFORMATION




Not
applicable.


73


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 for 2010
Meeting” in our proxy statement for the 2009 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 Accounting Officer. The code of ethics is posted on our website at
http://www.miscor.com.




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 “Ownership of MISCOR Stock,” “Equity
Compensation Plan Information,” and “Executive Compensation – Equity Incentive
Plans” 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.


74


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)





75





Exhibit
      Number
            
            Description3.1c
            
            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)3.2
            
            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 stock 2004 (incorporated by reference to Exhibit 4.1
      to the registrant’s Form 10-K filed March 31, 2008)4.2
            
            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))





76





Exhibit
      Number
            
            Description4.11
            
            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))4.11a
            
            Amendment
      to Promissory Note dated April 14, 2009 issued by the registrant (assignee
      of Magnetech Industrial Services, Inc.) to John A.
  Martell4.12
            
            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)4.14
            
            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)





77





Exhibit
      Number
            
            Description4.21*
            
            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))10.2
            
            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))





78





Exhibit
      Number
            
            Description10.9a
            
            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))10.12
            
            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))





79





Exhibit
      Number
            
            Description10.18@
            
            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))10.28
            
            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)





80





Exhibit
      Number
                
                Description10.31
                
                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)10.41
                
                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)





81





Exhibit
      Number
                
                Description10.42
                
                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 3-D3E 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)





82





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)10.56a
                  
                  Second
      Amendment to Credit and Security Agreement dated August 28, 2008, among
      Wells Fargo Bank, the registrant and certain subsidiaries of the
      registrant identified therein (incorporated by reference to Exhibit 10.56a
      to the registrant’s Registration Statement on Form S-1 (Reg. No.
      333-154679)10.56b
                  
                  Fourth
      Amendment to Credit and Security Agreement and Limited Waiver of Defaults
      dated April 14, 2009, among Wells Fargo Bank, the registrant and certain
      subsidiaries of the registrant identified therein.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)





83





Exhibit
      Number
                  
                  Description10.65
                  
                  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)10.70
                  
                  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 Accounting 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.


84


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.April
      15, 2009
            By:
            /s/
      JOHN A. MARTELLJohn
      A. Martell, Chief Executive 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
                  
                  Chairman
      of the Board, Chief Executive Officer and President
                    (Principal
      Executive Officer)
                  
                  April
      15, 2009John
      A. Martell/s/
      MARY M. HUNT
                  
                  Vice
      President of Finance
                    (Principal
      Financial and Accounting Officer)
                  
                  April
      15, 2009Mary
      M. Hunt/s/
      WILLIAM J. SCHMUHL, JR.
                  
                  Director
                  
                  April
      15, 2009William
      J. Schmuhl, Jr./s/
      RICHARD A. TAMBORSKI
                  
                  Director
                  
                  April
      15, 2009Richard
      A. Tamborski












85