**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 1934
  **For
        the quarterly period ended October 1, 2006**
  o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
        Act
        of 1934
  Commission
        file number: **333-129354**
  **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.      Yes x No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large accelerated filer o Accelerated
        filer o Non-accelerated
        filer 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 October 31, 2006, there were 117,285,272 shares outstanding of the issuer’s
        Common Stock, without par value** .
  
  
 **MISCOR
        GROUP, LTD.**
 
 **INDEX
        TO FORM 10-Q**
 
 Item
                  Number
              
              Page
                  NumberPART
                  I - FINANCIAL INFORMATION1.
              Financial
                  Statements:Condensed
                  Consolidated Balance Sheets October 1, 2006 (Unaudited) and December
                  31,
                  2005
              1Condensed
                  Consolidated Statements of Operations (Unaudited) Three and Nine
                  Months ended October 1, 2006 and September 25, 2005
              2Condensed
                  Consolidated Statements of Cash Flow (Unaudited) Nine Months ended
                  October
                  1, 2006 and September 25, 2005
              3Notes
                  to Consolidated Financial Statements
              42.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              163.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              274.
              Controls
                  and Procedures
              27PART
                  II - OTHER INFORMATION2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              285.
              Other
                Information
              286.
              Exhibits
              28Signatures
              31
 
  
 **PART
        I - FINANCIAL INFORMATION**
 **ITEM
        1. FINANCIAL STATEMENTS**
 
 **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(Amounts
        in thousands, except share and per share data)**
 **ASSETS****October
                      1,**
                  
                  **December
                      31,****2006**
                  
                  **2005****(unaudited)**CURRENT
                      ASSETSCash
                  
                  $
                  425
                  
                  $
                  23Accounts
                      receivable, net of allowance for doubtful accounts of $395
                      and $341,
                      respectively
                  
                  
                  10,097
                  
                  
                  8,677Inventories,
                      net
                  
                  
                  8,226
                  
                  
                  8,415Prepaid
                      expenses and other current assets
                  
                  
                  778
                  
                  
                  1,050Total
                      current assets
                  
                  
                  19,526
                  
                  
                  18,165PROPERTY
                      AND EQUIPMENT, net
                  
                  
                  6,392
                  
                  
                  4,110OTHER
                      ASSETSDeposits
                  
                  
                  259
                  
                  
                  89Debt
                      issue costs, net
                  
                  
                  2,357
                  
                  
                  3,354Other
                      intangibles, net
                  
                  
                  2
                  
                  
                  3Total
                      other assets
                  
                  
                  2,618
                  
                  
                  3,446**Total
                      Assets**
                  
                  $
                  28,536
                  
                  $
                  25,721**LIABILITIES
                      AND STOCKHOLDERS' EQUITY**CURRENT
                      LIABILITIESRevolving
                      credit line, net of discount of $636 and $885,
                      respectively
                  
                  $
                  4,626
                  
                  $
                  3,961Current
                      portion of long-term debt
                  
                  
                  1,924
                  
                  
                  1,024Accounts
                      payable
                  
                  
                  5,656
                  
                  
                  5,356Accrued
                      expenses and other current liabilities
                  
                  
                  2,506
                  
                  
                  1,771Total
                      current liabilities
                  
                  
                  14,712
                  
                  
                  12,112LONG
                      TERM LIABILITIESLong-term
                      debt, net of discount of $278 and $484, respectively
                  
                  
                  6,288
                  
                  
                  5,603Long-term
                      debt, Stockholder
                  
                  
                  3,000
                  
                  
                  3,000Warrant
                      liability
                  
                  
                  1,810
                  
                  
                  -Total
                      long-term liabilities
                  
                  
                  11,098
                  
                  
                  8,603Total
                      liabilities
                  
                  
                  25,810
                  
                  
                  20,715COMMITMENTS
                      AND CONTINGENCIESSTOCKHOLDERS'
                      EQUITYPreferred
                      stock, no par value; 20,000,000 shares authorized; no shares
                      issued and
                      outstanding
                  
                  
                  -
                  
                  
                  -Common
                      stock, no par value; 300,000,000 shares authorized; 116,677,328
                      and
                      104,608,962 shares issued and outstanding, respectively
                  
                  
                  8,458
                  
                  
                  7,659Additional
                      paid in capital
                  
                  
                  8,865
                  
                  
                  8,840Deferred
                      compensation
                  
                  
                  (48
                  )
                  
                  (57
                  )Accumulated
                      deficit
                  
                  
                  (14,549
                  )
                  
                  (11,436
                  )Total
                      Stockholders' equity
                  
                  
                  2,726
                  
                  
                  5,006**Total
                      Liabilities and Stockholders' Equity**
                  
                  $
                  28,536
                  
                  $
                  25,721
  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**
                  **3
                    months ended**
                
                **For
                    the**
                  **9
                    months ended**
                ********
                ****
                ****
                **October
                      1, 2006**
                ****
                ****
                **September
                      25, 2005**
                ****
                ****
                **October
                      1, 2006**
                ****
                ****
                **September
                      25, 2005**
                ********
                ****
                ****
                **(unaudited)**
                ****
                ****
                **(unaudited)**
                ****
                ****
                **(unaudited)**
                ****
                ****
                **(unaudited)****REVENUES**Product
                    sales
                
                $
                4,187
                
                $
                4,214
                
                $
                14,118
                
                $
                10,839Service
                    revenue
                
                
                11,350
                
                
                8,196
                
                
                29,156
                
                
                21,724Total
                    revenues
                
                
                15,537
                
                
                12,410
                
                
                43,274
                
                
                32,563**COST
                    OF REVENUES**Product
                    sales
                
                
                3,188
                
                
                3,456
                
                
                10,769
                
                
                8,573Service
                    revenue
                
                
                9,010
                
                
                6,344
                
                
                23,415
                
                
                17,558Total
                    cost of revenues
                
                
                12,198
                
                
                9,800
                
                
                34,184
                
                
                26,131Gross
                    Profit
                
                
                3,339
                
                
                2,610
                
                
                9,090
                
                
                6,432Selling,
                    general and administrative expenses
                
                
                2,777
                
                
                2,445
                
                
                7,872
                
                
                6,448Operating
                    income (loss)
                
                
                562
                
                
                165
                
                
                1,218
                
                
                (16
                )Loss
                    on warrant liability
                
                
                984
                
                
                -
                
                
                1,810
                
                
                -Interest
                    expense
                
                
                783
                
                
                5,181
                
                
                2,521
                
                
                5,723**NET
                    LOSS**
                
                $
                (1,205
                )
                $
                (5,016
                )
                $
                (3,113
                )
                $
                (5,739
                )Basic
                    and diluted loss per common share
                
                $
                (0.01
                )
                $
                (0.05
                )
                $
                (0.03
                )
                $
                (0.06
                )Weighted
                    average number of common shares
                
                
                108,108,389
                
                
                99,294,125
                
                
                106,621,866
                
                
                97,815,970
 
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  2
 **MISCOR
        GROUP, LTD. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Amounts
        in thousands, except share and per share data)**
 For
                    the 9 months endedOctober
                    1,
                
                September
                    25,2006
                
                2005**(Unaudited)**
                
                **(Unaudited)**OPERATING
                    ACTIVITIESNet
                    cash provided (utilized) by operating activities
                
                $
                1,787
                
                $
                (3,927
                )INVESTING
                    ACTIVITIESAcquisition
                    of business assets
                
                
                (3,569
                )
                
                (2,557
                )Acquisition
                    of property and equipment
                
                
                (278
                )
                
                (669
                )Proceeds
                    from disposal of property and equipment
                
                
                11
                
                
                19Net
                    cash utilized by investing activities
                
                
                (3,836
                )
                
                (3,207
                )FINANCING
                    ACTIVITIESPayments
                    on capital lease obligations
                
                
                (11
                )
                
                -Short
                    term borrowings, net
                
                
                1,145
                
                
                (2,509
                )Advances
                    from Stockholder, net
                
                
                -
                
                
                (122
                )Borrowings
                    of long-term debt
                
                
                2,100
                
                
                -Repayments
                    of long-term debt
                
                
                (710
                )
                
                -Proceeds
                    from the issuance of debentures
                
                
                -
                
                
                4,025Debt
                    issuance costs
                
                
                (156
                )
                
                (1,292
                )Proceeds
                    from issuance of term note
                
                
                -
                
                
                3,000Proceeds
                    from issuance of revolving note
                
                
                -
                
                
                4,000Proceeds
                    from the issuance of shares and exercise of warrants
                
                
                83
                
                
                -Net
                    cash provided by financing activities
                
                
                2,451
                
                
                7,102**INCREASE
                    (DECREASE) IN CASH**
                
                
                402
                
                
                (32
                )Cash,
                    beginning of period
                
                
                23
                
                
                109Cash,
                    end of period
                
                $
                425
                
                $
                77SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOW INFORMATION:Cash
                    paid during the period for:Interest
                
                $
                760
                
                $
                310
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  3
  **MISCOR
        GROUP, LTD.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        AND NINE MONTHS IN THE PERIOD ENDED OCTOBER 1, 2006**
 **(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”) of and for the three and nine months ended October 1, 2006 and
        September 25, 2005, 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 our management, all adjustments, consisting of
        normal, recurring adjustments, considered necessary for a fair statement
        have
        been included. The results for the three and nine months ended October 1,
        2006
        are not necessarily indicative of the results to be expected for the year
        ending
        December 31, 2006.
  **NOTE
        B - RECENT ACCOUNTING PRONOUNCEMENTS**
  *SFAS
        No. 151*
  In
        November 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs -
        an Amendment of ARB No. 43.  SFAS No. 151 was one of a number of projects
        by the FASB to converge U.S. accounting standards to International Accounting
        Standards.  SFAS No. 151 requires abnormal amounts of idle facility
        expenses, freight, handling costs and spoilage to be recognized as current
        period charges.  In addition, the allocation of fixed manufacturing
        overhead costs to the costs of conversion is required to be based on the
        normal
        capacity of the manufacturing facilities. SFAS No. 151 will be effective
        for
        inventory costs incurred during fiscal years beginning after June 15,
        2005.  The Company adopted SFAS No. 151 on January 1, 2006. Adoption of
        this standard did not have a material impact on the Company’s consolidated
        financial position, results of operations or cash flows as the Company’s
        existing inventory and conversion cost methodologies are generally consistent
        with that required by the new standard.
  *SFAS
        No. 123R* **
  Effective
        January 1, 2006, the Company adopted SFAS 123R, Share-Based Payment, using
        the
        Modified Prospective Approach. See Note G for further detail regarding the
        adoption of this standard.
  *EITF
        05-4*
  Warrants,
        issued in conjunction with the Senior Debt Financing were accounted for under
        the Emerging Issues Task Force (“EITF”) Issue No. 00-19 *Accounting
        for Derivative Financial Instruments Index to and Potentially Settled in
        a
        Company’s Own Stock* and
        View A of EITF No. ** 05-4, *The
        Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
        Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled in, a Company’s Own Stock* . ** Due
        to certain factors and the liquidated damage provision in the Registration
        Rights Agreements, the Company determined that the warrants are derivative
        liabilities. Accordingly, the warrants will be marked to market through earnings
        at the end of each reporting period (see Note F).
  
  4
  
 **NOTE
        C - ACQUISITIONS**
  In
        May 2006, the Company acquired certain business assets in a transaction
        accounted for using the purchase method. Accordingly, the results of operations
        from these net assets acquired are included in the Company’s consolidated
        financial statements from that date forward. The acquisition of net assets
        was
        made for the purpose of expanding the Company’s market penetration into the
        industrial services segment. The aggregate purchase price was $3,569, and
        was
        allocated to assets acquired based on their estimated fair values at the
        date of
        acquisition. The purchase price consideration consisted of cash of $2,987
        at
        closing, which paid for all inventory, property, plant and equipment. The
        balance of $582, representing the accounts receivable purchased less accounts
        payable assumed, was paid in July 2006. The allocation of the purchase price
        was
        as follows:
  Accounts
                  receivable
              
              $
              1,116Inventory
              
              
              224Property,
                  plant and equipment
              
              
              2,613Accounts
                  payable
              
              
              (384
              )$
              3,569
 
  The
        following table presents the unaudited results of operations of the Company
        as
        if the acquisition had been consummated as of January 1, 2005, and includes
        certain pro forma adjustments, including depreciation and amortization on
        the
        assets acquired.
 Nine
                    months endedOct.
                    1
                
                Sept.
                    25,2006
                
                2005Revenues
                
                $
                46,742
                
                $
                37,001Net
                    loss
                
                $
                (2,875
                )
                $
                (5,333
                )Basic
                    and diluted loss per share
                
                $
                (0.03
                )
                $
                (0.05
                )
   **NOTE
        D - EARNINGS PER SHARE**
  The
        Company accounts for loss per common share under the provisions of SFAS No.
        128, *Earnings
        Per Share* ,
        which requires a dual presentation of basic and diluted loss per common share.
        Basic loss per common share excludes dilution and is computed by dividing
        income
        available to common stockholders by the weighted average number of common
        shares
        outstanding for the year. Diluted loss per common share is computed assuming
        the
        conversion of common stock equivalents, when dilutive.
  For
        the nine months ended October 1, 2006, the Company’s common stock equivalents,
        consisting of warrants to purchase 14,369,213 shares of common stock, senior
        and
        subordinated debt convertible into 71,421,830 common shares, and options
        to
        purchase 1,185,000 shares of common stock issued to directors and employees
        under the 2005 Stock Option Plan, were not included in computing diluted
        loss
        per share because their effects were anti-dilutive. For the nine months ended
        September 25, 2005, the Company’s common stock equivalents, consisting of
        warrants to purchase 22,291,534 shares of common stock and senior and
        subordinated debt convertible into 73,343,123 common shares, were not included
        in computing diluted loss per share because their effects were anti-dilutive.
        Basic and diluted loss per share were the same for the three and nine months
        ended October 1, 2006 and September 25, 2005, respectively, as there were
        no
        potentially dilutive securities outstanding.
  
  5
  
 **NOTE
        E - INVENTORY**
  Inventory
        consists of the following:
  **October
                  1, 2006**
              
              **December
                  31, 2005**Raw
                  materials
              
              $
              2,227
              
              $
              2,666Work-in-process
              
              
              3,450
              
              
              3,887Finished
                  goods
              
              
              2,736
              
              
              1,9798,413
              
              
              8,532Less:
                  allowance for slow moving and obsolete inventories
              
              
              (187
              )
              
              (117
              )$
              8,226
              
              $
              8,415
  **NOTE
        F - DEBT**
  *Long-term
        debt*
  Long-term
        debt consists of the following:
 
 **October
                  1, 2006**
              
              **December
                  31, 2005**Note
                  payable to Stockholder, due December 2008, plus interest at prime
                  rate
                  less 1%; (7.25% and 6.25% at October 1, 2006 and December 31, 2005,
                  respectively), secured by a subordinated interest in substantially
                  all
                  assets owned by the Company
              
              $
              3,000
              
              $
              3,000Long-term
                  debt, debentures (net of discount of $278 and $484 at October 1,
                  2006 and
                  December 31, 2005, respectively)
              
              
              3,747
              
              
              3,541Note
                  payable to former employee in annual principal payments of $10,
                  unsecured
                  and without interest
              
              
              20
              
              
              30Revolving
                  note due in August 2008 (net of discount of $636 and $885 at October
                  1,
                  2006 and December 31, 2005, respectively) with interest payable
                  monthly at
                  1% over the Wall Street Journal prime rate (9.25% and 8.25% at
                  October 1,
                  2006 and December 31, 2005), secured by substantially all assets
                  owned by
                  the Company
              
              
              4,109
              
              
              3,961Term
                  note payable in monthly principal payments of $100 plus interest
                  at 1%
                  above the Wall Street Journal prime rate (9.25% and 8.25% at October
                  1,
                  2006 and December 31, 2005, respectively), secured by substantially
                  all
                  assets owned by the Company and maturing in August 2008
              
              
              2,300
              
              
              3,000
 
 
  6
 
 
 Revolving
                  note due May 31, 2009 with interest payable monthly (see below),
                  secured
                  by substantially all assets owned by the Company
              
              
              517
              
              
              -Term
                  note payable in monthly principal payments of $70 beginning December
                  2006
                  plus interest at (see below), secured by substantially all assets
                  owned by
                  the Company and maturing in May 2009
              
              
              2,100
              
              
              -Capital
                  lease obligations
              
              
              45
              
              
              5615,838
              
              
              13,588Less:
                  current portion
              
              
              (6,550
              )
              
              (4,985
              )$
              9,288
              
              $
              8,603
 
  *Senior
        Debt Financing*
  On
        September 29, 2006, Laurus converted $729 of the Revolving Note due in August
        2008 at a conversion rate of $0.19 per share for a total of 3,836,412 shares
        of
        the Company’s common stock.
 
 In
        May 2006, the Company entered into a second Security and Purchase Agreement
        with
        Laurus. The Agreement provided financing comprised of a $1,600 Revolving
        Note
        and a $2,100 Term Note. The Notes mature in May 2009. Laurus agreed to advance
        funds under the Revolving Note in amounts up to 90% of eligible trade accounts
        receivable. Interest is payable monthly at 2.5% and 1.5% over prime (9.75%
        at
        October 1, 2006) as published in the Wall Street Journal for the first $.3
        million and the remaining $1.3 million under the Revolving Note, respectively.
        The maximum outstanding balance allowable under the Revolving Note decreases
        $10
        per month beginning December 2006.
  Under
        the Term Loan, the Company must make monthly principal payments of $70 with
        interest beginning December 2006. Interest is payable monthly at 1.0% over
        prime (9.25% at October 1, 2006) as published in the Wall Street Journal
        under the Term Note.
  The
        Notes are collateralized by a blanket security interest covering substantially
        all assets owned by the Company. Proceeds from the financing were used to
        acquire substantially all of the assets of E. T. Smith Services of Alabama,
        Inc., an Alabama corporation (“Smith Alabama”) pursuant to the terms and subject
        to the conditions included in an Asset Purchase Agreement dated May 31, 2006.
  As
        part of the financing, Laurus received $133 in cash and was issued warrants
        for
        375,000 shares of the Common Stock with an exercise price of $0.01 per share. Total
        debt issue costs were $156. Interest expense was $4 and $17 for the three
        and
        nine months ended October 1, 2006. Net debt issue cost at October 1, 2006
        related to this instrument was $139.
  Under
        the registration rights agreement with Laurus, the Company would be in default
        of its credit facility and is subject to certain penalties in the event the
        Company’s common stock is not quoted or listed on the OTC Bulletin Board, Nasdaq
        or a national exchange within 60 days after the effective date of the
        registration of its common stock (See Note G). As a result, the Company is
        accounting for these warrants as a liability in accordance with EITF No.
        00-19
        and EITF No. 05-4. The Company used the Black-Scholes valuation model in
        estimating the fair value of the common stock purchase warrants. The following
        assumptions were used for such estimates: no dividend yield, expected volatility
        of 41.7%, risk-free interest rate of 4.6% and an expected life of the common
        stock purchase warrants of 6.7 years. The Company recorded a liability of
        $155
        at October 1, 2006 and the warrants will be marked to market through earnings
        at
        the end of each reporting period. The Company recorded a loss on warrant
        liability of $64 and $155 for the three and nine months ended October 1,
        2006,
        respectively.
  
  7
  
 **NOTE
        F - DEBT (CONTINUED)**
  The
        provisions of the $7,000 and $1,600 Revolving Notes include a lock-box agreement
        and also allow Laurus, in its reasonable credit judgment, to assess additional
        reserves, or reduce the advance rate, against accounts receivable used in
        the
        borrowing base calculation. These provisions satisfy the requirements for
        consideration of EITF Issue No. 95-22, *Balance
        Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
        that include both a Subjective Acceleration Clause and a Lock-Box
        Arrangement* .
        Based on further analysis of the terms of the Revolving Notes, there are
        certain
        provisions that could potentially be interpreted as a subjective acceleration
        clause. More specifically, Laurus, in its reasonable credit judgment, can
        assess
        additional reserves to the borrowing base calculation or reduce the advance
        rate
        against accounts receivable to account for changes in the nature of the
        Company's business that alters the underlying value of the collateral. The
        reserve requirements may result in an overadvance borrowing position that
        could
        require an accelerated repayment of the overadvance portion. Since the inception
        of these Revolving Note facilities, Laurus has not applied any additional
        reserves to the borrowing base calculation. The Company does not anticipate
        any
        changes in its business practices that would result in any material adjustments
        to the borrowing base calculation. However, management cannot be certain
        that
        additional reserves will not be assessed by Laurus to the borrowing base
        calculation. As a result, the Company classifies borrowings under the Revolving
        Note facilities as short-term obligations.
  Aggregate
        maturities of long-term debt for the periods subsequent to October 1, 2006
        on a
        calendar year basis are as follows:
  **Years
                  Ending December 31,**2006
              $
                  5,6352007
              2,0652008
              8,6912009
              361
 
  Following
        is a summary of interest expense for the three and nine months ended October
        1,
        2006 and September 25, 2005:
  Three
                  Months Ended
              
              Nine
                  Months EndedOctober
                  1, 2006
              
              September
                  25, 2005
              
              October
                  1, 2006
              
              September
                  25, 2005Interest
                  expense on principal
              
              $
              306
              
              $
              202
              
              $
              914
              
              $
              435Amortization
                  of debt issue costs
              
              
              344
              
              
              343
              
              
              1,152
              
              
              526Amortization
                  of debt discount - debentures and revolving notes payable
              
              
              133
              
              
              136
              
              
              455
              
              
              262Interest
                  related to conversion option
              
              
              -
              
              
              4,500
              
              
              -
              
              
              4,500Total
                  interest expense
              
              $
              783
              
              $
              5,181
              
              $
              2,521
              
              $
              5,723
 
  8
 
 **NOTE
        G - STOCKHOLDERS’ EQUITY**
  *Equity
        Issuance and Warrants*
  As
        part of the Senior Debt Financing (Note F) in August 2005, Laurus was issued
        6,163,588 shares of the Common Stock valued at $0.25 per share or $1,541
        at
        closing and warrants for 7,352,941 shares of the Common Stock at an exercise
        price of $0.34 per share. In the event the Company’s common stock is not quoted
        or listed on the OTC Bulletin Board, Nasdaq or a national exchange within
        60
        days, with continued quotation or listing, after the effective date of the
        registration of its common stock, the Company would be in default of its
        credit
        facility with Laurus, and would be subject to certain penalties. As a result,
        the Company is accounting for these warrants as liabilities in accordance
        with
        EITF 00-19 and EITF 05-4.
 
 On
        September 29, 2006, Laurus converted $729 of the Revolving Note at a conversion
        rate of $0.19 per share for a total of 3,836,412 shares of the Company’s common
        stock.
 
 The
        Company used the Black-Scholes valuation model in estimating the fair value
        of
        the common stock purchase warrants. The following assumptions were used for
        such
        estimates: no dividend yield, expected volatility of 41.7%, risk-free rate
        of
        4.6% and an expected life of the common stock purchase warrants of 5.9 years.
        The Company recorded a liability of $1,655 at October 1, 2006, and the warrants
        will be marked to market through earnings at the end of each reporting period.
        The Company recorded a loss on warrant liability of $920 and $1,655 for the
        three and nine months ended October 1, 2006, respectively.
 
  *Equity
        Incentive Plans*
  2005
        Stock Option Plan
 
 On
        August 3, 2006, the Company granted stock options to acquire 1,185,000 shares
        of
        the Company’s common stock at an exercise price of $0.25 per share under the
        2005 Stock Option Plan (the “Plan”) adopted by the board of directors in August
        2005. Of the 1,185,000 total options, 500,000 shares were granted to outside
        Directors. These options expired in 30 days from the date of grant. Options
        for
        250,000 of these shares were exercised in August 2006 at $0.25 per share
        and the
        remaining options expired. The total cost of the grant in the amount of $6
        was
        recognized in the three months ended October 1, 2006, over the 30 day period
        during which the directors were required to provide services in exchange
        for the
        award.
 
 The
        remaining 685,000 options were granted to an executive, outside directors,
        and
        certain key employees. These options, which expire in five years, are
        exercisable in 25% cumulative increments on and after the first four
        anniversaries of their grant date. At the time of issuance of the stock options,
        the estimated fair value of the Company’s common stock was $0.25 per share. The
        fair value of the Company’s common stock was determined contemporaneously and
        based upon the most recent sale of the Company’s common stock. As a result of
        adopting SFAS No. 123R on January 1, 2006, the Company will record compensation
        cost based on the grant date fair value of the award of 685,000 shares at
        $0.25
        per share. The total cost of the grant in the amount of $67 will be recognized
        over the four year period during which the employees are required to provide
        services in exchange for the award - the requisite service period (usually
        the
        vesting period). The Company recorded compensation expense related to these
        options of $10 and $12 for the three and nine months ended October 1, 2006,
        respectively.
 
 
 2005
        Restricted Stock Purchase Plan
 
 On
        August 3, 2006, the Company issued offers to purchase 50,000 shares of common
        stock at a nominal price of $0.01 per share to certain key employees under
        the
        2005 Restricted Stock Purchase Plan adopted by the board of directors in
        August
        2005. The Company recorded deferred compensation (reflected as a contra-equity
        account) and credited additional paid-in capital in the amount of $12. The
        issuance of the restricted stock was intended to lock-up key employees for
        a
        three year period. As a result, the Company is recording compensation expense
        over the three year restriction period by amortizing deferred compensation
        on a
        straight-line basis over the three year period commencing August 2006. The
        Company recorded compensation expense related to this restricted stock of
        $6 and
        $16 for the three and nine months ended October 1, 2006,
        respectively.
 
  9
  
 **NOTE
        G - STOCKHOLDERS’ EQUITY (CONTINUED)**
  *Registration
        Statement*
  MISCOR
        completed an initial public registration of its common stock on Form S-1,
        which
        was declared effective by the Securities and Exchange Commission on May 12,
        2006. The Company’s common stock was accepted for trading on the OTC Bulletin
        Board, effective August 1, 2006.
 
 MISCOR
        completed a follow-on public registration of its common stock on Form S-1,
        which
        was declared effective by the Securities and Exchange Commission on November
        9,
        2006. The registration covered 375,000 shares of common stock issuable upon
        the
        exercise of warrants issued to Laurus in conjunction with the new senior
        debt
        financing (see Note F).
 
 **NOTE
        H - RELATED PARTY TRANSACTIONS**
  *Long-term
        debt, stockholder*
  The
        Company was indebted to its majority stockholder for a note payable with
        a
        balance of $3,000 at October 1, 2006 (see Note F). Interest is payable monthly
        at prime less 1%. The loan matures on December 31, 2008, except that the
        Company
        can extend the maturity for five years upon 60 days prior written notice
        at an
        interest rate of prime plus 1%. Interest expense on the note was $54 and
        $42 for
        the three months ended, and $155 and $121 for the nine months ended October
        1,
        2006 and September 25, 2005, respectively.
  In
        September 2005, the Company provided John A. Martell, its CEO and majority
        shareholder, a conversion option which allows Mr. Martell to convert any
        or all
        of his $3,000 outstanding note payable into shares of common stock of the
        Company at a conversion price of $0.10 per share.
  *Leases*
  The
        Company leases its South Bend, Indiana; Hammond, Indiana; Mobile, Alabama;
        and
        Boardman, Ohio facilities from its majority stockholder. Total rent expense
        under these agreements was approximately $82 and $71 for the three months
        ended,
        and $244 and $210 for the nine months ended October 1, 2006 and September
        25,
        2005, respectively.
  *Advances
        from stockholder*
  The
        majority stockholder has made other unsecured advances to the Company. The
        balance as of October 1, 2006 and December 31, 2005 was $0. Beginning in
        January
        2004, the Company began paying monthly interest at the prime rate on the
        outstanding advances. Interest expense on the advances from the majority
        stockholder was $0 and $1 for the three months ended and $0 and $9 for the
        nine
        months ended October 1, 2006 and September 25, 2005, respectively.
  
  10
  
 **NOTE
        I - 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 October 1, 2006 and December 31, 2005, approximately 20% and 25%
        of
        gross accounts receivable were due from entities in the steel, metal working
        and
        scrap industries, and 23% and 18% of gross receivables were due from entities
        in
        the railroad industry, respectively. No single customer accounted for more
        than
        10% of gross accounts receivable at October 1, 2006 and December 31, 2005.
        Additionally, no single customer accounted for more than 10% of sales for
        the
        three and nine months ended October 1, 2006 and September 25, 2005.
  **NOTE
        J - COMMITMENTS AND CONTINGENCIES**
  *Collective
        bargaining agreements*
  At
        October 1, 2006 and December 31, 2005, approximately 36% and 42%, 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
        K - FAIR VALUE OF FINANCIAL INSTRUMENTS**
  The
        following methods and assumptions were used to estimate the fair value of
        each
        class of financial instrument:
  *Cash,
        accounts receivable, accounts payable and accrued expenses*
  The
        carrying amounts of these items are a reasonable estimate of their fair values
        because of the current maturities of these instruments.
  *Debt
        and stockholder guarantees*
  The
        fair value of debt differs from the carrying amount due to guarantees by
        the
        Company’s majority stockholder. At October 1, 2006 and December 31, 2005, the
        aggregate fair value of debt, with an aggregate carrying value of $15,838
        and
        $13,588, respectively, is estimated at $19,853 and $17,509, respectively,
        and is
        based on the estimated future cash flows discounted at terms at which the
        Company estimates it could borrow such funds from unrelated parties and without
        guarantees from the Company’s stockholder.
   11
  
 **NOTE
        L - SEGMENT INFORMATION**
  The
        Company reports segment information in accordance with SFAS No. 131, *Disclosures
        about Segments of an Enterprise* .
        The Company operated primarily in two segments, industrial services and
        electrical contracting services, through December 31, 2004. The Company’s wholly
        owned subsidiary, Magnetech Industrial Services, Inc., provides industrial
        services to its customers. Electrical contracting services are provided by
        the
        Company’s other wholly owned subsidiary, Martell Electric LLC.
  In
        March 2005, the Company acquired certain operating assets of Hatch & Kirk,
        Inc. and formed a subsidiary named HK Engine Components, LLC which it operates
        as a third segment - engine components. These three segments are managed
        separately because they offer different products and services and each segment
        requires different technology and marketing strategies. The Company intends
        to
        integrate the selling efforts of HK Engine Components and MIS to further
        penetrate the rail industry. Corporate administrative and support services
        for
        the Company are not allocated to the segments but are presented separately.
  The
        industrial services segment is primarily engaged in providing maintenance
        and
        repair services to the electric motor industry, repairing and manufacturing
        industrial lifting magnets, providing engineering and repair services for
        electrical power distribution systems within industrial plants and commercial
        facilities, and providing custom and standardized training in the area of
        industrial maintenance. The electrical contracting segment provides a wide
        range
        of electrical contracting services, mainly to industrial, commercial and
        institutional customers. The diesel engine components segment manufactures,
        remanufactures, repairs and engineers power assemblies, engine parts, and
        other
        components related to large diesel engines for the rail, utilities and offshore
        drilling industries.
  The
        Company evaluates the performance of its business segments based on net income
        or loss. Summarized financial information concerning the Company’s reportable
        segments as of and for the three and nine months ended October 1, 2006 and
        September 25, 2005 is shown in the following tables:
  
  12
 
 **NOTE
        L - SEGMENT INFORMATION (continued)**
 **Diesel**
                
                
                
                
                
                **Three
                    Months****Industrial**
                
                **Electrical**
                
                **Engine**
                
                
                
                **Intersegment**
                
                **Oct.
                    1, 2006****2006**
                
                **Services**
                
                **Contracting**
                
                **Components**
                
                **Corporate**
                
                **Eliminations**
                
                **Consolidated**External
                    revenue:Product sales
                
                $
                1,786
                
                $
                -
                
                $
                2,401
                
                $
                -
                
                $
                -
                
                $
                4,187Service revenue
                
                
                7,662
                
                
                3,688
                
                
                -
                
                
                -
                
                
                -
                
                
                11,350Intersegment
                    revenue:
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Product sales
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Service revenue
                
                
                -
                
                
                43
                
                
                -
                
                
                -
                
                
                (43
                )
                
                -Depreciation
                    included in cost of revenues
                
                
                130
                
                
                26
                
                
                35
                
                
                -
                
                
                -
                
                
                191Gross
                    profit
                
                
                2,365
                
                
                588
                
                
                394
                
                
                -
                
                
                (8
                )
                
                3,339Other
                    depreciation & amortization
                
                
                7
                
                
                7
                
                
                1
                
                
                22
                
                
                -
                
                
                37Interest
                    expense
                
                
                145
                
                
                -
                
                
                -
                
                
                638
                
                
                -
                
                
                783Net
                    income (loss)
                
                
                758
                
                
                349
                
                
                (19
                )
                
                (2,293
                )
                
                -
                
                
                (1,205
                )Total
                    assets
                
                
                5,198
                
                
                4,279
                
                
                505
                
                
                18,554
                
                
                -
                
                
                28,536Capital
                    expenditures
                
                $
                71
                
                $
                4
                
                $
                2
                
                $
                3
                
                $
                -
                
                $
                80
 
 **Diesel**
                
                
                
                
                
                **Three
                    Months****Industrial**
                
                **Electrical**
                
                **Engine**
                
                
                
                **Intersegment**
                
                **Sept.
                    25, 2005****2005**
                
                **Services**
                
                **Contracting**
                
                **Components**
                
                **Corporate**
                
                **Eliminations**
                
                **Consolidated**External
                    revenue:Product sales
                
                $
                2,167
                
                $
                -
                
                $
                2,047
                
                $
                -
                
                $
                -
                
                $
                4,214Service revenue
                
                
                5,346
                
                
                2,850
                
                
                -
                
                
                -
                
                
                -
                
                
                8,196Intersegment
                    revenue:
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Product sales
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Service revenue
                
                
                -
                
                
                26
                
                
                -
                
                
                -
                
                
                (26
                )
                
                -Depreciation
                    included in cost of revenues
                
                
                82
                
                
                22
                
                
                33
                
                
                -
                
                
                -
                
                
                137Gross
                    profit
                
                
                1,987
                
                
                365
                
                
                265
                
                
                -
                
                
                (7
                )
                
                2,610Other
                    depreciation & amortization
                
                
                13
                
                
                5
                
                
                1
                
                
                32
                
                
                -
                
                
                51Interest
                    expense
                
                
                42
                
                
                -
                
                
                -
                
                
                5,139
                
                
                -
                
                
                5,181Net
                    income (loss)
                
                
                669
                
                
                152
                
                
                (120
                )
                
                (5,717
                )
                
                -
                
                
                (5,016
                )Total
                    assets
                
                
                19,524
                
                
                4,793
                
                
                7,269
                
                
                26,360
                
                
                (31,649
                )
                
                26,297Capital
                    expenditures
                
                $
                417
                
                $
                40
                
                $
                73
                
                $
                -
                
                $
                -
                
                $
                530
  13
 
 **NOTE
        L - SEGMENT INFORMATION (continued)**
 
 **Diesel**
              
              
              
              
              
              **Nine
                  Months****Industrial**
              
              **Electrical**
              
              **Engine**
              
              
              
              **Intersegment**
              
              **Oct.
                  1, 2006****2006**
              
              **Services**
              
              **Contracting**
              
              **Components**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product sales
              
              $
              6,557
              
              $
              -
              
              $
              7,561
              
              $
              -
              
              $
              -
              
              $
              14,118Service revenue
              
              
              20,013
              
              
              9,143
              
              
              -
              
              
              -
              
              
              -
              
              
              29,156Intersegment
                  revenue:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Product sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service revenue
              
              
              -
              
              
              104
              
              
              -
              
              
              -
              
              
              (104
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              322
              
              
              73
              
              
              108
              
              
              -
              
              
              -
              
              
              503Gross
                  profit
              
              
              6,510
              
              
              1,335
              
              
              1,263
              
              
              -
              
              
              (18
              )
              
              9,090Other
                  depreciation & amortization
              
              
              26
              
              
              18
              
              
              4
              
              
              47
              
              
              -
              
              
              95Interest
                  expense
              
              
              272
              
              
              -
              
              
              -
              
              
              2,249
              
              
              -
              
              
              2,521Net
                  income (loss)
              
              
              2,210
              
              
              578
              
              
              46
              
              
              (5,947
              )
              
              -
              
              
              (3,113
              )Total
                  assets
              
              
              5,198
              
              
              4,279
              
              
              505
              
              
              18,554
              
              
              -
              
              
              28,536Capital
                  expenditures
              
              $
              2,711
              
              $
              107
              
              $
              43
              
              $
              30
              
              $
              -
              
              $
              2,891




**Diesel**
              
              
              
              
              
              **Nine
                  Months****Industrial**
              
              **Electrical**
              
              **Engine**
              
              
              
              **Intersegment**
              
              **Sept.
                  25, 2005****2005**
              
              **Services**
              
              **Contracting**
              
              **Components**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product sales
              
              $
              6,600
              
              $
              -
              
              $
              4,239
              
              $
              -
              
              $
              -
              
              $
              10,839Service revenue
              
              
              15,033
              
              
              6,691
              
              
              -
              
              
              -
              
              
              -
              
              
              21,724Intersegment
                  revenue:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Product sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service revenue
              
              
              -
              
              
              97
              
              
              -
              
              
              -
              
              
              (97
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              238
              
              
              57
              
              
              72
              
              
              -
              
              
              -
              
              
              367Gross
                  profit
              
              
              5,112
              
              
              839
              
              
              509
              
              
              -
              
              
              (28
              )
              
              6,432Other
                  depreciation & amortization
              
              
              38
              
              
              12
              
              
              1
              
              
              68
              
              
              -
              
              
              119Interest
                  expense
              
              
              121
              
              
              -
              
              
              -
              
              
              5,602
              
              
              -
              
              
              5,723Net
                  income (loss)
              
              
              1,276
              
              
              264
              
              
              (343
              )
              
              (6,936
              )
              
              -
              
              
              (5,739
              )Total
                  assets
              
              
              19,524
              
              
              4,793
              
              
              7,269
              
              
              26,360
              
              
              (31,649
              )
              
              26,297Capital
                  expenditures
              
              $
              540
              
              $
              85
              
              $
              1,548
              
              $
              -
              
              $
              -
              
              $
              2,173





14








**NOTE
      M - SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
      ACTIVITIES**


Nine
                  Months EndedOct.
                  1, 2006
              
              Sept.
                  25, 2005Issuance
                  of common stock purchase warrants
              
              $
              -
              
              $
              2,382Issuance
                  of common stock in conjuction with issuance of debentures
              
              $
              -
              
              $
              12Issuance
                  of common stock in conjuction with asset acquisition
              
              $
              -
              
              $
              75Issuance
                  of note payable in conjuction with asset acquisition
              
              $
              -
              
              $
              30Issuance
                  of common stock in conjuction with term and revolving
                  notes
              
              $
              -
              
              $
              1,541Issuance
                  of conversion options
              
              $
              -
              
              $
              5,496Assumption
                    of accounts payable and accrued liabilities in conjunctionwith
                    asset acquisition
              
              $
              384
              
              $
              105Conversion
                  of revolving note to common stock
              
              $
              729
              
              $
              -













15








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




**Overview**




We
      operate in three business segments: industrial services; electrical contracting
      services; and diesel engine components. We provide industrial services through
      our subsidiary Magnetech Industrial Services, Inc., and electrical contracting
      services through our subsidiary Martell Electric, LLC. In March 2005, we
      acquired certain assets related to the diesel engine operations of Hatch &
Kirk, Inc. located in Hagerstown, Maryland and Weston, West Virginia. This
      created our third business segment, which we operate through our subsidiary
      HK
      Engine Components, LLC.




We
      manage these three segments separately because they offer different products
      and
      services, and each segment requires different technology and marketing
      strategies. We do not allocate corporate administrative and support services
      for
      the company to the segments.




The
      industrial services segment is primarily engaged in providing maintenance and
      repair services to industry, including repairing and manufacturing industrial
      electric motors and lifting magnets, and providing engineering and repair
      services for electrical power distribution systems within industrial plants
      and
      commercial facilities. The electrical contracting segment provides a wide range
      of electrical contracting services, mainly to industrial, commercial and
      institutional customers. The diesel engine components segment manufactures,
      remanufactures, repairs and engineers power assemblies, engine parts and other
      components related to large diesel engines for the rail, utilities, maritime
      and
      offshore drilling industries.




**Recent
      Developments**




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




**Critical
      Accounting Policies and Estimates**




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




*Use
      of estimates.* The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and 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 industrial services and diesel engine components segments
      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 on historical experience. Our revenue recognition policies are
      in
      accordance with Staff Accounting Bulletins No. 101 and No. 104.










16








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




*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.




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




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




*Income
      taxes* .
      We account for income taxes in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .




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










17







As
      a result of adopting SFAS No. 123R on January 1, 2006, we recorded compensation
      cost of $1,000 and $3,000 for the three and nine months ended October 1, 2006,
      respectively, based on the grant date fair value of the award of 500,000 shares
      at $0.25 per share. The total cost of the grant in the amount of $18,000 will
      be
      recognized over the four year period during which the employees are required
      to
      provide services in exchange for the award -- the requisite service period
      (usually the vesting period).




*New
      Accounting Standards* .
      In November 2004, the Financial Accounting Standards Board (“ **FASB** ”)
      issued SFAS No. 151, *Inventory
      Costs - an amendment of ARB No. 43* .
      SFAS 151 was one of a number of projects by the FASB to converge United States
      accounting standards to International Accounting Standards. SFAS 151 requires
      abnormal amounts of idle facility expenses, freight, handling costs and spoilage
      to be recognized as current period charges. In addition, we are required to
      allocate fixed manufacturing overhead costs to the costs of conversion based
      on
      the normal capacity of the manufacturing facilities. SFAS 151 will be effective
      for inventory costs incurred during fiscal years beginning after June 15,
      2005. We adopted SFAS No. 151 on January 1, 2006. Adoption of this standard
      did
      not have a material impact on our consolidated financial position, results
      of
      operations or cash flows as our existing inventory and conversion cost
      methodologies are generally consistent with that required by the new
      standard.




In
      June 2005, the Emerging Issues Task Force released EITF Issue No. 05-4, *The
      Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
      Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled in, a Company’s Own Stock* (“ **EITF
      No. 05-4** ”).
      EITF 05-4 addresses financial instruments, such as convertible notes and stock
      purchase warrants, which are accounted for under EITF 00-19 that may be issued
      at the same time and in contemplation of a registration rights agreement that
      includes a liquidated damages clause. EITF 05-4 specifically provides guidance
      to issuers as to how to account for registration rights agreements that require
      an issuer to use its "best efforts" to file a registration statement for the
      resale of equity instruments and have it declared effective by the end of a
      specified grace period and, if applicable, maintain the effectiveness of the
      registration statement for a period of time or pay a liquidated damage penalty
      to the investor. The consensus for EITF No. 05-4 has not been finalized.




Under
      our registration rights agreement with Laurus, if our common stock is not traded
      on the OTC Bulletin Board, Nasdaq or a national exchange for three consecutive
      trading days and trading does not resume within 30 days, then, subject to
      certain exceptions, for each day that any of those events is occurring, we
      are
      required to pay Laurus an amount in cash equal to 1/30th of the product of
      the
      outstanding principal amount owed to Laurus, multiplied by 0.01 (or
      approximately 1% per month). In addition, the embedded conversion rights under
      our senior secured facility with Laurus may be considered non-conventional
      under
      the guidance of paragraph 4 of EITF No. 00-19 because, subject to certain
      exceptions, the conversion price of the notes issued to Laurus may be adjusted.
      As a result, warrants, issued in conjunction with the Laurus financing, were
      accounted for under the Emerging Issues Task Force (“EITF”) Issue No. 00-19 *Accounting
      for Derivative Financial Instruments Index to and Potentially Settled in a
      Company’s Own Stock* and View A of EITF No. ** 05-4, *The
      Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
      Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled in, a Company’s Own Stock.* Due
      to certain factors and the liquidated damage provision in the Registration
      Rights Agreements, the Company determined that the warrants are derivative
      liabilities.













18








**Results
      of Operations**




*Three
      Months Ended October 1, 2006 Compared to Three Months Ended September 25,
      2005*




*Revenues* .
      Total revenues increased by $3.1 million or 25% to $15.5 million in 2006 from
      $12.4 million in 2005. The increase in revenues resulted from increases in
      industrial services segment revenue of $1.9 million or 26% and electrical
      contracting segment revenues of $.8 million or 29%, and diesel engine components
      segment revenues of $.4 million or 17%.




The
      increase in industrial services segment revenue resulted from a decrease in
      product sales during 2006 to $1.8 million, which was $.4 million or 18% lower
      than product sales of $2.2 million during 2005, and an increase in service
      revenue during 2006 to $7.7 million, which was $2.3 million or 43% higher than
      service revenue of $5.4 million during 2005. The increase in service
      revenues of $2.3 million resulted from increases of all services, including
      motor and magnet repairs of $.7 million and $.4 million, respectively and
      various other industrial services of $1.2 million. The acquisition of certain
      assets of Smith Alabama in May 2006 accounted for the increase in motor repairs
      and $.5 of the increase in other industrial services.




The
      increase in electrical contracting segment revenues during 2006 resulted
      primarily from market penetration, geographic expansion and a strong local
      construction market.




The
      increase in diesel engine component segment revenues during 2006 resulted
      primarily from market penetration.




To
      continue to grow our business segments at historical rates, we believe we must
      continue to make strategic business acquisitions. We make no assurance, however,
      that we will be able to identify, acquire and successfully integrate additional
      companies to achieve such growth. Revenues from our industrial services segment
      should increase to reflect the acquisition of Smith Alabama. We expect our
      rates
      of revenue growth from existing operations in our electrical contracting segment
      to slow relative to historical rates in 2006 and thereafter in light of our
      current market penetration and geographic markets. Revenues from our diesel
      engine components segment should increase in 2006 to reflect a full year of
      sales.




*Cost
      of Revenues* .
      Total cost of revenues in 2006 was $12.2 million or 79% of total revenues
      compared to $9.8 million or 79% of total revenues in 2005. The increase of
      $2.4
      million in cost of revenues was due primarily to the overall increase in our
      total revenue. Cost of revenues as a percentage of total revenue did not change
      from 2005 to 2006 as the sales mix by segment did not fluctuate significantly
      from 2005 to 2006.




*Gross
      Profit.* Total gross profit in 2006 was $3.3 million or 21% of total revenues compared
      to
      $2.6 million or 21% of total revenues in 2005. The increase of $.7 million
      was
      due to increased revenues. Gross profit as a percentage of total revenue is
      expected to increase as diesel engine component segment revenues increase and
      capacity utilization increases. However, gross profit, as a percentage of
      revenue, could increase or decrease if the sales mix between segments
      changes.




*Selling,
      General and Administrative Expenses* .
      Selling, general and administrative expenses increased $.4 million or 17% to
      $2.8 million in 2006 from $2.4 million in 2005. Selling expenses increased
      29%
      to $.9 million in 2006 from $.7 million in 2005 primarily due to higher
      commissions on increased sales. General and administrative expenses increased
      12% to $1.9 million in 2006 from $1.7 million in 2005, primarily due to higher
      salaries and benefits to support the growing business.




*Loss
      on Warrant Liability.* In
      accordance with EITF 00-19 and EITF 05-4, we incurred a loss on warrant
      liability of $984 in 2006, related to the issuance of warrants as part of the
      Laurus financings in August 2005 and May 2006.










19








*Interest
      Expense and Other Income* .
      Interest expense decreased in 2006 to $.8 million from $5.2 million in 2005.
      The
      decrease was primarily due to the $4.5 million interest charge related to the
      conversion option granted in September 2005 which did not recur in
      2006.




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




*Net
      Loss.* Net loss was $1.2 million and $5.0 million in 2006 and 2005, respectively.
      The
      decrease in the net loss was due primarily to lower interest expense and higher
      operating income generated from higher sales, partially offset by the loss
      on
      warrant liability.




*Nine
      Months Ended October 1, 2006 Compared to Nine Months Ended September 25,
      2005*




*Revenues* .
      Total revenues increased by $10.7 million or 33% to $43.3 million in 2006 from
      $32.6 million in 2005. The increase in revenues resulted from increases in
      industrial services segment revenue of $4.9 million or 23%, electrical
      contracting segment revenues of $2.5 million or 37%, and diesel engine
      components segment of $3.3 or 78%.




The
      increase in industrial services segment revenue resulted from an increase in
      services during 2006 to $20.0 million, which was $5.0 million or 33% higher
      than
      services of $15.0 million during 2005. Product sales declined $.1 million from
      $6.6 million in 2005 to $6.5 million in 2006. The increase in service revenues
      of $5.0 million resulted from increases of all services, including motor and
      magnet repairs of $1.5 million and $.7 million, respectively, and other
      industrial services. The acquisition of certain assets of Smith Alabama in
      May
      2006 accounted for $1.7 million of the increase in service revenues.




The
      increase in electrical contracting segment revenues during 2006 of $2.5 million
      resulted primarily from continued market penetration, geographic expansion
      and a
      strong local construction market.




The
      increase in diesel engine component segment revenues resulted primarily from
      having nine months sales in 2006 compared to only seven months sales in 2005
      and
      increased market penetration.




To
      continue to grow our business segments at historical rates, we believe we must
      continue to make strategic business acquisitions. We make no assurance, however,
      that we will be able to identify, acquire and successfully integrate additional
      companies to achieve such growth. Revenues from our industrial services segment
      should increase to reflect the acquisition of Smith Alabama. We expect our
      rates
      of revenue growth from existing operations in our electrical contracting segment
      to slow relative to historical rates in 2006 and thereafter in light of our
      current market penetration and geographic markets. Revenues from our diesel
      engine components segment should increase in 2006 to reflect a full year of
      sales.




*Cost
      of Revenues* .
      Total cost of revenues in 2006 was $34.2 million or 79% of total revenues
      compared to $26.1 million or 80% of total revenues in 2005. The increase of
      $8.1
      million in cost of revenues was due primarily to the overall increase in our
      total revenue. The decrease in cost of revenues as a percentage of total revenue
      from 2005 to 2006 of 1% was due to an increase in capacity utilization in the
      diesel engine components segment and improved operating performance in the
      electrical contracting segment.










20








*Gross
      Profit.* Total gross profit in 2006 was $9.1 million or 21% of total revenues compared
      to
      $6.4 million or 20% of total revenues in 2005. The increase of $2.7 million
      was
      due primarily to increased revenues. Gross profit as a percentage of total
      revenue is expected to increase as diesel engine component segment revenues
      increase and capacity utilization increases. However, gross profit, as a
      percentage of revenue, could increase or decrease if the sales mix between
      segments changes.




*Selling,
      General and Administrative Expenses* .
      Selling, general and administrative expenses increased $1.4 million or 22%
      to
      $7.9 million in 2006 from $6.4 million in 2005. Selling expenses increased
      32%
      to $2.5 million in 2006 from $1.9 million in 2005 primarily due to higher
      commissions on increased sales and higher travel and entertainment expenses
      required to support the growth in total revenues. General and administrative
      expenses increased 20% to $5.4 million in 2006 from $4.5 million in 2005,
      primarily due to higher salaries and benefits to support the growing business,
      offset in part by lower travel expenses. Professional fees also increased due
      to
      costs associated with becoming a public company under federal securities
      laws.




*Loss
      on Warrant Liability.* In
      accordance with EITF 00-19 and EITF 05-4, we incurred a loss on warrant
      liability of $1.8 million in 2006, related to the issuance of warrants as part
      of the Laurus financings in August 2005 and May 2006.




*Interest
      Expense and Other Income* .
      Interest expense decreased in 2006 to $2.5 million from $5.7 million in 2005.
      The decrease was primarily due to the $4.5 million interest charge related
      to
      the conversion option granted in September 2005 which did not recur in 2006.
      Interest on principal debt increased to $.9 million from $.4 million due to
      higher outstanding balances and interest rates. Interest related to the
      amortization of debt issue costs and debt discount costs on debentures and
      senior revolving debt increased to $1.6 million in 2006 from $.8 in
      2005.




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




*Net
      Loss.* Net loss was $3.1 million and $5.7 million in 2006 and 2005, respectively.
      The
      decrease in the net loss was due primarily to lower interest expense and higher
      operating income generated from higher sales, partially offset by the loss
      on
      warrant liability.





**Liquidity
      and Capital Resources**




At
      October 1, 2006 we had $.4 million of cash and approximately $4.8 million of
      working capital. Working capital decreased $1.3 million from approximately
      $6.1
      million at December 31, 2005. Our total debt to equity ratio increased from
      approximately 4.1:1 to 9.5:1 from December 31, 2005 to October 1, 2006 due
      to
      increases in short term borrowings under the revolving notes, $2.1 million
      term
      note obtained in May 2006, warrant liability of $1.8 million and the net loss
      incurred during the nine months ended October 1, 2006.




We
      have incurred operating losses since we began operations in 2000. The operating
      losses were due to start up costs, including start up costs associated with
      acquisitions, underutilized operating capacity and costs incurred to build
      a
      corporate infrastructure sufficient to support increasing sales from existing
      operations and acquisitions for the foreseeable future. We funded these
      accumulated operating losses, increases in working capital, contractual
      obligations, acquisitions and capital expenditures with investments and advances
      from our majority stockholder ($7.2 million), a private debt offering ($4.0
      million), private equity offerings ($2.7 million), trade credit and bank
      loans.




Our
      net loss for the nine months ended October, 2006 of $3.1 million included
      non-cash expenditures of depreciation and amortization of $.6 million, loss
      on
      warrant liability of $1.8 million and amortization related to debt issue and
      debt discount costs of $1.6 million.










21








Net
      Cash provided by operating activities was $1.8 million for the nine months
      ended
      October, 2006, and net cash used in operating activities was $3.9 million for
      the nine months ended September 25, 2005. For the nine months ended October
      1,
      2006, net cash provided by operations resulted primarily from net income before
      non-cash charges for loss on warrants, depreciation and amortization of debt
      issue and debt discount costs of $1.1 million and an increase in accrued
      expenses and other current liabilities of $.7 million. Accounts receivable
      increased $.6 million due to higher sales. Inventory declined $.4 million,
      despite higher sales, as a result of improved inventory turnover. For the nine
      months ended September 25, 2005, net cash used in operating activities was
      due
      primarily to increases in accounts receivable and inventories of $4.6 million
      and $2.1 million, respectively, offset in part by increases in accounts payable
      of $1.8 million and accrued expenses and other current liabilities of $1.3
      million, due primarily to the increase in sales. Accounts receivable and
      inventory may increase if sales increase. Several of our trade accounts payable
      have extended beyond the terms allowed by the applicable vendors. As a result,
      certain vendors have placed us on credit hold or cash in advance which has
      resulted in delays in receipt of necessary materials and parts. Disruptions
      of
      this nature have resulted in delayed shipments to our customers and may continue
      to result in such delays in the future. We do not believe that these delays
      have
      resulted in the loss of any material amount of sales orders, although future
      delays might have an adverse affect on our business. We expect this condition
      to
      continue for the immediate future.




During
      the nine months ended October 1, 2006 and September 25, 2005, net cash outflows
      from investing activities were $3.8 million and $3.2 million, respectively.
      In
      2006 we acquired certain assets from E.T. Smith Services of Alabama, Inc. for
      $3.5 million and we also acquired machinery and equipment of $.3 million. In
      2005, we acquired certain assets from Hatch & Kirk, Inc. for $2.6 million.
      We also acquired machinery and equipment of $.7 million.




We
      generated $2.4 million from financing activities during the nine months ended
      October 1, 2006 primarily from the Laurus financing of $3.4 million for the
      acquisition of E.T. Smith Services of Alabama, Inc. in May 2006, less payments
      of notes payable and long term debt. We generated approximately $7.1 million
      from financing activities during the nine months ended September 25, 2005
      primarily from the issuance of convertible, subordinated debentures of
      approximately $4 million and increased net borrowings under the senior line
      of
      credit from Laurus of $4.5 million.




We
      are undertaking various activities to improve our future cash flows. These
      activities include efforts to collect accounts receivable at a faster rate
      and
      to decrease inventory levels by improving controls over purchasing and more
      aggressive selling efforts. In that regard, we do not expect our accounts
      receivable to become more difficult or unlikely to collect, and we feel our
      inventory levels are consistent with anticipated future sales and not excessive.




From
      March through May of 2005, we issued $4.0 million aggregate principal amount
      of
      subordinated convertible debentures. The debentures originally were scheduled
      to
      mature on February 28, 2007; however, in April 2006, the debenture holders
      agreed to extend the maturity date to February 28, 2008. The debentures bear
      interest at a fixed annual rate of 6%, payable in cash upon redemption or at
      maturity if the holders do not elect to convert their debentures. Each debenture
      holder has the option to convert principal and accrued interest under the
      debentures into shares of our common stock at a fixed conversion price of
      $0.3404926 per share, subject to certain anti-dilution adjustments. As of
      October 1, 2006, no debenture holder has elected to convert principal and
      accrued interest. To the extent that any debenture holder elects to convert
      principal and accrued interest into common stock, our obligation to repay the
      principal and accrued interest at maturity decreases accordingly. If no
      debenture holder elects to convert before maturity, we will be obligated to
      make
      principal and accrued interest payments totaling approximately $4.7 million
      on
      February 28, 2008. We are uncertain whether we will generate sufficient funds
      from operations to make that entire payment. If not, then absent exercise of
      the
      debenture holders’ conversion rights, we will have to refinance this
      indebtedness at its maturity or otherwise raise additional capital through
      debt
      or equity financing to pay off the indebtedness. There is no assurance that
      we
      will successfully refinance the indebtedness or secure such other financing
      on
      terms acceptable to us, or at all. If we are not successful, we would default
      under the debentures.






22




If
      we default under the debentures, all unpaid amounts will accrue interest at
      a
      rate of 15% per year from the date of default until paid. Other remedies
      available to the debenture holders upon an event of default, which remedies
      are
      subject and subordinate in right to the rights of Laurus as our senior secured
      lender, include the right to accelerate the maturity of all obligations, the
      right to foreclose on our assets securing the obligations, all rights of a
      secured creditor under applicable law, and other rights set forth in the
      debenture documents. The events of default under the debenture documents include
      failure to pay principal and interest when due, breach of any covenant under
      the
      debenture documents that continues unremedied for 10 days, certain events
      relating to bankruptcy, default under other indebtedness in a principal amount
      exceeding $200,000, a judgment in excess of $50,000 is levied against our
      assets, and other events described in the debenture documents.




In
      August 2005, we entered into a $10.0 million credit facility with Laurus Master
      Fund, Ltd. On September 29, 2006, Laurus converted $729 of the Revolving Note
      at
      a conversion rate of $0.19 per share for a total of 3,836,412 shares of the
      Company’s common stock. At October 1, 2006, we had borrowed an aggregate of $7.9
      million under the facility: $2.3 million under a term note, $3.3 million under
      a
      minimum borrowing note and $1.4 million under a revolving note.




The
      notes bear interest at an annual rate of 1% over the prime rate as published
      in *The
      Wall Street Journal* .
      Interest is payable monthly, in arrears, beginning on September 1, 2005. The
      notes mature on August 24, 2008, are convertible into our common stock, and
      are
      secured by a first priority lien in our assets and our pledge of the equity
      interests in our subsidiaries. The obligations to Laurus also are guaranteed
      by
      certain subsidiaries.




The
      term note issued to Laurus requires monthly principal payments of $100,000,
      together with all accrued and unpaid interest, beginning on March 1, 2006.
      Subject to the conversion limitations noted below, monthly payments of principal
      and interest under the term note must be made in shares of our common stock
      if
      (i) the average of the closing prices of our common stock as reported on our
      principal trading market for the five trading days immediately preceding the
      payment due date is greater than or equal to 110% of the then-applicable
      conversion price, and (ii) the amount of such conversion does not exceed 28%
      of
      the aggregate dollar trading volume of our common stock for the period of 22
      trading days immediately preceding such date. Otherwise, we must pay Laurus
      an
      amount in cash equal to 101% of the principal and interest due. We believe
      that
      our existing working capital and cash provided by operations will be adequate
      to
      allow us to make such principal and interest payments in cash rather than stock
      for at least the next 12 months.




Laurus
      has the option to convert all or any portion of the outstanding principal amount
      and/or accrued interest and fees under each note into shares of our common
      stock. With respect to the first $3.5 million aggregate principal amount
      converted under the minimum borrowing note, the conversion price is $0.19 per
      share. With respect to the remaining principal amount, the conversion price
      is
      $0.32 per share. The conversion price under the term note is $0.26 per share.
      Each of the foregoing conversion prices is subject to certain anti-dilution
      adjustments. On September 29, 2006 Laurus converted approximately $729,000
      in
      exchange for 3,836,412 shares of our common stock at $.19 per
      share.




None
      of the obligations under the notes may be converted into our common stock to
      the
      extent that conversion would result in Laurus having beneficial ownership in
      excess of 9.99% of our issued and outstanding common stock. This conversion
      limitation becomes null and void if we are in default under our obligations
      to
      Laurus or on 75 days’ prior notice by Laurus. Further, the obligations are not
      convertible into our common stock unless:




**·**
            an
                effective current registration statement covering the shares of common
                stock exists or (ii) an exemption from registration for resale of
                all of
                the common stock is available pursuant to Rule 144 of the Securities
                Act
                of 1933; and





**·**
            no
                event of default exists and is
                continuing.






23


To
      the extent that Laurus elects to convert principal and accrued interest into
      common stock, our obligation to repay the principal and accrued interest at
      maturity decreases accordingly. If Laurus does not exercise its conversion
      right
      or is prevented from doing so, we will be obligated to repay the outstanding
      principal and interest on August 24, 2008. We do not anticipate being able
      to
      generate sufficient funds from operations to pay all such principal and interest
      on that date. Consequently, absent exercise of Laurus’ conversion rights, we
      anticipate having to refinance this indebtedness at its maturity or otherwise
      raise additional capital through debt or equity financing to pay off the
      indebtedness. There is no assurance that we will successfully refinance the
      indebtedness or secure such other financing on terms acceptable to us, or at
      all. If we are not successful, we would default under the notes.




If
      we default under the notes, then the interest on the outstanding principal
      balance of each note will increase at a rate of 1% per month until the default
      is cured or waived, and Laurus can require a default payment equal to 112%
      of
      the outstanding principal, interest and fees due to it. Other remedies available
      to Laurus upon an event of default include the right to accelerate the maturity
      of all obligations, the right to foreclose on our assets securing the
      obligations, all rights of a secured creditor under applicable law, and other
      rights set forth in the loan documents with Laurus. The events of default under
      the notes include failure to pay amounts within five days after the applicable
      due date, material breach of our loan agreement with Laurus that continues
      unremedied for 30 days, material breach of any other agreement with Laurus
      that
      continues unremedied beyond any applicable grace period, certain events relating
      to bankruptcy, we cease operations or experience a change of control, our common
      stock is not listed or quoted on an established trading market or exchange
      on or
      before August 15, 2006, and other events described in our loan agreement with
      Laurus.




In
      May 2006, we entered into a second Security and Purchase Agreement with Laurus.
      The agreement provided financing comprised of a $1.6 million revolving note
      and
      a $2.1 million term note. The notes mature in May 2009. Laurus agreed to advance
      funds under the revolving note in amounts up to 90% of eligible trade accounts
      receivable. Interest is payable monthly at 2.5% and 1.5% over prime as published
      in the Wall Street Journal for the first $.3 million and the remaining $1.3
      million under the revolving note, respectively. The maximum outstanding balance
      allowable under the revolving note decreases $10,000 per month beginning
      December 2006.




Under
      the term loan, the Company must make monthly principal payments of $70,000
      with
      interest beginning December 2006. Interest is payable monthly at 1.0% over
      prime
      as published in the Wall Street Journal under the term note. As part of the
      financing, Laurus received $133,000 in cash and was issued warrants for 375,000
      shares of the Company’s common stock with an exercise price of $0.01 per share.




The
      provisions of the $7 million and $1.6 million revolving notes include a lock-box
      agreement and also allow Laurus, in its reasonable credit judgment, to assess
      additional reserves against, or reduce the advance rate against accounts
      receivable used in the borrowing base calculation. These provisions satisfy
      the
      requirements for consideration of EITF Issue No. 95-22, *Balance
      Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
      that include both a Subjective Acceleration Clause and a Lock-Box
      Arrangement* .
      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, Laurus, in its reasonable credit judgment, can assess
      additional reserves to the borrowing base calculation or reduce the advance
      rate
      against accounts receivable to account for changes in the nature of our 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 this revolving
      note
      facility, Laurus has not applied any additional reserves to the borrowing base
      calculation. We do not anticipate any changes in our business practices that
      would result in any material adjustments to the borrowing base calculation.
      However, we cannot be certain that additional reserves will not be assessed
      by
      Laurus to the borrowing base calculation. As a result, we classify borrowings
      under the revolving note facilities as short-term obligations.


24


If
        we
        default under the notes, then the interest on the outstanding principal balance
        will increase at a rate of 1% per month until the default is cured or waived,
        and Laurus can require a default payment equal to 112% of the outstanding
        principal, interest, and fees due to it. Other remedies available to Laurus
        upon
        an event of default include the right to accelerate the maturity of all
        obligations, the right to foreclose on our assets securing the obligations,
        all
        rights of a secured creditor under applicable law, and other rights set forth
        in
        the Security and Purchase Agreement with Laurus. The events of default under
        the
        notes include failure to pay amounts within five days after the applicable
        due
        date, a material breach of the Security and Purchase Agreement that continues
        unremedied for 30 days, a material breach of any other agreement with Laurus
        that continues unremedied beyond any applicable grace period, certain events
        relating to bankruptcy, we cease operations or experience a change of control,
        the SEC issues a stop trade order or the NASD suspends the trading of our
        common
        stock on the OTCBB and such order or suspension remains in effect for five
        consecutive days or for five days during any period of ten consecutive days,
        unless remedied within 60 days, and other events described in the Security
        and
        Purchase Agreement with Laurus.


In
      June 2005, the Emerging Issues Task Force released EITF Issue No. 05-4, *The
      Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
      Subject to EITF Issue No. 00-19, .Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock* (“ **EITF
      No. 05-4** ”).
      EITF 05-4 addresses financial instruments, such as convertible notes and stock
      purchase warrants, which are accounted for under EITF 00-19 that may be issued
      at the same time and in contemplation of a registration rights agreement that
      includes a liquidated damages clause. EITF 05-4 specifically provides guidance
      to issuers as to how to account for registration rights agreements that require
      an issuer to use its "best efforts" to file a registration statement for the
      resale of equity instruments and have it declared effective by the end of a
      specified grace period and, if applicable, maintain the effectiveness of the
      registration statement for a period of time or pay a liquidated damage penalty
      to the investor. The consensus for EITF No. 05-4 has not been finalized.




Under
      our registration rights agreements with Laurus, if our common stock is not
      traded on the OTC Bulletin Board, Nasdaq or a national exchange for three
      consecutive trading days and trading does not resume within 30 days, then,
      subject to certain exceptions, for each day that any of those events is
      occurring, we are required to pay Laurus an amount in cash equal to 1/30th
      of
      the product of the outstanding principal amount owed to Laurus, multiplied
      by
      0.01 (or approximately 1% per month). In addition, the embedded conversion
      rights under our senior secured facility with Laurus may be considered
      non-conventional under the guidance of paragraph 4 of EITF No. 00-19 because,
      subject to certain exceptions, the conversion price of the notes issued to
      Laurus may be adjusted. As a result, warrants, issued in conjunction with the
      Laurus financing, were accounted for under the Emerging Issues Task Force
      (“EITF”) Issue No. 00-19 *Accounting
      for Derivative Financial Instruments Index to and Potentially Settled in a
      Company’s Own Stock* and View A of EITF No. ** 05-4, *The
      Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
      Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled in, a Company’s Own Stock.* Due
      to certain factors and the liquidated damage provision in the registration
      rights agreements, the Company determined that the warrants are derivative
      liabilities.




Our
      current financing arrangements do not contain any financial covenant measures,
      such as minimum working capital, debt to equity or debt coverage ratios, that
      materially restrict our ability to undertake financing. These arrangements
      do
      include, however, restrictions on our ability to incur new indebtedness (other
      than trade debt), whether secured or unsecured, to redeem our capital stock,
      to
      issue preferred stock, and to pay dividends on any of our capital stock. In
      addition, so long as the senior secured notes we issued are outstanding, Laurus
      has a right of first refusal with respect to any future debt financing that
      is
      convertible into our capital stock. These restrictions and the right of first
      refusal will make it more difficult to obtain future financing for our business.






25


Following
      is a summary of fixed payments related to certain contractual obligations as
      of
      October 1, 2006 (amounts in thousands):




**As
                of October 1, 2006**:
            
            
            
            **Payments
                due by period**Contractual
                Obligations
            
            Total
            
            Less
                than
              1
                year
            
            1-3
                years
            
            3-5
                years
            
            More
                than
              5
                yearsLong-Term
                Debt
            
            $
            16,755
            
            $
            6,977
            
            $
            9,775
            
            $
            3
            
            $
            -Lease
                Obligations
            
            
            3,625
            
            
            836
            
            
            1,512
            
            
            854
            
            
            423Total
            
            $
            20,380
            
            $
            7,813
            
            $
            11,287
            
            $
            857
            
            $
            423




We
      believe that our existing working capital, cash provided by operations and
      our
      existing senior credit facility with Laurus, under which we had an additional
      $2.2 million available as of October 1, 2006, should be sufficient to fund
      our
      working capital needs, capital requirements and contractual obligations for
      at
      least the next 12 months. We will need, however, to raise additional debt or
      equity capital to fund any future business acquisitions. As of October 1, 2006,
      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.










26







**Discussion
      of Forward-Looking Statements**




We
      have made “forward-looking statements” in this document within the meaning of
      Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934, as amended. These statements, including
      estimates of future net sales, future net income and future earnings per share,
      contained in the section titled “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations,” are subject to risks and
      uncertainties. Forward-looking statements include the information concerning
      our
      possible or assumed results of operations. Also, statements including words
      such
      as “believes,” “expects,” “anticipates,” “intends,” “estimates,” or similar
      expressions are forward-looking statements. We have based these forward-looking
      statements on our current expectations and projections about the growth of
      our
      business, our financial performance and the development of our industry. Because
      these statements reflect our current views concerning future events, these
      forward-looking statements involve risks and uncertainties. Investors should
      note that many factors, as more fully described in “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and elsewhere in this
      Report could affect our future financial results and could cause our actual
      results to differ materially from those expressed in forward-looking statements
      contained in this Report. Other factors that may affect our operations and
      prospects are discussed in our Registration Statement on Form S-1 (Reg. No.
      333-137940), “Risk Factors.” We undertake no duty to update these
      forward-looking statements.




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




We
      are exposed to interest rate market risk with respect to our debt. Our total
      debt as of October 1, 2006 had a carrying value of approximately $15.8 million
      and a fair value of approximately $19.9 million. As of October 1, 2006, 76%
      of
      our total debt was subject to variable interest rates. As of October 1, 2006,
      the weighted-average interest rate of our debt was 8.14%. To the extent that
      we
      refinance our existing debt or incur additional debt outside of our currently
      existing arrangements, we will be subject to additional interest rate market
      risk, which could be substantial.




Our
      exposure to interest rate market risk with respect to cash is limited because
      our cash balances are maintained in a bank deposit account.




We
      are exposed to credit risk. Credit risk relates to the risk of loss resulting
      from the nonperformance by a customer of its contractual obligations. Our
      exposure generally relates to receivables and unbilled revenue for services
      provided. We maintain credit policies intended to minimize credit risk and
      actively monitor these policies.




Our
      exposure to foreign currency exchange rate risk is limited because substantially
      all of our transactions are conducted in United States dollars, and we do not
      believe that a change in any exchange rate of 10% would have a material impact
      on our consolidated results of operations or cash flows.




**ITEM
      4. CONTROLS AND PROCEDURES**




Under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and Chief Financial Officer, we have evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
      as of the end of the period covered by this quarterly report on Form 10-Q (the
      “ **Evaluation
      Date** ”).
      Based on that evaluation, our Chief Executive Officer and Chief Financial
      Officer concluded that, as of the Evaluation Date, our disclosure controls
      and
      procedures are effective to ensure that information required to be disclosed
      in
      the reports that we file or submit under the Securities Exchange Act of 1934
      is
      recorded, processed, summarized and reported within the time periods specified
      in the Securities and Exchange Commission’s rules and forms. There has been no
      change in our internal control over financial reporting during the most recent
      fiscal quarter that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.












27







**PART
      II - OTHER INFORMATION**





**ITEM
      2.  UNREGISTERED SALES OF EQUITY SECURITIES AND 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. To date 7,641,200 shares
      have been issued upon the exercise of warrants and, [to our knowledge, no shares
      have been sold by selling shareholders pursuant to the offering]. We have
      incurred total expenses in connection with the offering of $400,000 and have
      received no offering proceeds, except that we received $6,561 upon the exercise
      of warrants.




**ITEM
        5. OTHER INFORMATION**
  *Amendment
        to Code of By-Laws*
 
 Effective
        November 9, 2006, the Board of Directors amended the Company’s Amended and
        Restated Code of By-Laws (the “By-Laws”) to permit the Company’s shareholders to
        take any action required or permitted to be taken at any shareholders’ meeting
        without a meeting if the action is taken in writing evidenced by one or more
        written consents signed by shareholders holding at least the minimum number
        of
        votes necessary to authorize the action at a meeting. A copy of the By-Laws,
        as
        amended and restated, is attached hereto as Exhibit 3.2.






**ITEM
      6.  EXHIBITS**





2.1
            Asset
                Purchase Agreement dated May 31, 2006 among Magnetech Industrial
                Services
                of Alabama, LLC, Magnetech Industrial Services, Inc., E. T. Smith
                Services
                of Alabama, Inc. and Smith Services, Inc., filed as Exhibit 2.1 to
                Current
                Report on Form 8-K filed by the registrant on June 1,
                20063.1
            Amended
                and Restated Articles of Incorporation of the registrant, filed as
                Exhibit
                3.1 to the Registration Statement on Form S-1 filed by the registrant
                on
                November 1, 20053.2*
            Amended
                and Restated Code of By-Laws of the registrant dated November 9,
                20064.1
            Specimen
                certificate of common stock, filed as Exhibit 4.1 to Amendment No.
                1 to
                the Registration Statement on Form S-1 filed by the registrant on
                December 30, 20054.2
            Warrant
                Agreement, form of Joinder Agreement and form of common stock purchase
                warrant issued to designees of Strasbourger Pearson Tulcin Wolff
                Incorporated pursuant to Placement Agency Agreement dated April 26,
                2004,
                filed as Exhibit 10.1 to the Registration Statement on Form S-1 filed
                by
                the registrant on November 1, 20054.3
            Form
                of common stock purchase warrant issued to designees of Strasbourger
                Pearson Tulcin Wolff Incorporated pursuant to Placement Agency Agreement
                dated January 25, 2005, filed as Exhibit 10.2 to the Registration
                Statement on Form S-1 filed by the registrant on November 1, 20054.4
            Form
                of common stock purchase warrant issued to purchasers of the registrant’s
                subordinated convertible debentures pursuant to Convertible Debenture
                Purchase Agreements with the registrant, filed as Exhibit 10.5 to
                the
                Registration Statement on Form S-1 filed by the registrant on November
                1,
                20054.5
            Common
                Stock Purchase Warrant dated August 24, 2005 issued to Laurus Master
                Fund,
                Ltd., filed as Exhibit 4.5 to the Registration Statement on Form
                S-1 filed
                by the registrant on November 1,
                2005




28




4.6
            Form
                of common stock purchase warrant issued to persons designated by
                Vertical
                Capital Partners, Inc., filed as Exhibit 4.6 to the Registration
                Statement
                on Form S-1 filed by the registrant on November 1,
                20054.7a
            Form
                of subordinated convertible debenture issued to purchasers pursuant
                to
                Convertible Debenture Purchase Agreements with the registrant, filed
                as
                Exhibit 10.5 to the Registration Statement on Form S-1 filed by the
                registrant on November 1, 20054.7b
            Letter
                Agreement dated April 16, 2006, to extend maturity date of subordinated
                convertible debentures, filed as Exhibit 4.7b to Amendment No. 3
                to the
                Registration Statement on Form S-1 filed by the registrant on
                April 19, 2006


4.8
            Secured
                Revolving Note dated August 24, 2005 issued to Laurus Master Fund,
                Ltd.,
                filed as Exhibit 4.8 to the Registration Statement on Form S-1 filed
                by
                the registrant on November 1, 20054.9
            Secured
                Convertible Minimum Borrowing Note dated August 24, 2005 issued to
                Laurus
                Master Fund, Ltd., filed as Exhibit 4.9 to the Registration Statement
                on
                Form S-1 filed by the registrant on November 1,
                20054.10
            Secured
                Convertible Term Note dated August 24, 2005 issued to Laurus Master
                Fund,
                Ltd., filed as Exhibit 4.10 to the Registration Statement on Form
                S-1
                filed by the registrant on November 1, 20054.11
            Promissory
                Note dated January 1, 2004 issued by Magnetech Industrial Services,
                Inc.
                to John A. Martell, filed as Exhibit 4.11 to the Registration Statement
                on
                Form S-1 filed by the registrant on November 1,
                20054.12
            Conversion
                Option dated September 12, 2005 among John A. Martell, Magnetech
                Industrial Services, Inc. and the registrant, filed as Exhibit 4.12
                to the
                Registration Statement on Form S-1 filed by the registrant on
                November 1, 20054.13
            Form
                of Registration Rights Agreement between the registrant and the purchasers
                scheduled therein, made pursuant to Stock Purchase Agreement with
                the
                registrant, filed as Exhibit 10.4 to the Registration Statement on
                Form
                S-1 filed by the registrant on November 1, 20054.14
            Form
                of Registration Rights Agreement between the registrant and the purchasers
                scheduled therein, made pursuant to Subordinated Convertible Debenture
                Purchase Agreements, filed as Exhibit 10.5 to the Registration Statement
                on Form S-1 filed by the registrant on November 1, 20054.15
            Registration
                Rights Agreement dated August 24, 2005 between the registrant and
                Laurus
                Master Fund, Ltd., filed as Exhibit 4.15 to the Registration Statement
                on
                Form S-1 filed by the registrant on November 1,
                20054.16
            Common
                Stock Purchase Warrant dated May 31, 2006 issued by registrant to
                Laurus
                Master Fund, Ltd., filed as Exhibit 4.1 to Current Report on Form
                8-K
                filed by the registrant on June 6, 20064.17
            Secured
                Non-convertible Revolving Note dated May 31, 2006 issued by Magnetech
                Industrial Services of Alabama, LLC to Laurus Master Fund, Ltd.,
                filed as
                Exhibit 4.2 to Current Report on Form 8-K filed by the registrant
                on
                June 6, 20064.18
            Secured
                Term Note dated May 31, 2006 issued by Magnetech Industrial Services
                of
                Alabama, LLC to Laurus Master Fund, Ltd., filed as Exhibit 4.3 to
                Current
                Report on Form 8-K filed by the registrant on June 6,
                20064.19a
            Registration
                Rights Agreement dated May 31, 2006 between the registrant and Laurus
                Master Fund, Ltd., filed as Exhibit 4.4 to Current Report on Form
                8-K
                filed by the registrant on June 6, 20064.19b
            Amendment
                dated July 31, 2006, to Registration Rights Agreement dated May 31,
                2006,
                between the registrant and Laurus Master Fund, Ltd., filed as Exhibit
                10.1
                to Current Report on Form 8-K filed by the registrant on August 4,
                20064.19c
            Amendment
                dated August 30, 2006, to Registration Rights Agreement dated May
                31,
                2006, between the registrant and Laurus Master Fund, Ltd., filed
                as
                Exhibit 10.1 to Current Report on Form 8-K filed by the registrant
                on
                August 31, 200631.1*
            Certification
                by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)
                of the
                Exchange Act




29




31.2*
            Certification
                by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)
                of the
                Exchange Act32*
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of
                the
                Sarbanes-Oxley Act of 2002


*Filed
        herewith. All other Exhibits have been previously filed.









30







**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
                13, 2006
            By:
            /s/Richard
                J. MullinRichard
                J. MullinChief
                Financial Officer(Signing
                on behalf of the registrant as Principal Financial
                Officer)













31





**INDEX
      TO EXHIBITS**





RegulationS-K
                ExhibitNumber
            Document2.1
            Asset
                Purchase Agreement dated May 31, 2006 among Magnetech Industrial
                Services
                of Alabama, LLC, Magnetech Industrial Services, Inc., E. T. Smith
                Services
                of Alabama, Inc. and Smith Services, Inc., filed as Exhibit 2.1 to
                Current
                Report on Form 8-K filed by the registrant on June 1,
                20063.1
            Amended
                and Restated Articles of Incorporation of the registrant, filed as
                Exhibit
                3.1 to the Registration Statement on Form S-1 filed by the registrant
                on
                November 1, 20053.2*
            Amended
                and Restated Code of By-Laws of the registrant dated November 9,
                20064.1
            Specimen
                certificate of common stock, filed as Exhibit 4.1 to Amendment No.
                1 to
                the Registration Statement on Form S-1 filed by the registrant on
                December 30, 20054.2
            Warrant
                Agreement, form of Joinder Agreement and form of common stock purchase
                warrant issued to designees of Strasbourger Pearson Tulcin Wolff
                Incorporated pursuant to Placement Agency Agreement dated April 26,
                2004,
                filed as Exhibit 10.1 to the Registration Statement on Form S-1 filed
                by
                the registrant on November 1, 20054.3
            Form
                of common stock purchase warrant issued to designees of Strasbourger
                Pearson Tulcin Wolff Incorporated pursuant to Placement Agency Agreement
                dated January 25, 2005, filed as Exhibit 10.2 to the Registration
                Statement on Form S-1 filed by the registrant on November 1, 20054.4
            Form
                of common stock purchase warrant issued to purchasers of the registrant’s
                subordinated convertible debentures pursuant to Convertible Debenture
                Purchase Agreements with the registrant, filed as Exhibit 10.5 to
                the
                Registration Statement on Form S-1 filed by the registrant on November
                1,
                20054.5
            Common
                Stock Purchase Warrant dated August 24, 2005 issued to Laurus Master
                Fund,
                Ltd., filed as Exhibit 4.5 to the Registration Statement on Form
                S-1 filed
                by the registrant on November 1, 20054.6
            Form
                of common stock purchase warrant issued to persons designated by
                Vertical
                Capital Partners, Inc., filed as Exhibit 4.6 to the Registration
                Statement
                on Form S-1 filed by the registrant on November 1,
                20054.7a
            Form
                of subordinated convertible debenture issued to purchasers pursuant
                to
                Convertible Debenture Purchase Agreements with the registrant, filed
                as
                Exhibit 10.5 to the Registration Statement on Form S-1 filed by the
                registrant on November 1, 20054.7b
            Letter
                Agreement dated April 16, 2006, to extend maturity date of subordinated
                convertible debentures, filed as Exhibit 4.7b to Amendment No. 3
                to the
                Registration Statement on Form S-1 filed by the registrant on
                April 19, 20064.8
            Secured
                Revolving Note dated August 24, 2005 issued to Laurus Master Fund,
                Ltd.,
                filed as Exhibit 4.8 to the Registration Statement on Form S-1 filed
                by
                the registrant on November 1, 20054.9
            Secured
                Convertible Minimum Borrowing Note dated August 24, 2005 issued to
                Laurus
                Master Fund, Ltd., filed as Exhibit 4.9 to the Registration Statement
                on
                Form S-1 filed by the registrant on November 1,
                20054.10
            Secured
                Convertible Term Note dated August 24, 2005 issued to Laurus Master
                Fund,
                Ltd., filed as Exhibit 4.10 to the Registration Statement on Form
                S-1
                filed by the registrant on November 1, 20054.11
            Promissory
                Note dated January 1, 2004 issued by Magnetech Industrial Services,
                Inc.
                to John A. Martell, filed as Exhibit 4.11 to the Registration Statement
                on
                Form S-1 filed by the registrant on November 1,
                20054.12
            Conversion
                Option dated September 12, 2005 among John A. Martell, Magnetech
                Industrial Services, Inc. and the registrant, filed as Exhibit 4.12
                to the
                Registration Statement on Form S-1 filed by the registrant on
                November 1, 2005











4.13
            Form
                of Registration Rights Agreement between the registrant and the purchasers
                scheduled therein, made pursuant to Stock Purchase Agreement with
                the
                registrant, filed as Exhibit 10.4 to the Registration Statement on
                Form
                S-1 filed by the registrant on November 1, 20054.14
            Form
                of Registration Rights Agreement between the registrant and the purchasers
                scheduled therein, made pursuant to Subordinated Convertible Debenture
                Purchase Agreements, filed as Exhibit 10.5 to the Registration Statement
                on Form S-1 filed by the registrant on November 1, 20054.15
            Registration
                Rights Agreement dated August 24, 2005 between the registrant and
                Laurus
                Master Fund, Ltd., filed as Exhibit 4.15 to the Registration Statement
                on
                Form S-1 filed by the registrant on November 1,
                20054.16
            Common
                Stock Purchase Warrant dated May 31, 2006 issued by registrant to
                Laurus
                Master Fund, Ltd., filed as Exhibit 4.1 to Current Report on Form
                8-K
                filed by the registrant on June 6, 20064.17
            Secured
                Non-convertible Revolving Note dated May 31, 2006 issued by Magnetech
                Industrial Services of Alabama, LLC to Laurus Master Fund, Ltd.,
                filed as
                Exhibit 4.2 to Current Report on Form 8-K filed by the registrant
                on
                June 6, 20064.18
            Secured
                Term Note dated May 31, 2006 issued by Magnetech Industrial Services
                of
                Alabama, LLC to Laurus Master Fund, Ltd., filed as Exhibit 4.3 to
                Current
                Report on Form 8-K filed by the registrant on June 6,
                20064.19a
            Registration
                Rights Agreement dated May 31, 2006 between the registrant and Laurus
                Master Fund, Ltd., filed as Exhibit 4.4 to Current Report on Form
                8-K
                filed by the registrant on June 6, 20064.19b
            Amendment
                dated July 31, 2006, to Registration Rights Agreement dated May 31,
                2006,
                between the registrant and Laurus Master Fund, Ltd., filed as Exhibit
                10.1
                to Current Report on Form 8-K filed by the registrant on August 4,
                20064.19c
            Amendment
                dated August 30, 2006, to Registration Rights Agreement dated May
                31,
                2006, between the registrant and Laurus Master Fund, Ltd., filed
                as
                Exhibit 10.1 to Current Report on Form 8-K filed by the registrant
                on
                August 31, 200631.1*
            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*
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of
                the
                Sarbanes-Oxley Act of 2002


*Filed
        herewith. All other Exhibits have been previously filed.