**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D. C. 20549**
  **FORM
        10-K**
  x  Annual
        report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
        1934
  **For
        the fiscal year ended December 31, 2006**
  o  Transition
        Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
        1934
   Commission
        file number: **000-52380**
 **MISCOR
        GROUP, LTD.**
  (Exact
        name of registrant as specified in its charter)
  
 **Indiana**
              **20-0995245**(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
 
 **1125
        S. Walnut St.**
 **South
        Bend, Indiana 46619**
 (Address
        of principal executive offices/zip code)
  Registrant’s
        telephone number, including area code: **(574)
        234-8131**
  Securities
                  registered pursuant to Section 12(g) of the Act:**Common
                  Stock, no par value**
  
 Indicate
                      by check mark if the registrant is a well-known seasoned issuer,
                      as
                      defined in Rule 405 of the Securities Act.
                  
                  oYes
                  xNoIndicate
                      by check mark if the registrant is not required to file reports
                      pursuant
                      to Section 13 or Section 15(d) of the Act.
                  
                  oYes
                  xNoIndicate
                      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.
                  
                  xYes
                  oNoIndicate
                      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, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 Large
                  accelerated filero
              
              Accelerated
                  filero
              
              Non-accelerated
                  filerx
  
 Indicate
                  by check mark whether the registrant is a shell company (as defined
                  in
                  Rule 12b-2 of the Exchange Act).
              
              oYesxNo
  As
        of
        July 2, 2006, the aggregate market value of the registrant’s voting common stock
        held by non-affiliates, computed by reference to the sale price provided
        in the
        registrant’s Registration Statement on Form S-1 (Reg. No. 333-129354), was
        approximately $26.6 million. The registrant does not have any non-voting
        common
        equity securities.
  **As
        of March 21, 2007, there were 187,408,902 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 2007 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** **-**
 **PAGE****PART
                  I**Item
                  1.
              Business
              1Item
                  1A.
              Risk
                  Factors
              10Item
                  1B.
              Unresolved
                  Staff Comments
              17Item
                  2.
              Properties
              17Item
                  3.
              Legal
                  Proceedings
              17Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              17**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              18Item
                  6.
              Selected
                  Financial Data
              20Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              21Item
                  7A.
              Quantitative
                  and Qualitative Discloses About Market Risk
              32Item
                  8.
              Financial
                  Statements and Supplementary DataReport
                  of Independent Registered Accounting Firm
              33Consolidated
                  Balance Sheets as of December 31, 2006 and 2005
              34Consolidated
                  Statements of Operations for the Years Ended December 31, 2006,
                  2005 and
                  2004
              35Consolidated
                  Statements of Stockholders’ Equity for the Years Ended December 31, 2006,
                  2005 and 2004
              36Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2006,
                  2005 and
                  2004
              37Notes
                  to Consolidated Financial Statements
              38
  i
  
 Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              70Item
                  9A.
              Controls
                  and Procedures
              70Item
                  9B.
              Other
                  Information
              70**PART
                  III**Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              70Item
                  11.
              Executive
                  Compensation
              71Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              71Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              72Item
                  14.
              Principal
                  Accounting Fees and Services
              72**PART
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              72SIGNATURES
              78
  
  ii
   **PART
        I**
 
  **ITEM
                  1.**
              **BUSINESS**
  **Overview**
  We
        provide electrical and mechanical solutions to industrial, commercial and
        institutional customers primarily in the United States.
  ·
              Industrial
                  Services - We provide maintenance and repair services for both
                  alternating
                  current and direct current electric industrial motors and generators,
                  we
                  manufacture and repair industrial lifting magnets, and we provide
                  engineering and repair services for electrical power distribution
                  systems
                  within industrial plants and commercial
                  facilities.
  ·
              Diesel
                  Engine Components - We manufacture, remanufacture, repair and engineer
                  power assemblies, engine parts and other components related to
                  large
                  diesel engines.
  ·
              Electrical
                  Contracting Services - We provide electrical contracting services,
                  including design-build services, to industrial, commercial and
                  institutional customers.
  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, Ohio, Washington and West Virginia. In April 2004, we
        reorganized our operations into a holding company structure, forming Magnetech
        Integrated Services Corp. to act as the parent company. In September 2005,
        we
        changed our name from Magnetech Integrated Services Corp. to MISCOR Group,
        Ltd.
  We
        developed our industrial services business to take advantage of certain market
        trends that we have observed. First is a shift among industrial companies
        toward
        outsourcing maintenance and other non-core services. These companies are
        increasing their use of outside contractors to control their internal labor
        and
        insurance costs and to eliminate the need for maintaining expensive,
        under-utilized equipment. Second, the mounting costs of training skilled
        employees, maintaining a satisfactory safety record and complying with rapidly
        changing government regulations are causing many industrial companies to
        seek
        experienced outsourcing providers. Third, many industrial companies prefer
        to
        simplify vendor management by working with larger providers that have broad
        geographic coverage. In response to these trends, we have made certain strategic
        business acquisitions to consolidate regionally fragmented service 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.
   1
  In
        March
        2005, we began our diesel engine components business by acquiring certain
        assets
        related to the diesel engine operations of Hatch & Kirk, Inc. located in
        Hagerstown, Maryland and Weston, West Virginia. In June 2005, we opened a
        sales
        office in Seattle. In this segment of our business, we manufacture,
        remanufacture, repair and engineer power assemblies, engine parts and other
        components related to large diesel engines for the rail, utilities, marine
        and
        offshore drilling industries.
  In
        May
        2006, we acquired substantially all of the assets of E.T. Smith Services
        of
        Alabama, Inc. (“ **Smith
        Alabama** ”).
        Smith
        Alabama provided electric motor repair, preventative maintenance and
        refurbishment for industrial companies such as utilities and manufacturers.
        The
        operating results of this business are included with the 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, 2006, we had 452 full-time employees, of which 96 were salaried
        and
        356 were hourly. At that date, approximately 37% 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.
   2
  **Segment
        Information**
  Through
        December 31, 2006, we operated in three reportable revenue generating segments:
        industrial services; electrical contracting services; and diesel engine
        components. The following table summarizes financial information concerning
        our
        reportable segments as of and for the three years ended December 31, 2006,
        2005
        and 2004 (amounts in thousands). Corporate administrative and support services
        are not allocated to the segments but are presented separately. See Note
        O of
        the notes to our consolidated financial statements included in “Item 8.
        Financial Statements and Supplementary Data” for additional financial
        information about our business segments.
 
 **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Revenues:Industrial
                  services
              
              $
              37,247
              
              $
              29,721
              
              $
              25,389Electrical
                  contracting
              
              
              14,101
              
              
              10,404
              
              
              3,595Diesel
                  engine components
              
              
              9,672
              
              
              6,320
              
              
              -0-Corporate
              
              
              -0-
              
              
              -0-
              
              
              -0-Elimination
              
              
              (266
              )
              
              (149
              )
              
              (87
              )Consolidated
              
              $
              60,754
              
              $
              46,296
              
              $
              28,897Gross
                  Profit:Industrial
                  services
              
              $
              8,429
              
              $
              6,907
              
              $
              5,912Electrical
                  contracting
              
              
              1,942
              
              
              1,187
              
              
              312Diesel
                  engine components
              
              
              1,587
              
              
              1,101
              
              
              -0-Corporate
              
              
              -0-
              
              
              -0-
              
              
              -0-Elimination
              
              
              (79
              )
              
              (39
              )
              
              (27
              )Consolidated
              
              $
              11,879
              
              $
              9,156
              
              $
              6,197Net
                  income (loss):Industrial
                  services
              
              $
              2,661
              
              $
              1,545
              
              $
              1,100Electrical
                  contracting
              
              
              868
              
              
              369
              
              
              9Diesel
                  engine components
              
              
              (88
              )
              
              (194
              )
              
              -0-Corporate
              
              
              (6,102
              )
              
              (8,916
              )
              
              (1,298
              )Consolidated
              
              $
              (2,661
              )
              $
              (7,196
              )
              $
              (189
              )
 
 **As
                  of December 31,****2006**
              
              **2005**Total
                  assets:Industrial
                  services
              
              $
              17,250
              
              $
              13,090Electrical
                  contracting
              
              
              5,352
              
              
              2,816Diesel
                  engine components
              
              
              5,242
              
              
              5,365Corporate
              
              
              3,023
              
              
              4,450Consolidated
              
              $
              30,867
              
              $
              25,721
 
  3
  Following
        is additional information regarding our three historical business
        segments.
  ***Industrial
        Services Segm*** **ent**
  We
        have
        organized our industrial services segment into three primary business groups:
        the Motor Group; the Magnet Group; and the Engineering Services Group. To
        supplement the services provided by these groups, we provide on-site equipment
        maintenance and education and training services.
  *Principal
        Products, Services, Markets and Distribution*
  Our
        Motor
        Group provides maintenance and repair services for both alternating current
        (AC)
        and direct current (DC) electric motors. Our customers operate in a broad
        range
        of major industries, including steel, railroad, marine, petrochemical, pulp
        and
        paper, 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 2006.
        Our
        Engineering Services Group provides engineering and repair services for
        electrical power distribution systems within industrial plants and commercial
        facilities. The Group’s services are intended to assist our customers in
        avoiding critical equipment or system downtime. We provide an integrated
        approach to help our customers minimize disruptions to their operations by
        applying state-of-the-art technology and up-to-date knowledge and education.
        Through both proactive programs and emergency evaluations, our skilled
        professionals test, analyze, maintain, repair and replace power distribution
        equipment to maximize reliable and safe operation. The Motor Group accounted
        for
        approximately 26%, 27% and 34% of total consolidated revenues for the years
        ended December 31, 2006, 2005 and 2004, respectively. The Magnet Group accounted
        for approximately 22%, 26% and 38% of total consolidated revenues for the
        years
        ended December 31, 2006, 2005 and 2004, respectively. The Engineering Services
        Group accounted for approximately 13%, 11% and 16% of total consolidated
        revenues for the years ended December 31, 2006, 2005 and 2004,
        respectively.
  *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.
  At
        December 31, 2006, we had approximately 250 customers in this segment with
        active accounts. Our largest customers include International Steel Group,
        CSX
        Transportation, USS Corporation, Mittal Steel and Beta Steel. No customer
        of our
        industrial services business accounted for 10% or more of our consolidated
        revenues during any of the last three fiscal years. Our industrial services
        business accounted for 61%, 64% and 88% of consolidated revenues for the
        years
        ended December 31, 2006, 2005 and 2004, respectively.
   4
  *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 complementary
        services to the industries we serve throughout the United States. To achieve
        this objective, 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 our other segments. 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 industrial service segment are steel,
        aluminum and various flexible 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*
  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
        2006.
  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.
   5
  *Backlog*
  At
        December 31, 2006, the backlog of our industrial services segment was
        approximately $2.6 million compared to $5.2 million at December 31, 2005.
        Backlog represents the amount of revenue that we expect to realize from work
        to
        be performed on uncompleted contracts in progress 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*
  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. We believe that
        our
        present working capital position, combined with forecasted cash flows and
        borrowing capacity as well as the net proceeds from the recent private offerings
        of our securities, will be sufficient to meet our working capital requirements
        and contractual obligations for at least the next 12 months. For further
        discussion of our borrowing facilities, see “Item 7. Management’s Discussion and
        Analysis of Financial Condition and Results of Operations - Liquidity and
        Capital Resources” and note F of the notes to our consolidated financial
        statements included in “Item 8. Financial Statements and Supplementary
        Data.”
  *Seasonality
        and Quarterly Fluctuations*
  Our
        revenues from our industrial services segment may be affected by the timing
        of
        scheduled outages at our industrial customers' facilities and 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. 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.
  ***Electrical
        Contracting Segment***
  *Principal
        Products, Services, Markets and Distribution*
  We
        provide electrical 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.
  *Marketing
        and Customers*
  Our
        customers include general contractors, real estate developers, commercial
        businesses, government agencies, manufacturers and institutions. No customer
        of
        our electrical contracting business accounted for 10% or more of our
        consolidated revenues during any of the last three fiscal years. Our electrical
        contracting business accounted for 23%, 22% and 12% of consolidated revenues
        for
        the years ended  December
        31, 2006, 2005 and 2004, respectively.
  *Business
        Strategy*
  Our
        strategy is to expand our electrical contracting 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.
   6
  *Raw
        Materials*
  The
        principal raw materials used in our electrical contracting 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 electrical contractors in our geographic
        market, based on sales for 2006. In addition, we compete against several
        smaller
        companies that provide electrical contracting services. Certain collective
        bargaining agreements to which we are a party limit our ability to compete
        on
        price with lower-cost, non-union contractors.
  *Backlog*
  At
        December 31, 2006, the backlog of our electrical contracting segment was
        approximately $5.2 million compared to $5.1 million at December 31, 2005.
        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 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*
  Our
        customers typically compensate us for services performed upon completion
        of a
        given project or on an agreed upon progress payment schedule for larger
        projects. Most contracts with general contractors and real estate developers
        allow the customer to retain generally between 5% and 10% of each progress
        billing until the contract is completed, inspected and approved. Therefore,
        we
        must have sufficient working capital to permit us to undertake our services,
        and
        to carry the appropriate inventory level of spare parts and equipment,
        throughout the duration of a project. We believe that our present working
        capital position, combined with forecasted cash flows and borrowing capacity
        as
        well as the net proceeds from the recent private offerings of our securities,
        will be sufficient to meet our working capital requirements and contractual
        obligations for at least the next 12 months. For further discussion of our
        borrowing facilities, see “Item 7. Management’s Discussion and Analysis of
        Financial Condition and Results of Operations - Liquidity and Capital Resources”
and note F of the notes to our consolidated financial statements included
        in
“Item 8. Financial Statements and Supplementary Data.”
  *Seasonality
        and Quarterly Fluctuations*
  Our
        revenues from our electrical contracting 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.
   7
  ***Diesel
        Engine Components Segment***
  We
        have
        operated our diesel engine contracting segment through our subsidiary HK
        Engine
        Components, LLC.
  *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. The aggregate purchase price was $2,613,000, comprised of the
        following: cash of $2,508,000; a note payable of $30,000; and 280,000 shares
        of
        our common stock valued at $75,000. We also assumed certain accrued liabilities
        in the aggregate face amount of $105,000, as well as the real property lease
        for
        Hatch & Kirk’s Hagerstown, Maryland facility. This acquisition launched the
        diesel engine components segment of our business.
  *Principal
        Products, Services, Markets and Distribution*
  In
        this
        segment of our business, we manufacture, remanufacture, repair and engineer
        power assemblies, engine parts and other components related to large diesel
        engines. These engines typically are used to power railroad locomotives,
        as
        marine engines and as back-up power supplies in power and utility plants
        and in
        the oil and gas industries.
  *Marketing
        and Customers*
  Diesel
        engine component customers include companies that use, manufacture or distribute
        diesel engines and related components for the rail, utilities, maritime and
        offshore drilling industries No customer accounted for 10% or more of our
        consolidated revenues in 2006 or 2005. Our diesel engine components business
        accounted for 16% and 14% of consolidated revenues for the year ended December
        31, 2006 and 2005, respectively.
  *Business
        Strategy*
  Our
        strategy is to expand into other geographic markets throughout the world,
        particularly with respect to the remanufacture and repair of Electro Motive
        Diesel power assemblies. We also intend to develop power assembly solutions
        for
        additional engine manufacturers.
  *Raw
        Materials*
  The
        principal raw materials used in our diesel engine components segment are
        scrap
        and raw steel, aluminum, alloys and molds. Certain raw materials can be obtained
        from a number of commercial sources at prevailing prices and we do not depend
        on
        any single supplier for any substantial portion of raw materials. However,
        it is
        sometimes difficult to obtain adequate quantities of scrap steel and alloys
        at
        competitive prices. The cost to deliver scrap steel can limit the geographic
        areas from which we can obtain this material. Valves, a critical component
        of
        our power assembly product offering, can be obtained from only two reliable
        sources at competitive prices, one of which is in South America. 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.
   8
  *Competition*
  Our
        two
        largest competitors 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,
        2006.
        There are a number of smaller competitors.
  *Foreign
        Sales*
  Our
        diesel engine components business derives a significant portion of its revenues
        from foreign customers. Foreign sales for the years ended December 31, 2006
        and
        2005 were $2.7 million or 28%, and $2.8 million or 44% of the total revenues
        of
        this segment, respectively.
  *Backlog*
  At
        December 31, 2006, the backlog of our diesel engine component segment was
        approximately $1.8 million compared to $2.1 million at December 31, 2005.
        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*
  Our
        customers typically pay within 30 to 60 days from the date of shipment. Some
        foreign customers typically pay in 90 days. Therefore, we must have sufficient
        working capital to permit us to undertake our services, and to carry the
        appropriate inventory level of spare parts and equipment, throughout the
        duration of a project. We believe that our present working capital position,
        combined with forecasted cash flows and borrowing capacity as well as the
        net
        proceeds from the recent private offerings of our securities, will be sufficient
        to meet our working capital requirements and contractual obligations for
        at
        least the next 12 months. For further discussion of our borrowing facilities,
        see “Item 7. Management’s Discussion and Analysis of Financial Condition and
        Results of Operations - Liquidity and Capital Resources” and note F of the notes
        to our consolidated financial statements included in “Item 8. Financial
        Statements and Supplementary Data.”
  *Seasonality
        and Quarterly Fluctuations*
  The
        effects of seasonality on revenues in our diesel engine components business
        are
        insignificant. However, the timing of large individual orders may have a
        significant impact on revenues in any quarter. 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.
   9
   **ITEM
                  1A.**
              **RISK
                  FACTORS**
  Investors
        should consider carefully the following factors that could cause our operating
        results and financial condition to be materially adversely affected. New
        risks
        may emerge at any time, and we cannot predict those risks or estimate the
        extent
        to which they may affect our businesses or financial performance.
  **We
        have not yet attained profitable levels of revenues, and we may not be
        profitable in the future. If we do not become profitable, we may not be able
        to
        continue our operations, and you may lose your entire investment.**
  For
        the
        fiscal years ended December 31, 2006, 2005 and 2004, we incurred net losses
        of
        approximately $2.7 million, $7.2 million and $0.2 million, respectively.
        We
        attribute these losses to investments we have made in the infrastructure
        of our
        business, which we expect will support a higher level of revenue than that
        being
        currently achieved. In addition, 2005 included a non-cash charge to interest
        expense related to the issuance of a conversion option in the amount of $4.5
        million. We expect to continue to make substantial expenditures for sales,
        infrastructure and other purposes, which may be fixed in the short term.
        As a
        result, we can provide no assurance as to the level, if any, of profitability
        in
        2007 and beyond. Our ability to increase revenue and achieve and maintain
        profitability in the future will depend primarily on our ability to complete
        strategic business acquisitions, increase sales of our existing products
        and
        services, maintain a reasonable cost structure and expand our geographical
        coverage. No assurance can be given that we will be able to increase our
        revenue
        at a rate that equals or exceeds expenditures.
  **We
        have a short operating history, which may make it difficult for investors
        to
        evaluate our business and our future prospects and will increase the risk
        of
        your investment.**
  We
        began
        operations in July 2000 with the purchase of the operating assets of an electric
        motor and magnet shop that launched our industrial services business. We
        expanded into electrical contracting in late 2001 and into diesel engine
        components in March 2005. Because of our limited operating history, we lack
        extended, historical financial and operational data, making it more difficult
        for an investor to evaluate our business, forecast our future revenues and
        other
        operating results, and assess the merits and risks of an investment in our
        common stock. This lack of information will increase the risk of your
        investment.
  **Our
        ability to execute our business plan will be impaired if we do not retain
        key
        employees.**
  We
        are
        highly dependent on the efforts and abilities of John A. Martell, our Chairman,
        Chief Executive Officer and President, and other senior management and key
        staff
        performing technical development, operations, customer support and sales
        and
        marketing functions. These employees are not obligated to continue their
        employment with us and may leave us at any time. We are not aware that Mr.
        Martell or any other member of our senior management team has any plans to
        leave
        the company. We do not have “key person” life insurance policies for any of our
        officers or other employees, including Mr. Martell. The loss of the technical
        knowledge and management and industry expertise that would result in the
        event
        Mr. Martell or other members of our senior management team left our company
        could delay the execution of our business strategy and divert our management
        resources. Our business also could be adversely affected if any member of
        management or any other of our key employees were to join a competitor or
        otherwise compete with us.
   10
  **If
        we are unable to hire additional qualified personnel, our ability to grow
        our
        business may be harmed.**
  We
        will
        need to hire additional qualified personnel with expertise in technical
        development, operations, customer support and sales and marketing. We compete
        for qualified individuals with numerous other industrial services companies.
        Competition for such individuals is intense, and we cannot be certain that
        our
        search for such personnel will be successful. Attracting and retaining qualified
        personnel will be critical to our success.
  **We
        face numerous competitors that have greater financial and other competitive
        resources than we have, which could hurt our ability to compete
        effectively.**
  The
        markets in which we do business are highly competitive. We do not expect
        the
        level of competition we face to be reduced in the future. An increase in
        competitive pressures in these markets or our failure to compete effectively
        may
        result in pricing reductions, reduced gross margins and loss of market share.
        Many of our competitors have longer operating histories, greater name
        recognition, more customers and significantly greater financial, marketing,
        technical and other competitive resources than we have. As a result, these
        companies may be able to adapt more quickly to new technologies and changes
        in
        customer needs, or to devote greater resources to the development, promotion
        and
        sale of their products and services. While we believe that our overall product
        and service offerings distinguish us from our competitors, these competitors
        could develop new products or services that could directly compete with our
        products and services.
  **Some
        of our employees work under collective bargaining agreements that will expire
        in
        2007, which may result in work stoppages or other disruptions that could
        have an
        adverse effect on our operating results.**
  As
        of
        December 31, 2006, approximately 37% of our employees were working under
        collective bargaining agreements with several trade unions. One of the
        collective bargaining agreements covering 5% of our employees expires in
        2007.
        While we expect to reach an acceptable renewal of this agreement, we may
        not be
        able to do so, and we may face work stoppages or other similar disruptions.
        Should this occur, we may not be able to meet the demands and expectations
        of
        our customers, which may result in cancelled orders and reduced business.
        This
        could have an adverse effect on our operating results.
  **We
        may have to reduce or cease operations if we are unable to obtain the funding
        necessary to meet our future capital requirements. Moreover, if we raise
        capital
        by issuing additional equity, your percentage ownership of our common stock
        will
        be diluted.**
  We
        believe that our existing working capital, cash provided by operations and
        our
        existing senior credit facility, under which we had an additional $5.0 million
        available as of March 23, 2007, should be sufficient to fund our working
        capital
        needs, capital requirements and contractual obligations for at least the
        next
        twelve months. We will need, however, to raise additional debt or equity
        capital
        to fund any future business acquisitions. In addition, we do not anticipate
        being able to generate sufficient funds from operations to pay off our
        obligations under our subordinated convertible debentures on their maturity
        date
        of February 28, 2008. As of March 21, 2007, debenture holders have converted
        $1,045,000 of the subordinated debt. However, absent further exercise of
        the
        right of the debenture holders to convert our indebtedness into shares of
        our
        common stock, we anticipate having to refinance or otherwise raise additional
        capital to pay off the $2,980,000 principal balance and accrued interest of
        the subordinated convertible debentures.
   11
  Our
        future working capital needs and capital expenditure requirements will depend
        on
        many factors, including our rate of revenue growth, the rate and size of
        future
        business acquisitions, the expansion of our marketing and sales activities,
        and
        the rate of development of new products and services. To the extent that
        funds
        from the sources described above are not sufficient to finance our future
        activities, we will need to improve future cash flows and/or raise additional
        capital through debt or equity financing or by entering into strategic
        relationships or making other arrangements. Any effort to improve cash flows,
        whether by increasing sales, reducing operating costs, collecting accounts
        receivable at a faster rate, reducing inventory and other means, may not
        be
        successful. Further, any additional capital we seek to raise might not be
        available on terms acceptable to us, or at all. In that event, we may be
        unable
        to take advantage of future opportunities or to respond to competitive pressures
        or unanticipated requirements, and we may default under our debentures. Any
        of
        these events may have, and with respect to a default under our indebtedness
        would have, a material adverse effect on our business, financial condition
        and
        operating results.
  Further,
        if we raise additional capital through the issuance of equity securities,
        the
        percentage ownership of each shareholder in the company will, and each
        shareholder’s economic interest in the company may, be diluted. The degree of
        dilution, which may be substantial, will depend to a large extent on the
        market
        price of our common stock and general market conditions at the time we issue
        any
        such new equity.
  **If
        we default on our obligations under our subordinated secured convertible
        debentures or our senior secured credit facility, our assets may be subject
        to
        foreclosure, which would likely put us out of business.**
  Our
        obligations under our subordinated secured convertible debentures issued
        to
        investors in our 2005 private offering are secured by a second lien on
        substantially all of our assets. Our obligations under our senior credit
        facility are secured by a first lien on our accounts receivable. Consequently,
        if we are unable to pay off our senior secured obligations or the debentures
        when they become due or otherwise default under the terms of our senior credit
        facility or the debentures, our senior lender or the holders of the debentures
        could foreclose their respective security interests and liquidate all of
        our
        assets. This would cause us to cease operations and likely result in the
        loss of
        your entire investment.
  **If
        we are unable to identify and make appropriate acquisitions in the future,
        our
        growth could be restricted.**
  A
        significant component of our growth strategy has been and is expected to
        continue to be the acquisition of companies that we expect to expand our
        product
        and service offerings, our geographic presence and our customer base. Since
        our
        organization in 2000, we have completed seven acquisitions, and we intend
        to
        continue making acquisitions in the future. It is possible, however, that
        we may
        not be able to identify or acquire additional companies on terms agreeable
        to
        us, if at all. If we fail to make such acquisitions on agreeable terms, our
        ability to increase our revenue and execute our growth strategy would be
        hurt.
   12
  **Any
        acquisitions we make could be difficult to integrate with and harm our existing
        operations and result in dilution to our existing
        shareholders.**
  We
        expect
        to continue making strategic business acquisitions. Evaluating acquisition
        targets is difficult, and acquiring other businesses involves risks, including
        the following:
  ·
              difficulty
                  in integrating the acquired operations and retaining acquired
                  personnel;
  ·
              difficulty
                  in retaining acquired sales and distribution channels and
                  customers;
  ·
              diversion
                  of management's attention from and disruption of our ongoing business;
                  and
  ·
              difficulty
                  in incorporating acquired technology and rights into our product
                  and
                  service offerings and maintaining uniform standards, controls,
                  procedures
                  and policies.
  Furthermore,
        we may issue equity securities to pay in whole or in part for future
        acquisitions. If we issue equity securities, the percentage ownership of
        each
        shareholder in the company will, and each shareholder’s economic interest in the
        company may, be diluted. The degree of dilution will depend, to a large extent,
        on the market price of our common stock and general market conditions at
        the
        time new equity is sought. Such dilution may be substantial.
  **We
        may not successfully manage our growth, which could result in continued losses
        and the failure of our business.**
  Our
        success will depend to a large extent on our ability to expand our operations
        and manage our growth, which will place a significant strain on our management
        and on our administrative, operational and financial resources. To manage
        this
        growth, we must expand our facilities, augment our operational, financial
        and
        management systems and hire and train additional qualified personnel. If
        we are
        unable to manage our growth effectively, our business may suffer.
  **We
        may be unable to adequately expand our operational systems to accommodate
        growth, which could harm our ability to deliver our products and
        services.**
  Our
        operational systems have not been tested at the customer volumes that may
        be
        required for us to become profitable in the future. These systems may not
        be
        able to operate effectively if the number of our customers grows substantially.
        In implementing new systems, we may experience periodic interruptions affecting
        all or a portion of our systems. Such interruptions could harm our ability
        to
        deliver our products and services and could result in the loss of current
        and
        potential new customers.
  **Changes
        in operating factors that are beyond our control could hurt our operating
        results.**
  Our
        operating results may fluctuate significantly in the future as a result of
        a
        variety of factors, many of which are beyond management's control. These
        factors
        include the costs of new technology, the relative speed and success with
        which
        we can acquire customers for our products and services, capital expenditures
        for
        equipment, sales and marketing and promotional activities and other costs,
        changes in our pricing policies, suppliers and competitors, changes in operating
        expenses, increased competition in our markets, and other general economic
        and
        seasonal factors. Adverse changes in one or more of these factors could hurt
        our
        operating results.
   13
  **We
        may be required to conduct environmental remediation activities, which could
        be
        expensive and inhibit the growth of our business and our ability to become
        profitable.**
  We
        are
        subject to a number of environmental laws and regulations, including those
        concerning the handling, treatment, storage and disposal of hazardous materials.
        These environmental laws generally impose liability on present and former
        owners
        and operators, transporters and generators of hazardous materials for
        remediation of contaminated properties. We believe that our businesses are
        operating in compliance in all material respects with applicable environmental
        laws, many of which provide for substantial penalties for violations. We
        cannot
        assure you that future changes in such laws, interpretations of existing
        regulations or the discovery of currently unknown problems or conditions
        will
        not require substantial additional expenditures. In addition, if we do not
        comply with these laws and regulations, we could be subject to material
        administrative, civil or criminal penalties or other liabilities. We may
        also be
        required to incur substantial costs to comply with current or future
        environmental and safety laws and regulations. Any such additional expenditures
        or costs that we may incur would hurt our operating results.
  **It
        may be difficult to obtain performance bonds at our subsidiary Martell Electric,
        LLC, which would adversely affect our ability to grow our electrical contracting
        business.**
  Certain
        large electrical contracts require that we post a performance bond when we
        submit our bid or quote. The insurance companies that issue performance bonds
        review our financial performance and condition and that of our subsidiary
        Martell Electric, LLC, through which we conduct the electrical contracting
        segment of our business. Due to our accumulated consolidated operating losses,
        we may not be able to obtain the performance bonds necessary to submits bids
        for
        future projects. This would adversely affect our ability to grow our electrical
        contracting business.
  **Insurance
        is expensive and it may be difficult for us to obtain appropriate coverage.
        If
        we suffer a significant loss for which we do not have adequate insurance
        coverage, our income will be reduced or our net loss will
        increase.**
  We
        have
        obtained insurance coverage for potential risks and liabilities that we deem
        necessary and which fall within our budget. Insurance companies are becoming
        more selective about the types of risks they will insure. It is possible
        that we
        may:
  ·
              not
                  be able to get sufficient insurance to meet our
                  needs;
  ·
              not
                  be able to afford certain types or amounts of
                  coverage;
  ·
              have
                  to pay insurance premiums at amounts significantly more than anticipated;
                  or
  ·
              not
                  be able to acquire any insurance for certain types of business
                  risks.
  This
        could leave us exposed to potential claims or denial of coverage in certain
        situations. If we were found liable for a significant claim in the future,
        the
        resulting costs would cause our net income to decrease or our net loss to
        increase.
  14
 **Certain
        raw materials and other materials purchased for our operations have been
        and may
        continue to be subject to sudden and significant price increases that we
        may not
        able to pass along to our customers. This could have an adverse effect on
        our
        ability to become profitable.**
  We
        purchase a wide range of commodities and other materials such as copper,
        aluminum, steel and petroleum-based materials as raw materials and for
        consumption in our operations. Some of these materials have been and may
        continue to be subject to sudden and significant price increases. Depending
        on
        competitive pressures and customer resistance, we may not be able to pass
        on
        these cost increases to our customers. This would reduce our gross profit
        margins and make it more difficult for us to become profitable.
  **The
        increased costs we will incur as a result of being a public company will
        make it
        more difficult for us to become profitable.**
  As
        a
        public company, we will incur significant additional legal, accounting,
        insurance, compliance, reporting, record keeping and other expenses that
        we did
        not incur as a private company. We also anticipate that we will incur costs
        associated with recently adopted corporate governance requirements, including
        requirements under the Sarbanes-Oxley Act of 2002, as well as new rules
        implemented by the SEC. We expect these rules and regulations to increase
        our
        general and administrative expenses and will make some activities more
        time-consuming and costly. The expense we incur in complying with these
        requirements will make it more difficult for us to become profitable.
  **The
        changing regulatory environment for public companies could make it more
        difficult for us to attract qualified directors.**
  We
        expect
        that the stricter regulatory environment following enactment of the
        Sarbanes-Oxley Act of 2002 may make it more difficult and more expensive
        for us
        to obtain director and officer liability insurance. We may also be required
        to
        accept reduced policy limits and coverage or incur substantially higher costs
        to
        obtain the same or similar coverage. As a result, it may be more difficult
        for
        us to attract and retain qualified individuals to serve on our board of
        directors or as executive officers.
  **We
        do not intend to pay dividends, and you may not experience a return on
        investment without selling your securities, which may be difficult because
        we
        have a limited trading market.**
  We
        have
        never declared or paid, nor do we intend in the foreseeable future to declare
        or
        pay, any dividends on our common stock. Our financing agreements also prohibit
        us from paying any dividends on our common stock. Since we intend to retain
        all
        future earnings to finance the operation and growth of our business, you
        will
        likely need to sell your securities in order to realize a return on your
        investment, if any. The market for our common stock is limited, and you may
        not
        be able to sell your shares of our common stock.
  15
 **Ownership
        of our common stock is concentrated among a small number of shareholders
        who
        have substantial control over matters requiring shareholder approval and
        may
        approve actions that are adverse to your interests or negatively impact the
        value of your investment.**
  As
        of
        March 23, 2007, our directors and executive officers beneficially owned or
        controlled approximately 36.9% of our outstanding
        common stock, or approximately 42.3% assuming exercise or conversion of
        outstanding warrants, convertible notes and convertible debentures .
        Tontine
        Capital Management L.L.C. and its affiliates own 33.3% of our outstanding
        common
        stock, or approximately 26.5% assuming exercise or conversion of outstanding
        warrants, convertible notes and convertible debentures As a result, such
        persons
        may have the ability to control most matters submitted to our shareholders
        for
        approval, including the election and removal of directors and the approval
        of
        any merger, consolidation or sale of all or substantially all of our assets.
        The
        interests of these shareholders in such matters may be different from your
        interests. Consequently, they may make decisions that are adverse to your
        interests. See “Item 12. Security Ownership of Certain Beneficial Owners and
        Management and Related Stockholder Matters” for more information about ownership
        of our outstanding shares.
  **Our
        articles of incorporation limit the liability of our directors and officers
        and
        require us to indemnify them against certain liabilities, which could restrict
        your ability to obtain recourse against our directors and officers for their
        actions and reduce the value of your investment in our common
        stock.**
  Our
        articles of incorporation limit the liability of our directors and officers
        for
        any loss or damage caused by their actions or omissions if they acted in
        good
        faith, with the care an ordinarily prudent person in a like position would
        have
        exercised under similar circumstances, and in a manner they reasonably believed
        was in the best interests of our company. Even if they do not meet these
        standards, our directors and officers would not be liable for any loss or
        damage
        caused by their actions or omissions if their conduct does not constitute
        willful misconduct or recklessness. Our articles of incorporation also require
        us to indemnify our directors and officers under certain circumstances against
        liability incurred in connection with proceedings to which they are made
        parties
        by reason of their relationships to our company.
  The
        limitation of liability and indemnification provisions in our articles of
        incorporation may discourage shareholders from bringing a lawsuit against
        our
        directors alleging a breach of their fiduciary duty. These limitations may
        also
        reduce the likelihood of derivative litigation against our directors and
        officers, even though an action, if successful, might benefit our company
        and
        shareholders. Furthermore, our operating results and the value of your
        investment may decline to the extent that we pay any costs of settlement
        and
        damage awards against directors and officers as required by these
        indemnification provisions.
   16
   **ITEM****1B.**
              **UNRESOLVED
                  STAFF COMMENTS**
  No t
        applicable.
   **ITEM****2.**
              **PROPERTIES**
  We
        conduct our business from thirteen locations in the United States. We lease
        facilities in South Bend, Elkhart, Hammond, Indianapolis and Merrillville,
        Indiana; Boardman, Ohio; Mobile, Alabama; Little Rock, Arkansas; Hagerstown,
        Maryland; Seattle, Washington; and Huntington, West Virginia. Our leases
        have
        terms expiring at various times through December 2014, with annual base rental
        payments ranging from $51,000 to $150,000. We own our facilities in Weston,
        West
        Virginia and Saraland, Alabama.
  We
        currently use the Elkhart facility in the electrical contracting segment
        of our
        business. In January 2007, we entered into a five year lease agreement for
        a
        property in South Bend to house the operations of the electrical contracting
        business. The annual rental for the new lease is $89,000. The Hagerstown,
        Seattle and Weston facilities are used in the diesel engine components segment
        of our business. 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 the new 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. See “Item 13. Certain Relationships and Related Party Transactions, and
        Director Independence.”
   **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**
  On
        December 7, 2006, we obtained shareholder approval of our 2005 Employee Stock
        Purchase Plan by written consent signed by Mr. Martell, our majority
        shareholder.
   17
  **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. 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. Sales price information consists of quotations
        by dealers making a market in our common stock and may not necessarily represent
        actual transactions. As a result, the sales price information for our common
        stock reflects inter-dealer prices without any mark-ups, mark-downs or
        commissions. In addition, trading in our common stock is limited in volume
        and
        may not be a reliable indication of its market value.
  **High**
              
              **Low****Fiscal
                  Year 2006:**3rd
                  quarter ended 10/1/06 *
              
              $
              0.70
              
              $
              0.404th
                  quarter ended 12/31/06
              
              $
              0.40
              
              $
              0.17*beginning
                  August 1, 2006
 
 As
        of
        March 21, 2007, there were 187,408,902 shares of common stock outstanding
        and
        approximately 77 shareholders of record. Our common stock was held by
        approximately 546 beneficial owners as of such date. In addition, as of that
        date we had outstanding:
  ·
              warrants
                  to acquire up to 9,415,265 shares of our common stock at fixed
                  exercise
                  prices ranging from $0.0001 to $0.34 per
                  share;
  ·
              subordinated
                  debentures convertible into 8,752,026 shares of our common stock
                  based on
                  aggregate indebtedness of $2,980,000 then outstanding and a fixed
                  conversion price of $0.3404926 per share;
  ·
              a
                  subordinated note convertible into 30,000,000 shares of our common
                  stock
                  based on aggregate indebtedness of $3,000,000 then outstanding
                  and a fixed
                  conversion price of $0.10 per share;
                  and
  ·
              options
                  issued under our 2005 Stock Option Plan to acquire 1,580,000 shares
                  of our
                  common stock at exercise prices ranging from $0.215 to $0.25 per
                  share.
  The
        number of shares issuable upon exercise of the foregoing warrants and conversion
        of the foregoing debentures and notes, as well as the respective fixed exercise
        and conversion prices, are subject to adjustment as provided in the applicable
        securities and related agreements.
  **Dividends**
  We
        have
        never paid cash dividends on our common stock. We presently intend to retain
        future earnings, if any, for use in the operation and expansion of the business
        and do not anticipate paying any cash dividends in the foreseeable future.
        Our
        subordinated convertible debentures and our senior credit facility contain
        restrictions on our ability to pay dividends. See “Item 7. Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations.”
   18
  **Unregistered
        Sales of Equity Securities**
  On
        May
        31, 2006, we issued to our senior lender, Laurus Master Fund, Ltd., warrants
        to
        purchase 375,000 shares of our common stock at a fixed exercise price of
        $0.01
        per share, subject to certain anti-dilution adjustments. These warrants are
        exercisable for a seven-year period. We issued the warrants to Laurus for
        no
        additional consideration in connection with financing Laurus provided for
        our
        acquisition of E.T. Smith Services of Alabama, Inc. Laurus was an “accredited
        investor,” as that term is defined in Rule 501 of Regulation D, and the issuance
        of these securities was exempt from registration under the Securities Act
        in
        reliance on Section 4(2) thereof, relating to offers of securities by an
        issuer
        not involving any public offering, and Rule 506 of Regulation D.
  Effective
        August 3, 2006, we issued the following options under our 2005 Stock Option
        Plan
        to acquire 1,185,000 shares of our common stock: (i) options to acquire 50,000
        shares each to an executive officer and two outside directors at an exercise
        price of $0.25 per share, (ii) options to acquire 250,000 each to two outside
        directors at an exercise price of $0.25 per share, of which 250,000 were
        exercised in September 2006 and 250,000 expired, and (iii) options to acquire
        535,000 shares to certain key employees. The issuance of the options was
        exempt
        from registration under the Securities Act in reliance on Section 4(2) thereof,
        relating to offers of securities by an issuer not involving any public
        offering.
  Effective
        August 31, 2006, we issued to two key employees 25,000 shares of restricted
        stock each pursuant to offers to purchase such shares granted under our 2005
        Restricted Stock Purchase Plan at an exercise price of $0.001 per share.
        The
        grant of the purchase offers and the issuance of the shares were exempt from
        registration under the Securities Act in reliance on Section 4(2) thereof,
        relating to offers of securities by an issuer not involving any public
        offering.
  **Use
        of Proceeds**
  Our
        Registration Statement on Form S-1 (Reg. No. 333-129354) was declared effective
        by the Securities and Exchange Commission on May 12, 2006. The registration
        statement relates to shares of our common stock that may be offered and sold
        from time to time by the selling shareholders named in the related prospectus
        and to certain shares issuable upon exercise of warrants and conversion of
        debt
        securities. We will not receive any of the proceeds from the sale of the
        common
        stock, but we have agreed to bear all expenses (other than direct expenses
        incurred by the selling shareholders, such as selling commissions, brokerage
        fees and expenses and transfer taxes) associated with registering such shares
        under federal and state securities laws. We will receive the exercise price
        upon
        exercise of the warrants held by selling shareholders. As of December 31,
        2006,
        we have issued 9,405,265 shares upon the exercise of warrants. 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 cannot ascertain the number or shares sold
        or the identity of the selling shareholders. We have incurred total expenses
        in
        connection with the offering of $400,000 and have received no offering proceeds,
        except that we received $8,325 upon the exercise of warrants.
   19
  **ITEM** **6. SELECTED FINANCIAL DATA**
  The
        table
        below summarizes selected financial information for MISCOR and our subsidiaries
        on a consolidated basis. For additional information, refer to our audited
        consolidated financial statements and the notes to the financial statements
        in
“Item 8. Financial Statements and Supplementary Data.”
  **STATEMENT
                      OF**
                  
                  **Year
                      Ended December 31,****OPERATIONS
                      DATA:**
                  
                  **2006**
                  
                  **2005**
                  
                  **2004**
                  
                  **2003**
                  
                  **2002****Revenues:**Product
                      sales
                  
                  $
                  18,083
                  
                  $
                  14,587
                  
                  $
                  6,763
                  
                  $
                  3,235
                  
                  $
                  881Service
                      revenues
                  
                  
                  42,671
                  
                  
                  31,709
                  
                  
                  22,134
                  
                  
                  12,260
                  
                  
                  10,911Total
                      revenues
                  
                  $
                  60,754
                  
                  $
                  46,296
                  
                  $
                  28,897
                  
                  $
                  15,495
                  
                  $
                  11,792**Cost
                      of revenues:**Product
                      sales
                  
                  $
                  13,891
                  
                  $
                  11,131
                  
                  $
                  4,769
                  
                  $
                  1,248
                  
                  $
                  1,044Service
                      revenues
                  
                  
                  34,984
                  
                  
                  26,009
                  
                  
                  17,931
                  
                  
                  10,735
                  
                  
                  8,915Total
                      cost of revenues
                  
                  $
                  48,875
                  
                  $
                  37,140
                  
                  $
                  22,700
                  
                  $
                  11,983
                  
                  $
                  9,959Gross
                      profit
                  
                  $
                  11,879
                  
                  $
                  9,156
                  
                  $
                  6,197
                  
                  $
                  3,512
                  
                  $
                  1,833Selling
                      expenses
                  
                  $
                  3,366
                  
                  $
                  2,866
                  
                  $
                  1,959
                  
                  $
                  1,457
                  
                  $
                  1,285General
                      and administrative expenses
                  
                  $
                  7,266
                  
                  $
                  6,806
                  
                  $
                  4,256
                  
                  $
                  3,003
                  
                  $
                  1,794Total
                      selling, general and administrative expense
                  
                  $
                  10,632
                  
                  $
                  9,672
                  
                  $
                  6,215
                  
                  $
                  4,460
                  
                  $
                  3,079Operating
                      income (loss)
                  
                  $
                  1,247
                  
                  $
                  (516
                  )
                  $
                  (18
                  )
                  $
                  (948
                  )
                  $
                  (1,246
                  )Interest
                      expense
                  
                  $
                  (3,404
                  )
                  $
                  (6,711
                  )
                  $
                  (183
                  )
                  $
                  (189
                  )
                  $
                  (117
                  )Loss
                      on warrant liability
                  
                  
                  (508
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Other
                      income
                  
                  
                  4
                  
                  
                  31
                  
                  
                  12
                  
                  
                  -
                  
                  
                  125Net
                      loss
                  
                  $
                  (2,661
                  )
                  $
                  (7,196
                  )
                  $
                  (189
                  )
                  $
                  (1,137
                  )
                  $
                  (1,238
                  )Net
                      loss per share
                  
                  $
                  (0.02
                  )
                  $
                  (0.07
                  )
                  $
                  (0.00
                  )
                  $
                  (0.01
                  )
                  $
                  (0.02
                  )Shares
                      used to compute Loss per share (1)
                  
                  
                  109,264,264
                  
                  
                  99,417,698
                  
                  
                  84,017,315
                  
                  
                  79,450,000
                  
                  
                  79,450,000
 ________________________________
 (1)
              See
                  Note A to our consolidated financial statements included in “Item 8.
                  Financial Statements” for a description of the computation of the number
                  of shares and net loss per share.
 
 **BALANCE
        SHEET DATA:**
  **As
                  of December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Working
                  capital
              
              $
              4,088
              
              $
              6,053
              
              $
              3,257
              
              $
              1,475
              
              $
              1,450Total
                  Assets
              
              
              30,867
              
              
              25,721
              
              
              12,533
              
              
              8,036
              
              
              5,934Long-term
                  debt
              
              
              8,824
              
              
              8,603
              
              
              3,000
              
              
              3,200
              
              
              3,507Accumulated
                  deficit
              
              
              (13,680
              )
              
              (11,436
              )
              
              (4,240
              )
              
              (4,051
              )
              
              (2,914
              )Total
                  shareholders’ equity (deficit)
              
              $
              3,693
              
              $
              5,006
              
              $
              2,690
              
              $
              203
              
              $
              (464
              )
  20
  **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
        have
        historically operated in three business segments: industrial services,
        electrical contracting services, and diesel engine components.
  The
        industrial services segment is primarily engaged in providing maintenance
        and
        repair services to industry, including repairing and manufacturing industrial
        electric motors and lifting magnets, and providing engineering and repair
        services for electrical power distribution systems within industrial plants
        and
        commercial facilities. The electrical contracting segment provides a wide
        range
        of electrical contracting services, mainly to industrial, commercial and
        institutional customers. The diesel engine components segment manufactures,
        remanufactures, repairs and engineers power assemblies, engine parts and
        other
        components related to large diesel engines for the rail, utilities, maritime
        and
        offshore drilling industries.
  In
        May
        2006, we acquired substantially all of the assets of E. T. Smith Services
        of
        Alabama Inc. (“ **Smith
        Alabama** ”).
        Smith
        Alabama provided electric motor repair, preventative maintenance and
        refurbishment for industrial companies such as utilities and manufacturers.
        The
        operating results of this business are included with the industrial services
        segment.
  On
        January 18, 2007 we sold 50,000,000 shares of common stock to Tontine Capital
        Management L.L.C. and 12,500,000 shares of common stock to Tontine Capital
        Overseas G.P. L.L.C. for $0.20 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., as of that date in the amount of approximately $10.0 million,
        including interest, plus approximately $0.5 million in prepayment penalties.
        We
        will use 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 will use
        borrowings under the note for capital expenditures and working capital purposes.
        Interest is payable monthly at 1⁄2% over prime as published in the Wall Street
        Journal.
  **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.
  *Use
        of estimates.* The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires our management
        to
        make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities and disclosure of contingent assets and liabilities as of the
        date
        of the financial statements, and the reported amounts of revenue and expenses
        during the reporting period. Significant estimates are required in accounting
        for inventory costing, asset valuations, costs to complete and depreciation.
        Actual results could differ from those estimates.
   21
  *Revenue
        recognition* .
        Revenue
        in our industrial services and diesel engine components segments consists
        primarily of product sales and service of industrial magnets, electric motors
        and diesel power assemblies. Product sales revenue is recognized when products
        are shipped and both title and risk of loss transfer to the customer. Service
        revenue is recognized when all work is completed and the customer’s property is
        returned. For services to a customer’s property provided at our site, property
        is considered returned when the customer’s property is shipped back to the
        customer and risk of loss transfers to the customer. For services to a
        customer’s property provided at the customer’s site, property is considered
        returned upon completion of work. We provide for an estimate of doubtful
        accounts based on specific identification of customer accounts deemed to
        be
        uncollectible and historical experience. Our revenue recognition policies
        are in
        accordance with Staff Accounting Bulletin No. 101 and No. 104.
  Revenues
        from Martell Electric, LLC’s electrical contracting business are recognized on
        the percentage-of-completion method, measured by the percentage of costs
        incurred to date to estimated total costs to complete for each contract.
        Costs
        incurred on electrical contracts in excess of customer billings are recorded
        as
        part of other current assets. Amounts billed to customers in excess of costs
        incurred on electrical contracts are recorded as part of other current
        liabilities.
  *Segment
        information* .
        We
        report segment information in accordance with Statement of Financial Accounting
        Standards (“ **SFAS** ”)
        No.
        131, *Disclosures
        about Segments of an Enterprise* .
  *Inventory* .
        We
        value inventory at the lower of cost or market. Cost is determined by the
        first-in, first-out method. We periodically review our inventories and make
        adjustments as necessary for estimated obsolescence and excess goods. The
        amount
        of any markdown is equal to the difference between cost of inventory and
        the
        estimated market value based upon assumptions about future demands, selling
        prices and market conditions.
  *Property,
        plant and equipment* . Property,
        plant and equipment are stated at cost less accumulated depreciation.
        Depreciation is computed over the estimated useful lives of the related assets
        using the straight-line method. Useful lives of property, plant and equipment
        are as follows:
  Buildings
              
              30
                  yearsLeasehold
                  improvements
              
              Shorter
                  of lease term or useful lifeMachinery
                  and equipment
              
              5
                  to 10 yearsVehicles
              
              3
                  to 5 yearsOffice
                  and computer equipment
              
              3
                  to 10 years
  *Long-lived
        assets* . We
        assess
        long-lived assets for impairment whenever events or changes in circumstances
        indicate that an asset’s carrying amount may not be recoverable.
  *Debt
        issue costs.* We
        capitalize and amortize costs incurred to secure senior debt financing over
        the
        term of the senior debt financing, which is three years. We also capitalize
        and
        amortize costs incurred to secure subordinated debenture financing over the
        term
        of the subordinated debentures, which initially was two years. However, in
        April
        2006, the debenture holders agreed to extend the maturity of the debentures
        from
        February 28, 2007 to February 28, 2008. Beginning in April 2006, the unamortized
        costs related to the debenture financing are amortized through the extended
        maturity date.
  *Warranty
        costs* .
        We
        warrant workmanship after the sale of our products. We record an accrual
        for
        warranty costs based upon the historical level of warranty claims and our
        management’s estimates of future costs.
   22
  *Income
        taxes* .
        We
        account for income taxes in accordance with SFAS No. 109, *Accounting
        for Income Taxes* .
  *Stock-based
        compensation.* Effective
        January 1, 2006, we adopted SFAS No. 123R, *Share-Based
        Payments* (revised
        2004), using the Modified Prospective Approach. SFAS No. 123R revises SFAS
        No.
        123, *Accounting
        for Stock-Based Compensation* and
        supersedes Accounting Principles Opinion (“ **APB** ”)
        No.
        25, *Accounting
        for Stock Issued to Employees* .
        SFAS
        No. 123R requires the cost of all share-based payments to employees, including
        grants of employee stock options, to be recognized in the financial statements
        based upon their fair values at grant date, or the date of later modification,
        over the requisite service period. In addition, SFAS No. 123R requires
        unrecognized cost (based on the amounts previously disclosed in our pro forma
        footnote disclosure) related to options vesting after the initial adoption
        to be
        recognized in the financial statements over the remaining requisite service
        period.
  Under
        the
        Modified Prospective Approach, the amount of compensation cost recognized
        includes (a) compensation cost for all share-based payments granted prior
        to,
        but not yet vested as of January 1, 2006, based on the grant date fair value
        estimated in accordance with the provisions of SFAS No. 123, and (b)
        compensation cost for all share-based payments granted subsequent to January
        1,
        2006, based on the grant date fair value estimated in accordance with the
        provisions of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, we
        accounted for our stock-based compensation plans under the recognition and
        measurement provisions of APB No. 25.
  *New
        Accounting Standards* .
        In
        December 2006, the Financial Accounting Standards Board (“ **FASB** ”)
        issued
        Staff Position EITF 00-19-2, *Accounting
        for Registration Payment Arrangements* (“ **FSP
        EITF 00-19-2** ”).
        FSP
        EITF 00-19-2 specifies that the contingent obligation to make future payments
        or
        otherwise transfer consideration under a registration payment arrangement,
        whether issued as a separate agreement or included as a provision of a financial
        instrument or other agreement, should be separately recognized and measured
        in
        accordance with FASB Statement No. 5, *Accounting
        for Contingencies* .
        FSP
        EITF 00-19-2 further clarifies that a financial instrument subject to a
        registration payment arrangement should be accounted for in accordance with
        applicable generally accepted accounting principles without regard to the
        contingent obligation to transfer consideration pursuant to the registration
        payment arrangement. In accordance with the provisions of FSP EITF 00-19-2,
        we
        have elected early adoption and have reclassified our warrant liability to
        equity.
  Warrants
        issued in conjunction with our senior debt financing were accounted for under
        the Emerging Issues Task Force (“ **EITF** ”)
        Issue
        No. 00-19, *Accounting
        for Derivative Financial Instruments Indexed to and Potentially Settled in
        a
        Company’s Own Stock* and View
        A of EITF No. 05-4, *The
        Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
        Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled in, a Company’s Own Stock* . Due
        to certain factors and the liquidated damage provision in the registration
        rights agreements issued in connection with the senior debt financing, we
        determined that the warrants are derivative liabilities. We have elected
        early
        adoption of FSP EITF 00-19-2, which supersedes the guidance under EITF
        05-4.
  In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“ **SAB** ”)
        No.
        108, *Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements* (“ **SAB
        108** ”).
        SAB
        108 provides interpretive guidance on how the effects of the carryover or
        reversal of prior year misstatements should be considered in quantifying
        a
        current year misstatement. The pronouncement prescribes an approach whereby
        the
        effect of all unrecorded identified errors should be considered on all of
        the
        financial statements rather than just either the effect on the balance sheet
        or
        the income statement. We adopted the provisions of SAB 108 as of December
        31,
        2006. The adoption of SAB 108 did not have a material impact on our consolidated
        financial statements.
   23
  In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* (“ **SFAS
        157** ”).
        SFAS
        157 defines fair value, establishes a framework for measuring fair value
        and
        expands disclosures about fair value measurements. SFAS 157 is effective
        for
        financial statements issued for fiscal years beginning after November 15,
        2007
        and interim periods within those fiscal years. We are currently evaluating
        the
        impact that SFAS 157 will have on our consolidated financial statements.
  In
        June
        2006, the FASB issued Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
        109* (“ **FIN
        48** ”).
        FIN
        48 clarifies the accounting for uncertainty in income taxes recognized in
        an
        enterprise’s financial statements in accordance with FASB Statement No. 109, *Accounting
        for Income Taxes* .
        FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. FIN 48 also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure, and transition. FIN 48 is effective for fiscal years beginning
        after
        December 15, 2006. We adopted this standard effective January 1, 2007. Adoption
        of this standard is not expected to have a material impact on our consolidated
        financial position, results of operations or cash flows.
  In
        February 2006, the FASB issued SFAS No. 155, Accounting
        for Certain Hybrid Financial Instruments - an Amendment of FASB Statements
        No.
        133 and 140 ("**SFAS 155**"). SFAS 155 allows financial
        instruments that contain an embedded derivative and that otherwise wold require
        bifurcation to be accounted for as a whole on a fair value basis, at the
        holder's election. SFAS 155 also clarifies and amends certain other provisions
        of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial
        instruments acquired or issued in fiscal years beginning after September
        15,
        2006. We do not expect SFAS 155 to have a material impact on our consolidated
        financial statements.
  In
        November 2004, the FASB issued SFAS No.
        151, *Inventory
        Costs - an amendment of ARB No. 43* (“ **SFAS
        151** ”). 
        SFAS 151 was one of a number of projects by the FASB to converge U.S. accounting
        standards to International Accounting Standards.  SFAS 151 requires
        abnormal amounts of idle facility expenses, freight, handling costs and spoilage
        to be recognized as current period charges.  In addition, the allocation of
        fixed manufacturing overhead costs to the costs of conversion is required
        to be
        based on the normal capacity of the manufacturing facilities. SFAS 151 will
        be
        effective for inventory costs incurred during fiscal years beginning after
        June 15, 2005. We
        adopted SFAS 151 on January 1, 2006. Adoption of this standard did
        not have a
        material impact on our consolidated financial position, results of operations
        or
        cash flows as our existing inventory and conversion cost methodologies are generally consistent with
        that
        required by the new standard.
  **Operating
        Results**
  ***Year
        Ended December 31, 2006 Compared to Year Ended December 31,
        2005***
  *Revenues* .
        Total
        revenues increased by $14.5 million or 31% to $60.8 million in 2006 from
        $46.3
        million in 2005. The increase in revenues resulted from increases in industrial
        services segment revenue of $7.5 million or 25%, electrical contracting segment
        revenues of $3.7 million or 36%, and diesel engine components segment of
        $3.3
        million or 53%.
  The
        increase in industrial services segment revenue resulted from an increase
        in
        service revenue during 2006 to $28.8 million, which was $7.4 million or 35%
        higher than service revenue of $21.4 million during 2005, and to a small
        increase in product sales during 2006 to $8.4 million, which was $0.1 million
        or
        1% higher than product sales of $8.3 million during 2005. The acquisition
        of
        Smith Alabama accounted for $3.4 million of the $7.4 million increase in
        service
        revenues.
  The
        increase in electrical contracting segment revenues during 2006 resulted
        primarily from market penetration facilitated by increasing name recognition
        and
        a strong local construction market.
   24
  The
        increase in diesel engine component segment revenues during 2006 was due
        to the
        full year impact in 2006 compared to only 10 months sales in 2005, and the
        increase in market share, resulting primarily from the increase in business
        with
        one major customer.
  To
        continue to grow our business segments at historical rates, we believe we
        must
        continue to make strategic business acquisitions. We make no assurance, however,
        that we will be able to identify, acquire and successfully integrate additional
        companies to achieve such growth. In 2007 and thereafter, we expect our rates
        of
        revenue growth from existing operations in our electrical contracting and
        diesel
        engine component segments to slow relative to historical rates in light of
        our
        current market penetration and geographic markets.
  *Cost
        of Revenues* .
        Total
        cost of revenues in 2006 was $48.9 million or 80% of total revenues compared
        to
        $37.1 million or 80% of total revenues in 2005. The increase of $11.8 million
        in
        cost of revenues was due primarily to the overall increase in our total
        revenue.
  *Gross
        Profit.* Total
        gross profit in 2006 was $11.9 million or 20% of total revenues compared
        to $9.2
        million or 20% of total revenues in 2005. The increase of $2.7 million was
        due
        to increased revenues. Gross profit as a percentage of total revenue is expected
        to increase as industrial services segment revenues and diesel engine component
        segment revenues increase and capacity utilization increases. However, gross
        profit, as a percentage of revenue, could increase or decrease if the sales
        mix
        between segments changes or if sales decline unexpectedly.
  *Selling,
        General and Administrative Expenses* .
        Selling, general and administrative expenses increased to $10.6 million in
        2006
        from $9.7 million in 2005. Selling expenses increased 17% to $3.4 million
        in
        2006 from $2.9 million in 2005 primarily due to higher commissions and travel
        and entertainment required to support the growth in total revenues. Selling
        expenses were 5.5% and 6.2% of total revenues in 2006 and 2005, respectively.
        General and administrative expenses increased 7% to $7.3 million in 2006
        from
        $6.8 million in 2005, primarily due to **** higher
        salaries and benefits, offset in part by lower travel expenses and professional
        fees. General and administrative expenses were 12% and 15% of total revenues
        for
        2006 and 2005, respectively. While general and administrative expenses may
        decline as a percentage of total revenues if we continue to increase sales
        from
        internal growth and acquisitions, general and administrative expenses should
        continue to increase with such sales growth. Further, general and administrative
        expenses should increase due to costs associated with being a public company
        under federal securities laws. We expect to be able to pay for these increased
        expenses with proceeds from our senior credit facility and improving our
        operating results by reducing inventory and increasing the rate at which
        we
        collect our accounts receivable.
  *Loss
        on Warrant Liability* .
        In
        accordance with EITF 00-19 and EITF 05-4, we incurred a loss on warrant
        liability of $0.5 million in 2006, related to the issuance of warrants as
        part
        of the Laurus financings in August 2005 and May 2006, which we further describe
        below under “Liquidity and Capital Resources.”
  *Interest
        Expense and Other Income* .
        Interest expense decreased in 2006 to $3.4 million from $6.7 million in 2005.
        Interest on principal debt increased to $1.2 million in 2006 from $0.7 million
        in 2005 due to higher outstanding balances and interest rates. Amortization
        of
        debt issue costs were $1.5 million in 2006 compared to $1.0 million in 2005.
        Amortization of debt discount costs on debentures and senior revolving debt
        was
        $0.7 million in 2006 compared to $0.5 million in 2005. The balance of interest
        expense in 2005 included interest related to the issuance of a conversion
        option
        of $4.5 million.
   25
  *Provision
        for Income Taxes* .
        We have
        experienced net operating losses in each year since we commenced operations.
        We
        are uncertain as to whether we will be able to utilize these tax losses before
        they expire. Accordingly, we have provided a valuation allowance for the
        income
        tax benefits associated with these net future tax assets which primarily
        relates
        to cumulative net operating losses, until such time profitability is reasonably
        assured and it becomes more likely than not that we will be able to utilize
        such
        tax benefits.
  *Net
        Loss.* Net loss
        was $2.7 million and $7.2 million in 2006 and 2005, respectively. The decrease
        in the net loss of $4.5 million was due primarily to higher gross profit
        on
        higher sales and lower interest expense, partially offset by higher selling,
        general and administrative expenses and the loss on warrant liability.
  ***Year
        Ended December 31, 2005 Compared to Year Ended December 31,
        2004***
  *Revenues* .
        Total
        revenues increased by $17.4 million or 60% to $46.3 million in 2005 from
        $28.9
        million in 2004. The increase in revenues resulted from increases in industrial
        services segment revenue of $4.3 million or 17% and electrical contracting
        segment revenues of $6.8 million or 194%. The remainder of the increase in
        revenues resulted from the diesel engine components segment of $6.3 million,
        acquired in March 2005.
  The
        increase in industrial services segment revenue resulted from an increase
        in
        product sales during 2005 to $8.3 million, which was $1.5 million or 22%
        higher
        than product sales of $6.8 million during 2004, and to an increase in service
        revenue during 2005 to $21.4 million, which was $2.8 million or 15% higher
        than
        service revenue of $18.6 million during 2004.
  The
        increase in electrical contracting segment revenues during 2005 resulted
        primarily from market penetration facilitated by increasing name recognition
        and
        a strong local construction market.
  *Cost
        of Revenues* .
        Total
        cost of revenues in 2005 was $37.1 million or 80% of total revenues compared
        to
        $22.7 million or 79% of total revenues in 2004. The increase of $14.4 million
        in
        cost of revenues was due primarily to the overall increase in our total
        revenue.
  *Gross
        Profit.* Total
        gross profit in 2005 was $9.2 million or 20% of total revenues compared to
        $6.2
        million or 21% of total revenues in 2004. The increase of $3 million was
        due to
        increased revenues. The decrease in gross profit as a percentage of total
        revenues was due to the increase in electrical contracting sales.
  *Selling,
        General and Administrative Expenses* .
        Selling, general and administrative expenses increased to $9.7 million in
        2005
        from $6.2 million in 2004. Selling expenses increased 45% to $2.9 million
        in
        2005 from $2.0 million in 2004 primarily due to higher salaries, benefits,
        commissions and travel and entertainment required to support the growth in
        total
        revenues. Selling expenses were 6% and 7% of total revenues in 2005 and 2004,
        respectively. General and administrative expenses increased 58% to $6.8 million
        in 2005 from $4.3 million in 2004, primarily due to higher salaries, benefits,
        travel and bad debt expenses. Professional fees also increased due to costs
        associated with becoming a public company under federal securities laws.
        General
        and administrative expenses were 15% of total revenues for 2005 and 2004,
        respectively.
  *Interest
          Expense and Other Income* .
          Interest expense increased in 2005 to $6.7 million from $0.2 million in
          2004.
          Interest on principal debt increased to $0.7 million from $0.2 million
          due to
          higher outstanding balances and interest rates. The balance of interest
          expense
          included interest related to the issuance of a conversion option of $4.5
          million, amortization of debt issue costs of $1.0 million and debt discount
          costs on debentures and senior revolving debt of $0.5 million.
  26
  *Provision
        for Income Taxes* .
        We have
        experienced net operating losses in each year since we commenced operations.
        Because we were uncertain as to whether we would be able to utilize these
        tax
        losses before they expire, we determined to provide 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 $7.2 million and $0.2 million in 2005 and 2004, respectively. The increase
        in the net loss was due primarily to slightly lower gross profit as a percent
        of
        sales, higher professional fees associated with becoming a public company
        under
        federal securities laws, and higher interest expense.
  **Liquidity
        and Capital Resources for the** **Years
        Ended December 31, 2006 and 2005**
  At
        December 31, 2006 we had $0.3 million of cash and approximately $4.1 million
        of
        working capital. Working capital decreased $1.9 million from approximately
        $6.0
        million at December 31, 2005.
  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 and underutilized operating capacity and costs incurred to build
        a
        corporate infrastructure sufficient to support increasing sales from existing
        operations and acquisitions for the foreseeable future. We funded these
        accumulated operating losses, increases in working capital, contractual
        obligations, acquisitions and capital expenditures with investments and advances
        from our majority stockholder ($7.2 million), a private debt offering ($4.0
        million), private equity offerings ($2.7 million), trade credit and bank
        loans.
  Our
        net
        loss for the year ended December 31, 2006 of $2.7 million included non-cash
        expenditures of depreciation and amortization of $0.9 million, loss on warrant
        liability of $0.5 million and amortization related to debt issue and debt
        discount costs of $2.2 million.
  Net
        cash
        provided by operating activities was $0.5 million for the year ended December
        31, 2006 compared to net cash utilized in operating activities of $4.6 million
        in 2005. In 2006, net cash provided from earnings before interest, taxes,
        depreciation and amortization of approximately $1.6 million was reduced by
        increases in other working capital accounts. Accounts receivable and prepaid
        expenses and other current assets increased $3.7 million and $0.2 million,
        respectively, while inventory decreased $1.0 million and accounts payable
        and
        accrued expenses increased $1.5 million and $0.8 million, respectively. Accounts
        receivable increased due to higher sales and a slowdown in collections at
        year
        end. Inventory declined, despite higher sales, as a result of improved inventory
        turnover. In 2005, net cash used in operating activities was due primarily
        to
        increases in accounts receivable and inventories of $3.7 million and $3.0
        million, respectively, due primarily to the increase in sales activity. Accounts
        receivable and inventory may increase if sales increase. Several of our trade
        accounts payable have extended beyond the terms allowed by the applicable
        vendors. As a result, certain vendors have placed us on credit hold or cash
        in
        advance which has resulted in delays in receipt of necessary materials and
        parts. Disruptions of this nature have resulted in delayed shipments to our
        customers. We do not believe that these delays have resulted in the loss
        of any
        material amount of sales orders, although future delays might have an adverse
        affect on our business.
  In
          2006,
          we acquired certain assets from E.T. Smith Services, Inc. for $3.6 million
          and
          we also acquired machinery and equipment of $0.4 million. In 2005, we acquired
          certain assets from Hatch & Kirk, Inc. for $2.6 million and machinery and
          equipment of $0.9 million.
  27
  We
        generated $3.7 million from financing activities in 2006 primarily from the
        Laurus financing of $3.4 million for the acquisition in May 2006. We generated
        approximately $7.9 million from financing activities in 2005 primarily from
        the
        issuance of convertible, subordinated debentures of approximately $4.0 million,
        and the refinancing of our bank line of credit of $5.5 million from MFB
        Financial with advances of $7.8 million under our senior credit facility
        with
        Laurus Master Fund, Ltd., also described below.
  We
        are
        undertaking various activities to improve our future cash flows. These
        activities include efforts to collect accounts receivable at a faster rate
        and
        to decrease inventory levels by improving controls over purchasing and more
        aggressive selling efforts. In that regard, we do not expect our accounts
        receivable to become more difficult or unlikely to collect, and we feel our
        inventory levels are consistent with anticipated future sales and not
        excessive.
  From
        March through May of 2005, we issued $4.0 million aggregate principal amount
        of
        subordinated convertible debentures. The debentures originally were scheduled
        to
        mature on February 28, 2007; however, in April 2006, the debenture holders
        agreed to extend the maturity date to February 28, 2008. The debentures bear
        interest at a fixed annual rate of 6%, payable in cash upon redemption or
        at
        maturity if the holders do not elect to convert their debentures. Each debenture
        holder has the option to convert principal and accrued interest under the
        debentures into shares of our common stock at a fixed conversion price of
        $0.3404926 per share, subject to certain anti-dilution adjustments. As of
        December 31, 2006, no debenture holder has elected to convert principal and
        accrued interest. To the extent that any debenture holder elects to convert
        principal and accrued interest into common stock, our obligation to repay
        the
        principal and accrued interest at maturity decreases accordingly.
  Between
        January 1, 2007 and March 21, 2007, debenture holders have converted
        approximately $1 million of the subordinated debt. However, absent further
        exercise of the right of the debenture holders to convert out indebtedness
        into
        shares of our common stock, we will be obligated to make principal and accrued
        interest payments totaling approximately $3.5 million on February 28, 2008.
        We
        are uncertain whether we will generate sufficient funds from operations to
        make
        that entire payment. If not, then absent exercise of the debenture holders’
conversion rights, we will have to refinance this indebtedness at its maturity
        or otherwise raise additional capital through debt or equity financing to
        pay
        off the indebtedness. There is no assurance that we will successfully refinance
        the indebtedness or secure such other financing on terms acceptable to us,
        or at
        all. If we are not successful, we would default under the
        debentures.
  If
        we
        default under the debentures, all unpaid amounts will accrue interest at
        a rate
        of 15% per year from the date of default until paid. Other remedies available
        to
        the debenture holders upon an event of default include the right to accelerate
        the maturity of all obligations, the right to foreclose on our assets securing
        the obligations, all rights of a secured creditor under applicable law, and
        other rights set forth in the debenture documents. As of December 31, 2006,
        these remedies were subject to and subordinate in right to the rights of
        our
        senior secured lender. The events of default under the debenture documents
        include failure to pay principal and interest when due, breach of any covenant
        under the debenture documents that continues unremedied for 10 days, certain
        events relating to bankruptcy, default under other indebtedness in a principal
        amount exceeding $200,000, a judgment in excess of $50,000 is levied against
        our
        assets, and other events described in the debenture documents.
  The
        debentures contain restrictions on our ability to incur more indebtedness
        (other
        than trade debt), whether secured or unsecured, to redeem our capital stock,
        to
        issue preferred stock, and to pay dividends on any of our capital
        stock.
  In
          August
          2005, we entered into a $10.0 million credit facility with Laurus Master
          Fund,
          Ltd. 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.
  28
  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
        375,000 shares of our common stock with an exercise price of $0.01 per
        share.
  The
        provisions of the $7 million and $1.6 million revolving notes included a
        lock-box agreement and also allowed Laurus, in its reasonable credit judgment,
        to assess additional reserves against, or reduce the advance rate against
        accounts receivable used in the borrowing base calculation. These provisions
        satisfy the requirements for consideration of EITF Issue No. 95-22, *Balance
        Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
        that include both a Subjective Acceleration Clause and a Lock-Box
        Arrangement* .
        Based
        on further analysis of the terms of the revolving note, there were certain
        provisions that could potentially be interpreted as a subjective acceleration
        clause. More specifically, Laurus, in its reasonable credit judgment, could
        have
        assessed additional reserves to the borrowing base calculation or reduced
        the
        advance rate against accounts receivable to account for changes in the nature
        of
        our business that altered the underlying value of the collateral. The reserve
        requirements could have resulted in an over-advance borrowing position that
        could have required an accelerated repayment of the over-advance portion.
        Since
        the inception of this revolving note facility, Laurus did not apply any
        additional reserves to the borrowing base calculation. We did not anticipate
        any
        changes in our business practices that would have resulted in any material
        adjustments to the borrowing base calculation. However, due to the uncertainty
        related to Laurus’s ability to assess additional reserves to the borrowing base
        calculation, we classified borrowings under the revolving note facilities
        as
        short-term obligations.
  In
        June
        2005, the Emerging Issues Task Force released EITF Issue No. 05-4. EITF 05-4
        addresses financial instruments, such as convertible notes and stock purchase
        warrants, which are accounted for under EITF 00-19 that may be issued at
        the
        same time and in contemplation of a registration rights agreement that includes
        a liquidated damages clause. EITF 05-4 specifically provides guidance to
        issuers
        as to how to account for registration rights agreements that require an issuer
        to use its "best efforts" to file a registration statement for the resale
        of
        equity instruments and have it declared effective by the end of a specified
        grace period and, if applicable, maintain the effectiveness of the registration
        statement for a period of time or pay a liquidated damage penalty to the
        investor.
   29
  Under
        our
        registration rights agreement with Laurus, if our common stock is not traded
        on
        the OTC Bulletin Board, Nasdaq or a national exchange for three consecutive
        trading days and trading does not resume within 30 days, then, subject to
        certain exceptions, for each day that any of those events is occurring, we
        are
        required to pay Laurus an amount in cash equal to 1/30th of the product of
        the
        outstanding principal amount owed to Laurus, multiplied by 0.01 (or
        approximately 1% per month). In addition, the embedded conversion rights
        under
        our prior senior secured facility with Laurus may have been considered
        non-conventional under the guidance of paragraph 4 of EITF No. 00-19 because,
        subject to certain exceptions, the conversion price of the notes issued to
        Laurus could have been adjusted. As a result, warrants issued in conjunction
        with the Laurus financing were accounted for under EITF Issue No. 00-19
*Accounting for Derivative Financial Instruments Index to, and Potentially
        Settled in, a Company’s Own Stock* and View A of EITF
        No.**05-4*.*Due to the liquidated damage provision in
        the registration rights agreements, we determined that the warrants were
        derivative liabilities. In December 2006, we adopted the accounting prescribed
        under Staff Position EITF 00-19-2, *Accounting for Registration Payment
        Arrangements,* which
        resulted in the derivative liabilities being reclassified to
        equity.
  Following
        is a summary of fixed payments related to certain contractual obligations
        as of
        December 31, 2006 (amounts in thousands):
  **Payments
                  due by period**Contractual
                  Obligations
              Total
              
              Less
                  than
                1
                  year
              
              1-3
                  years
              
              3-5
                  years
              
              More
                  than
                5
                  yearsLong-Term
                  Debt
              $
              18,072
              
              $
              9,019
              
              $
              9,053
              
              $
              -
              
              $
              -Lease
                  Obligations
              
              3,927
              
              
              927
              
              
              1,665
              
              
              950
              
              
              385Total
              $
              21,999
              
              $
              9,946
              
              $
              10,718
              
              $
              950
              
              $
              385
 
 On
        January 18, 2007 we sold 50,000,000 shares of common stock to Tontine Capital
        Management L.L.C. and 12,500,000 shares of common stock to Tontine Capital
        Overseas G.P. L.L.C. for $0.20 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 will use 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 will use
        borrowings under the note for capital expenditures and working capital purposes.
        Interest is payable monthly at 1⁄2% over prime as published in the Wall Street
        Journal. The facility contains annual financial covenants, including minimum
        tangible net worth, current ratio and debt coverage ratio, and maximum debt
        to
        equity ratio. An event of default under the facility will occur if , among
        other
        things, we fail to make a required payment on time or when due, we fail to
        keep
        the secured property insured, we default under any other agreements we have
        with
        MFB Financial, we are involved in any legal proceeding by a creditor for
        the
        collection of debt, we become insolvent, or make any misrepresentation in
        financial information we provide to MFB Financial, or we do or fail to do
        something that causes MFB Financial to believe that it will have difficulty
        collecting the debt.
  We
        believe that our existing working capital, cash provided by operations and
        our
        existing revolving credit facility with MFB Financial, under which we had
        all $5
        million available as of March 23, 2007, should be sufficient to fund our
        working
        capital needs, capital requirements and contractual obligations for at least
        the
        next 12 months. We also believe that we will be able to improve relationships
        with our vendors and ensure a more steady supply of parts and materials.
        We will
        need, however, to raise additional debt or equity capital to fund any future
        business acquisitions. As of December 31, 2006, we did not have any material
        commitments for capital expenditures.
  30
 Our
        future working capital needs and capital-expenditure requirements will depend
        on
        many factors, including our rate of revenue growth, the rate and size of
        future
        business acquisitions, the expansion of our marketing and sales activities,
        and
        the rate of development of new products and services. To the extent that
        funds
        from the sources described above are not sufficient to finance our future
        activities, we will need to improve future cash flows and/or raise additional
        capital through debt or equity financing or by entering into strategic
        relationships or making other arrangements. Any effort to improve cash flows,
        whether by increasing sales, reducing operating costs, collecting accounts
        receivable at a faster rate, reducing inventory and other means, may not
        be
        successful. Further, any additional capital we seek to raise might not be
        available on terms acceptable to us, or at all.
  **** **Off-Balance
        Sheet Transactions**
  As
        of
        December 31, 2006, 2005 and 2004, 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, including those described
        in
        Item 1A, “Risk Factors,” that may cause our actual results to differ materially
        from those anticipated or implied in the forward-looking
        statements.
  31
  **ITEM
        7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
        RISK**
  We
        are
        exposed to interest rate market risk with respect to our debt. Our total
        debt as
        of December 31, 2006, had a carrying value of approximately $17.4 million
        and a
        fair value of approximately $20.6 million. As of December 31, 2006, 77% of
        our
        total debt was subject to variable interest rates. As of December 31, 2006
        the
        weighted-average interest rate of our debt was approximately 8.2%. To the
        extent
        that we refinance our existing debt or incur additional debt outside of our
        currently existing arrangements, we will be subject to additional interest
        rate
        market risk, which could be substantial.
  Our
        exposure to interest rate market risk with respect to cash is limited because
        our cash balances are maintained in a bank deposit account.
  We
        are
        exposed to credit risk. Credit risk relates to the risk of loss resulting
        from
        the nonperformance by a customer of its contractual obligations. Our exposure
        generally relates to receivables and unbilled revenue for services provided.
        We
        maintain credit policies intended to minimize credit risk and actively monitor
        these policies.
  Our
        exposure to foreign currency exchange rate risk is limited because substantially
        all of our transactions are conducted in United States dollars, and we do
        not
        believe that a change in any exchange rate of 10% would have a material impact
        on our consolidated results of operations or cash flows.
   32
 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, 2006 and 2005, and the related
          consolidated statements of operations, stockholders’ equity and cash flows for
          each of the three years in the period ended December 31, 2006. These
          consolidated financial statements are the responsibility of the Company’s
          management. 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, 2006 and 2005, and the consolidated
          results of its operations and its cash flows for each of the three years
          in the
          period ended December 31, 2006 in conformity with accounting principles
          generally accepted in the United States of America. Also, in our opinion,
          the
          financial statement schedule, when considered in relation to the basic
          consolidated financial statements taken as a whole, presents fairly, in
          all
          material respects, the information set forth therein.
  
      ASHER
          & COMPANY, Ltd.
  
  **Philadelphia,
          Pennsylvania**
 **March
          29, 2007**
   33
 **ITEM****8.**
              **FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA**
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(Amounts
        in thousands, except share and per share data)**
 December
                    31,2006
                
                2005**ASSETS**CURRENT
                    ASSETSCash
                
                $
                297
                
                $
                23Accounts
                    receivable, net of allowance for doubtful accounts of $428 for
                    2006 and
                    $341 for 2005
                
                
                13,275
                
                
                8,677Inventories,
                    net
                
                
                7,640
                
                
                8,415Prepaid
                    expenses
                
                
                204
                
                
                315Other
                    current assets
                
                
                1,022
                
                
                735Total
                    current assets
                
                
                22,438
                
                
                18,165PROPERTY
                    AND EQUIPMENT, net
                
                
                6,320
                
                
                4,110OTHER
                    ASSETSDeposits
                
                
                90
                
                
                89Debt
                    issue costs, net
                
                
                2,017
                
                
                3,354Other
                    intangibles, net
                
                
                2
                
                
                3Total
                    other assets
                
                
                2,109
                
                
                3,446**Total
                    Assets**
                
                $
                30,867
                
                $
                25,721**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**CURRENT
                    LIABILITIESRevolving
                    credit line (net of discount of $438 in 2006 and $885 in
                    2005)
                
                $
                6,500
                
                $
                3,961Current
                    portion of long term debt
                
                
                2,081
                
                
                1,024Accounts
                    payable
                
                
                7,237
                
                
                5,356Accrued
                    expenses
                
                
                2,152
                
                
                1,604Other
                    current liabilities
                
                
                380
                
                
                167Total
                    current liabilities
                
                
                18,350
                
                
                12,112LONG
                    TERM LIABILITIESLong-term
                    debt, (net of discount of $229 in 2006 and $484 in 2005)
                
                
                5,824
                
                
                5,603Long-term
                    debt, Stockholder
                
                
                3,000
                
                
                3,000Total
                    long term liabilities
                
                
                8,824
                
                
                8,603Total
                    liabilities
                
                
                27,174
                
                
                20,715Commitments
                    and contingenciesSTOCKHOLDERS'
                    EQUITYMISCOR
                    Preferred stock, no par value; 20,000,000 shares authorized;
                    no shares
                    issued and outstanding
                
                
                -
                
                
                -MISCOR
                    Common stock, no par value; 300,000,000 shares authorized;issued
                    and
                    outstanding 117,285,272 shares at December 31, 2006 and 104,608,962
                    at
                    December 31, 2005
                
                
                8,459
                
                
                7,659Additional
                    paid in capital
                
                
                8,961
                
                
                8,840Deferred
                    compensation
                
                
                (47
                )
                
                (57
                )Accumulated
                    deficit
                
                
                (13,680
                )
                
                (11,436
                )Total
                    stockholders' equity
                
                
                3,693
                
                
                5,006**Total
                    Liabilities and Stockholders' Equity**
                
                $
                30,867
                
                $
                25,721
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  34
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(Amounts
        in thousands, except share and per share data)**
 
 Years
                    Ended December 31,2006
                
                2005
                
                2004**REVENUES**Product sales
                
                $
                18,083
                
                $
                14,587
                
                $
                6,763Service revenue
                
                
                42,671
                
                
                31,709
                
                
                22,134Total revenues
                
                
                60,754
                
                
                46,296
                
                
                28,897**COST
                    OF REVENUES**Product sales
                
                
                13,891
                
                
                11,131
                
                
                4,769Service revenue
                
                
                34,984
                
                
                26,009
                
                
                17,931Total cost of revenues
                
                
                48,875
                
                
                37,140
                
                
                22,700Gross
                    profit
                
                
                11,879
                
                
                9,156
                
                
                6,197Selling,
                    general and administrative expenses
                
                
                10,632
                
                
                9,672
                
                
                6,215Income
                    (loss) from operations
                
                
                1,247
                
                
                (516
                )
                
                (18
                )Other
                    income (expense)Loss on warrant liability
                
                
                (508
                )
                
                -
                
                
                -Interest expense
                
                
                (3,404
                )
                
                (6,711
                )
                
                (183
                )Other income
                
                
                4
                
                
                31
                
                
                12(3,908
                )
                
                (6,680
                )
                
                (171
                )**NET LOSS**
                
                $
                (2,661
                )
                $
                (7,196
                )
                $
                (189
                )Basic
                    and diluted loss per common share
                
                $
                (0.02
                )
                $
                (0.07
                )
                $
                (0.00
                )Weighted
                    average number of common shares
                
                
                109,264,264
                
                
                99,417,698
                
                
                84,017,315
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  35
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY**
 **(Amounts
        in thousands, except share and per share data)**
 **MIS**
                      
                      **MISCOR****Additional**
                      
                      
                      
                      
                      
                      **Additional****Common**
                      
                      **Paid-in-**
                      
                      
                      
                      **Common**
                      
                      **Paid-in-**
                      
                      **Deferred**
                      
                      **Accumulated****Shares**
                      
                      **Stock**
                      
                      **Capital**
                      
                      **Shares**
                      
                      **Stock**
                      
                      **Capital**
                      
                      **Compensation**
                      
                      **Deficit**
                      
                      **Total**Balances,
                          December 31, 2003
                      
                      
                      1,000
                      
                      $
                      1,000
                      
                      $
                      3,254
                      
                      
                      -
                      
                      $
                      -
                      
                      $
                      -
                      
                      $
                      -
                      
                      $
                      (4,051
                      )
                      $
                      203Exchange
                          of common stock of MIS for common stock of MISCOR
                      
                      
                      (1,000
                      )
                      
                      (1,000
                      )
                      
                      (3,254
                      )
                      
                      79,450,000
                      
                      
                      4,254
                      
                      
                      -
                      
                      
                      -
                      
                      
                      
                      
                      
                      -Sale
                          of common stock of MISCOR, net of issuance costs of $548
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      12,750,000
                      
                      
                      2,001
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,001Conversion
                          of MIS Series A preferred stock to common stock of MISCOR,
                          net of issuance
                          of MISCOR, net of issuance costs of $75
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,750,006
                      
                      
                      675
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      675Issuance
                          of MISCOR common stock in consideration for services rendered
                          in
                          connection with sale of common stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      50,000
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Issuance
                          of warrants to purchase stock in consideration for services
                          rendered in
                          connection with sale of common stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (900
                      )
                      
                      900
                      
                      
                      
                      
                      
                      
                      
                      
                      -Net
                          loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      (189
                      )
                      
                      (189
                      )Balances,
                          December 31, 2004
                      
                      
                      -
                      
                      $
                      -
                      
                      $
                      -
                      
                      
                      97,000,006
                      
                      
                      6,030
                      
                      
                      900
                      
                      
                      -
                      
                      
                      (4,240
                      )
                      
                      2,690Issuance
                          of warrants to purchase 10,438,593shares of MISCOR common
                          stock in
                          connection with sale of debentures
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,382
                      
                      
                      
                      
                      
                      
                      
                      
                      2,382Intrinsic
                          value of conversion option on long-term debt, stockholder
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,500
                      
                      
                      
                      
                      
                      
                      
                      
                      4,500Intrinsic
                          value of conversion option on on long-term debt financing
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      996
                      
                      
                      
                      
                      
                      
                      
                      
                      996Issuance
                          of MISCOR common stock in consideration for services rendered
                          in
                          connection with sale of debentures
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      50,000
                      
                      
                      12
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      12Issuance
                          of MISCOR common stock in connection with business acquisition
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      280,000
                      
                      
                      75
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      75Issuance
                          of MISCOR common stock in connection with long-term debt
                          financing
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      6,163,588
                      
                      
                      1,541
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,541Issuance
                          of MISCOR common stock in connection exercise of stock
                          warrants
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      865,368
                      
                      
                      1
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1Issuance
                          of MISCOR common stock in connection with 2005 Restricted
                          Stock
                          Plan
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      250,000
                      
                      
                      
                      
                      
                      62
                      
                      
                      (62
                      )
                      
                      
                      
                      
                      -Amortization
                          of deferred compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5
                      
                      
                      
                      
                      
                      5Net
                          loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (7,196
                      )
                      
                      (7,196
                      )Balances,
                          December 31, 2005
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      104,608,962
                      
                      $
                      7,659
                      
                      $
                      8,840
                      
                      $
                      (57
                      )
                      $
                      (11,436
                      )
                      $
                      5,006Issuance
                          of MISCOR common stock in connection exercise of stock
                          warrants
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,539,898
                      
                      
                      8
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8Issuance
                          of MISCOR common stock in connection exercise of stock
                          options
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      250,000
                      
                      
                      63
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      63Conversion
                          of Senior debt into MISCOR common stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,836,412
                      
                      
                      729
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      729Issuance
                          of MISCOR common stock in connection with 2005 Restricted
                          Stock
                          Plan
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      50,000
                      
                      
                      
                      
                      
                      12
                      
                      
                      (12
                      )
                      
                      
                      
                      
                      -Amortization
                          of deferred compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      22
                      
                      
                      
                      
                      
                      22Stock
                          based compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      18
                      
                      
                      
                      
                      
                      
                      
                      
                      18Reclassify
                          warrant liability to equity per adoption of FSP EITF
                          00-19-2
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      91
                      
                      
                      
                      
                      
                      417
                      
                      
                      508Net
                          loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,661
                      )
                      
                      (2,661
                      )117,285,272
                      
                      $
                      8,459
                      
                      $
                      8,961
                      
                      $
                      (47
                      )
                      $
                      (13,680
                      )
                      $
                      3,693
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  36
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(Amounts
        in thousands, except share and per share data)**
 
 Years
                      ended December 31,2006
                  
                  2005
                  
                  2004OPERATING
                      ACTIVITIESNet
                      loss
                  
                  $
                  (2,661
                  )
                  $
                  (7,196
                  )
                  $
                  (189
                  )Adjustments
                      to reconcile net loss to net cash provided by (utilized in)
                      operating
                      activities:Fair
                      value of warrant liability
                  
                  
                  508
                  
                  
                  -
                  
                  
                  -Depreciation
                      and amortization
                  
                  
                  862
                  
                  
                  695
                  
                  
                  451Bad
                      debts
                  
                  
                  251
                  
                  
                  238
                  
                  
                  128Inventory
                      reserve
                  
                  
                  195
                  
                  
                  88
                  
                  
                  -Loss
                      (gain) on sale of assets
                  
                  
                  1
                  
                  
                  (9
                  )
                  
                  (2
                  )Amortization
                      of stock-based compensation plans
                  
                  
                  40
                  
                  
                  5
                  
                  
                  -Amortization
                      of debt issuance costs and debt discount
                  
                  
                  2,195
                  
                  
                  1,507
                  
                  
                  -Interest
                      related to conversion options
                  
                  
                  -
                  
                  
                  4,500
                  
                  
                  -Changes
                      in:Accounts
                      receivable
                  
                  
                  (3,733
                  )
                  
                  (3,661
                  )
                  
                  (2,218
                  )Inventories
                  
                  
                  804
                  
                  
                  (3,042
                  )
                  
                  (1,515
                  )Prepaid
                      expenses and other current assets
                  
                  
                  (176
                  )
                  
                  (572
                  )
                  
                  (285
                  )Deposits
                      and other non-current assets
                  
                  
                  (1
                  )
                  
                  20
                  
                  
                  (26
                  )Accounts
                      payable
                  
                  
                  1,497
                  
                  
                  2,198
                  
                  
                  1,190Accrued
                      expenses and other current liabilities
                  
                  
                  761
                  
                  
                  677
                  
                  
                  432Net
                      cash provided by (utilized in) operating activities
                  
                  
                  543
                  
                  
                  (4,552
                  )
                  
                  (2,034
                  )INVESTING
                      ACTIVITIESAcquisition
                      of business assets
                  
                  
                  (3,569
                  )
                  
                  (2,575
                  )
                  
                  -Acquisition
                      of property and equipment
                  
                  
                  (449
                  )
                  
                  (916
                  )
                  
                  (930
                  )Proceeds
                      from disposal of property and equipment
                  
                  
                  11
                  
                  
                  20
                  
                  
                  2Net
                      cash utilized in investing activities
                  
                  
                  (4,007
                  )
                  
                  (3,471
                  )
                  
                  (928
                  )FINANCING
                      ACTIVITIESCash
                      overdraft
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (477
                  )Short
                      term borrowings, net
                  
                  
                  -
                  
                  
                  (2,509
                  )
                  
                  1,063Payments
                      on capital lease obligations
                  
                  
                  (18
                  )
                  
                  (6
                  )
                  
                  -Proceeds
                      from the issuance of shares and exercise of warrants
                  
                  
                  8
                  
                  
                  1
                  
                  
                  -Advances
                      (Repayments) from (to) Stockholder
                  
                  
                  -
                  
                  
                  (122
                  )
                  
                  102Repayment
                      of long term debt, bank
                  
                  
                  (1,080
                  )
                  
                  -
                  
                  
                  (300
                  )Proceeds
                      from the issuance of debentures
                  
                  
                  -
                  
                  
                  4,025
                  
                  
                  -Debt
                      issuance costs - debentures
                  
                  
                  -
                  
                  
                  (536
                  )
                  
                  -Proceeds
                      from the issuance of term note
                  
                  
                  2,100
                  
                  
                  3,000
                  
                  
                  -Proceeds
                      from the issuance of revolving note, net
                  
                  
                  2,821
                  
                  
                  4,846
                  
                  
                  -Debt
                      issuance costs - term and revolving notes
                  
                  
                  (156
                  )
                  
                  (762
                  )
                  
                  -Proceeds
                      from sale of common stock
                  
                  
                  63
                  
                  
                  -
                  
                  
                  3,300Payment
                      of stock issuance costs
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (624
                  )Net
                      cash provided by financing activities
                  
                  
                  3,738
                  
                  
                  7,937
                  
                  
                  3,064**INCREASE
                      (DECREASE) IN CASH**
                  
                  
                  274
                  
                  
                  (86
                  )
                  
                  102Cash,
                      beginning of year
                  
                  
                  23
                  
                  
                  109
                  
                  
                  7Cash,
                      end of year
                  
                  $
                  297
                  
                  $
                  23
                  
                  $
                  109SUPPLEMENTAL
                      DISCLOSURES OF CASH FLOW INFORMATION:Cash
                      paid during the year for:Interest
                  
                  $
                  933
                  
                  $
                  460
                  
                  $
                  189
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  37
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
  **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  *Nature
        of business*
  Magnetech
        Integrated Services Corp. (the “Company” or “MISCOR”), an Indiana Corporation,
        was organized in April 2004 as a holding company for Magnetech Industrial
        Services, Inc. (“MIS”) and its wholly owned subsidiary Martell Electric, LLC.
        Upon the Company’s formation in April 2004, the sole stockholder of MIS
        contributed all 1,000 issued and outstanding shares of MIS common stock in
        exchange for 79,450,000 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.
  MIS,
        an
        Indiana corporation, is an industrial services company which through its
        seven
        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
        March
        2005, MISCOR acquired certain operating assets from Hatch & Kirk, Inc. and
        formed a subsidiary, HK Engine Components, LLC (“HKEC”). HKEC manufactures,
        remanufactures, repairs and engineers power assemblies, engine parts, and
        other
        components related to large diesel engines.
  In
        May
        2006, MIS acquired certain operating assets of E.T. 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.
  The
        Company’s customers are primarily located throughout the United States of
        America. The Company operates from twelve locations in Alabama, Indiana,
        Ohio,
        West Virginia, and Maryland.
  *Principles
        of consolidation*
  The
        consolidated financial statements presented through December 31, 2004 include
        the accounts of MISCOR and its wholly owned subsidiaries, MIS and Martell
        Electric, LLC. The consolidated financial statements for the year ended December
        31, 2005 also include the accounts of HKEC. The consolidated financial
        statements for the year ended December 31, 2006 also include the accounts
        of
        Magnetech of Alabama. All significant intercompany balances and transactions
        have been eliminated.
   38
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  *Concentration
        of credit risk*
  The
        Company maintains its cash primarily in bank deposit accounts. The Federal
        Deposit Insurance Corporation insures these balances up to $100 per bank.
        The
        Company has not experienced any losses on its bank deposits and management
        believes these deposits do not expose the Company to any significant credit
        risk.
  *Inventory*
  The
        Company values inventory at the lower of cost or market. Cost is determined
        by
        the first-in, first-out method. The Company periodically reviews its inventories
        and makes provisions as necessary for estimated obsolescence and excess goods.
        The amount of such markdown is equal to the difference between cost of inventory
        and the estimated market value based upon assumptions about future demands,
        selling prices and market conditions.
  *Property
        and equipment*
  Property
        and equipment are stated at cost less accumulated depreciation. Depreciation
        is
        computed over the estimated useful lives of the related assets using the
        straight-line method. Useful lives of property and equipment are as
        follows:
  Building
              30
                  yearsLeasehold
                  improvements
              Shorter
                  of lease term or useful lifeMachinery
                  and equipment
              5
                  to 10 yearsVehicles
              3
                  to 5 yearsOffice
                  and computer equipment
              3
                  to 10 years
 
 *Debt
        issue costs*
  Costs
        incurred by the Company to secure senior debt financing agreement are
        capitalized and amortized over the term of the senior debt financing agreement
        which is three years. Costs incurred by the Company to secure subordinated
        debenture financing are capitalized and amortized over the term of the
        subordinated debentures which initially was two years. However, in April
        2006,
        the debenture holders agreed to extend the maturity date one year from February
        28, 2007 to February 28, 2008. Accordingly, the balance of debt issue costs
        is
        being amortized through February 28, 2008. Amortization of debt issue costs,
        recorded as a charge to interest expense, was $1,492 and $1,044 for the years
        ended December 31, 2006 and 2005. As of December 31, 2006 and 2005, accumulated
        amortization of deferred financing fees was $2,536 and $1,044,
        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* .
   39
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  *Patents
        and trademarks*
  The
        costs
        of successful registrations for patents and trademarks are amortized over
        the
        estimated useful lives of the assets, which is generally ten years, using
        the
        straight-line method. The costs of unsuccessful registrations are charged
        to
        expense.
  *Long-lived
        assets*
  The
        Company assesses long-lived assets for impairment whenever events or changes
        in
        circumstances indicate that an asset’s carrying amount may not be
        recoverable.
  *Revenue
        recognition*
  Revenue
        consists primarily of sales and service of industrial magnets, electric motors,
        electrical power distribution systems, and power assemblies. Product sales
        revenue is recognized when products are shipped and both title and risk of
        loss
        transfer to the customer. Service revenue is recognized when all work is
        completed and the customer’s property is returned. For services to a customer’s
        property provided at the Company’s site, property is considered returned when
        the customer’s property is shipped back to the customer and risk of loss
        transfers to the customer. For service to a customer’s property provided at the
        customer’s site, property is considered returned upon completion of work. The
        Company provides for an estimate of doubtful accounts, based on specific
        identification of customer accounts deemed to be uncollectible and historical
        experience. The Company’s revenue recognition policies are in accordance with
        Staff Accounting Bulletin (“SAB”) No. 101 and SAB No. 104.
  Revenues
        from Martell Electric, LLC’s electrical contracting business are recognized on
        the percentage-of-completion method, measured by the percentage of cost incurred
        to date to estimated total costs to complete for each contract. Costs incurred
        on electrical contracts in excess of customer billings are recorded as part
        of
        other current assets. Amounts billed to customers in excess of costs incurred
        on
        electrical contracts are recorded as part of other current
        liabilities.
  *Advertising
        costs*
  Advertising
        costs are expensed when incurred, except for costs associated with
        direct-response advertising, which are capitalized and amortized over the
        expected period of future benefits. Advertising expense was $138, $105, and
        $49
        for the years ended December 31, 2006, 2005 and 2004, respectively. There
        were
        no direct-response advertising costs reported as assets at December 31, 2006,
        2005 or 2004.
  *Warranty
        costs*
  The
        Company warrants workmanship after the sale of its products. An accrual for
        warranty costs is recorded based upon the historical level of warranty claims
        and management’s estimates of future costs.
   40
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  *Income
        taxes*
  The
        Company accounts for income taxes in accordance with SFAS No. 109, *Accounting
        for Income Taxes* .
  *Stock**based
        compensation*
  In
        connection with the formation of the Company’s stock option plan in 2005, the
        Company had adopted the disclosure-only provisions of SFAS No. 123, *Accounting
        for Stock-Based Compensation* ,
        and
        used the intrinsic value method of accounting for stock-based awards granted
        to
        employees, as prescribed in Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related interpretations. No compensation expense was recognized for the
        Company’s stock option plan for the year ended December 31, 2005.
  Pro-forma
        information regarding net income is required to be presented as if the Company
        had accounted for all stock options granted under the provisions of SFAS
        No. 123. The fair value of stock options granted has been estimated, as of
        the respective dates of grant, using the Black-Scholes option-pricing model.
        The
        following assumptions were used for such estimates: no dividend yield; no
        expected volatility; risk-free interest rate of 4.18%; and a weighted average
        expected term of the options of 3.75 years. Had the accounting provisions
        of SFAS No. 123 been adopted, net loss and share data for the year
        ended December 31, 2005 would have been as follows:
  Net
                  loss:As
                  reported
              
              $
              (7,196
              )Compensation
                  cost based on the fair value method
              
              
              (1
              )Pro
                  forma net loss
              
              $
              (7,197
              )Basic
                  and diluted loss per share:As
                  reported
              
              $
              (.07
              )Pro
                  forma
              
              $
              (.07
              )
 
 In
        December 2004, the FASB issued SFAS No. 123R, *Share-Based
        Payments (revised 2004)* (“SFAS
        123R”). This statement eliminates the option to apply the intrinsic value
        measurement provisions of APB Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        to
        stock compensation awards issued to employees. Rather, the Statement requires
        companies to measure the cost of employee services received in exchange for
        an
        award of equity instruments based on the grant date fair value of the award.
        That cost will be recognized over the period during which an employee is
        required to provide services in exchange for the award - the requisite service
        period (usually the vesting period). In March 2005, the SEC staff expressed
        their views with respect to SFAS 123R in SAB No. 107, *Share-Based
        Payment* (“SAB
        107”). SAB 107 provides guidance on valuing options. SFAS 123R became effective
        for the Company's fiscal year beginning January 1, 2006. Effective
        January 1, 2006, the Company adopted SFAS 123R using the Modified Prospective
        Approach. See Note G for further detail regarding the adoption of this standard.
   41
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POL** **ICIES
        (CONTINUED)**
  *Earnings
        per share*
  The
        Company accounts for loss per common share under the provisions of SFAS No.
        128, *Loss
        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, 2006, the Company’s common stock equivalents, consisting
        of warrants to purchase 13,761,268 shares of common stock, senior and
        subordinated debt convertible into 74,803,780 common shares, and options
        to
        purchase 1,185,000 shares of common stock issued to employees under the 2005
        Stock Option Plan, were not included in computing diluted loss per share
        because
        their effects were anti-dilutive.
  For
        the
        year ended December 31, 2005, the Company’s common stock equivalents, consisting
        of warrants to purchase 21,926,166 shares of common stock, senior and
        subordinated debt convertible into 75,988,073 common shares, and options
        to
        purchase 500,000 shares of common stock issued to employees under the 2005
        Stock
        Option Plan, were not included in computing diluted loss per share because
        their
        effects were anti-dilutive. For the year ended December 31, 2004, warrants
        to
        purchase 4,500,000 shares of common stock were not included in computing
        loss
        per share because their effects were antidilutive. Basic and diluted loss
        per
        share were the same for the years ended December 31, 2005 and 2004, as there
        were no potentially dilutive securities outstanding.
  *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 Financial Accounting Standards Board (“FASB”) issued
        Interpretation No. 46 *Consolidation
        of Variable Interest Entities* (“FIN
        46”). 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.
   42
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  *Variable
        Interest Entities**,
        continued*
  The
        Company is involved with JAM Fox Investments LLC, which qualifies as a variable
        interest entity. The variable interest entity is 100% owned by the majority
        shareholder 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, 2006,
        total
        assets and liabilities of JAM Fox Investments LLC were $1,544 and $1,055,
        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, 2006.
  *New
        Accounting Standards*
  FSP
        EITF 00-19-2
  In
        December 2006, the FASB issued Staff Position EITF 00-19-2, *Accounting
        for Registration Payment Arrangements* (“FSP
        EITF 00-19-2”). FSP EITF 00-19-2 specifies that the contingent obligation to
        make future payments or otherwise transfer consideration under a registration
        payment arrangement, whether issued as a separate agreement or included as
        a
        provision of a financial instrument or other agreement, should be separately
        recognized and measured in accordance with FASB Statement No. 5, *Accounting
        for Contingencies* .
        FSP
        EITF 00-19-2 further clarifies that a financial instrument subject to a
        registration payment arrangement should be accounted for in accordance with
        applicable generally accepted accounting principles without regard to the
        contingent obligation to transfer consideration pursuant to the registration
        payment arrangement. In accordance with the provisions of FSP EITF 00-19-2,
        the
        Company has elected early adoption and has reclassified its warrant liability
        to
        equity (See Note F).
  EITF
        05-4
  Warrants
        issued in conjunction with the Senior Debt Facility were accounted for under
        the
        Emerging Issues Task Force (“EITF”) Issue No. 00-19, *Accounting
        for Derivative Financial Instruments Indexed to and Potentially Settled in
        a
        Company’s Own Stock* and
        View
        A of EITF No. 05-4 *,
        The
        Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
        Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled in, a Company’s Own Stock* . Due
        to the liquidated damage provision in the registration rights agreements
        relating to the warrants, the Company determined that the warrants were
        derivative liabilities. The Company has elected early adoption of FSP EITF
        00-19-2, which supersedes the guidance under EITF 05-4.
   43
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  *New
        Accounting Standards**,
        continued*
  SAB
        108
  In
        September 2006, the Securities and Exchange Commission issued SAB No. 108, *Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements* ("SAB
        108"). SAB 108 provides interpretive guidance on how the effects of the
        carryover or reversal of prior year misstatements should be considered in
        quantifying a current year misstatement. The pronouncement prescribes an
        approach whereby the effect of all unrecorded identified errors should be
        considered on all of the financial statements rather than just either the
        effect
        on the balance sheet or the income statement. The Company adopted the provisions
        of SAB 108 as of December 31, 2006. The adoption of SAB 108 did not have
        a
        material impact on the Company’s consolidated financial statements.
  SFAS
        155
  In
        February 2006, the FASB issued SFAS No. 155, *Accounting
        for Certain Hybrid Financial Instruments — an Amendment of FASB Statements
        No. 133 and 140* (“ SFAS
        155 ”).
        SFAS
        155 allows financial instruments that contain an embedded derivative and
        that
        otherwise would require bifurcation to be accounted for as a whole on a fair
        value basis, at the holder’s election. SFAS 155 also clarifies and amends
        certain other provisions of SFAS No. 133 and SFAS No. 140. This
        statement is effective for all financial instruments acquired or issued in
        fiscal years beginning after September 15, 2006. The Company does not
        expect SFAS 155 to have a material impact on the consolidated financial
        statements.
  SFAS
        157
  In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* (“SFAS
        157”). SFAS 157 defines fair value, establishes a framework for measuring fair
        value and expands disclosures about fair value measurements. SFAS 157 is
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007 and interim periods within those fiscal years. The Company
        is
        currently evaluating the impact that SFAS 157 will have on its consolidated
        financial statements.
  FIN
        48
  In
        June
        2006, the FASB issued Interpretation No. 48 *Accounting
        for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
        109* (“FIN
        48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
        in an enterprise’s financial statements in accordance with FASB Statement No.
        109, Accounting for Income Taxes. This Interpretation prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        This Interpretation also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure, and
        transition. This Interpretation is effective for fiscal years beginning after
        December 15, 2006. The Company will adopt this standard effective January
        1,
        2007. Adoption of this standard is not expected to have a material impact
        on its
        consolidated financial position, results of operations or cash
        flows.
   44
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  *New
        Accounting Standards**,
        continued*
  SFAS
        151
  In
        November 2004, the FASB issued SFAS No.
        151, *Inventory
        Costs - an amendment of ARB No. 43* (“SFAS
        151”).  SFAS 151 was one of a number of projects by the FASB to converge
        U.S. accounting standards to International Accounting Standards. SFAS151
        requires abnormal amounts of idle facility expenses, freight, handling costs
        and
        spoilage to be recognized as current period charges.  In addition, the
        allocation of fixed manufacturing overhead costs to the costs of conversion
        is
        required to be based on the normal capacity of the manufacturing facilities.
        SFAS 151 will be effective for inventory costs incurred during fiscal years
        beginning after June 15, 2005.The
        Company adopted SFAS 151 on January 1, 2006. Adoption of this standard did
        nothave a
        material impact on its consolidated financial position, results of operations
        or
        cash flows asthe Company’s existinginventory and conversion cost methodologies are generally consistent with
        that
        required by the new standard.
  *Reclassifications*
  Certain
        amounts have been reclassified in the prior years' financial statements to
        conform to the 2006 presentation.
  **NOTE
        B** **-
        ACQUISITIONS**
  In
        May
        2006, the Company acquired certain business assets in a transaction accounted
        for using the purchase method. Accordingly, the results of operations from
        these
        net assets acquired are included in the Company’s consolidated financial
        statements from that date forward. The acquisition of net assets was made
        for
        the purpose of expanding the Company’s market penetration into the industrial
        services segment. The aggregate purchase price was $3,569, and was allocated
        to
        assets acquired based on their estimated fair values at the date of acquisition.
        The purchase price consideration consisted of cash of $2,987 at closing,
        which
        paid for all inventory, property, plant and equipment. The balance of $582,
        representing the accounts receivable purchased less accounts payable assumed,
        was paid in July 2006. The allocation of the purchase price was as
        follows:
  Accounts
                  receivable
              
              $
              1,116Inventory
              
              
              224Property,
                  plant and equipment
              
              
              2,613Accounts
                  payable
              
              
              (384
              )$
              3,569
  45
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
  **NOTE
        B** **-
        ACQUISITIONS (CONTINUED)**
  In
        March
        2005, the Company acquired certain business assets in a transaction accounted
        for using the purchase method. Accordingly, the results of operations from
        these
        net assets acquired are included in the Company’s consolidated financial
        statements from that date forward. The acquisition of net assets was made
        for
        the purpose of expanding the Company’s market penetration into the rail
        industry. The aggregate purchase price was $2,613, and was allocated to assets
        acquired based on their estimated fair values at the date of acquisition.
        The
        purchase price consideration consisted of cash of $2,508, note payable of
        $30
        and 280,000 shares of common stock with an estimated fair value of $75. The
        value of the common stock issued was determined based on management’s best
        estimate of the fair value of the Company’s common stock at the date the asset
        purchase agreement was signed. The allocation of the purchase price was as
        follows:
  Inventory
              
              $
              1,201Property,
                  plant and equipment
              
              
              1,484Deposits
              
              
              33Accrued
                  liabilities
              
              
              (105
              )$
              2,613
 
 The
        following table presents the unaudited results of operations of the Company
        as
        if both of the acquisitions had been consummated as of January 1, 2005, and
        includes certain pro forma adjustments, including depreciation and amortization
        on the assets acquired.
  **2006**
                          
                          
                          **2005**Revenues
                          
                          $
                          64,222
                          
                          $
                          53,921Net
                              Loss
                          
                          $
                          (2,423
                          )
                          $
                          (7,130
                          )Basic
                              and diluted loss per share
                          
                          $
                          (0.02
                          )
                          $
                          (0.07
                          )
  **NOTE
        C - INVENTORY**
  Inventory
        consists of the following:
  **December
                  31,****2006**
              
              **2005**Raw
                  materials
              
              $
              2,861
              
              $
              2,666Work-in-process
              
              
              2,761
              
              
              3,887Finished
                  goods
              
              
              2,330
              
              
              1,9797,952
              
              
              8,532Less:
                  allowance for slow moving and obsolete inventories
              
              
              (312
              )
              
              (117
              )$
              7,640
              
              $
              8,415
  46
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
  **NOTE
        D - PROPERTY AND EQUIPMENT**
  Property
        and equipment consists of the following:
  **December
                  31,****2006**
              
              **2005**Land
                  and building
              
              $
              1,800
              
              $
              200Leasehold
                  improvements
              
              
              343
              
              
              339Machinery
                  and equipment
              
              
              4,819
              
              
              3,674Construction
                  in progress
              
              
              220
              
              
              263Vehicles
              
              
              939
              
              
              659Office
                  and computer equipment
              
              
              714
              
              
              6388,835
              
              
              5,773Less
                  accumulated depreciation
              
              
              (2,515
              )
              
              (1,663
              )$
              6,320
              
              $
              4,110
 
 Depreciation
        expense was $861, $682 and $431 for years ended December 31, 2006, 2005,
        and
        2004, respectively.
   **NOTE
        E - OTHER INTANGIBLES**
  Other
        intangibles consist of the following:
  **December
                  31,****2006**
              
              **2005**Patents
                  and trademarks
              
              $
              4
              
              $
              4Less
                  accumulated amortization
              
              
              (2
              )
              
              (1
              )$
              2
              
              $
              3
 
 The
        Company also had recorded a covenant not-to-compete in the amount of $150,
        which
        was fully amortized in 2005. Amortization expense was $1, $13 and $20 for
        years
        ending December 31, 2006, 2005 and 2004, respectively.
   **NOTE
        F - DEBT**
  *Line
        of credit*
  2005
  In
        November 2004, the Company was issued a line of credit with maximum borrowings
        of $3,000. The line of credit bore interest at .375% above the bank’s prime
        rate. The line of credit was due on demand, collateralized by a blanket security
        agreement covering substantially all assets owned by the Company, and was
        guaranteed by the Company’s majority stockholder. The line was subject to
        certain financial covenants pertaining to maximum net worth, senior debt
        to net
        worth, and debt service coverage. In April 2005, the Company increased its
        line
        of credit with its bank to $5,500. All other terms remained the same. In
        August
        2005, the Company paid off the outstanding balance under the line of credit
        with
        proceeds from its Senior Debt Facility.
  47
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        F - DEBT (Continued)**
  *Long-term
        debt*
  Long-term
        debt consists of the following:
  2006
              
              2005Note
                  payable to its Stockholder, due December 2008, plus interest at
                  prime rate
                  less 1% (7.25% and 6.25% at December 31, 2006 and 2005, respectively)
                  secured by a subordinated interest in substantially all assets
                  owned by
                  the Company
              
              $
              3,000
              
              $
              3,000Long-term
                  debt, debentures (net of discount of $229 and $484 at December
                  31, 2006
                  and 2005, respectively) (see note below)
              
              
              3,796
              
              
              3,541Note
                  payable to former employee in annual principal payments of $10,
                  unsecured
                  and without interest
              
              
              20
              
              
              30Revolving
                  note payable in August 2008 (net of discount of $438 and $885 at
                  December
                  31, 2006 and 2005, respectively) with interest payable monthly
                  at 1% over
                  the Wall Street Journal prime rate (9.25% and 8.25% at December
                  31, 2006
                  and 2005, respectively) secured by substantially all assets owned
                  by the
                  Company (see note below)
              
              
              5,759
              
              
              3,961Term
                  note payable in monthly principal payments of $100 plus interest
                  at 1%
                  over the Wall Street Journal prime rate (9.25% and 8.25% at December
                  31,
                  2006 and 2005, respectively) secured by substantially all assets
                  owned by
                  the Company (see note below)
              
              
              2,000
              
              
              3,000Revolving
                  note payable in May 2009 with interest payable monthly at 1.5%
                  over the
                  Wall Street Journal prime rate (9.75% at December 31, 2006) secured
                  by
                  substantially all assets owned by the Company (see note
                  below)
              
              
              741
              
              
              -Term
                  note payable in monthly principal payments of $70 plus interest
                  at 1% over
                  the Wall Street Journal prime rate (9.25% at December 31, 2006)
                  secured by
                  substantially all assets owned by the Company (see note
                  below)
              
              
              2,030
              
              
              -Capital
                  lease obligations (see note below)
              
              
              59
              
              
              5617,405
              
              
              13,588Less:
                  current portion
              
              
              8,581
              
              
              4,985$
              8,824
              
              $
              8,603
 
 
  48
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        F - DEBT (CONTINUED)**
  *Long-term
        debt, debentures*
  In
        January 2005, the Company commenced a private offering (the “Debenture
        Offering”) of a maximum of $4,025 principal amount of subordinated secured
        convertible debentures. The debentures, which are payable on February 28,
        2008,
        bear interest at the rate of 6% per year, payable upon conversion or at
        redemption or maturity. Investors will receive interest in cash only if they
        elect not to convert their debentures. Each holder has the option any time
        prior
        to the redemption date to convert principal and accrued interest under the
        debentures at into shares of our common stock at a fixed conversion price
        of
        $0.3404926 per share. In 2007 certain debenture holders converted debentures
        totaling $1,045 into shares of our common stock (See Note Q). If the number
        of
        our outstanding shares of common stock is increased because of a stock split
        or
        stock dividend, the conversion price will be proportionately reduced, and
        if the
        number is decreased because of a stock combination, the conversion price
        will be
        proportionately increased, except that any adjustment to the conversion price
        of
        less than $0.0001 is not required to be made.
  The
        Company reserved 11,821,108 shares of common stock for issuance upon conversion
        of the debentures. The Company issued the maximum $4,025 principal amount
        of
        debentures as of May 5, 2005. The debentures are secured by a second lien
        on
        substantially all of the Company’s assets which is subordinate to the lien of
        the Company’s senior secured lender.
  Upon
        written notice the Company can redeem any or all of the outstanding debentures
        prior to the maturity date at a redemption price, payable in cash, equal
        to 100%
        of the principal amount redeemed, plus accrued and unpaid interest through
        the
        redemption date. Any notice to redeem must be given to all holders no less
        than
        30 days or more than 45 days prior to the date set forth for redemption.
        The
        loan agreements with the senior secured lender restrict the Company’s ability to
        exercise this redemption right.
  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 $0.001 per
        share.
        The Company has allocated 4,255,601 five-year common stock purchase warrants
        among all purchasers of the debentures. The Company used the Black-Scholes
        valuation model in estimating the fair value of common stock purchase warrants.
        The following assumptions were used for such estimates: no dividend yield,
        no
        expected volatility, risk-free interest rate of 3.3% and an expected term
        of the
        common stock purchase warrants of one year. The estimated fair value of these
        warrants was $836. This debt discount is amortized to interest expense over
        the
        term of the debentures. Interest expense was $255 and $352 for the years
        ended
        December 31, 2006 and 2005, respectively. Net debt issue discount at December
        31, 2006 and 2005 related to this instrument was $229 and $484,
        respectively.
  For
        its
        services as placement agent in the Debenture Offering, MISCOR issued to its
        placement agent, ten-year common stock purchase warrants to purchase 6,182,992
        shares of MISCOR common stock at an exercise price of $0.001 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 term, representing the remaining contractual term, of
        the
        common stock purchase warrants of one year. The estimated fair value of the
        warrants issued to the placement agent was $1,546.
   49
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        F - DEBT (CONTINUED)**
  *Long-term
        debt, debetures (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 50,000 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 $695 and $778 for
        the
        years ended December 31, 2006 and 2005, respectively. Net debt issue cost
        at
        year ended December 31, 2006 and 2005 related to these instruments was $622
        and
        $1,317, respectively.
  *Sen**ior
        Debt Financing*
  In
        August
        2005, the Company entered into a Security and Purchase Agreement with Laurus
        Master Fund, LTD. (“Laurus”). The Agreement provides financing comprised of a
        $7,000 Revolving Note and a $3,000 Term Note. The Notes mature in August
        2008.
        Laurus agreed to advance funds under the Revolving Note in amounts up to
        90% of
        eligible trade accounts receivable. Interest is payable monthly under the
        Revolving and Term Notes at 1% over prime as published in the Wall Street
        Journal. The Notes are collateralized by a blanket security interest covering
        substantially all assets owned by the Company. Proceeds from the financing
        were
        used to repay the Company’s previous lender and for working capital.
  Laurus
        has the option to convert all or any portion of the outstanding principal
        amount
        and/or accrued interest under the Revolving Note into shares of MISCOR common
        stock at the Fixed Conversion Price. Fixed Conversion Price means (i) with
        respect to the first $3,500 of the aggregate principal amount converted,
        $0.19
        per share or 18,421,053 shares and (ii) with respect to the remaining principal
        amount converted, $0.32 per share or 10,937,500 shares. In August, 2005,
        the
        Company borrowed $4,000 under the Revolving Note which was convertible into
        19,983,553 shares of common stock at an average price of $0.2002 per share.
        Since the shares were valued at $0.25 per share, the intrinsic value of the
        beneficial conversion feature for the difference between the fair value per
        share and the conversion price per share was $996. The Company is accreting
        this
        debt discount to interest expense over the term of the Revolving Note in
        accordance with Emerging Issues Task Force Consensus (“EITF”) 98-5 and 00-27.
  Up
        to
        $4,000 of the Revolving Note may be segregated into a Minimum Borrowing Note
        to
        facilitate the conversion into the Company’s common stock. The Company may
        prepay all or a portion of the Minimum Borrowing Note by paying to Laurus
        one
        hundred fifteen percent (115%) of the principal amount of this Note together
        with interest. On September 29, 2006, Laurus converted $729 of the Revolving
        Note due in August 2008 at a conversion rate of $0.19 per share for a total
        of
        3,836,412 shares of the Company’s common stock. A prorata portion of the
        unamortized debt discount related to the conversion totaling $132 was expensed
        as interest at the time of the conversion. Total interest expense related
        to the
        beneficial conversion feature was $447 and $111 for the years ended December
        31,
        2006 and 2005, respectively. Net debt issue discount at December 31, 2006
        and
        2005 related to this instrument was $438 and $885, respectively.
  The
        total
        outstanding balance under the Revolving Note was $6,197 at December 31, 2006,
        convertible into 14,584,641 shares at $0.19 per share and 10,705,724 shares
        at
        $0.32 per share. The Company had available an additional $803 under the
        Revolving Note at December 31, 2006.
   50
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        F - DEBT (CONTINUED)**
  *Sen**ior
        Debt Financing, continued*
  In
        March
        2006, the Company began making monthly principal payments of $100 with interest
        under the Term Loan. Payments may be made in cash or in the Company’s common
        stock. If (i) the average of the closing prices of the Common Stock as reported
        by Bloomberg, L.P. on the NASD Over The Counter Bulletin Board for the five
        (5)
        trading days immediately preceding the payment due date is greater than or
        equal
        to 110% of the Fixed Conversion Price of $0.26 per share and (ii) the amount
        of
        such conversion does not exceed twenty eight percent (28%) of the aggregate
        dollar trading volume of the Common Stock for the period of twenty-two (22)
        trading days immediately preceding such date, then the payment of principal
        and
        interest must be made in Common Stock. Otherwise, the Company must pay Laurus
        an
        amount in cash equal to 101% of the principal and interest due. The outstanding
        balance under the Term Note was $2,000,000 at December 31, 2006 convertible
        into
        7,692,308 shares of common stock at $0.26 per share.
  If
        (i)
        the Company registers the shares of the Common Stock underlying the conversion
        of the Term Note and each Minimum Borrowing Note then outstanding on a
        registration statement declared effective by the Securities and Exchange
        Commission, which the Company has done, and (ii) the average of the Closing
        Prices of the Common Stock as reported by Bloomberg, L.P. on the NASD Over
        The
        Counter Bulletin Board for the five (5) trading days immediately preceding
        each
        month end exceeds the then applicable Fixed Conversion Price by at least
        twenty-five percent (25%), the interest rate for the succeeding calendar
        month
        will be reduced by 200 basis points (200 b.p.) (2.0%) for each incremental
        twenty-five percent (25%) increase in the Closing Price Average of the Common
        Stock above the then applicable Fixed Conversion Price.
  As
        part
        of the financing, Laurus received $360 in cash and was issued 6,163,588 shares
        of the Common Stock at closing and warrants for 7,352,941 shares of the Common
        Stock with an exercise price of $0.34 per share. The 6,163,588 shares were
        valued at $0.25 per share or $1,541. The Company used the Black-Scholes
        valuation model in estimating the fair value of the common stock purchase
        warrants. The following assumptions were used for such estimates: no dividend
        yield, no expected volatility, risk-free interest rate of 4.11% and an expected
        term of the common stock purchase warrants of seven years. The Company also
        granted registration rights with respect to the shares issuable upon exercise
        of
        the warrants (Note G). Total debt issue costs were $2,303. Interest expense
        was
        $767 and $266 for the years ended December 31, 2006 and 2005, respectively.
        Net
        debt issue cost at December 31, 2006 and 2005 related to this instrument
        was
        $1,270 and $2,037, respectively.
  Under
        the
        registration rights agreement with Laurus, if the Company’s common stock is not
        traded on the OTC Bulletin Board, Nasdaq or a national exchange for three
        consecutive trading days and trading does not resume within 30 days, then,
        subject to certain exceptions, for each day that any of those events is
        occurring, we are required to pay Laurus an amount in cash equal to
        1/30 th of the
        product of the outstanding principal amount owed to Laurus, multiplied by
        0.01
        (or approximately 1% per month). As a result, the Company accounted for these
        warrants as a liability in accordance with EITF No. 00-19 and View A of EITF
        No.
        05-4. The Company used the Black-Scholes valuation model in estimating the
        fair
        value of the common stock purchase warrants. At December 31, 2006, the following
        assumptions were used for such estimates: no dividend yield, expected volatility
        of 41.2%, risk-free interest rate of 4.7% and an expected term, representing
        the
        remaining contractual term, of the common stock purchase warrants of 5.7
        years. The Company recorded a loss on warrant liability of $436 for the year
        ended December 31, 2006.
   51
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        F - DEBT (CONTINUED)**
  *Sen**ior
        Debt Financing, continued*
  As
        described in Note A, the Company elected to early adopt FSP EITF 00-19-2,
        which
        supersedes the guidance under EITF No. 05-4, effective December 31, 2006.
        Under
        FSP EITF 00-19-2, the warrants issued subject to a registration rights agreement
        are accounted for in accordance with applicable generally accepted accounting
        principles without regard to the contingent obligation to transfer consideration
        pursuant to the registration rights agreement. As of December 31, 2006, the
        Company reclassified the warrant liability of $436 to equity since the only
        provision which caused the warrants issued to be accounted for as a derivative
        liability was the liquidated damages provision in the registration rights
        agreement. In recording the reclassification entry, the Company credited
        $436
        to acumulated deficit since these warrants had no estimated fair
        value on the date of issuance. In addition, the Company determined that no
        separate liability needed to be recorded related to the registration rights
        agreement as of December 31, 2006, since the registration rights penalty
        is
        based on a percentage of outstanding Laurus debt and all outstanding debt
        due
        Laurus was subsequently paid in full in January 2007 (Note Q).
  None
        of
        the Company’s obligations to Laurus under the Revolving or Term Notes or
        warrants may be converted into Common Stock unless (a) either (i) an effective
        current Registration Statement covering the shares of Common Stock exists
        or
        (ii) an exemption from registration for resale of all of the Common Stock
        issued
        and issuable is available, and (b) no event of default exists and is continuing.
        Laurus is not permitted to own in excess of 9.99% of the issued and outstanding
        shares of MISCOR common stock.
  In
        May
        2006, the Company entered into a second Security and Purchase Agreement with
        Laurus. The Agreement provided financing comprised of a $1,600 Revolving
        Note
        and a $2,100 Term Note. The Notes mature in May 2009. Laurus agreed to advance
        funds under the Revolving Note in amounts up to 90% of eligible trade accounts
        receivable. Interest is payable monthly at 2.5% and 1.5% over prime (9.75%
        at
        December 31, 2006) as published in the Wall Street Journal for the first
        $0.3
        million and the remaining $1.3 million under the Revolving Note, respectively.
        The maximum outstanding balance allowable under the Revolving Note decreases
        $10
        per month beginning December 2006.
  Under
        the
        Term Loan, the Company must make monthly principal payments of $70 with interest
        beginning December 2006. Interest is payable monthly at 1.0% over
        prime (9.25% at December 31, 2006) as published in the Wall Street Journal
        under the Term Note.
  The
        Notes
        are collateralized by a blanket security interest covering substantially
        all
        assets owned by the Company. Proceeds from the financing were used to acquire
        substantially all of the assets of E. T. Smith Services of Alabama, Inc.,
        an
        Alabama corporation (“Smith Alabama”) pursuant to the terms and subject to the
        conditions included in an Asset Purchase Agreement dated May 31, 2006.
  As
        part
        of the financing, Laurus received $133 in cash and was issued warrants for
        375,000 shares of the Common Stock with an exercise price of $0.01 per share.
        Total debt issue costs were $156. Interest expense was $30 for the year ended
        December 31, 2006. Net debt issue cost at December 31, 2006 related to this
        instrument was $126.
   52
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        F - DEBT (CONTINUED)**
  *Sen**ior
        Debt Financing, continued*
  Under
        the registration rights agreement with Laurus, if
        the
        Company’s common stock is not traded on the OTC Bulletin Board, Nasdaq or a
        national exchange for three consecutive trading days and trading does not
        resume
        within 30 days, then, subject to certain exceptions, for each day that any
        of
        those events is occurring, the Company is required to pay Laurus an amount
        in
        cash equal to 1/30 th of the
        product of the outstanding principal amount owed to Laurus, multiplied by
        0.01
        (or approximately 1% per month). As
        a result, the Company accounted for these warrants as a liability in accordance
        with EITF No. 00-19 and View A of EITF No. 05-4. The Company used the
        Black-Scholes valuation model in estimating the fair value of the common
        stock
        purchase warrants. The following assumptions were used for such estimates:
        no
        dividend yield, expected volatility of 41.2%, risk-free interest rate of
        4.7%
        and an expected term, representing the remaining contractual term, of the
        common stock purchase warrants of 6.4 years. The Company recorded a loss
        on
        warrant liability of $72 for the year ended December 31, 2006.
  As
        described in Note A, the Company elected to early adopt FSP EITF 00-19-2,
        which
        supersedes the guidance under EITF No. 05-4, effective December 31, 2006.
        Under
        FSP EITF 00-19-2, the warrants issued subject to a registration rights agreement
        are accounted for in accordance with applicable generally accepted accounting
        principles without regard to the contingent obligation to transfer consideration
        pursuant to the registration rights agreement. As of December 31, 2006, the
        Company reclassified the warrant liability of $72 to equity since the only
        provision which caused the warrants issued to be accounted for as a derivative
        liability was the liquidated damages provision in the registration rights
        agreement. In recording the reclassification entry, the Company credited
        $91 to
        additional paid-in capital which represents the estimated fair value of these
        warrants on the date of issuance, offset by a debit to accumulated deficit
        of
        $19 which represents the difference between the estimated fair value of these
        warrants at the date of issuance and the estimated fair value as of December
        31,
        2006. In addition, the Company determined that no separate liability needed
        to
        be recorded related to the registration rights agreement as of December 31,
        2006, since the registration rights penalty is based on a percentage of
        outstanding Laurus debt and all outstanding debt due Laurus was subsequently
        paid in full in January 2007 (Note Q).
  The
        provisions of the $7,000
        and $1,600 Revolving
        Notes include a lock-box agreement and also allow Laurus, in its reasonable
        credit judgment, to assess additional reserves against, or reduce the advance
        rate against accounts receivable used in the borrowing base calculation.
        These
        provisions satisfy the requirements for consideration of EITF Issue No. 95-22, *Balance
        Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
        that include both a Subjective Acceleration Clause and a Lock-Box Arrangement* ("EITF
        95-22"). Based on further analysis of the terms of the Revolving Notes, there
        are certain provisions that could potentially be interpreted as a subjective
        acceleration clause. More specifically, Laurus, in its reasonable credit
        judgment, can assess additional reserves to the borrowing base calculation
        or
        reduce the advance rate against accounts receivable to account for changes
        in
        the nature of the Company's business that alters the underlying value of
        the
        collateral. The reserve requirements may result in an overadvance borrowing
        position that could require an accelerated repayment of the overadvance portion.
        Since the inception of these Revolving Notes, Laurus has not applied any
        additional reserves to the borrowing base calculation. The Company does not
        anticipate any changes in its business practices that would result in any
        material adjustments to the borrowing base calculation. However, management
        cannot be certain that additional reserves will not be assessed by Laurus
        to the
        borrowing base calculation. As a result, the Company classifies borrowings
        under
        the Revolving Notes as short-term obligations.
   53
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        F - DEBT (CONTINUED)**
  *Sen**ior
        Debt Financing, continued*
  On
        January 18, 2007, the Company paid off the total outstanding balance of its
        Senior Debt Facility with Laurus, including interest and prepayment penalties,
        with the proceeds from the sale of 62,500,000 shares of its common stock
        (Note
        Q).
  *Capital
        Lease Obligations*
  The
        Company leases certain equipment under agreements that are classified as
        capital
        leases. The following is a summary of capital leases:
  2006
              
              2005Machinery
                  & Equipment
              
              $
              83
              
              $
              62Less
                  accumulated depreciation
              
              
              (12
              )
              
              (3
              )$
              71
              
              $
              59
 
 
 Minimum
        future lease payments required under capital leases, with an imputed interest
        rate of 7%, as of December 31, 2006 for each of the next three years and
        in the
        aggregate are:
  Year
                  Ending2007
              
              $
              342008
              
              
              172009
              
              
              12Total
                  minimum lease payments
              
              
              63Less
                  imputed interest
              
              
              (4
              )Present
                  value of net minimum lease payments
              
              $
              59
 
 
 Aggregate
        maturities of long-term debt for the periods subsequent to December 31, 2006
        are
        as follows:
  Years
                  Ending December 31,
              
              Amount2007
              
              
              9,0192008
              
              
              8,6922009
              
              
              361
 
  54
   MISCOR
        GROUP, LTD. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006
 **(Amounts
        in thousands, except share and per share data)**
  **NOTE
        F - DEBT (CONTINUED)**
  *Capital
        Lease Obligations, continued*
  Following
        is a summary of interest expense for the years ended December 31, 2006, 2005
        and
        2004:
  Years
                  ended December 31,2006
              
              2005
              
              2004Interest
                  expense on principal
              
              $
              1,209
              
              $
              704
              
              $
              183Amortization
                  of debt issue costs
              
              
              1,493
              
              
              1,044
              
              
              -Amortization
                  of debt discount -debentures and revolving notes payable
              
              
              702
              
              
              463
              
              
              -Interest
                  related to issuance of conversion option
              
              
              -
              
              
              4,500
              
              
              -Total
                  interest expense
              
              $
              3,404
              
              $
              6,711
              
              $
              183
 
  **NOTE
        G - EQUITY ISSUANCES**
  *MIS
        Series A Redeemable Preferred Stock Issuance*
  In
        March,
        2004, MIS raised proceeds of $675, net of issuance costs of $75, through
        the
        issuance of 750,000 shares of Series A Redeemable Preferred Stock. According
        to
        the terms of the offering, each share of Series A Redeemable Preferred Stock
        converted automatically into 6.33333 shares of MISCOR common stock upon
        completion of a MISCOR common stock offering with aggregate proceeds of not
        less
        than $3,000. In December 2004, MISCOR completed a common stock offering and,
        although aggregate proceeds were less than $3,000, all outstanding shares
        of
        Series A Redeemable Preferred Stock were converted into 4,750,006 shares
        of
        MISCOR common stock.
  *Common
        Stock Exchange*
  Upon
        the
        formation of MISCOR in April 2004, the sole stockholder of MIS contributed
        all
        1,000 of the issued and outstanding shares of MIS common stock in exchange
        for
        79,450,000 shares of MISCOR common stock.
   55
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
  **NOTE
        G - EQUITY ISSUANCES (CONTINUED)**
  *MISCOR
        Common Stock Issuance*
  2004
  In
        May
        2004, MISCOR commenced a private offering of its common stock. Upon the closing
        of the common stock offering in December 2004, the Company received proceeds
        in
        the amount of $2,001, net of issuance costs of $548, through the issuance
        of
        12,750,000 shares of common stock.
  For
        its
        services as placement agent in the MIS preferred stock offering and the MISCOR
        common stock offering, MISCOR issued to its placement agent, ten-year common
        stock purchase warrants to purchase 4,500,000 shares of MISCOR common stock
        at
        an exercise price of $0.0001 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 2.6% and an expected term
        of the
        common stock purchase warrants of one year. The estimated fair value of the
        common stock purchase warrants was $900 and was recorded as part of common
        stock
        issuance costs with an offset to additional paid-in capital.
  In
        addition, for its services as securities counsel in the MIS preferred stock
        offering and the MISCOR common stock offering, MISCOR issued 50,000 shares
        of
        MISCOR common stock to its securities counsel. The fair value of common stock
        issued as part of this transaction was determined to be $0.20 per share or
        $10
        and was recorded as part of common stock issuance costs.
  2005
  In
        March
        2005, MISCOR issued 30,000 shares of common stock in conjunction with an
        acquisition (Note B). The fair value of the common stock was determined to
        be
        $0.40 per share or $12 and was recorded as part of the purchase price
        consideration. The Company also paid an individual 250,000 shares of its
        common
        stock valued at $0.25 per share or $63 as a finder’s fee.
  In
        addition, for its services as securities counsel in the Debenture Offering
        (Note
        F), MISCOR issued 50,000 shares of MISCOR common stock to its securities
        counsel. The fair value of common stock issued as part of this transaction
        was
        determined to be $0.25 per share or $12 and was recorded as part of debt
        issuance costs.
  As
        part
        of the senior debt refinancing (Note F) in August 2005, Laurus was issued
        6,163,588 shares of MISCOR common stock valued at $0.25 per share or $1,541
        at
        closing and warrants for 7,352,941 shares of common stock at an exercise
        price
        of $0.34 per share. The Company used the Black-Scholes valuation model in
        estimating the fair value of the common stock purchase warrants. The following
        assumptions were used for such estimates: no dividend yield, no expected
        volatility, risk-free rate of 4.11% and an expected term of the common stock
        purchase warrants of seven years. Based on the Black-Scholes model, the warrant
        had no fair value at the time of issuance.
   56
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        G - EQUITY ISSUANCES (CONTINUED)**
  *MISCOR
        Common Stock Issuance**,
        continued*
  In
        September 2005, the Company provided John A. Martell, its CEO and majority
        shareholder, a conversion option which allows Mr. Martell to convert any
        or all
        of his $3,000 outstanding notes payable into shares of common stock of the
        Company at a conversion price of $0.10 per share. The intrinsic value of
        the
        option at the time of grant was $0.15. Accordingly, the Company recorded
        interest expense of $4,500 and additional paid-in capital of $4,500 for the
        year
        ended December 31, 2005.
  *Equity
        Incentive Plans*
  2005
        Stock Option Plan
  On
        September 30, 2005, the Company granted stock options to certain executives
        to
        acquire a total of 500,000 shares of the Company’s common stock at an exercise
        price of $0.25 per share under the 2005 Stock Option Plan adopted by the
        board
        of directors in August 2005. The options, which expire in five years, are
        exercisable in 25% cumulative increments on and after the first four
        anniversaries of their grant date. At the time of issuance of the stock options
        to acquire 500,000 shares of the Company’s common stock, the estimated fair
        value of the Company’s common stock was $0.25 per share. The fair value of the
        Company’s common stock was determined contemporaneously and based upon the most
        recent sale of the Company’s common stock. As a result, such stock options had
        no intrinsic value at the time of issuance.
  Effective
        January 1, 2006, the Company adopted SFAS No. 123R using the Modified
        Prospective Approach. SFAS No. 123R revises SFAS No. 123, *Accounting
        for Stock-Based Compensation* and
        supersedes 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.
  Under
        the
        Modified Prospective Approach, the amount of compensation cost recognized
        includes (a) compensation cost for all share-based payments granted prior
        to,
        but not yet vested as of January 1, 2006, based on the grant date fair value
        estimated in accordance with the provisions of SFAS No. 123, and (b)
        compensation cost for all share-based payments granted subsequent to January
        1,
        2006, based on the grant date fair value estimated in accordance with the
        provisions of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, the
        Company
        accounted for its stock-based compensation plans under the recognition and
        measurement provisions of APB No. 25.
  As
        a
        result of adopting SFAS No. 123R on January 1, 2006, the Company recorded
        compensation cost of $5 for the year ended December 31, 2006 based on the
        grant
        date fair value of the award of 500,000 shares at $0.25 per share. The total
        cost of the grant in the amount of $18 will be recognized over the four year
        period during which the employees are required to provide services in exchange
        for the award - the requisite service period (usually
        the vesting period) .
   57
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        G - EQUITY ISSUANCES (CONTINUED)**
  *Equity
        Incentive Plans**,
        continued*
  2005
        Stock Option Plan,
        continued
  On
        August
        3, 2006, the Company granted stock options to acquire 1,185,000 shares of
        the
        Company’s common stock at an exercise price of $0.25 per share under the 2005
        Stock Option Plan. Of the 1,185,000 total options, 500,000 shares were granted
        to outside directors. These options expired in 30 days from the date of grant.
        Options for 250,000 of these shares were exercised in August 2006 at $0.25
        per
        share and the remaining options expired. The fair value of the options were
        estimated using the Black-Scholes valuation model, straight-line amortization
        and the following assumptions: expected term of one month, risk-free interest
        rate of 5.18%, volatility of 41.72%, no dividend yield and fair value of
        grant
        of $0.25. The total cost of the grant in the amount of $6 was recognized
        in the
        year ended December 31, 2006, over the 30 day period during which the directors
        were required to provide services in exchange for the award.
  The
        remaining 685,000 options were granted to an executive, outside directors,
        and
        certain key employees. These options, which expire in five years, are
        exercisable in 25% cumulative increments on and after the first four
        anniversaries of their grant date. At the time of issuance of the stock options,
        the estimated fair value of the Company’s common stock was $0.25 per share. The
        fair value of the Company’s common stock was determined contemporaneously and
        based upon the most recent sale of the Company’s common stock.
  The
        fair
        value of the options was estimated using the Black-Scholes valuation model
        and
        the following assumptions: expected term of 3.75 years, risk-free interest
        rate
        of 4.91%, volatility of 41.72% and no dividend yield. The Company recorded
        compensation cost based on the grant date fair value of the award of 685,000
        shares at $0.25 per share. The total cost of the grant in the amount of $67
        will
        be recognized over the four year period during which the employees are required
        to provide services in exchange for the award - the requisite service period.
        The Company recorded compensation expense related to all stock options of
        $18
        for the year ended December 31, 2006.
  The
        expected term used in the Black-Scholes valuation model represents the period
        that stock-based awards are expected to be outstanding, giving consideration
        to
        the contractual terms of the stock-based awards, vesting schedules and
        expectations of future employee behavior as influenced by changes to the
        terms
        of our stock-based awards. For the year ended December 31, 2006, we have
        elected
        to use the simplified method of determining the expected term, as permitted
        by
        SAB No. 107 issued by the Securities and Exchange Commission. The computation
        of
        expected volatility for stock-based awards is based on the historical volatility
        of comparable companies from a representative peer group selected based on
        industry and market capitalization data. As required by SFAS 123R, management
        estimates expected forfeitures and is recognizing compensation costs only
        for
        those equity awards expected to vest.
   58
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        G - EQUITY ISSUANCES (CONTINUED)**
  *Equity
        Incentive Plans**,
        continued*
  2005
        Stock Option Plan,
        continued
  The
        2005
        Stock Option Plan provides for the grant of options to acquire up to 2,000,000
        shares of common stock to the Company’s executive employees who are materially
        responsible for the management and operation of its business, and to the
        Company’s directors. The options may be either Incentive Stock Options (“ISO”),
        within the meaning of Section 422 of the Internal Revenue Code, or non-statutory
        stock options (“NQSO”). 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.
  Following
        is a summary of the activity in the option plan:
 
 WeightedAverageNumber
                  of
              
              ExerciseShares
              
              PriceOutstanding
                  at January 1, 2005
              
              
              -
              
              $
              -Granted
              
              
              500,000
              
              $
              0.25Exercised
              
              
              -
              
              $
              -Forfeited
              
              
              -
              
              $
              -Outstanding
                  at December 31, 2005
              
              
              500,000
              
              $
              0.25Granted
              
              
              1,185,000
              
              $
              0.25Exercised
              
              
              (250,000
              )
              $
              0.25Forfeited
              
              
              (250,000
              )
              $
              0.25Outstanding
                  at December 31, 2006
              
              
              1,185,000
              
              $
              0.25Exercisable
                  at December 31, 2006
              
              
              125,000
              
              $
              0.25Weighted
                  average fair value of options granted during 2006
              
              $
              0.25
 
  59
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        G - EQUITY ISSUANCES (CONTINUED)**
  *Equity
        Incentive Plans**,
        continued*
  2005
        Stock Option Plan,
        continued
  Following
        is a summary of the status of fixed options outstanding at December 31,
        2006:
 Outstanding
                          Options
                      
                      Exercisable
                          OptionsExercise
                          Price Range
                      
                      Number
                      
                      Weighted
                          Average Remaining Contractual Life
                      
                      Weighted
                          Average Exercise Price
                      
                      Number
                      
                      Weighted
                          Average Exercise Price$
                          0.25
                      
                      500,000
                      
                      3.75
                          years
                      
                      $
                          0.25
                      
                      125,000
                      
                      $
                          0.25$
                          0.25
                      
                      685,000
                      
                      4.58
                          years
                      
                      $
                          0.25
                      
                      -
                      
                      -
 
 2005
        Restricted Stock Purchase Plan
  On
        September 30, 2005, the Company issued offers to purchase 250,000 shares
        of
        common stock at a nominal price of $0.001 per share to certain executives
        under
        the 2005 Restricted Stock Purchase Plan adopted by the board of directors
        in
        August 2005. The Plan provides for the grant of offers to purchase up to
        1,000,000 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.
  At
        the
        date of issuance, the restricted stock issued had an intrinsic value of $0.249
        per share or $62. On September 30, 2005, the Company charged deferred
        compensation (reflected as a contra-equity account) and credited additional
        paid-in capital in the amount of $62. The issuance of the restricted stock
        was
        intended to lock-up key employees for a three year period. As a result, the
        Company is recording compensation expense over the three year restriction
        period
        by amortizing deferred compensation on a straight-line basis over the three
        year
        period commencing September 30, 2005.
  On
        August
        3, 2006, the Company issued offers to purchase 50,000 shares of common stock
        at
        a nominal price of $0.001 per share to certain key employees. The fair value
        of
        the restricted stock issued was estimated using the Black-Scholes valuation
        model and the following assumptions: expected term, representing the restriction
        period, of 3 years, risk-free interest rate of 4.92%, volatility of 41.72%
        and
        no dividend yield. The Company charged deferred compensation and credited
        additional paid-in capital in the amount of $12. The issuance of the restricted
        stock was intended to lock-up key employees for a three year period. As a
        result, the Company is recording compensation expense over the three year
        restriction period. Compensation expense of $22 and $5 was recorded for the
        years ended December 31, 2006 and 2005, respectively.
   60
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        G - EQUITY ISSUANCES (CONTINUED)**
  *Verti**cal
        Capital Warrants*
  In
        October 2005, in connection with the Laurus financing (Note F), the Company
        paid
        to Vertical Capital Partners, Inc., as a finder’s fee, cash of $200 and issued
        to persons designated by Vertical Capital Partners warrants to acquire up
        to
        500,000 shares of the Company’s common stock for three years at an exercise
        price of $0.34 per share, subject to certain anti-dilution adjustments. The
        Company also granted registration rights with respect to the shares issuable
        upon exercise of the warrants. There are no cash penalties associated with
        not
        registering shares issuable upon exercise of these warrants. The Company
        used
        the Black-Scholes valuation model in estimating the fair value of the common
        stock purchase warrants. The following assumptions were used for such estimates:
        no dividend yield, no expected volatility, risk-free interest rate of 4.18%
        and
        an expected term of the common stock purchase warrants of three years. Based
        on
        the Black-Scholes model, such warrants had no intrinsic value.
   **NOTE
        H - INCOME TAXES**
  Deferred
        income taxes result primarily from temporary differences in the bases of
        certain
        assets and liabilities for financial and income tax reporting purposes.
        Significant components of the Company’s deferred tax assets and liabilities are
        as follows:
  **December
                  31,**Deferred
                  tax assets:
              
              **2006**
              
              **2005**Net
                  operating losses carryforwards
              
              $
              1,934
              
              $
              1,677Accounts
                  receivable
              
              
              141
              
              
              112Inventory
              
              
              1
              
              
              2Warranty
                  reserve
              
              
              72
              
              
              22Accrued
                  expenses and other
              
              
              53
              
              
              18Total
                  gross deferred tax assets
              
              
              2,201
              
              
              1,831Valuation
                  allowance
              
              
              (1,841
              )
              
              (1,633
              )360
              
              
              198Deferred
                  tax liabilities:Property,
                  equipment and intangibles
              
              
              (360
              )
              
              (198
              )Net
                  deferred tax asset
              
              $
              -
              
              $
              -
 
 The
        valuation allowance has been established due to the uncertainty of realizing
        the
        benefits of tax loss carryforwards. The allowance was increased $208 and
        $315
        during the years ended December 31, 2006 and 2005, respectively, due primarily
        to the increases in the loss carryforwards.
  At
        December 31, 2006, net operating loss carryforwards of $5,862 were available
        to
        be applied against future taxable income, expiring through 2026, and subject
        to
        change of ownership limitations.
   61
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        I - LEASE COMMITMENTS**
  The
        Company leases its Mobile, Alabama; South Bend, Indiana; Hammond, Indiana;
        and
        Boardman, Ohio facilities from companies controlled by its majority stockholder
        as of December 31, 2006 under agreements expiring between February 2009 and
        December 2014. The Company leases its Indianapolis, Indiana; Merrillville,
        Indiana; Huntington, West Virginia; Seattle, Washington; Little Rock, Arkansas;
        and Elkhart, Indiana facilities from unrelated parties under agreements expiring
        between June 2007 and December 2010. 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. Total rent expense for all facility leases
        was approximately $732, $696 and $464 for the years ended December 31, 2006,
        2005 and 2004, respectively. (See Note Q).
  The
        Company also leases other manufacturing and office equipment under operating
        leases with varying terms expiring through June 2010. Total rent expense
        under
        these leases was approximately $164, $76 and $17 for the years ended December
        31, 2006, 2005 and 2004, respectively.
  Future
        minimum lease payments required under the operating leases in effect in excess
        of one year as of December 31, 2006 are as follows:
  Years
                  Ending December 31,
              
              Amount2007
              
              $
              9272008
              
              
              9032009
              
              
              7622010
              
              
              5992011
              
              
              351Thereafter
              
              
              385$
              3,927
  **NOTE
        J - RELATED PARTY TRANSACTIONS**
  *Long-term
        debt, other*
  The
        Company was indebted to the estate of a former employee for a note payable
        with
        a balance of $20 and $30 at December 31, 2006 and 2005, respectively. The
        unsecured note is payable in annual principal installments of $10 and is
        non-interest bearing.
  *Long-term
        debt, stockholder*
  The
        Company was indebted to its majority stockholder for a note payable with
        a
        balance of $3,000 at December 31, 2006 and 2005 (see Note F). Interest is
        payable monthly at prime less 1%. The loan matures on December 31, 2008,
        except
        that the Company can extend the maturity for five years upon 60 days’ prior
        written notice at an interest rate of prime plus 1%. Interest expense on
        the
        note was $210, $157 and $95 for the years ended December 31, 2006, 2005 and
        2004, respectively.
   62
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        J - RELATED PARTY TRANSACTIONS** **(continued)**
  *Leases*
  As
        discussed in Note I, the Company leases its South Bend, Indiana; Hammond,
        Indiana; Mobile, Alabama; and Boardman, Ohio facilities from its majority
        stockholder as of December 31, 2006. Total rent expense under these agreements
        was approximately $326, $281 and $278 for the years ended December 31, 2006,
        2005 and 2004, 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 $150
        and
        $125 for the years ended December 31, 2006 and 2005, respectively.
  *Advances
        from stockholder*
  The
        Company’s majority stockholder as of December 31, 2006 has made other unsecured
        advances to the Company. The balance as of December 31, 2006 and 2005 was
        $-0-.
        Beginning in January 2004, the Company began paying monthly interest at the
        prime rate on the outstanding advances. Interest expense on the advances
        to the
        majority stockholder for the years ended December 31, 2006, 2005 and 2004
        was
        $-0-, $10 and $6, respectively.
   **NOTE
        K - RETIREMENT PLANS**
  In
        connection with its collective bargaining agreements with various unions,
        the
        Company participates with other companies in the unions’ multi-employer pension
        plans. These plans cover all of the Company’s employees who are members of such
        unions. The Employee Retirement Income Security Act of 1974, as amended by
        Multi-Employer Pension Plan Amendments Act of 1980, imposes certain liabilities
        upon an employer’s withdrawal from, or upon termination of, such plans. The
        Company has no plan to withdraw from these plans.
  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
        $706,
        $762 and $390 for the years ended December 31, 2006, 2005 and 2004,
        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. Employer
        contributions to the plan were $44, $17 and $13 for the years ended December
        31,
        2006, 2005 and 2004, respectively. Under the second plan, which is for all
        employees covered by collective bargaining agreements, there is no provision
        for
        employer contributions.
   63
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        L - CONCENTRATIONS OF CREDIT RISK**
  The
        Company grants credit, generally without collateral, to its customers, which
        are
        primarily in the steel, metal working, and scrap industries. Consequently,
        the
        Company is subject to potential credit risk related to changes in economic
        conditions within those industries. However, management believes that its
        billing and collection policies are adequate to minimize the potential credit
        risk. At December 31, 2006 and 2005, approximately 21% and 25% of gross accounts
        receivable were due from entities in the steel, metal working and scrap
        industries, respectively, and 19% and 18% of gross receivables were due from
        entities in the railroad industry. No single customer accounted for more
        than
        10% of gross accounts receivable at December 31, 2006 and 2005. Additionally,
        no
        single customer accounted for more than 10% of sales for the years ended
        December 31, 2006, 2005 and 2004.
   **NOTE
        M - COMMITMENTS AND CONTINGENCIES**
  *Collective
        bargaining agreements*
  At
        December 31, 2006 and 2005, approximately 37% and 42%, respectively, of the
        Company’s employees were covered by multi-employer collective bargaining
        agreements. One of the collective bargaining agreements expires in 2007
        representing 5% of the Company’s employees at December 31, 2006.
  *Potential
        lawsuits*
  The
        Company is involved in disputes or legal actions arising in the ordinary
        course
        of business. Management does not believe the outcome of such legal actions
        will
        have a material adverse effect on the Company’s financial position or results of
        operations.
  *Employment
        Agreements*
  On
        September 30, 2005, the Company entered into employment agreements with its
        executive officers. Each agreement is for an initial three-year term, subject
        to
        earlier termination as provided in the agreement. The term will automatically
        renew for successive one-year periods unless either party, at least three
        months
        before the end of the initial term or any renewal term, requests termination
        or
        renegotiation of the agreement. Each employment agreement provides for certain
        benefits to the executive if employment is terminated by the Company for
        cause,
        by the executive without good reason, or due to death or disability. The
        benefits include continuation of a multiple of the executive’s base salary for
        one to three years depending on the executive, any earned but unpaid
        profit-sharing or incentive bonus, and company-paid health insurance for
        one
        year.
   64
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
  **NOTE
        N - FAIR VALUE OF FINANCIAL INSTRUMENTS**
  The
        following methods and assumptions were used to estimate the fair value of
        each
        class of financial instrument:
  *Cash,
        accounts receivable, accounts payable and accrued expenses*
  The
        carrying amounts of these items are a reasonable estimate of their fair values
        because of the current maturities of these instruments.
  *Debt
        and stockholder guarantees*
  The
        fair
        value of debt differs from the carrying amount due to favorable interest
        terms
        on debt with the Company’s majority stockholder. At December 31, 2006 and
        2005, the aggregate fair value of debt, with an aggregate carrying value
        of
        $17,405 and $13,588, respectively, is estimated at $20,633 and $17,509,
        respectively, and is based on the estimated future cash flows discounted
        at
        terms at which the Company estimates it could borrow such funds from unrelated
        parties and without guarantees from the Company’s majority
        stockholder.
   **NOTE
        O - SEGMENT INFORMATION**
  The
        Company reports segment information in accordance with SFAS No. 131, *Disclosures
        about Segments of an Enterprise* .
        The
        Company operated primarily in two segments, industrial services and electrical
        contracting services, through December 31, 2004. The Company’s wholly owned
        subsidiary, MIS, provides industrial services to its customers. Electrical
        contracting services are provided by another wholly owned subsidiary of the
        Company, Martell Electric, LLC.
  In
        March
        2005, the Company acquired certain operating assets of Hatch & Kirk, Inc.
        through its newly formed subsidiary HKEC, which it operates as a third segment
        -
        engine components.
  These
        three segments are managed separately because they offer different products
        and
        services and each segment requires different technology and marketing
        strategies. Corporate administrative and support services for MISCOR are
        not
        allocated to the segments but are presented separately.
  The
        industrial services segment is primarily engaged in providing maintenance
        and
        repair services to the electric motor industry, repairing and manufacturing
        industrial lifting magnets, providing engineering and repair services for
        electrical power distribution systems within industrial plants and commercial
        facilities, and providing custom and standardized training in the area of
        industrial maintenance. The electrical contracting segment provides a wide
        range
        of electrical contracting services, mainly to industrial, commercial and
        institutional customers. The diesel engine components segment manufactures,
        remanufactures, repairs and engineers power assemblies, engine parts, and
        other
        components related to large diesel engines for the rail, utilities and offshore
        drilling industries.
  The
        accounting policies of the segments are the same as those described in the
        summary of significant accounting policies in Note A. The Company evaluates
        the
        performance of its business segments based on net income or loss. Summarized
        financial information concerning the Company’s reportable segments as of and for
        the years ended December 31, 2006, 2005 and 2004 is shown in the following
        tables:
   65
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE
        O - SEGMENT INFORMATION (CONTINUED)**
  ****
              ****
              ****
              ****
              ****
              **Diesel**
              ****
              ****
              ****
              ****
              ****
              **December
                  31,**
              ********
              ****
              **Industrial**
              ****
              **Electrical**
              ****
              **Engine**
              ****
              ****
              ****
              **Intersegment**
              ****
              **2006**
              ******2006**
              ****
              **Services**
              ****
              **Contracting**
              ****
              **Components**
              ****
              **Corporate**
              ****
              **Eliminations**
              ****
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              8,411
              
              $
              -
              
              $
              9,672
              
              $
              -
              
              $
              -
              
              $
              18,083Service
                  revenue
              
              
              28,817
              
              
              13,854
              
              
              -
              
              
              -
              
              
              -
              
              
              42,671Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              19
              
              
              247
              
              
              -
              
              
              -
              
              
              (266
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              502
              
              
              95
              
              
              144
              
              
              -
              
              
              -
              
              
              741Gross
                  profit
              
              
              8,429
              
              
              1,942
              
              
              1,587
              
              
              -
              
              
              (79
              )
              
              11,879Other
                  depreciation & amortization
              
              
              37
              
              
              24
              
              
              5
              
              
              55
              
              
              -
              
              
              121Interest
                  expense
              
              
              407
              
              
              -
              
              
              -
              
              
              2,997
              
              
              -
              
              
              3,404Net
                  income (loss)
              
              
              2,661
              
              
              868
              
              
              (88
              )
              
              (6,102
              )
              
              -
              
              
              (2,661
              )Total
                  assets
              
              
              17,250
              
              
              5,352
              
              
              5,242
              
              
              3,023
              
              
              -
              
              
              30,867Capital
                  expenditures
              
              
              2,898
              
              
              111
              
              
              40
              
              
              33
              
              
              -
              
              
              3,082
 
 **Diesel**
              
              
              
              
              
              **December
                  31,****Industrial**
              
              **Electrical**
              
              **Engine**
              
              
              
              **Intersegment**
              
              **2005****2005**
              
              **Services**
              
              **Contracting**
              
              **Components**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              8,267
              
              $
              -
              
              $
              6,320
              
              $
              -
              
              $
              -
              
              $
              14,587Service
                  revenue
              
              
              21,454
              
              
              10,255
              
              
              -
              
              
              -
              
              
              -
              
              
              31,709Intersegment
                  revenue:Product
                  sales
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              
              
              
              149
              
              
              -
              
              
              -
              
              
              (149
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              336
              
              
              80
              
              
              115
              
              
              -
              
              
              -
              
              
              531Gross
                  profit
              
              
              6,907
              
              
              1,187
              
              
              1,101
              
              
              -
              
              
              (39
              )
              
              9,156Other
                  depreciation & amortization
              
              
              53
              
              
              17
              
              
              2
              
              
              90
              
              
              -
              
              
              162Interest
                  expense
              
              
              167
              
              
              -
              
              
              -
              
              
              6,544
              
              
              -
              
              
              6,711Net
                  income (loss)
              
              
              1,545
              
              
              369
              
              
              (194
              )
              
              (8,916
              )
              
              -
              
              
              (7,196
              )Total
                  assets
              
              
              27,810
              
              
              7,820
              
              
              9,633
              
              
              40,982
              
              
              (60,524
              )
              
              25,721Capital
                  expenditures
              
              
              637
              
              
              141
              
              
              1,560
              
              
              62
              
              
              -
              
              
              2,400
 
 
  66
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
  **NOTE
        O - SEGMENT INFORMATION (CONTINUED)**
 
 **December
                  31,****Industrial**
              
              **Electrical**
              
              
              
              **Intersegment**
              
              **2004****2004**
              
              **Services**
              
              **Contracting**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              6,763
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              6,763Service
                  revenue
              
              
              18,626
              
              
              3,508
              
              
              -
              
              
              -
              
              
              22,134Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              -
              
              
              87
              
              
              -
              
              
              (87
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              261
              
              
              29
              
              
              -
              
              
              -
              
              
              290Gross
                  profit
              
              
              5,912
              
              
              312
              
              
              -
              
              
              (27
              )
              
              6,197Other
                  depreciation & amortization
              
              
              49
              
              
              7
              
              
              105
              
              
              -
              
              
              161Interest
                  expense
              
              
              95
              
              
              -
              
              
              88
              
              
              -
              
              
              183Net
                  income (loss)
              
              
              1,100
              
              
              9
              
              
              (1,298
              )
              
              -
              
              
              (189
              )Total
                  assets
              
              
              10,366
              
              
              3,799
              
              
              7,258
              
              
              (8,890
              )
              
              12,533Capital
                  expenditures
              
              
              712
              
              
              218
              
              
              -
              
              
              -
              
              
              930
  **NOTE** **P
        - SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
        ACTIVITIES**
  SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:**Years
                  ended December 31,****2006**
              
              **2005**
              
              **2004**Issuance
                  of common stock purchase warrants
              
              $
              -
              
              $
              2,382
              
              $
              900Issuance
                  of common stock in conjuction with issuance of debentures
              
              
              -
              
              
              12
              
              
              -Issuance
                  of common stock in conjuction with asset acquisition
              
              
              -
              
              
              75
              
              
              -Issuance
                  of note payable in conjuction with asset acquisition
              
              
              -
              
              
              30
              
              
              -Issuance
                  of common stock in conjuction with term and revolving
                  notes
              
              
              -
              
              
              1,171
              
              
              -Issuance
                  of conversion option and beneficial conversion feature
              
              
              -
              
              
              5,496
              
              
              -Assumption
                  of accounts payable and accrued liabilities in conjunction with
                  asset
                  acquisition
              
              
              384
              
              
              105
              
              
              -Obligation
                  under capital lease
              
              
              21
              
              
              56
              
              
              -Conversion
                  of revolving note to common stock
              
              
              729
              
              
              -
              
              
              -Reclassification
                  of warrant liability to equity per adoption of FSP EITF
                  00-19-2
              
              
              508
              
              
              -
              
              
              -
 
  67
  **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        YEARS IN THE PERIOD ENDED DECEMBER 31, 2006**
 **(Amounts
        in thousands, except share and per share data)**
 
 **NOTE** **Q
        - SUBSEQUENT EVENTS**
  *Lease
        Commitments*
  On
        January 1, 2007, the Company entered into a lease agreement for a facility
        at an
        annual rental of $89. The lease expires on December 31, 2011. The lessor,
        Martell Properties, LLC, is owned by the children of the majority shareholder
        as
        of December 31, 2006.
  *Equity
        Issuances*
  On
        January 18, 2007 the Company issued 62,500,000 shares of its common stock
        at a
        price of $0.20 per share. The proceeds of $12,500 were used to pay off all
        senior secured debt, accrued interest and prepayment penalties of $9,921,
        $42,
        and $517, respectively. Remaining proceeds of $2,020 will be used for general
        working capital purposes and to reduce accounts payable.
  *Debt
        Conversion*
  During
        2007, certain debenture holders exercised their options to convert $1,045
        into
        3,069,082 shares of MISCOR common stock at a price of $0.3404926 per share.
        In
        accordance with the provisions of the Debenture Offering, the debenture holders
        did not receive any payments of accrued interest.
  *Line
        of Credit*
  In
        March
        2007, the Company entered into a $5 million line of credit agreement and
        related
        note with a bank. The line of credit is due on demand and is secured by all
        of
        the Company’s accounts receivable and other rights to payment. The interest rate
        is .5% above the Wall Street Journal Prime Rate, payable monthly. The debentures
        and note payable to shareholder are subordinated to the Company’s indebtedness
        under the line of credit.
   **NOTE** **R
        - SUMMARIZED QUARTERLY DATA (UNAUDITED)**
  **** The
        following is a summary of the unaudited results of operations for each quarter
        in 2006 and 2005:
 QuarterFirst
                
                Second
                
                Third
                
                FourthYear
                    ended December 31, 2006Revenues
                
                $
                13,251
                
                $
                14,486
                
                $
                15,537
                
                $
                17,480Gross profit
                
                
                2,711
                
                
                3,040
                
                
                3,339
                
                
                2,789Net income (loss)
                
                
                (786
                )
                
                (1,122
                )
                
                (1,205
                )
                
                452Earnings (loss) per common share, basic and diluted
                
                $
                (0.01
                )
                $
                (0.01
                )
                $
                (0.01
                )
                $
                (0.01
                )Year
                    ended December 31, 2005Revenues
                
                $
                9,036
                
                $
                11,117
                
                $
                12,410
                
                $
                13,733Gross profit
                
                
                1,600
                
                
                2,222
                
                
                2,610
                
                
                2,724Net income (loss)
                
                
                (218
                )
                
                (505
                )
                
                (5,016
                )
                
                (1,457
                )Earnings (loss) per common share, basic and diluted
                
                $
                -
                
                $
                (0.01
                )
                $
                (0.05
                )
                $
                (0.01
                )
  68
 **MISCOR
          GROUP, LTD. AND SUBSIDIARIES**
 **SCHEDULE
          II**
 **FINANCIAL
          STATEMENT SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS**
 **(Amounts
          in thousands, except share and per share data)**
   Allowance
                    for
                      Doubtful
                    Accounts
                  
                  
                  
                  Reserve
                    for
                      Excess
                    and
                      Obsolete
                    InventoryBalance
                      at December 31, 2003
                  
                  $
                  149
                  
                  
                  
                  
                  $
                  29Charges
                      to operations
                  
                  
                  128
                  
                  
                  
                  
                  
                  ---Deductions
                  
                  
                  (134
                  )
                  (a)
                  
                  
                  
                  ---Balance
                      at December 31, 2004
                  
                  
                  143
                  
                  
                  
                  
                  
                  29Charges
                      to operations
                  
                  
                  238
                  
                  
                  
                  
                  
                  88Deductions
                  
                  
                  (40
                  )
                  (a)
                  
                  
                  
                  ---Balance
                      at December 31, 2005
                  
                  
                  341
                  
                  
                  
                  
                  
                  117Charges
                      to operations
                  
                  
                  251
                  
                  
                  
                  
                  
                  195Deductions
                  
                  
                  (164
                  )
                  (a)
                  
                  
                  
                  ---Balance
                      at December 31,2006
                  
                  $
                  428
                  
                  
                  
                  
                  $
                  312
 _________________
 (a)
          Uncollectible accounts written off, net of recoveries.
  69
  **ITEM****9.**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
  Not
        applicable.
   **ITEM****9A.**
              **CONTROLS
                  AND PROCEDURES**
  Our
        disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e)
        under the Exchange Act are designed to ensure that information we are required
        to disclose in our reports filed under the Exchange Act, such as this Annual
        Report on Form 10-K, is recorded, processed, summarized and reported within
        the
        time periods specified in the rules of the Securities and Exchange Commission.
        Our disclosure controls and procedures also are designed to ensure that such
        information is accumulated and communicated to our management, including
        our
        Chief Executive Officer and Chief Financial Officer, as appropriate to allow
        timely decisions regarding required disclosures.
  Our
        management, under the supervision and with the participation of our Chief
        Executive Officer and Chief Financial Officer, evaluated the effectiveness
        of
        our disclosure controls and procedures in effect as of December 31, 2006.
        Based
        on this evaluation, our Chief Executive Officer and Chief Financial Officer
        concluded that, as of December 31, 2006, 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 made
        known to management, including the Chief Executive Officer and Chief Financial
        Officer, on a timely basis.
  There
        were no changes in our internal control over financial reporting that occurred
        during the quarter ended December 31, 2006, that has materially affected,
        or are
        reasonably likely to materially affect, our internal control over financial
        reporting.
   **ITEM****9B.**
              **OTHER
                  INFORMATION**
  Not
        applicable.
   **PART
        III**
 
  **ITEM****10.**
              **DIRECTORS,
                  EXECUTIVE OFFICERS AND CORPORATE
                  GOVERNANCE**
  **Directors
        and Executive Officers**
  Information
        contained under the captions “Proposal 1: Election of Directors,” “Executive
        Officers,” “Corporate Governance - Section 16(a) Beneficial Ownership Reporting
        Compliance” and “Other Matters - Director Nominations by Shareholders” in our
        proxy statement for the 2007 annual meeting of its shareholders (the
“**Proxy Statement**”) is incorporated by reference in this Item
        10.
  **Code
        of Ethics**
  We
        have adopted the MISCOR Group, Ltd. Code of Business Conduct and Ethics,
        a code
        of ethics that applies to the President and Chief Executive Officer and the
        Chief Financial Officer. The code of ethics is filed as Exhibit 14.1 to this
        Annual Report on Form 10-K.
   70
   **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 “Compensation
        Discussion and Analysis,” “Executive Compensation,” “Compensation of Directors,”
“Compensation Committee Report” and “Corporate Governance - Compensation
        Committee Interlocks and Insider Participation”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**
  **Security
        Ownership**
  Information
        contained under the caption “Security Ownership of Principal Holders and
        Management” in the Proxy Statement is incorporated by reference in this Item
        12.
  **Securities
        Authorized for Issuance under Equity Compensation Plans**
  As
        of
        December 31, 2006, the following shares were authorized to be issued under
        our
        equity compensation plans :
  **Equity
                  Compensation Plan Information****Plan
                  Category**
              
              Number
                        of securities tobe issued upon exerciseof
                    outstanding options,warrants and rights
              
              
              Weighted
                        Averageexercise price ofoutstanding
                    options,warrants and rights
              
              
              Number
                      of securitiesremaining availablefor future
                  issuanceEquity
                  compensation plans approved by security holders (1)
              
              
              1,185,000
              
              
              
              
              $
              0.250
              
              
              
              
              
              565,000Equity
                  compensation plans not approved by security holders(2)
              
              
              -
              (3)
              
              
              
              
              -
              (3)
              
              
              
              
              700,000Total
              
              
              1,185,000
              
              
              
              
              $
              0.250
              
              
              
              
              
              1,265,000
  1  Includes
          the MISCOR Group, Ltd. 2005 Stock Option Plan.
 2  Includes
          the MISCOR Group, Ltd. 2005 Restricted Stock Purchase Plan.
 3  Excludes
          300,000 shares issued under the MISCOR Group, Ltd. 2005 Restricted Stock
          Purchase Plan, pursuant to accepted offers to purchase such shares at nominal
          exercise prices.
  71
  *2005
        Restricted Stock Purchase Plan.* Our
        board
        of directors adopted the 2005 Restricted Stock Purchase Plan in August 2005.
        The
        Plan provides for the grant of offers to purchase restricted stock to our
        directors, officers and key employees. A total of 1,000,000 shares of common
        stock were reserved for issuance under the Plan. This number is subject to
        adjustment as a result of a stock split, combination of shares,
        recapitalization, merger or other transaction resulting in a change in our
        shares. If we repurchase any shares in accordance with the terms of the Plan,
        the re-acquired shares become available for issuance under the Plan.
  The
        Plan
        is administered by our board of directors or a committee of the board designated
        for that purpose. The grants described above were approved by our full board
        of
        directors, which has since designated the compensation committee to act as
        administrator of the Plan. The administrator has the power to determine the
        persons eligible to participate in the Plan and the terms of each purchase
        offer, including the purchase price (which may be zero) and the number of
        shares
        subject to the offer. An offer to purchase terminates 30 days after the offer
        is
        made or, if earlier, termination of employment for any reason.
  A
        participant may not transfer shares acquired under the Plan except in the
        event
        of the sale or liquidation of our company. A participant is deemed to agree
        to
        any sale or liquidation approved by holders of a majority of our common stock,
        and to have granted such holders an irrevocable proxy to vote the participant’s
        shares in favor of the sale or liquidation.
  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, we are required under the Plan 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, we are required under the Plan to purchase the shares for a price
        equal
        to their fair market value.
   **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.
   **PART
        IV**
 
   **ITEM****15.**
              **EXHIBITS
                  AND FINANCIAL STATEMENT
                  SCHEDULES**
  **Financial
        Statements**
  The
        consolidated financial statements of MISCOR Group, Ltd. and its subsidiaries
        and
        independent auditors’ report are included in Part II (Item 8) of this Form
        10-K.
   72
   **Financial
        Statement Schedules**
  The
        following financial statement schedule for the years ended December 31, 2006,
        2005 and 2004 included in this report:
  Schedule
        II - Valuation and Qualifying Accounts
  All
        other
        schedules are omitted because they are not applicable or the required
        information is included in the financial statements and notes
        thereto.
  **Exhibits**
  The
        following documents are included or incorporated by reference in this Annual
        Report on Form 10-K:
  **Exhibit****Number**
              **Description**2.1
              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)2.2
              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 Registration
                  Statement)2.3
              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 Registration
                  Statement)3.1
              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) (the “**Registration
                  Statement**))3.2
              Amended
                  and Restated Code of By-Laws of the registrant4.1
              Specimen
                  certificate of common stock (incorporated by reference to Exhibit
                  4.1 to
                  the Registration Statement)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 10.1 to the Registration
                  Statement)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 10.2
                  to the
                  Registration Statement)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 10.5 to the Registration Statement)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 Registration
                  Statement)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
                  Registration Statement)4.7a
              Form
                  of subordinated convertible debenture issued to purchasers pursuant
                  to
                  Convertible Debenture Purchase Agreements with the registrant
                  (incorporated by reference to Exhibit 10.5 to the Registration
                  Statement)
  73
  
 **Exhibit****Number**
              **Description**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
                  Registration Statement)4.8
              Secured
                  Revolving Note dated August 24, 2005 issued to Laurus Master Fund,
                  Ltd.
                  (incorporated by reference to Exhibit 4.8 to the Registration
                  Statement)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
                  Registration Statement)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 Registration
                  Statement)4.11
              Promissory
                  Note dated January 1, 2004 issued by Magnetech Industrial Services,
                  Inc.
                  to John A. Martell (incorporated by reference to Exhibit 4.11 to
                  the
                  Registration Statement)4.12
              Conversion
                  Option dated September 12, 2005 among John A. Martell, Magnetech
                  Industrial Services, Inc. and the registrant (incorporated by reference
                  to
                  Exhibit 4.12 to the Registration Statement)4.13
              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 10.4 to the Registration
                  Statement)4.14
              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 10.5
                  to the
                  Registration Statement)4.15
              Registration
                  Rights Agreement dated August 24, 2005 between the registrant and
                  Laurus
                  Master Fund, Ltd. (incorporated by reference to Exhibit 4.15 to
                  the
                  Registration Statement)4.16
              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)4.17
              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)4.18
              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)4.19a
              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)4.19b
              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)4.19c
              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)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 Registration
                  Statement)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 Registration
                  Statement)
  74
  
 **Exhibit****Number**
              **Description**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 Registration
                  Statement)10.4
              Form
                  of Stock Purchase Agreement between the registrant and the purchasers
                  scheduled therein (incorporated by reference to Exhibit 10.4 to
                  the
                  Registration Statement)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
                  Registration Statement)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 Registration
                  Statement)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 10.7 to the Registration Statement)10.7b
              Funds
                  Escrow Disbursement Letter/Joint Instructions dated August 24,
                  2005
                  (incorporated by reference to Exhibit 10.7b to the Registration
                  Statement)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 Registration Statement)10.9a
              Security
                  and Purchase Agreement dated August 24, 2005 among Laurus Master
                  Fund,
                  Ltd., the registrant and subsidiaries of the registrant identified
                  therein
                  (incorporated by reference to Exhibit 10.9 to the Registration
                  Statement)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
                  Registration Statement)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
                  Registration Statement)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 Registration
                  Statement)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 Registration
                  Statement)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 Registration
                  Statement)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 Registration Statement)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 Registration Statement)
  75
  
 **Exhibit****Number**
              **Description**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 Registration Statement)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 Registration Statement)10.17@
              2005
                  Stock Option Plan of the registrant (incorporated by reference
                  to Exhibit
                  10.18 to the Registration Statement)10.18@
              Form
                  of Stock Option Agreement under 2005 Stock Option Plan (incorporated
                  by
                  reference to Exhibit 10.19 to the Registration
                  Statement)10.19@
              2005
                  Restricted Stock Purchase Plan of the registrant (incorporated
                  by
                  reference to Exhibit 10.20 to the Registration
                  Statement)10.20@
              Employment
                  Agreement dated September 30, 2005 between the registrant and John
                  A.
                  Martell (incorporated by reference to Exhibit 10.21 to the Registration
                  Statement)10.21@
              Employment
                  Agreement dated September 30, 2005 between the registrant and James
                  M.
                  Lewis (incorporated by reference to Exhibit 10.22 to the Registration
                  Statement)10.22@
              Employment
                  Agreement dated September 30, 2005 between the registrant and Richard
                  J.
                  Mullin (incorporated by reference to Exhibit 10.23 to the Registration
                  Statement)10.23@
              Employment
                  Agreement dated September 30, 2005 between Magnetech Industrial
                  Services,
                  Inc. and William Wisniewski (incorporated by reference to Exhibit
                  10.24 to
                  the Registration Statement)10.24@
              Employment
                  Agreement dated September 30, 2005 between Martell Electric, LLC
                  and
                  Anthony Nicholson (incorporated by reference to Exhibit 10.25 to
                  the
                  Registration Statement)10.25@
              Employment
                  Agreement dated September 30, 2005 between HK Engine Components,
                  LLC and
                  Cullen Burdette (incorporated by reference to Exhibit 10.26 to
                  the
                  Registration Statement )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 Registration
                  Statement)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
                  Registration Statement)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)10.31
              Mortgage
                  granted by Magnetech Industrial Services of Alabama, LLC in favor
                  of
                  Laurus Master Fund, Ltd. (incorporated by reference to Exhibit
                  10.4 to the
                  registrant’s Current Report on Form 8-K filed by the registrant on
                  June 6, 2006)10.32
              Guaranty
                  dated May 31, 2006 made by the registrant and certain subsidiaries
                  of the
                  registrant identified therein in favor of Laurus Master Fund, Ltd.
                  (incorporated by reference to Exhibit 10.5 to the registrant’s Current
                  Report on Form 8-K filed by the registrant on June 6,
                  2006)
  76
  
 **Exhibit****Number**
              **Description**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)14.1
              Code
                  of Business Conduct and Ethics (incorporated by reference to Exhibit
                  14 to
                  the Registration Statement)21.1
              Subsidiaries
                  of the registrant23.1
              Consent
                  of Asher & Company, Ltd.31.1
              Certification
                  by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)
                  of the
                  Exchange Act31.2
              Certification
                  by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)
                  of the
                  Exchange Act32.1
              Section
                  1350 Certifications
 
 @  Denotes
        a
        management contract or compensatory plan.
   77
  **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
  **MISCOR
                  GROUP, LTD.**March 29,
                  2007
              By:
              /s/
                  RICHARD J. MULLINRichard
                  J. Mullin, Chief Financial Officer
 
  
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed 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)
              
              March
                  29, 2007John
                  A. Martell/s/
                  RICHARD J. MULLIN
              
              Chief
                  Financial Officer
                (Principal
                  Financial and Accounting Officer)
              
              March
                  29, 2007Richard
                  J. Mullin/s/
                  WILLIAM J. SCHMUHL, JR.
              
              Director
              
              March
                  29, 2007William
                  J. Schmuhl, Jr./s/
                  RICHARD A. TAMBORSKI
              
              Director
              
              March
                  29, 2007Richard
                  A. Tamborski
 
   
  78