UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549





FORM
10-Q





x
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended September 28, 2008o
            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
South Walnut Street


South
Bend, Indiana 46619


(Address
of principal executive offices/zip code)





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






Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




x
Yes   o No






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


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





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




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. As of November 11, 2008, there were
11,739,883 shares outstanding of the issuer’s Common Stock, without par
value.















MISCOR
GROUP, LTD.





INDEX
TO FORM 10-Q





Item
            
            PageNumber
            
            NumberPART
      I - FINANCIAL INFORMATION1.
            Financial
      Statements:Condensed
      Consolidated Balance Sheets September 28, 2008 (Unaudited) and
      December 31, 2007
            1Condensed
      Consolidated Statements of Operations (Unaudited) Three and Nine Months
      ended September 28, 2008 and September 30, 2007
            2Condensed
      Consolidated Statements of Cash Flows (Unaudited) Nine Months ended
      September 28, 2008 and September 30, 2007
            3Notes
      to Condensed Consolidated Financial Statements
            42.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            203.
            Quantitative
      and Qualitative Disclosures about Market Risk
            294T.
            Controls
      and Procedures
            30PART
      II - OTHER INFORMATION2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            316.
            Exhibits
            31Signatures
            32





i
  PART
I - FINANCIAL INFORMATION


ITEM
      1.FINANCIAL STATEMENTS




MISCOR GROUP, LTD. AND
  SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETS(Amounts
      in thousands, except share and per share data)ASSETSSeptember
      28,
            
            
            December
      31,2008
            
            
            2007(Unaudited)CURRENT
      ASSETSCash
            
            $
            -
            
            
            $
            2,807Accounts
      receivable, net of allowance for doubtful accounts of $803 and $669,
      respectively
            
            
            21,433
            
            
            
            17,233Inventories,
      net
            
            
            13,727
            
            
            
            10,884Prepaid
      expenses and other current assets
            
            
            4,826
            
            
            
            2,006Total
      current assets
            
            
            39,986
            
            
            
            32,930PROPERTY
      AND EQUIPMENT, net
            
            
            14,021
            
            
            
            10,125OTHER
      ASSETSDeposits
      and other assets
            
            
            268
            
            
            
            182Goodwill
            
            
            13,381
            
            
            
            8,003Debt
      issue costs, net
            
            
            34
            
            
            
            40Customer
      relationships, net
            
            
            9,593
            
            
            
            7,568Other
      intangible assets, net
            
            
            1,254
            
            
            
            699Total
      other assets
            
            
            24,530
            
            
            
            16,492Total
      Assets
            
            $
            78,537
            
            
            $
            59,547LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESRevolving
      credit line, net of discount of $131 and $-0-,
respectively
            
            $
            5,803
            
            
            $
            -Current
      portion of long-term debt, net of discount of $-0- and $15,
      respectively
            
            
            924
            
            
            
            3,036Accounts
      payable
            
            
            10,925
            
            
            
            7,530Accrued
      expenses and other current liabilities
            
            
            5,833
            
            
            
            4,558Total
      current liabilities
            
            
            23,485
            
            
            
            15,124LONG
      TERM LIABILITIESLong-term
      debt
            
            
            4,806
            
            
            
            2,195Long-term
      debt, Officers
            
            
            4,600
            
            
            
            5,000Total
      long-term liabilities
            
            
            9,406
            
            
            
            7,195Total
      liabilities
            
            
            32,891
            
            
            
            22,319Commitments
      and ContingenciesSTOCKHOLDERS'
      EQUITYPreferred
      stock, no par value; 800,000 shares authorized; no shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, no par value; 30,000,000 shares authorized; 11,731,440 and
      11,129,012 shares issued and outstanding, respectively
            
            
            50,794
            
            
            
            43,967Additional
      paid in capital
            
            
            9,185
            
            
            
            9,019Deferred
      compensation
            
            
            (167
            )
            
            
            (55
            )Accumulated
      deficit
            
            
            (14,166
            )
            
            
            (15,703
            )Total
      Stockholders' equity
            
            
            45,646
            
            
            
            37,228Total
      Liabilities and Stockholders' Equity
            
            $
            78,537
            
            
            $
            59,547





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








1




MISCOR
GROUP, LTD. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts
in thousands, except share and per share data)
  For
      the
              
              
              For
      the
              
              
              For
      the
              
              
              For
      the3
      months ended
              
              
              3
      months ended
              
              
              9
      months ended
              
              
              9
      months endedSeptember
      28,
              
              
              September
      30,
              
              
              September
      28,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)REVENUESProduct
      sales
              
              $
              6,150
              
              
              $
              6,092
              
              
              $
              18,771
              
              
              $
              17,115Service
      revenue
              
              
              25,353
              
              
              
              11,578
              
              
              
              73,017
              
              
              
              33,465Total
      revenues
              
              
              31,503
              
              
              
              17,670
              
              
              
              91,788
              
              
              
              50,580COST
      OF REVENUESProduct
      sales
              
              $
              5,656
              
              
              
              4,399
              
              
              
              15,248
              
              
              
              12,476Service
      revenue
              
              
              20,834
              
              
              
              10,289
              
              
              
              61,715
              
              
              
              29,363Total
      cost of revenues
              
              
              26,490
              
              
              
              14,688
              
              
              
              76,963
              
              
              
              41,839Gross
      Profit
              
              
              5,013
              
              
              
              2,982
              
              
              
              14,825
              
              
              
              8,741Selling,
      general and administrative expenses
              
              
              4,334
              
              
              
              2,661
              
              
              
              12,401
              
              
              
              7,781Operating
      income
              
              
              679
              
              
              
              321
              
              
              
              2,424
              
              
              
              960Other
      (income)/expenseLoss
      on debt extinguishment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,300Gain
      on sale of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              (42
              )
              
              
              -Interest
      expense
              
              
              198
              
              
              
              257
              
              
              
              693
              
              
              
              972198
              
              
              
              257
              
              
              
              651
              
              
              
              3,272Income
      before taxes
              
              
              481
              
              
              
              64
              
              
              
              1,773
              
              
              
              (2,312
              )Income
      tax expense
              
              
              10
              
              
              
              -
              
              
              
              236
              
              
              
              -NET
      INCOME (LOSS)
              
              $
              471
              
              
              $
              64
              
              
              $
              1,537
              
              
              $
              (2,312
              )Basic
      and diluted earnings (loss) per share
              
              $
              0.04
              
              
              $
              0.01
              
              
              $
              0.13
              
              
              $
              (0.32
              )Weighted
      average shares outstanding:Basic
              
              
              11,731,394
              
              
              
              7,526,450
              
              
              
              11,616,370
              
              
              
              7,283,347Diluted
              
              
              12,988,391
              
              
              
              8,744,230
              
              
              
              12,915,610
              
              
              
              7,283,347





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







2








MISCOR
      GROUP, LTD. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts
      in thousands, except share and per share data)For
      the 9 months endedSeptember
      28,
            
            
            September
      30,2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)OPERATING
      ACTIVITIESNet
      cash utilized by operating activities
            
            $
            (768
            )
            
            $
            (1,885
            )INVESTING
      ACTIVITIESAcquisition
      of business assets, net of cash acquired
            
            
            (8,041
            )
            
            
            -Acquisition
      of property and equipment
            
            
            (1,863
            )
            
            
            (367
            )Proceeds
      from disposal of property and equipment
            
            
            143
            
            
            
            3Net
      cash utilized by investing activities
            
            
            (9,761
            )
            
            
            (364
            )FINANCING
      ACTIVITIESPayments
      on capital lease obligations
            
            
            (39
            )
            
            
            (29
            )Short
      term borrowings, net
            
            
            5,763
            
            
            
            (6,188
            )Borrowings
      of long-term debt
            
            
            2,389
            
            
            
            -Repayments
      of long-term debt
            
            
            (440
            )
            
            
            (4,040
            )Proceeds
      from the issuance of shares and exercise of warrants
            
            
            94
            
            
            
            12,567Debt
      issuance costs
            
            
            (45
            )
            
            
            -Payment
      of stock issuance costs
            
            
            -
            
            
            
            (75
            )Net
      cash provided by financing activities
            
            
            7,722
            
            
            
            2,235DECREASE
      IN CASH
            
            
            (2,807
            )
            
            
            (14
            )Cash,
      beginning of period
            
            
            2,807
            
            
            
            297Cash,
      end of period
            
            $
            -
            
            
            $
            283SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
            
            $
            587
            
            
            $
            238





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




3


MISCOR
GROUP, LTD.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
AND NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 28, 2008


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





NOTE
      A - BASIS OF PRESENTATION




The
unaudited interim consolidated financial statements of MISCOR Group, Ltd. (the
“Company”) as of and for the three and nine months ended September 28, 2008 and
September 30, 2007, have been prepared in accordance with generally accepted
accounting principles for interim information and the rules and regulations of
the Securities and Exchange Commission for interim financial information.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, in the opinion of the Company’s management, all adjustments, consisting
of normal, recurring adjustments, considered necessary for a fair statement have
been included. The results for the nine months ended September 28, 2008 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2008. Refer to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007 for the most recent disclosure of the Company’s
accounting policies.




The
Company completed a 1 for 25 reverse stock split of its common stock effective
January 14, 2008. Accordingly, all shares, share prices and earnings (loss) per
share presented in the interim consolidated financial statements reflect the
effect of the reverse stock split.




Certain
amounts from the prior year financial statements have been reclassified to
conform to the current year presentation. Long-term debt, Stockholder was
renamed Long-term debt, Officers on the condensed consolidated balance sheets.
In addition, Long-term debt in the amount of $2,000 was reclassified to
Long-term debt, Officers as of December 31, 2007. These reclassifications had no
effect on the Company’s consolidated statements of operations or cash
flows.






NOTE
      B - RECENT ACCOUNTING
PRONOUNCEMENTS




SFAS 157




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






SFAS 159




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115(“SFAS 159”). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Entities that elect
the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes
presentation and disclosure requirements to facilitate comparisons between
companies that choose different measurement attributes for similar assets and
liabilities. The adoption of SFAS 159 did not have an




4


NOTE
B - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)




SFAS 159
(CONTINUED)




effect on
our financial condition or results of operations as we did not elect this fair
value option, nor is it expected to have a material impact on future periods as
the election of this option for our financial instruments is expected to be
limited.






SFAS 141(R)




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






SFAS 160




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






SFAS 161




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






FSP
142-3




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







5


NOTE
B - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)




SFAS 162







In May
2008, the FASB issuedSFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”(“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with U.S. GAAP. SFAS 162 will become
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.”  The
Company does not expect the adoption of this standard to have a material impact
on its consolidated financial statements.






NOTE
C - EARNINGS PER SHARE




The
Company accounts for earnings/loss per common share under the provisions of SFAS
No. 128, Earnings Per
Share, which requires a dual presentation of basic and diluted
earnings/loss per common share. Basic earnings/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
earnings per common share is computed assuming the conversion of common stock
equivalents, when dilutive.




Components
of basic and diluted earnings per share were as follows:




Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      28,
            
            
            September
      30,
            
            
            September
      28,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income available for common stockholders used in basic earnings per
      share
            
            $
            471
            
            
            $
            64
            
            
            $
            1,537
            
            
            $
            (
      2,312
            )Interest
      on convertible debt
            
            
            30
            
            
            
            5
      4
            
            
            
            102
            
            
            
            -Net
      income available for common stockholders after assumed conversion of
      diluted securities
            
            $
            501
            
            
            $
            118
            
            
            $
            1,639
            
            
            $
            (
      2,312
            )Weighted
      average outstanding shares of common stock
            
            
            11,731,394
            
            
            
            7,526,450
            
            
            
            11,616,370
            
            
            
            7,283,347Dilutive
      effect of stock options and warrants
            
            
            56,997
            
            
            
            17,780
            
            
            
            99,240
            
            
            
            -Dilutive
      effect of convertible debt
            
            
            1,200,000
            
            
            
            1,200,000
            
            
            
            1,200,000
            
            
            
            -Weighted
      average outstanding shares of common stock and common stock
      equivalents
            
            
            12,988,391
            
            
            
            8,744,230
            
            
            
            12,915,610
            
            
            
            7,283,347Earnings
      (loss) per share:Basic
            
            $
            0.04
            
            
            $
            0.01
            
            
            $
            0.13
            
            
            $
            (0.32
            )Diluted
            
            $
            0.04
            
            
            $
            0.01
            
            
            $
            0.13
            
            
            $
            (0.32
            )







6


NOTE
C - EARNINGS PER SHARE (CONTINUED)




For the
three months ended September 30, 2007, the Company’s common stock equivalents,
consisting of subordinated debt convertible into 350,081 common shares were not
included in computing dilutive earnings per share because their effects were
anti-dilutive. For the nine months ended September 30, 2007, the Company’s
common stock equivalents, consisting of warrants to purchase 326,462 shares of
common stock, subordinated debt convertible into 1,550,081 common shares, and
options to purchase 59,000 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.






NOTE
      D - ACQUISITIONS




On
January 16, 2008, the Company acquired 100% of the outstanding shares of common
stock of American Motive Power, Inc. (“AMP”) in a transaction accounted for
using the purchase method of accounting. Accordingly, the results of operations
are included in the Company’s consolidated financial statements from that date
forward. AMP is engaged in the business of repairing, remanufacturing, and
rebuilding locomotives and locomotive engines and providing related goods and
services to the railroad industry.




The
aggregate purchase price was $10,827, including $7,215 paid in cash at closing,
costs of acquisition of $112, and 253,623 shares of MISCOR common stock
valued at $13.80 per share, or $3,500. The purchase price was allocated to
assets acquired and liabilities assumed based on their estimated fair value at
the date of acquisition. The excess purchase price over those fair values was
recorded as goodwill. The fair value assigned to assets acquired and liabilities
assumed are based on valuations using management’s estimates and assumptions as
of January 1, 2008, the effective date of the acquisition.




The
preliminary allocation of the purchase price is as follows:




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







The
intangible assets have an 14-year weighted average useful life comprised of
customer relationships (20-years), non-compete agreements (3 years) and mutual
services agreement (1 year). The $5,377 of goodwill was assigned to the repair,
remanufacturing and manufacturing segment. No portion of the goodwill is
expected to be deductible for income tax purposes.




In
September 2008, the Company acquired certain business assets of Visalia Electric
Motor Shop Inc. (“VEMS”) in a transaction accounted for using the purchase
method. Accordingly, the results of operations from these net assets acquired
are included in the Company’s consolidated financial statements from that date
forward. VEMS provides maintenance and repair services for both alternating
current and direct current electric industrial motors and
generators.   The acquisition of net assets was made for the
purpose of expanding the Company’s market penetration into the repair,
remanufacturing and manufacturing segment. The aggregate purchase price of
$1,000 was paid in cash at closing and was financed through borrowings under the
credit facility. Concurrent with this acquisition, the Company leased $0.8
million of equipment from VEMS which is being accounted for as a capital lease.
The purchase price was allocated to assets acquired based on their estimated
fair values at the date of acquisition. The fair value assigned to assets
acquired is based on valuations using management’s estimates and assumptions as
of September 23, 2008, the effective date of the acquisition.  The
intangible assets, comprised of customer relationships, have a 20-year useful
life. The preliminary allocation of the purchase price is as
follows:




7






NOTE
D – ACQUISITIONS (CONTINUED)





Inventory
            
            $
            494Customer
      relationships
            
            
            506$
            1,000










The
following table presents the unaudited results of operations of the Company as
if the acquisitions had been consummated as of January 1, 2007, and includes
certain proforma adjustments, including depreciation and amortization on the
assets acquired.




Nine
      months endedSeptember
      28, 2008
            
            
            September
      30, 2007Revenues
            
            $
            94,150
            
            
            $
            56,503Net
      earnings (loss)
            
            $
            1,640
            
            
            $
            (
      4,547
            )Basic
      and diluted earnings (loss) per share
            
            $
            0.14
            
            
            $
            (
      0.60
            )







NOTE
      E - INVENTORY




Inventory
consists of the following:




September
      28, 2008
            
            
            December
      31, 2007Raw
      materials
            
            $
            7,093
            
            
            $
            5,197Work-in-process
            
            
            5,648
            
            
            
            4,846Finished
      goods
            
            
            2,120
            
            
            
            1,60814,861
            
            
            
            11,651Less:
      allowance for slow moving and obsolete inventories
            
            
            (1,134
            )
            
            
            (767
            )$
            13,727
            
            
            $
            10,884










NOTE
      F – INTANGIBLE ASSETS




Intangible
assets consist of the following:




September
      28, 2008
            
            
            December
      31, 2007Gross
            
            
            Accumulated
      Amortization
            
            
            Net
            
            
            Gross
            
            
            Accumulated
      Amortization
            
            
            NetPatents
      and trademarks
            
            $
            4
            
            
            $
            (2
            )
            
            $
            2
            
            
            $
            4
            
            
            $
            (2
            )
            
            $
            2Technical
      library
            
            
            700
            
            
            
            (29
            )
            
            
            671
            
            
            
            700
            
            
            
            (3
            )
            
            
            697Non-compete
      agreements
            
            
            790
            
            
            
            (209
            )
            
            
            581
            
            
            
            -
            
            
            
            -
            
            
            
            -Mutual
      services agreement
            
            
            100
            
            
            
            (100
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Customer
      relationships
            
            
            9,975
            
            
            
            (382
            )
            
            
            9,593
            
            
            
            7,600
            
            
            
            (32
            )
            
            
            7,568$
            11,569
            
            
            $
            (
      722
            )
            
            $
            10,847
            
            
            $
            8,304
            
            
            $
            (37
            )
            
            $
            8,267


8


NOTE
      F – INTANGIBLE ASSETS (CONTINUED)




The
estimated future amortization expense related to intangible assets for the
periods subsequent to September 28, 2008 on a calendar year basis is as
follows:




Years
      Ending December 31,
            
            Amount2008
            
            $
            1762009
            
            
            7972010
            
            
            7972011
            
            
            5462012
            
            
            534Thereafter
            
            
            7,997$
            10,847







NOTE G – REVOLVING CREDIT
      LINE




On
January 14, 2008, the Company entered into a credit facility with Wells Fargo
Bank, National Association (“Wells Fargo”).  The credit facility is
comprised of a $1,250 real estate term note and a $13,750 revolving
note.  On January 16, 2008, MISCOR borrowed $7,500 under the revolving
note and used the net proceeds of the loan for working capital and to acquire
all of the outstanding shares of common stock of American Motive Power, Inc.
(Note D).  The original maturity date of the notes is January 1, 2011,
at which time the notes will automatically renew for one-year periods until
terminated.  The notes are secured by (1) a first priority lien on the
assets of the Company; (2) a mortgage on certain real property; and (3) the
pledge of the equity interests in MISCOR’s subsidiaries.  The real
estate term note bears interest at an annual rate equal to the rate of interest
most recently announced by Wells Fargo at its principal office as its prime rate
(the “Prime Rate”), subject to certain minimum annual interest
payments.  The revolving note bears interest at an annual rate of
either (i) the Prime Rate, or (ii) Wells Fargo’s LIBOR rate plus 2.8%, depending
on the nature of the advance.  Interest is payable monthly, in
arrears, under the revolving note beginning on February 1, 2008.  The
outstanding balance on the revolving note was $5,934 at September 28,
2008. As of September 28, 2008 there was $2,650 available under the
revolving credit line. The real estate term note requires monthly principal
payments of $10, plus interest, beginning on June 1, 2008, the first day of the
month following receipt of the advance. The outstanding balance under the real
estate term note as of September 28, 2008 was $1,208.




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




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




9


NOTE G –
      REVOLVING CREDIT LINE (CONTINUED)




If the
Company defaults under its obligations to Wells Fargo, then the interest on the
outstanding principal balance of each note will increase by 3% until the default
is cured or waived.  Other remedies available to Wells Fargo upon an
event of default include the right to accelerate the maturity of all
obligations, the right to foreclose on the assets securing the obligations, all
rights of a secured creditor under applicable law, and other rights set forth in
the loan documents. There are certain financial covenants including minimum book
net worth and net income, maximum capital expenditures and debt service coverage
ratios. The Company was not in compliance with one of its financial covenants at
September 28, 2008; however, the Company received a waiver for the covenant
violation from the lender.




The
Company may prepay the term note at any time, subject to certain prepayment
penalties.  With respect to the revolving note, the Borrowers may
borrow, pay down and re-borrow under the note until the maturity
date.  The maximum aggregate principal amount that may be borrowed
under the revolving note is the lesser of (1) the sum of 40% of the Company’s
eligible construction related trade receivables up to $2,000 and 85% of certain
remaining eligible trade accounts receivable less any reserves established by
Wells Fargo from time to time and (2) $13,750 less any reserves established by
Wells Fargo. In April 2008, the Company and Wells Fargo amended the credited
facility entered into in January 2008. The amendment revised the formula for the
maximum aggregate principal amount that may be borrowed under the revolving
note. Specifically, the percentage
of a portion of the Company’s eligible construction related trade receivables
resulting from time and material services and completed contracts was increased
from 40% to 85% and the related borrowings were removed from the $2,000
limitation.




As part
of the financing, the Company paid debt issue costs of $45 and is amortizing
these costs to interest expense over the three year term of the
financing.  Interest expense was $4 and $11 for the three and nine
months ended September 28, 2008, respectively. Net debt issue cost at September
28, 2008 was $34. The Company also paid fees to Wells Fargo as part of the
financing in the amount of $171. These fees were recorded as a debt discount.
The Company is accreting this debt discount to interest expense over the term of
the credit facility. Interest expense was $14 and $40 for the three and nine
months ended September 28, 2008, respectively. Net debt discount at September
28, 2008 related to this instrument was $131.




The April
2008 amendment also provided a four year equipment term note in the amount of
$1,000, secured by substantially all of the machinery and equipment of the
Company. The note matures June 1, 2012 and is payable in monthly installments of
$21 plus interest at the bank’s prime rate beginning June 1, 2008. The
outstanding balance under the equipment term note as of September 28, 2008 was
$917.




In
September 2008, the Company amended the credit facility with Wells Fargo. The
second amendment revised a financial covenant which increased the maximum amount
of capital expenditures for 2008 to $2 million, no more than $1.25 million of
which could be paid for from working capital. The amendment also limited the
investment and loans from AMP to AMP Canada to $1 million.




Interest
expense under the Wells Fargo Credit facility, excluding amortization of debt
issue costs and debt discount, for the three and nine months ended September 28,
2008 was $95 and $254, respectively.













10




NOTE
H - DEBT




Long-term
debt




Long-term
debt consists of the following:




September
      28,
            
            
            December
      31,2008
            
            
            2007Note
      payable to Officer, due December 2008, plus interest at prime rate less 1%
      (4.00% at September 28, 2008 and 6.25% at December 31, 2007, 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 $-0- and $15 at September 28, 2008
      and December 31, 2007, respectively)
            
            
            -
            
            
            
            2,965Note
      payable to former employee in annual principal payments of
      $10,  unsecured and without interest, paid of March 7,
      2008
            
            
            -
            
            
            
            10Notes
      payable to former  stockholders of 3-D Service, Ltd. due
      November 30, 2010, plus interest at prime rate (5.00% at September 28,
      2008 and 7.25% at December 31, 2007, respectively) secured by a
      subordinated interest in machinery and equipment of 3-D Service,
      Ltd.
            
            
            4,000
            
            
            
            4,000Note
      payable to bank in monthly installments of $10 through May 2018, plus
      interest at prime rate (5.00% at September 28, 2008) secured by certain
      real estate
            
            
            1,208
            
            
            
            -Note
      payable to bank in monthly installments of $21 through May 2012, plus
      interest at prime rate (5.00% at September 28, 2008) secured by inventory
      and substantially all machinery and equipment
            
            
            917
            
            
            
            -Note
      payable to bank in monthly installments of $3 through November 16, 2014,
      plus interest at 8% secured by a security interest in certain
      equipment
            
            
            180
            
            
            
            197Notes
      payable to bank in monthly principal payments of $1 through June 2009,
      without interest secured by certain vehicles paid, off in January
      2008
            
            
            -
            
            
            
            15Notes
      payable to bank in monthly principal payments of $1 through June 2009,
      without interest secured by certain vehicles
            
            
            9
            
            
            
            18Note
      payable to bank in monthly installments of $3 through August 2013, with
      interest at 8.3% secured by a security interest in certain equipment and
      software
            
            
            139
            
            
            
            -Capital
      lease obligations
            
            
            877
            
            
            
            2610,330
            
            
            
            10,231Less:
      current portion
            
            
            924
            
            
            
            3,036$
            9,406
            
            
            $
            7,195







11


NOTE
      H - DEBT (CONTINUED)




Notes payable to
officers




The
Company is indebted to its CEO for a note payable with a balance of $3,000 at
September 28, 2008 (see Note J).  Interest is payable monthly at prime
less 1%. The note is convertible into 1,200,000 shares of common stock at a
price of $2.50 per share. 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%.  If the Company elects to
extend the maturity, it must begin making principal payments of $50, plus
interest, beginning February 1, 2009. The Company provided notice to its CEO
that it intends to extend the maturity in the event the note is not converted
into shares of MISCOR common stock. Accordingly, the note, less the current
portion, has been classified as long-term debt. Interest expense on the note was
$30 and $54 for the three months, and $102 and $163 for the nine months ended
September 28, 2008 and September 30, 2007, respectively.




The
Company is indebted to the former shareholders of 3-D, one of whom is President
of MIS, for a note payable with a balance of $2,000 at December 31,
2007.  Interest is payable monthly at prime. The loan matures on
November 30, 2010. Interest expense for the three and nine months ended
September 28, 2008 was $26 and $89, respectively.






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 Company issued the maximum $4,025 principal amount
of debentures as of May 5, 2005. The debentures, which were payable on February
28, 2008, bore interest at the rate of 6% per year, which were payable upon
conversion, redemption or maturity.




The
Company reserved 472,844 shares of common stock for issuance upon conversion of
the debentures. During the nine months ended September 30, 2007, certain
debenture holders converted $1,045 of the aggregate principal amount of the
debentures into 122,763 shares of common stock. During the nine months ended
September 28, 2008, certain debenture holders converted $2,690 of the aggregate
principal amount of debentures into 316,017 shares of common stock. As a result,
$544 of accrued interest was forfeited and written off against common stock in
conjunction with the conversion of $2,690 of the aggregate principal amount of
the debentures. In addition, the Company redeemed debentures in the amount of
$342, including interest of $52.




Each
purchaser of debentures received common stock purchase warrants for no
additional consideration. Each warrant entitled its holder to purchase one share
of common stock for a five year period at an exercise price of $0.025 per share.
The Company has allocated warrants to purchase 170,224 shares of common stock
among all purchasers of the debentures. The Company used the Black-Scholes
valuation model in estimating the fair value of the common stock purchase
warrants. The following assumptions were used for such estimates: no dividend
yield, no expected volatility, risk-free interest rate of 3.3% and an expected
life of the common stock purchase warrants of one year. The estimated fair value
of these warrants is $836. This debt discount is amortized to interest expense
over the term of the debentures. Interest expense was $15 and $134 for the nine
months ended September 28, 2008 and September 30, 2007, respectively. In
addition, for the nine months ended September 30, 2007, $50 in debt discount was
written off against common stock in conjunction with the conversion of $1,045 of
the aggregate principal amount of the debentures. As of September 28, 2008,
warrants to purchase 169,167 shares had been exercised.




The
Company issued to its placement agent in the Debenture Offering, as compensation
for its services, ten-year warrants to purchase 247,320 shares of the Company’s
common stock at an exercise price of $0.025 per share. The Company used the
Black-Scholes valuation model in estimating the fair value of common stock
purchase warrants. The following assumptions were used for such estimates: no
dividend yield, no expected volatility, risk-free interest rate of 3.3% and an
expected life of the common stock purchase warrants of one year. The estimated
fair value of the warrants issued to the placement agent was $1,546. As of
September 28, 2008, warrants to purchase 246,320 shares had been
exercised.




12


NOTE
      H - DEBT (CONTINUED)




The
Company also paid the placement agent a fee of 10% of the amount raised in the
offerings, or $403. In addition, the Company issued to its securities counsel in
the Debenture Offering, as compensation for its services, 2,000 shares of the
Company’s common stock, the fair value of which was $12. The summation of these
debt issue costs was $2,095. Interest expense was $40 and $382 for the nine
months ended September 28, 2008 and September 30, 2007,
respectively.  In addition, $137 in debt issue costs was written off
against common stock in conjunction with the conversion of $1,045 of the
aggregate principal amount of the debentures in the nine months ended September
30, 2007.




Senior Debt
Financing




On
January 18, 2007, the Company paid off all senior debt financing, accrued
interest and prepayment penalties of $9,921, $42, and $517, respectively, upon
the issuance of 2,500,000 shares of its common stock at a price of $5.00 per
share for a total of $12,500. The remaining proceeds of $2,020 were used to pay
for related legal costs, for general working capital purposes and to reduce
accounts payable. The Company recorded a loss on the extinguishment of debt of
$2,300 for the nine months ended September 30, 2007.




On March
9, 2007, the Company obtained financing from MFB Financial in the form of a $5
million revolving credit facility, secured by accounts receivable. Borrowings
under the note was used for capital expenditures and working capital purposes.
Interest was payable monthly at 1⁄2% over prime, as published in the Wall Street
Journal. Interest expense was $15 and $23 for the three and nine months ended
September 30, 2007, respectively. The revolving credit agreement was canceled in
December 2007.




Capital Lease
Obligations




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




September
      28,
            
            
            December
      31,2008
            
            
            2007Machinery
      and equipment
            
            $
            946
            
            
            $
            83Less
      accumulated depreciation
            
            
            (38
            )
            
            
            (27
            )$
            908
            
            
            $
            56







Minimum
future lease payments required under capital leases for the periods subsequent
to September 28, 2008 on a calendar year basis are as follows:




Years
      Ending December 31,2008
              
              $
              482009
              
              
              1462010
              
              
              1242011
              
              
              1022012
              
              
              1022013
              
              
              1,011Total
      minimum lease payments
              
              
              1,533Less
      imputed interest
              
              
              (656
              )Present
      value of net minimum lease payments
              
              $
              877


13


NOTE
      H - DEBT (CONTINUED)




Aggregate
maturities of long-term debt for the periods subsequent to September 28, 2008 on
a calendar year basis are as follows:




Year ending December 31,2008
            
            $
            1372009
            
            
            1,0132010
            
            
            5,0502011
            
            
            1,0452012
            
            
            916Thereafter
            
            
            2,169





Following
is a summary of interest expense for the three and nine months ended September
28, 2008 and September 30, 2007:




Three
      months ended
            
            
            Nine
      months endedSept.
      28,
            
            
            Sept.
      30,
            
            
            Sept.
      28,
            
            
            Sept.
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      expense on principal
            
            $
            180
            
            
            $
            114
            
            
            $
            587
            
            
            $
            456Amortization
      of debt issue costs
            
            
            4
            
            
            
            105
            
            
            
            51
            
            
            
            382Amortization
      of debt discount - debentures and revolving notes payable
            
            
            14
            
            
            
            38
            
            
            
            55
            
            
            
            134Total
      interest expense
            
            $
            198
            
            
            $
            257
            
            
            $
            693
            
            
            $
            972








NOTE
I - STOCKHOLDERS’ EQUITY




Equity Incentive
Plans




2005 Stock Option
Plan




In 2008,
the Company granted stock options to certain executives and key employees to
acquire shares of the Company’s common stock under the 2005 Stock Option
Plan.  These options, which expire in five years, are exercisable in
25% cumulative increments on and after the first four anniversaries of their
grant date. At the time of issuance of the stock options, the exercise price was
the estimated fair value of the Company’s common stock. The fair value of the
Company’s common stock was determined based upon the average of the high and low
sale prices of the Company’s common stock on the date of grant.




The fair
value of the options was estimated using the Black-Scholes valuation model and
an expected term of 3.75 years.  The Company recorded compensation
cost based on the grant date fair value of each  award of shares. The
total cost of each grant 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 $13 and $5 for the three months and $31 and $20 for the
nine months ended September 28, 2008 and September 30, 2007, respectively. Key
information and assumptions for each award follow:




14


NOTE
I - STOCKHOLDERS’ EQUITY (CONTINUED)




Grant
      Date
            
            #
      of Shares
            
            Exercise
      Price
            
            Risk-free
      Interest Rate
            
            Volatility
            
            Total
      Cost of Grant (in 000s)May
      15, 2008
            
            
            12,200
            
            
            $
            10.250
            
            
            
            2.90
            %
            
            
            42.51
            %
            
            $
            46May
      19, 2008
            
            
            1,000
            
            
            $
            9.950
            
            
            
            2.88
            %
            
            
            43.00
            %
            
            $
            4June
      17, 2008
            
            
            1,000
            
            
            $
            11.450
            
            
            
            3.46
            %
            
            
            43.00
            %
            
            $
            4August
      11, 2008
            
            
            1,000
            
            
            $
            9.825
            
            
            
            3.06
            %
            
            
            42.81
            %
            
            $
            4August
      13, 2008
            
            
            8,000
            
            
            $
            10.013
            
            
            
            2.99
            %
            
            
            42.81
            %
            
            $
            29







2005 Restricted Stock
Purchase Plan




In 2008,
the Company issued offers to purchase shares of common stock to certain
executives and key employees.  The Company recorded deferred
compensation (reflected as a contra-equity account) and credited additional
paid-in capital.  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 with the date of each offer. The Company recorded compensation
expense related to all restricted stock of $18 and $8 for the three months and
$37 and $24 for the nine months ended September 28, 2008 and September 30, 2007,
respectively.




Key
information and assumptions for each award follow:




Grant
      Date
            
            #
      of Shares
            
            Exercise
      Price
            
            Total
      Cost of Grant (in 000s)May
      15, 2008
            
            
            10,000
            
            
            $
            0.025
            
            
            $
            1
      02May
      19, 2008
            
            
            1,000
            
            
            $
            0.025
            
            
            $
            10August
      11, 2008
            
            
            2,000
            
            
            $
            0.025
            
            
            $
            20August
      13, 2008
            
            
            2,000
            
            
            $
            0.025
            
            
            $
            20







Employee Stock Purchase
Plan





In
December 2006, the Corporation's Board of Directors and stockholders approved
the MISCOR Group, Ltd. Employee Stock Purchase Plan (the “ESPP”) under which
eligible employees may purchase the Company's common stock at a price per share
equal to 90% of the lower of the fair market value of the common stock at the
beginning or end of each offering period. Each offering period of the ESPP lasts
three months, with the first offering period which commenced on April 1, 2007.
Participation in the offering may range from 2% to 8% of an employee's base
salary (not to exceed $5,000 annually or amounts otherwise allowed under Section
423 of the Internal Revenue Code). Participation may be terminated at any time
by the employee, and automatically ends on termination of employment with the
Company. A total of 640,000 shares of common stock have been reserved for
issuance under the ESPP. The common stock to satisfy the stock purchases under
the ESPP will be newly issued shares of common stock. During the quarter ended
September 28, 2008, 2,121 shares were purchased under the ESPP. As of September
28, 2008 there were 625,525 shares available for future offerings. The Company
recorded compensation expense of $4 and $13 for the three and nine months ended
September 28, 2008 and $18 and $20 for the three and nine months ended September
30, 2007, respectively.




15


NOTE
      J - RELATED PARTY TRANSACTIONS






Long-term debt,
other




The
Company was indebted to the estate of a former employee for an unsecured,
non-interest bearing note payable with a balance of $10 at December 31, 2007.
The Company paid off the note in March 2008.






Long-term debt,
officers




The
Company is indebted to its Chief Executive Officer and stockholder for a note
payable with a balance of $3,000 at September 28, 2008 (see Notes G and H).
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%. The Company has
notified its CEO that it intends to extend the maturity of the note. Interest
expense on the note was $30 and $54 for the three months and $102 and $163 for
the nine months ended September 28, 2008 and September 30, 2007,
respectively.




The
Company is indebted to the former stockholders of 3-D, one of whom is President
of Magnetech Industrial Services, Inc. (“MIS”), for a note payable with a
balance of $2,000 at September 28, 2008 (see Note G and H). Interest is payable
monthly at prime. Interest expense on that note was $26 and $89 for the three
and nine months ended September 28, 2008, respectively. The note matures on
November 30, 2010.






Leases




The
Company leases its South Bend, Indiana; Hammond, Indiana; Mobile, Alabama; and
Boardman, Ohio facilities from its Chief Executive Officer and stockholder.
Total rent expense under these agreements was approximately $83 and $83 for the
three months and $250 and $247 for the nine months ended September 28, 2008 and
September 30, 2007, respectively.




The
Company leases its Hagerstown, Maryland facility from a partnership of which an
officer of the Company’s subsidiary, HK Engine Components, LLC, is a partner.
Rent expense under this agreement was $39 and $38 for the three months and $117
and $115 for the nine months ended September 28, 2008 and September 30, 2007,
respectively.




In
January 2007, the Company began leasing a new facility in South Bend for the
electrical contracting business from a limited liability company owned by the
adult children of its Chief Executive Officer and stockholder. Rent expense
under this agreement was $22 for the three months and $67 for the nine months
ended September 28, 2008 and September 30, 2007, respectively.




In
November 2007, The Company began leasing a facility in Massillon, Ohio from a
partnership, one partner of which is an officer of MIS, under an agreement
expiring in November 2017. Rent expense under the lease was $135 and $405 for
the three and nine months ended September 28, 2008, respectively.






NOTE
      K - 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 September 28, 2008 and December 31, 2007, approximately 15% and 14% of
gross accounts receivable were due from entities in the steel, metal working and
scrap industries, and 21% and 18%, respectively, of gross receivables were due
from entities in the railroad industry. One customer accounted for 16% of gross
accounts receivable at September 28, 2008. No single customer accounted for more
than 10% of gross accounts receivable at December 31, 2007. Additionally, no
single customer accounted for more than 10% of sales for the three and nine
months ended September 28, 2008 and September 30, 2007.




16


NOTE
      L - COMMITMENTS AND CONTINGENCIES




Leases




In
January 2008, as part of the AMP acquisition, the Company entered into a seven
year lease agreement with Dansville Properties, LLC, which is controlled by
AMP’s former majority shareholder.  Rent expense under the lease was
$96 and $272 for the three and nine months ended September 28,
2008.




In
September 2008, as part of the acquisition from VEMS of certain operating
assets, the Company entered into a seven year lease agreement with VEMS, which
is controlled by its former 100% shareholder and current employee of Magnetech
Industrial Services, Inc., at a monthly rental of $14.  Rent expense
under the lease was $4 for the three and nine months ended September 28,
2008.






Collective bargaining
agreements




At
September 28, 2008 and December 31, 2007, approximately 30% and 37%,
respectively, of the Company’s employees were covered by collective bargaining
agreements.






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.






NOTE
      M - 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




The fair
value of debt differs from the carrying amount due to favorable interest terms
on debt with its Chief Executive Officer and stockholder. September 28, 2008 and
December 31, 2007, the aggregate fair value of debt, with an aggregate carrying
value of $16,133 and $10,231, respectively, is estimated at $16,170 and $11,336,
respectively, and is based on the estimated future cash flows discounted at
terms at which the Company estimates it could borrow such funds from unrelated
parties.






NOTE
      N - SEGMENT INFORMATION




The
Company reports segment information in accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise. The Company operates primarily in two segments: repair,
remanufacturing and manufacturing and construction and engineering
services.




The
repair, remanufacturing and manufacturing segment is primarily engaged in
providing maintenance and repair services to the electric motor industry,
repairing, remanufacturing and manufacturing industrial lifting magnets for the
steel and scrap industries, locomotives and locomotive engines for the rail
industry, and power assemblies, engine parts, and other components related to
large diesel engines for the rail, utilities and offshore drilling industries.
The construction and engineering services segment provides a wide range of
electrical and mechanical contracting services, mainly to industrial, commercial
and institutional customers.




17


NOTE
N – SEGMENT INFORMATION (CONTINUED)




The
Company evaluates the performance of its business segments based on net income
or loss. Corporate administrative and support services for the Company are not
allocated to the segments but are presented separately.




Summarized
financial information concerning the Company’s reportable segments as of and for
the three and nine months ended September 28, 2008 and September 30, 2007 is
shown in the following tables:









2008
            
            Repair,
      Manufacturing & Remanufacturing
            
            
            Construction
      & Engineering Services
            
            
            Corporate
            
            
            Intersegment
      Eliminations
            
            
            Three
      Months Sept. 28, 2008 ConsolidatedExternal
      revenue:Product
      sales
            
            $
            6,150
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            6,150Service
      revenue
            
            
            15,600
            
            
            
            9,753
            
            
            
            -
            
            
            
            -
            
            
            
            25,353Intersegment
      revenue:
            
            
            -Product
      sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Service
      revenue
            
            
            975
            
            
            
            42
            
            
            
            -
            
            
            
            (1,017
            )
            
            
            -Depreciation-cost
      of revenues
            
            
            433
            
            
            
            30
            
            
            
            -
            
            
            
            -
            
            
            
            463Gross
      profit
            
            
            3,552
            
            
            
            1,461
            
            
            
            -
            
            
            
            -
            
            
            
            5,013Other
      depreciation & amortization
            
            
            260
            
            
            
            7
            
            
            
            14
            
            
            
            -
            
            
            
            281Interest
      expense
            
            
            85
            
            
            
            -
            
            
            
            113
            
            
            
            -
            
            
            
            198Net
      income (loss)
            
            
            871
            
            
            
            945
            
            
            
            (1,345
            )
            
            
            -
            
            
            
            471Total
      assets
            
            
            64,710
            
            
            
            12,689
            
            
            
            1,138
            
            
            
            -
            
            
            
            78,537Capital
      expenditures
            
            
            577
            
            
            
            10
            
            
            
            88
            
            
            
            -
            
            
            
            675











2007
            
            Repair,
      Manufacturing & Remanufacturing
            
            
            Construction
      & Engineering Services
            
            
            Corporate
            
            
            Intersegment
      Eliminations
            
            
            Three
      Months Sept. 30, 2007 ConsolidatedExternal
      revenue:Product
      sales
            
            $
            6,092
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            6,092Service
      revenue
            
            
            7,521
            
            
            
            4,057
            
            
            
            -
            
            
            
            -
            
            
            
            11,578Intersegment
      revenue:
            
            
            -Product
      sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Service
      revenue
            
            
            -
            
            
            
            27
            
            
            
            -
            
            
            
            (27
            )
            
            
            -Depreciation
      – cost of revenues
            
            
            169
            
            
            
            31
            
            
            
            -
            
            
            
            -
            
            
            
            200Gross
      profit
            
            
            2,661
            
            
            
            321
            
            
            
            -
            
            
            
            -
            
            
            
            2,982Other
      depreciation & amortization
            
            
            4
            
            
            
            7
            
            
            
            11
            
            
            
            -
            
            
            
            22Interest
      expense
            
            
            54
            
            
            
            -
            
            
            
            203
            
            
            
            -
            
            
            
            257Net
      income (loss)
            
            
            1,122
            
            
            
            (39
            )
            
            
            (1,019
            )
            
            
            -
            
            
            
            64Total
      assets
            
            
            22,533
            
            
            
            5,988
            
            
            
            1,532
            
            
            
            -
            
            
            
            30,053Capital
      expenditures
            
            
            160
            
            
            
            4
            
            
            
            15
            
            
            
            -
            
            
            
            179










18


NOTE
N – SEGMENT INFORMATION (CONTINUED)










2008
            
            Repair,
      Manufacturing & Remanufacturing
            
            
            Construction
      & Engineering Services
            
            
            Corporate
            
            
            Intersegment
      Eliminations
            
            
            Nine
      Months Sept. 28, 2008 ConsolidatedExternal
      revenue:Product
      sales
            
            $
            18,771
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            18,771Service
      revenue
            
            
            44,989
            
            
            
            28,028
            
            
            
            -
            
            
            
            -
            
            
            
            73,017Intersegment
      revenue:Product
      sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Service
      revenue
            
            
            2,127
            
            
            
            337
            
            
            
            -
            
            
            
            (2,464
            )
            
            
            -Depreciation
      – cost of revenues
            
            
            1,257
            
            
            
            90
            
            
            
            -
            
            
            
            -
            
            
            
            1,347Gross
      profit
            
            
            10,934
            
            
            
            3,891
            
            
            
            -
            
            
            
            -
            
            
            
            14,825Other
      depreciation & amortization
            
            
            755
            
            
            
            18
            
            
            
            35
            
            
            
            -
            
            
            
            808Interest
      expense
            
            
            309
            
            
            
            0
            
            
            
            384
            
            
            
            -
            
            
            
            693Net
      income (loss)
            
            
            3,295
            
            
            
            2,318
            
            
            
            (4,076
            )
            
            
            -
            
            
            
            1,537Total
      assets
            
            
            64,710
            
            
            
            12,689
            
            
            
            1,138
            
            
            
            -
            
            
            
            78,537Capital
      expenditures
            
            
            1,431
            
            
            
            19
            
            
            
            413
            
            
            
            -
            
            
            
            1,863








2007
            
            Repair,
      Manufacturing & Remanufacturing
            
            
            Construction
      & Engineering Services
            
            
            Corporate
            
            
            Intersegment
      Eliminations
            
            
            Nine
      Months Sept. 30, 2007 ConsolidatedExternal
      revenue:Product
      sales
            
            $
            17,115
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            17,115Service
      revenue
            
            
            20,777
            
            
            
            12,688
            
            
            
            -
            
            
            
            -
            
            
            
            33,465Intersegment
      revenue:Product
      sales
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Service
      revenue
            
            
            -
            
            
            
            72
            
            
            
            -
            
            
            
            (72
            )
            
            
            -Depreciation
      – cost of revenues
            
            
            527
            
            
            
            92
            
            
            
            -
            
            
            
            -
            
            
            
            619Gross
      profit
            
            
            7,306
            
            
            
            1,435
            
            
            
            -
            
            
            
            -
            
            
            
            8,741Other
      depreciation & amortization
            
            
            20
            
            
            
            20
            
            
            
            29
            
            
            
            -
            
            
            
            69Interest
      expense
            
            
            178
            
            
            
            -
            
            
            
            794
            
            
            
            -
            
            
            
            972Net
      income (loss)
            
            
            2,720
            
            
            
            293
            
            
            
            (5,325
            )
            
            
            -
            
            
            
            (2,312
            )Total
      assets
            
            
            22,533
            
            
            
            5,988
            
            
            
            1,532
            
            
            
            -
            
            
            
            30,053Capital
      expenditures
            
            
            245
            
            
            
            88
            
            
            
            34
            
            
            
            -
            
            
            
            367










NOTE
O - SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES




Nine
      months endedSeptember
      28,
            
            
            September
      30,2008
            
            
            2007Conversion
      of subordinated debentures
            
            $
            3,234
            
            
            $
            979Issuance
      of restricted stock
            
            
            152
            
            
            
            22Assumption
      of accounts payable and accrued liabilities in conjunction with asset
      acquisition
            
            
            2,549
            
            
            
            -Issuance
      of common stock in conjunction with acquisition
            
            
            3,500
            
            
            
            -Cashless
      exercise of warrants
            
            
            16
            
            
            
            -Equipment
      acquired through capital lease obligation
            
            
            864
            
            
            
            -








19




ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS




Overview




We
operate in two segments: repair, remanufacturing and manufacturing, and
construction and engineering services.




The
repair, remanufacturing and manufacturing segment is primarily engaged in
providing maintenance and repair services to the electric motor industry,
repairing, remanufacturing and manufacturing industrial lifting magnets for the
steel and scrap industries, locomotives and locomotive engines for the rail
industry and power assemblies, engine parts, and other components related to
large diesel engines for the rail, utilities and offshore drilling industries.
The construction and engineering services segment provides a wide range of
electrical contracting services, mainly to industrial, commercial and
institutional customers.




We
evaluate the performance of our business segments based on net income or loss.
Corporate administrative and support services for MISCOR are not allocated to
the segments but are presented separately.






Recent
Developments




On
January 14, 2008, we entered into a credit facility with Wells Fargo Bank,
National Association (“Wells Fargo”).  The credit facility is
comprised of a $1,250,000 real estate term note and a $13,750,000 revolving
note.  On January 16, 2008, we borrowed $7,500,000 under the revolving
note and used the net proceeds of the loans for working capital and to acquire
all of the outstanding shares of common stock of American Motive Power, Inc.
discussed below.  The original maturity date of the notes is January
1, 2011, at which time the notes will automatically renew for one-year periods
until terminated.  The notes are secured by (1) a first priority lien
on the assets of the Company; (2) a mortgage on certain real property; and (3)
the pledge of the equity interests in MISCOR’s subsidiaries.  The term
note bears interest at an annual rate equal to the rate of interest most
recently announced by Wells Fargo at its principal office as its prime rate (the
“Prime Rate”), subject to certain minimum annual interest
payments.  The revolving note bears interest at an annual rate of
either (i) the Prime Rate, or (ii) Wells Fargo’s LIBOR rate plus 2.8%, depending
on the nature of the advance.  Interest is payable monthly, in
arrears, under the revolving note beginning on February 1, 2008.  The
term note requires monthly principal payments of $10,000, plus interest,
beginning on June 1, 2008, the first day of the month following receipt of the
advance. The term note was funded in April 2008.




On
January 14, 2008, we amended our Amended and Restated Articles of Incorporation
to effect a 1-for-25 reverse stock split of our issued and outstanding and
authorized but unissued shares of common stock (the “Reverse Stock Split”).
Pursuant to the Reverse Stock Split, each 25 shares of our common stock, whether
issued and outstanding, held by MISCOR as treasury stock, or authorized but
unissued, was combined into one share of common stock.  Any
shareholder who held a fractional share of common stock after giving effect to
the Reverse Stock Split received in cash, in lieu of such fractional share, an
amount equal to the product of (i) $0.566, which was the mean of the average of
the closing bid and ask prices of our common stock as quoted on the OTC Bulletin
Board for the five business days before the effective date of the Reverse Stock
Split, multiplied by (ii) 25, multiplied by (iii) the fractional share. As a
result of the Reverse Stock Split, the symbol assigned to MISCOR’s common stock
for quotation on the OTC Bulletin Board was changed from “MCGL” to “MIGL”. The
Reverse Stock Split was approved by our Board of Directors on November 30, 2007
and became effective on January 14, 2008 by the filing of articles of amendment
to our Amended and Restated Articles of Incorporation with the Indiana Secretary
of State. Under Indiana law, the Reverse Stock Split did not require
shareholder approval.




On
January 16, 2008, we acquired 100% of the outstanding shares of common stock of
American Motive Power, Inc. (“AMP”). Accordingly, the results of operations are
included in the Company’s consolidated financial statements from that date
forward. AMP is engaged in the business of repairing, remanufacturing, and
rebuilding locomotives and locomotive engines and providing related goods and
services to the railroad industry.




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






20




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




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




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




In
September 2008, the Company acquired certain business assets of Visalia Electric
Motor Shop Inc. (“VEMS”). VEMS provides maintenance and repair services for both
alternating current and direct current electric industrial motors and
generators.   The acquisition of net assets was made for the
purpose of expanding the Company’s market penetration into the repair,
remanufacturing and manufacturing segment. The aggregate purchase price of
$1,000,000 was paid in cash at closing and was financed through borrowings under
the credit facility. Concurrent with this acquisition, the Company leased
approximately $800,000 of equipment from VEMS.




In
September 2008, we amended our credit facility with Wells Fargo. The second
amendment revised a financial covenant which increased the maximum amount of
capital expenditures for 2008 to $2 million, no more than $1.25 million of which
could be paid from working capital. The amendment also limited the investment
and loans from American Motive Power, Inc. to AMP Rail Services Canada, ULC to
$1 million.






Critical
Accounting Policies and Estimates




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




Principles of consolidation.
The consolidated financial statements for the three and nine months ended
September 28, 2008 and September 30, 2007 include our accounts and those of our
wholly-owned subsidiaries, Magnetech Industrial Services, Inc., Martell
Electric, LLC, HK Engine Components, LLC, and Magnetech Power Services LLC. The
consolidated financial statements for the three and nine months ended September
28, 2008 also include the accounts of Ideal Consolidated, Inc. (“Ideal”), 3-D
Service, Ltd. (“3-D”), and AMP. All significant intercompany balances and
transactions have been eliminated.




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




Revenue recognition. Revenues
in our repair, remanufacturing and manufacturing segment consist 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
specific identification of customer accounts deemed to be uncollectible and on
historical experience. Our revenue recognition policies are in accordance with
Staff Accounting Bulletins No. 101 and No. 104.




21


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




Earnings per share. We
account for earnings (loss) per common share under the provisions of SFAS No.
128, Earnings Per Share, which requires a dual presentation of basic and diluted
earnings (loss) per common share. Basic earnings (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 earnings (loss) per common share is computed assuming the
conversion of common stock equivalents, when dilutive.




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




Inventory. We value inventory
at the lower of cost or market. Cost is determined by the first-in, first-out
method. We periodically review our inventories and make adjustments as necessary
for estimated obsolescence and slow-moving 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.




Goodwill and other intangible
assets.In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, Goodwill and
Other Intangible Assets, intangible assets other than goodwill are
amortized over their useful lives, unless the useful lives are determined to be
indefinite.




Goodwill
represents the excess cost of companies acquired over the fair value of their
net assets at the dates of acquisition.  Goodwill, which is not
subject to amortization, is required to be tested for impairment, at least
annually, and written down when impaired.  In accordance with SFAS No.
142, goodwill is tested for impairment using a two-step process.  The
first step is to identify a potential impairment and the second step measures
the amount of the impairment loss, if any.  Goodwill is deemed to be
impaired if the carrying amount of the asset exceeds its estimated fair
value.




Debt issue costs.We
capitalize and amortize costs incurred to secure senior debt financing over the
term of the senior debt financing. 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 were 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 Taxesand FASB Interpretation No. 48.




Stock-based compensation.Effective January 1, 2006, we adopted SFAS No. 123R, Share-Based Payments (revised
2004), using the Modified Prospective Approach. SFAS 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 September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements.  SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. In February 2008, the FASB issued FASB Staff
Position No. 157-2, which deferred the effective date of SFAS 157 for
all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) until January 1, 2009. Accordingly, our adoption
of this standard on January 1, 2008 was limited to financial assets and
liabilities. The adoption of SFAS 157 did not have a material effect on our
financial condition or results of operations. We are still in the process of
evaluating this standard with respect to its effect on non-financial assets and
liabilities and therefore has not yet determined the impact that it will have on
our financial statements upon full adoption in 2009. Non-financial assets and
liabilities for which we have not applied the provisions of SFAS 157 include
those measured at fair value in impairment testing and those initially measured
at fair value in a business combination.




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115(“SFAS 159”). SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
fair value option may be elected on an instrument-by-instrument basis, with few
exceptions. SFAS 159 also establishes presentation and disclosure requirements
to facilitate comparisons between companies that choose different measurement
attributes for similar assets and liabilities. The adoption of SFAS 159 did not
have an effect on our financial condition or results of operations as we did not
elect this fair value option, nor is it expected to have a material impact on
future periods as the election of this option for our financial instruments is
expected to be limited.




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




23


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




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




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




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles”. The adoption of this standard is not expected to have a
material impact on our consolidated financial statements.






Results
of Operations




Three
Months Ended September 28, 2008 Compared to Three Months Ended September 30,
2007




Revenues. Total revenues
increased by $13.8 million or 78% to $31.5 million in 2008 from $17.7 million in
2007. The increase in revenues resulted from increases in repair,
remanufacturing and manufacturing segment revenue of $8.1 million or 60% and
construction and engineering services segment revenues of $5.7 million or
140%.




The
increase in repair, remanufacturing and manufacturing segment revenue of $8.1
million in 2008 resulted from an increase in revenue from sales of motors,
magnets and other industrial products and services of $4.8 million or 48% due
mainly to the acquisition of 3-D in November 2007, $4.5 million in revenue from
locomotive and locomotive engine rebuild and remanufacturing from the
acquisition of AMP in January 2008, less declines in revenue from diesel engine
components of $0.2 million or 7% and intercompany sales of $1.0 million. The
increase in construction and engineering services revenue of $5.7 million in
2008 resulted from an increase in electrical contracting services of $2.5
million or 67% due to continued market penetration and a strong local
construction market, and increases in service revenues of $3.2 million from the
acquisition of Ideal in October 2007.




Cost of Revenues. Total cost
of revenues in 2008 was $26.5 million or 84% of total revenues compared to $14.7
million or 83% of total revenues in 2007. The increase of $11.8 million in cost
of revenues was due primarily to the overall corresponding increase in our total
revenue.




24


Gross Profit. Total gross
profit in 2008 was $5.0 million or 16% of total revenues compared to $3.0
million or 17% of total revenues in 2007. The increase of $2.0 million or 67%
was due to increased consolidated revenues. Although gross profit as a
percentage of total revenue was nearly the same in 2008 and 2007, gross profit
on repair, remanufacturing and manufacturing segment revenue declined 3% and
gross profit on construction and engineering services revenue increased 7%.
Gross profit on repair, remanufacturing and manufacturing revenues declined due
to unabsorbed overhead costs at AMP due to AMP’s overcapacity. Gross profit on
construction and engineering services revenue increased due to improved gross
profit on a few larger electrical contracts.




Selling, General and Administrative
Expenses. Selling, general and administrative expenses were $4.3 million
in 2008 compared to $2.7 million in 2007. The increase of $1.6 million was due
to increases in selling expenses of $0.5 million and general and administrative
expenses of $1.2 million. Selling expenses increased 36% to $1.5 million in 2008
from $1.1 million in 2007 primarily due to the acquisitions of Ideal, 3-D and
AMP. General and administrative expenses increased 75% to $2.8 million in 2008
from $1.6 million in 2007, due to the aforementioned acquisitions, including
related professional fees, and increases in compensation.




Interest Expense and Other
Income. Interest expense decreased in 2008 to $0.2 million from $0.3
million in 2007 as a result of the payoff of the remaining subordinated
debentures and lower interest rates, partially offset by higher principal
outstanding related to the notes payable to former 3-D stockholders and the real
estate and equipment term loans from Wells Fargo. Interest on principal debt
increased to $0.2 million from $0.1 million. Interest related to the
amortization of debt issue costs and debt discount costs on subordinated
debentures and senior secured debt decreased $0.2 million in 2008 compared to
2007.




Provision for Income Taxes.
Prior to 2008, we experienced net operating losses in each year since we
commenced operations. In January 2007, an ownership change occurred that will
limit the amount of net operating loss that we will be able to use in future
periods in accordance with Section 382 of the Internal Revenue Code, as amended.
We are uncertain as to whether we will be able to utilize these tax losses
before they expire. Accordingly, we provided a valuation allowance for the
income tax benefits associated with these net future tax assets that 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 Income. Net income in
2008 was $0.5 million compared to $0.1 million in 2007. The $0.4 million
improvement was due to the increase in revenues and correspondingly smaller
increase in expenses described above.






Nine
Months Ended September 28, 2008 Compared to nine Months Ended September 30,
2007




Revenues. Total revenues
increased by $41.2 million or 81% to $91.8 million in 2008 from $50.6 million in
2007. The increase in revenues resulted from increases in repair,
remanufacturing and manufacturing segment revenue of $25.9 million or 68% and
construction and engineering services segment revenues of $15.3 million or
121%.




The
increase in repair, remanufacturing and manufacturing segment revenue of $25.9
million in 2008 resulted from an increase in revenue from sales of motors,
magnets and other industrial products and services of $15.9 million or 58%
mainly due to the acquisition of 3-D, an increase in revenue of diesel engine
components of $0.8 million or 7%, and increases in service revenues of $11.3
million from the acquisition of AMP, less intercompany sales of $2.1
million.  The increase in construction and engineering services
revenue of $15.3 million in 2008 resulted from an increase in electrical
contracting services of $6.5 million or 59% due to continued market penetration
and a strong local construction market, an increase in power services of $0.7
million or 47%, and $8.4 million from the acquisition of Ideal, less
intercompany sales of $0.3 million.




Cost of Revenues. Total cost
of revenues in 2008 was $77.0 million or 84% of total revenues compared to $41.8
million or 83% of total revenues in 2007. The increase of $35.2 million in cost
of revenues was due primarily to the overall corresponding increase in our total
revenue.




Gross Profit. Total gross
profit in 2008 was $14.8 million or 16% of total revenues compared to $8.7
million or 17% of total revenues in 2007. The increase in gross profit of $6.1
million was due to the corresponding increase in revenues. The 1% decrease from
17% to 16% was due to a 2.0% decrease in gross profit on repair, remanufacturing
and manufacturing segment revenue offset by a 3.0% increase in gross profit on
construction and




25


engineering
services revenue. Gross profit on repair, remanufacturing and manufacturing
segment revenue decreased due to unabsorbed overhead costs at AMP due to initial
overcapacity. Gross profit on construction and engineering services revenue
increased due to improved gross profit on a few larger electrical
contracts.




Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased $4.6
million to $12.4 million in 2008 from $7.8 million in 2007. Selling expenses
increased 34% to $4.3 million in 2008 from $3.2 million in 2007 primarily due to
the acquisitions of Ideal, 3-D and AMP. General and administrative expenses
increased 76% to $8.1 million in 2008 from $4.6 million in 2007, due to the
aforementioned acquisitions, including related professional fees, and increases
in compensation.




Loss on Debt Extinguishment.
We incurred a loss on extinguishment of debt of $2.3 million in the nine months
ended September 30, 2007 related to the payoff of all Laurus senior secured debt
in January 2007.




Interest Expense and Other
Income. Interest expense decreased in 2008 to $0.7 million from $1.0
million in 2007 as a result of the payoff of the remaining subordinated
debentures and lower interest rates, partially offset by higher principal
outstanding related to the notes payable to former 3-D stockholders and Wells
Fargo.  Interest on principal debt increased to $0.6 million from $0.5
million. Interest related to the amortization of debt issue costs and debt
discount costs on subordinated debentures and senior secured debt decreased to
$0.1 million from $0.5 million.




Provision for Income Taxes.
Income tax expense was $0.2 million in 2008 compared to zero in 2007. Prior to
2008, we experienced net operating losses in each year since we commenced
operations. In January 2007, an ownership occurred that will limit the amount of
net operating loss that we will be able to use in future periods in accordance
with Section 382 of the Internal Revenue Code, as amended. Accordingly, a
provision for income taxes was recorded for the nine months ended September 28,
2008 as a result of the limitation on the use of the net operating losses. We
are uncertain as to whether we will be able to utilize these tax losses before
they expire. Accordingly, we provided a valuation allowance for the income tax
benefits associated with these net future tax assets that 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 Income/Loss. Net income
in 2008 was $1.5 million compared to a net loss of $2.3 million in 2007. The
$3.8 million improvement was due to higher operating income from increased
sales, lower interest expense, and the absence in 2008 of the aforementioned
loss on debt extinguishment of $2.3 million.






Liquidity
and Capital Resources




At
September 28, 2008, we had approximately $16.5 million of working
capital.   Working capital decreased approximately $1.3 million
from approximately $17.8 million at December 31, 2007. The decrease in working
capital was due mainly to cash consideration paid for the acquisition of AMP in
January 2008, less the redemption of the convertible debentures of $2.9 million.
Our total debt to equity ratio increased slightly from approximately .60:1 to
..72:1 from December 31, 2007 to September 28, 2008.




Through
December 31, 2007, we incurred operating losses since we began operations in
2000. The operating losses were due to start up costs, including start up costs
associated with acquisitions, underutilized operating capacity and costs
incurred to build a corporate infrastructure sufficient to support increasing
sales from existing operations and acquisitions for the foreseeable future. We
funded these accumulated operating losses, increases in working capital,
contractual obligations, acquisitions and capital expenditures with investments
and advances from our Chief Executive Officer ($7.2 million), a private debt
offering ($4.0 million), private equity offerings ($35.2 million), trade credit
and bank loans.




We
recorded net income of $1.5 million for the nine months ended September 28,
2008. Our net loss for the nine months ended September 30, 2007 of $2.3 million
included non-cash expenditures of depreciation and amortization of $0.7 million
and loss on debt extinguishment of $2.3 million.




26


Net cash
utilized by operating activities was $0.8 million and $1.9 million for the nine
months ended September 28, 2008 and September 30, 2007, respectively. For the
nine months ended September 28, 2008, net cash utilized by operations resulted
from net income of $1.5 million, increase in bad debt and inventory reserves of
$0.5 million and depreciation and amortization of $2.3 million, reduced by net
increases in working capital of $5.1 million.  For the nine months
ended September 30, 2007, net cash utilized by operating activities was due to
the net loss of $2.3 million and net increases in working capital of $2.8
million, less depreciation of $1.2 million and amortization of debt issuance
costs and loss on debt extinguishment of $1.8 million.




Accounts
receivable and inventory may increase if sales increase. In the past, certain of
our trade accounts payable have extended beyond the terms allowed by the
applicable vendors. As a result, certain vendors placed us on credit hold or
cash in advance which resulted in delays in receipt of necessary materials and
parts. Further, in January 2008 we acquired 100% of the common stock of AMP for
$7.2 million in cash and $3.5 million in common stock. AMP incurred operating
losses from inception in 2005 through 2007 and into 2008 and may continue to
incur losses and utilize cash for the balance of 2008. This may result in the
increase in past due accounts payable and further delays in receipt of necessary
materials and parts. Disruptions of this nature resulted in delayed shipments
and service to our customers and may continue to result in such delays in the
future. We do not believe that these delays resulted in the loss of any material
amount of sales orders, although future delays might have an adverse affect on
our business.




During
the nine months ended September 28, 2008 and September 30, 2007, net cash
utilized in investing activities was $9.9 million and $0.4 million,
respectively. In 2008, net cash utilized consisted of the acquisitions of AMP
and certain assets of VEMS of $7.2 million and $1.0 million, respectively, net
of cash acquired, and capital expenditures, net of disposals of $1.9 million. In
2007, net cash utilized in investing activities consisted of capital
expenditures.




We
generated approximately $7.8 million from financing activities during the nine
months ended September 28, 2008, primarily from borrowings under the Wells Fargo
credit facility of $8.0 million and proceeds from the sale of common stock of
$0.1 million, less the payoff of convertible debentures of $0.3 million. We
generated approximately $2.2 million from financing activities during the nine
months ended September 30, 2007, primarily from advances on our revolving line
of credit of $0.8 million, the sale of our common stock of approximately $12.4
million, less the payoff of all senior secured debt due to Laurus of
approximately $11.0 million.




We are
undertaking various activities to improve our future cash flows. These
activities include efforts to collect accounts receivable at a faster rate,
modify credit limits and terms when necessary, 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.




From
March through May of 2005, we issued $4.0 million of subordinated convertible
debentures. The debentures originally were scheduled to mature on February 28,
2007; however, in April 2006, the debenture holders agreed to extend the
maturity date to February 28, 2008. The debentures bore interest at a fixed
annual rate of 6%, payable in cash upon redemption or at maturity if the holders
did not elect to convert their debentures. Each debenture holder had the option
to convert principal and accrued interest under the debentures into the number
of shares of our common stock determined by dividing the principal amount by a
fixed conversion price of $8.5123, subject to certain anti-dilution
adjustments.




During
the nine months ended September 28, 2008 and September 30, 2007, debenture
holders converted approximately $2.7 million and $1.0 million, respectively, of
the subordinated debt. During the nine months ended September 30, 2008, the
remaining debenture holders were paid off with interest. As of September 28,
2008, no convertible debentures were outstanding.




In August
2005, we entered into a $10.0 million credit facility with Laurus. In May 2006,
we entered into an additional $3.7 million credit facility with Laurus. In
January 2007, we paid off all amounts due Laurus with proceeds from the Tontine
equity financing described below.




27


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




On March
9, 2007, we obtained financing from MFB Financial in the form of a $5 million
revolving credit facility, secured by accounts receivable. We used the
borrowings under the note for capital expenditures, working capital purposes and
the acquisition of Ideal. The revolving credit facility was paid off in full in
December 2007 with proceeds from the November 30, 2007 equity financing
described below.




On
November 30, 2007, we sold 2,666,667 shares of common stock to TCP and 666,666
shares of common stock to TCOMF for $6.00 per share or $20.0 million (amounts
stated after giving effect to the Reverse Stock Split). Proceeds were used to
fund the acquisition of 3-D for $16.7 million and to retire all amounts due to
our senior lender under a revolving credit facility as of that date in the
amount of $2.02 million, including interest of $5,000. We used the balance of
the proceeds for working capital.




On
January 14, 2008, we entered into a credit facility with Wells Fargo. The
credit facility is comprised of a $1.25 million real estate term note and a
$13.75 million revolving note. On January 16, 2008, we borrowed $7.5
million under the revolving note and used the net proceeds of the loans for
working capital and to acquire all of the outstanding shares of common stock of
AMP.




The
original maturity date of the Wells Fargo notes is January 1, 2011, at which
time the notes will automatically renew for one-year periods until
terminated.  The notes are secured by (1) a first priority lien on our
assets; (2) a mortgage on certain real property; and (3) the pledge of the
equity interests in our subsidiaries. The term note bears interest at an
annual rate equal to the rate of interest most recently announced by Wells Fargo
at its principal office as the Prime Rate, subject to certain minimum annual
interest payments. The revolving note bears interest at an annual rate of
either (i) the Prime Rate, or (ii) Wells Fargo’s LIBOR rate plus 2.8%, depending
on the nature of the advance.  Interest is payable monthly, in
arrears, under the revolving note beginning on February 1, 2008.  The
term note requires monthly principal payments of $10,000, plus interest,
beginning on the first day of the month following receipt of the advance. The
$1.25 million real estate term note was funded in April 2008.




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




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




We may
prepay the Wells Fargo term note at any time, subject to certain prepayment
penalties.  With respect to the Wells Fargo revolving note, we may
borrow, pay down and re-borrow under the note until the maturity
date.  The maximum aggregate principal amount that may be borrowed
under the revolving note is the lesser of (1) the sum of 40% of our eligible
construction related trade receivables up to $2 million and 85% of certain
remaining eligible trade accounts receivable less any reserves established by
Wells Fargo from time to time, and (2) $13.75 million less any reserves
established by Wells Fargo.




In April
2008, we amended the Wells Fargo credit facility entered into in January 2008.
The amendment revised the formula for the maximum aggregate principal amount
that may be borrowed under the revolving note. Specifically, the percentage of a
portion of the Company’s eligible construction related trade receivables
resulting from time and material services and completed contracts was increased
from 40% to 85% and the related borrowings were removed from the $2 million
limitation. The amendment also provided a four year term note in the amount of
$1 million, secured by substantially all of the machinery and equipment of the
Company. The note matures June 1, 2012 and is payable in monthly installments of
$21,000, plus interest at the bank’s prime rate beginning June 1,
2008.




28


In
September 2008, we further amended our credit facility with Wells Fargo. The
second amendment revised a financial covenant which increased the maximum amount
of capital expenditures for 2008 to $2 million, no more than $1.25 million of
which could be paid from our working capital. The amendment also limited the
investment and loans from AMP to AMP Canada to $1 million.




We
believe that our existing working capital, cash provided by operations and our
existing credit facility with Wells Fargo, under which we had $2.2 million
available as of September 30, 2008, 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 continue to improve relationships
with our vendors and ensure a more steady supply of parts and materials. We may,
however, need to raise additional debt or equity capital to fund certain future
business acquisitions. As of September 30, 2008, we did not have any material
commitments for capital expenditures.




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






Discussion
of Forward-Looking Statements




Certain
matters described in the foregoing “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” as well as other statements
contained in this Quarterly Report on Form 10-Q 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. 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. 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.




Management
based the forward-looking statements largely on its current expectations and
perspectives about future events and financial trends that management believes
may affect our financial condition, results of operations, business strategies,
short-term and long-term business objectives, and financial needs. These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions, that may cause actual results to differ materially from those
indicated in the forward-looking statements, due to, among other things, factors
identified in this report, including those identified in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.






ITEM
      3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK




Not
Applicable.




29




ITEM
      4T.   CONTROLS AND
PROCEDURES




Evaluation
of Effectiveness of Disclosure Controls and Procedures




Our
disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (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 Quarterly Report on Form 10-Q, is recorded,
processed, summarized and reported within the time periods specified in the
rules of the Securities and Exchange Commission. Our disclosure controls and
procedures also are designed to ensure that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.




In order
to monitor compliance with this system of controls, our Board of Directors,
which performs the audit committee function for the Company, oversees
management’s discharge of its financial reporting responsibilities. The Board of
Directors meets regularly with the Company’s independent registered public
accounting firm, Asher & Company, Ltd., and representatives of management to
review accounting, auditing, internal control, and financial reporting matters.
The Board of Directors is responsible for the engagement of our independent
registered public accounting firm.




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 September 28, 2008. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of September 28, 2008, our disclosure controls and procedures
were effective to provide reasonable assurance that material information
relating to the Company and its consolidated subsidiaries required to be
included in our Exchange Act reports, including this Quarterly Report on Form
10-Q, is recorded, processed, summarized, and reported as required, and is made
known to management, including the Chief Executive Officer and Chief Financial
Officer, on a timely basis.




Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 28, 2008, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.







30


PART
II - OTHER INFORMATION




ITEM
      2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS




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 September 28, 2008,
we have issued 616,408 shares upon the exercise of warrants, and we have
received proceeds of $131,567 that were used for general working capital
purposes. Based on information provided by our transfer agent, we believe that
some selling shareholders have sold shares pursuant to the offering. However,
because many shares are held in “street” name, we are unable to determine the
number of shares sold or the identity of the selling shareholders. We have
incurred total expenses in connection with the offering of approximately $0.8
million and have received no offering proceeds other than the proceeds received
upon the exercise of warrants.






ITEM
      6.   EXHIBITS




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




Exhibit
      No.
            
            Description10.1
            
            Second
      Amendment to Credit and Security Agreement dated August 28, 2008, among
      Wells Fargo Bank, the registrant and certain subsidiaries of the
      registrant identified therein. (incorporated by reference to Exhibit
      10.56a to the registrant’s Registration Statement on Form S-1 (Reg No.
      333-154649))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
            
            Section
      1350 Certifications





31


SIGNATURES





Pursuant
to the requirements 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.November
      12, 2008
            By:
            /s/
      Richard J. MullinRichard
      J. MullinChief
      Financial Officer(Signing
      on behalf of the registrant as Principal Financial
  Officer)





32


EXHIBIT
INDEX





Exhibit
      No.
            
            Description10.1
            
            Second
      Amendment to Credit and Security Agreement dated August 28, 2008, among
      Wells Fargo Bank, the registrant and certain subsidiaries of the
      registrant identified therein. (incorporated by reference to Exhibit
      10.56a to the registrant’s Registration Statement on Form S-1 (Reg No.
      333-154649))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
            
            Section
      1350 Certifications