**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 July 2, 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 ofincorporation
                  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 August 11, 2006, there were 106,305,916 shares outstanding of the issuer’s
        Common Stock, without par value** .
  
  
   **MISCOR
        GROUP, LTD.**
 
 **INDEX
        TO FORM 10-Q**
 
 ItemNumber
              
              PageNumber1.
              Financial
                  Statements:Condensed
                  Consolidated Balance Sheets July 2, 2006 (Unaudited) and December
                  31,
                  2005
              1Condensed
                  Consolidated Statements of Operations (Unaudited) Three and Six
                  Months ended July 2, 2006 and June 26, 2005
              2Condensed
                  Consolidated Statements of Cash Flow (Unaudited) Six Months ended
                  July 2,
                  2006 and June 26, 2005
              3Notes
                  to Consolidated Financial Statements2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              163.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              264.
              Controls
                  and Procedures
              26PART
                  II - OTHER INFORMATION2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              276.
              Exhibits
              27Signatures
              28
 
 
 
  
   **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)**
 
 **July
                    2, 2006**
                
                **December
                    31, 2005****ASSETS**
                
                **(Unaudited)**CURRENT
                    ASSETSCash
                
                $
                1,060
                
                $
                23Accounts
                    receivable, net of allowance for doubtful accounts of $354 and
                    $341,
                    respectively
                
                
                10,077
                
                
                8,677Inventories,
                    net
                
                
                8,404
                
                
                8,415Prepaid
                    expenses and other current assets
                
                
                1,078
                
                
                1,050Total
                    current assets
                
                
                20,619
                
                
                18,165PROPERTY
                    AND EQUIPMENT, net
                
                
                6,690
                
                
                4,110OTHER
                    ASSETSDeposits
                
                
                143
                
                
                89Debt
                    issue costs, net
                
                
                2,551
                
                
                3,354Other
                    intangibles, net
                
                
                2
                
                
                3Total
                    other assets
                
                
                2,696
                
                
                3,446**Total
                    Assets**
                
                $
                30,005
                
                $
                25,721**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**CURRENT
                    LIABILITIESRevolving
                    credit line, net of discount of $719 and $885,
                    respectively
                
                $
                5,870
                
                $
                3,961Current
                    portion of long-term debt
                
                
                1,714
                
                
                1,024Accounts
                    payable
                
                
                6,334
                
                
                5,356Accrued
                    expenses and other current liabilities
                
                
                2,398
                
                
                1,771Total
                    current liabilities
                
                
                16,316
                
                
                12,112LONG
                    TERM LIABILITIESLong-term
                    debt, net of discount of $328 and $484, respectively
                
                
                6,752
                
                
                5,603Long-term
                    debt, Stockholder
                
                
                3,000
                
                
                3,000Warrant
                    liability
                
                
                826
                
                
                -Total
                    long-term liabilities
                
                
                10,578
                
                
                8,603Total
                    liabilities
                
                
                26,894
                
                
                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; 106,305,916
                    and
                    104,608,962 shares issued and outstanding, respectively
                
                
                7,660
                
                
                7,659Additional
                    paid in capital
                
                
                8,842
                
                
                8,840Deferred
                    compensation
                
                
                (47
                )
                
                (57
                )Accumulated
                    deficit
                
                
                (13,344
                )
                
                (11,436
                )Total
                    Stockholders' equity
                
                
                3,111
                
                
                5,006**Total
                    Liabilities and Stockholders' Equity**
                
                $
                30,005
                
                $
                25,721
 
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements
  1
 **MISCOR
          GROUP, LTD. AND SUBSIDIARIES**
 **CONDENSED
          CONSOLIDATED STATEMENT OF OPERATIONS**
 **(Amounts
          in thousands, except share and per share data)**
 
 **For
                    the 3 months ended**
                
                **For
                    the 6 months ended****July
                    2, 2006**
                
                **June
                    26, 2005**
                
                **July
                    2, 2006**
                
                **June
                    26, 2005****(Unaudited)****REVENUES**Product
                    sales
                
                $
                4,771
                
                $
                4,346
                
                $
                9,931
                
                $
                6,625Service
                    revenue
                
                
                9,715
                
                
                6,771
                
                
                17,806
                
                
                13,528Total
                    revenues
                
                
                14,486
                
                
                11,117
                
                
                27,737
                
                
                20,153**COST
                    OF REVENUES**Product
                    sales
                
                
                3,728
                
                
                3,363
                
                
                7,581
                
                
                5,117Service
                    revenue
                
                
                7,718
                
                
                5,532
                
                
                14,405
                
                
                11,214Total
                    cost of revenues
                
                
                11,446
                
                
                8,895
                
                
                21,986
                
                
                16,331Gross
                    Profit
                
                
                3,040
                
                
                2,222
                
                
                5,751
                
                
                3,822Selling,
                    general and administrative expenses
                
                
                2,564
                
                
                2,306
                
                
                5,095
                
                
                4,003Operating
                    income (loss)
                
                
                476
                
                
                (84
                )
                
                656
                
                
                (181
                )Loss
                    on warrant liability
                
                
                826
                
                
                -
                
                
                826
                
                
                -Interest
                    expense
                
                
                772
                
                
                421
                
                
                1,738
                
                
                542**NET
                    LOSS**
                
                $
                (1,122
                )
                $
                (505
                )
                $
                (1,908
                )
                $
                (723
                )Basic
                    and diluted loss per common share
                
                $
                (0.01
                )
                $
                (0.01
                )
                $
                (0.02
                )
                $
                (0.01
                )Weighted
                    average number of common shares
                
                
                105,557,679
                
                
                97,030,006
                
                
                105,367,295
                
                
                97,019,498
   
 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 6 months ended****July
                    2, 2006**
                
                **June
                    26, 2005****(Unaudited)**OPERATING
                    ACTIVITIESNet
                    cash provided (utilized) by operating activities
                
                $
                790
                
                $
                (3,900
                )INVESTING
                    ACTIVITIESAcquisition
                    of business assets
                
                
                (2,987
                )
                
                (2,533
                )Acquisition
                    of property and equipment
                
                
                (198
                )
                
                (360
                )Proceeds
                    from disposal of property and equipment
                
                
                11
                
                
                3Net
                    cash utilized by investing activities
                
                
                (3,174
                )
                
                (2,890
                )FINANCING
                    ACTIVITIESCash
                    Overdraft
                
                
                -
                
                
                811Payments
                    on capital lease obligations
                
                
                (7
                )
                
                -Short
                    term borrowings, net
                
                
                1,743
                
                
                2,581Advances
                    from Stockholder, net
                
                
                -
                
                
                (121
                )Borrowings
                    (repayments) of long-term debt, net
                
                
                1,690
                
                
                -Proceeds
                    from the issuance of debentures
                
                
                -
                
                
                4,025Debt
                    issuance costs
                
                
                (6
                )
                
                (528
                )Proceeds
                    from the issuance of shares and exercise of warrants
                
                
                1
                
                
                -Net
                    cash provided by financing activities
                
                
                3,421
                
                
                6,768**INCREASE
                    (DECREASE) IN CASH**
                
                
                1,037
                
                
                (22
                )Cash,
                    beginning of year
                
                
                23
                
                
                109Cash,
                    end of period
                
                $
                1,060
                
                $
                87SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOW INFORMATION:Cash
                    paid during the year for:Interest
                
                $
                460
                
                $
                170
   
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  3
 **MISCOR
        GROUP, LTD.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        AND SIX MONTHS IN THE PERIOD ENDED JULY 2, 2006**
 
  **NOTE
        A - BASIS OF PRESENTATION**
  The
        unaudited interim consolidated financial statements of MISCOR Group, Ltd.
        (“the Company”) of and for the three and six months ended July 2, 2006 and June
        26, 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 six months ended July 2, 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.
  *S**FAS
        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 $3,719, 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,
        including transaction costs of $150, which paid for all inventory, property,
        plant and equipment. The balance of $732, 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
              
              
              89Work-in
                  process
              
              
              85Finished
                  goods
              
              
              50Property,
                  plant and equipment
              
              
              2,763Accounts
                  payable
              
              
              (384
              )$
              3,719
 
  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.
  Six
                  months endedJuly
                  2, 2006
              
              June
                  26, 2005Revenues
              
              $
              31,205
              
              $
              22,427Net
                  loss
              
              $
              (1,670
              )
              $
              (680
              )Basic
                  and diluted loss per share
              
              $
              (0.02
              )
              $
              (0.01
              )
 
  **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
        six months ended July 2, 2006, the Company’s common stock equivalents,
        consisting of warrants to purchase 20,604,213 shares of common stock, senior
        and
        subordinated debt convertible into 75,871,702 common shares, and options
        to
        purchase 500,000 shares of common stock issued to employees under the 2005
        Stock
        Option Plan, were not included in computing diluted loss per share because
        their
        effects were anti-dilutive. For the six months ended June 26, 2005, the
        Company’s common stock equivalents, consisting of warrants to purchase
        14,938,593 shares of common stock and subordinated debt convertible into
        11,821,108 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 six months ended July 2, 2006 and June 26, 2005,
        respectively, as there were no potentially dilutive securities
        outstanding.
   5
  **NOTE
        E** **- INVENTORY**
  Inventory
        consists of the following:
  **July
                  2,****2006**
              
              **December
                  31,****2005**Raw
                  materials
              
              $
              2,024
              
              $
              2,666Work-in-process
              
              
              3,690
              
              
              3,887Finished
                  goods
              
              
              2,859
              
              
              1,9798,573
              
              
              8,532Less:
                  allowance for slow moving and obsolete inventories
              
              
              (169
              )
              
              (117
              )$
              8,404
              
              $
              8,415
 
  **NOTE
        F - DEBT**
  *Long-term
        debt*
  Long-term
        debt consists of the following:
  **July
                  2, 2006**
              
              **December
                  31, 2005**Note
                  payable to Stockholder, due December 2008, plus interest at prime
                  rate
                  less 1%; (7.25% and 6.25% at July 2, 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 $328 and $484 at July 2, 2006
                  and
                  December 31, 2005, respectively)
              
              
              3,697
              
              
              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 $719 and $885 at July
                  2, 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 July
                  2, 2006
                  and December 31, 2005), secured by substantially all assets owned
                  by the
                  Company
              
              
              4,582
              
              
              3,961Term
                  note payable in monthly principal payments of $100 plus interest
                  at 1%
                  above the Wall Street Journal prime rate (9.75% and 8.25% at July
                  2, 2006
                  and December 31, 2005, respectively), secured by substantially
                  all assets
                  owned by the Company and maturing in August 2008
              
              
              2,600
              
              
              3,000
 
  6
  
 Revolving
                  note due May 31, 2009 with interest payable monthly (see below),
                  secured
                  by substantially all assets owned by the Company
              
              
              1,288
              
              
              -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
              
              
              49
              
              
              5617,336
              
              
              13,588Less:
                  current portion
              
              
              (7,584
              )
              
              (4,985
              )$
              9,752
              
              $
              8,603
 
  *New
        Senior Debt Financing*
  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
        July 2, 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 July 2, 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.
        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 N). 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 41.8%, risk-free interest rate of 5.1% and an expected life of the common
        stock purchase warrants of seven years. The Company recorded a liability
        of $91
        at July 2, 2006 and the warrants will be marked to market through earnings
        at
        the end of each reporting period.
   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 July 2, 2006 on
        a
        calendar year basis are as follows:
  **Years
                  Ending December 31,**2006
              $
                  7,2662007
              2,0652008
              8,6912009
              361
 
  Following
        is a summary of interest expense for the three and six months ended July
        2, 2006
        and June 26, 2005:
  Three
                  Months Ended
              
              Six
                  Months EndedJuly
                  2,2006
              
              June
                  26,2005
              
              July
                  2,2006
              
              June
                  26,2005Interest
                  expense on principal
              
              $
              312
              
              $
              146
              
              $
              607
              
              $
              234Amortization
                  of debt issue costs
              
              
              327
              
              
              175
              
              
              809
              
              
              183Amortization
                  of debt discount - debentures and revolving notes payable
              
              
              133
              
              
              100
              
              
              322
              
              
              125Total
                  interest expense
              
              $
              772
              
              $
              421
              
              $
              1,738
              
              $
              542
 
   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. 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 41.8%, risk-free rate of 5.1% and an expected life of the common stock
        purchase warrants of 6.2 years. The Company recorded a liability of $735
        at July
        2, 2006, and the warrants will be marked to market through earnings at the
        end
        of each reporting period.
  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 (See Note N). As a result, the Company is
        accounting for these warrants as liabilities in accordance with EITF 00-19
        and
        EITF 05-4. At July 2, 2006 and December 31, 2005, the warrants had no value
        as
        calculated using the Black-Scholes model. The Company will continue to determine
        the estimated fair value of these warrants on a quarterly basis in accordance
        with EITF 00-19 and EITF 05-4.
  *Equity
        Incentive Plans*
  2005
        Stock Option Plan
  Effective
        January 1, 2006, the Company adopted SFAS No. 123R using the Modified
        Prospective Approach. SFAS No. 123R revises SFAS No. 123, *Accounting
        for Stock-Based Compensation* and
        supersedes Accounting Principles Opinion (“APB”) No. 25, *Accounting
        for Stock Issued to Employees* .
        SFAS
        No. 123R requires the cost of all share-based payments to employees, including
        grants of employee stock options, to be recognized in the financial statements
        based upon their fair values at grant date, or the date of later modification,
        over the requisite service period. In addition, SFAS No. 123R
        requires unrecognized cost (based on the amounts previously disclosed in
        the
        Company’s pro forma footnote disclosure) related to options vesting after the
        initial adoption to be recognized in the financial statements over the remaining
        requisite service period.
  Under
        the
        Modified Prospective Approach, the amount of compensation cost recognized
        includes (a) compensation cost for all share-based payments granted prior
        to,
        but not yet vested as of January 1, 2006,
        based on the grant date fair value estimated in accordance with the provisions
        of SFAS No. 123, and (b) compensation cost for all share-based payments granted
        subsequent to January 1, 2006, based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS No. 123R. Prior to the adoption of
        SFAS
        No. 123R, the Company accounted for its stock-based compensation plans under
        the
        recognition and measurement provisions of APB No. 25.
  As
        a
        result of adopting SFAS No. 123R on January 1, 2006, the Company recorded
        compensation cost of $1 and $2 for the three and six months ended July 2,
        2006
        based on the grant date fair value of the award of 500,000 shares at $0.25
        per
        share. The total cost of the grant in the amount of $18 will be recognized
        over
        the four year period during which the employees are required to provide services
        in exchange for the award -- the requisite service period (usually the vesting
        period).
   9
  **NOTE
        G** **- STOCKHOLDERS’ EQUITY (CONTINUED)**
  *2005
        Restricted Stock Purchase Plan*
  Prior
        to
        the adoption of SFAS No. 123R, the Company accounted for its Restricted Stock
        Purchase Plan under the recognition and measurement provisions of APB No.
        25. At
        the date of issuance, the restricted stock issued had an intrinsic value
        of
        $0.249 per share or $62. On September 30, 2005, the Company charged deferred
        compensation (reflected as a contra-equity account) and credited additional
        paid-in capital in the amount of $62. As a result, the Company is recording
        compensation expense over the three year restriction period by amortizing
        deferred compensation on a straight-line basis over the three year period
        commencing September 30, 2005.
  With
        the
        adoption of SFAS No. 123R on January 1, 2006, the Company recorded compensation
        cost of $5 and $10 for the three and six months ended July 2, 2006 based
        on the
        grant date fair value of the 250,000 restricted shares of common stock at
        $0.2491 per share. The total cost of the restricted shares of common stock
        in
        the amount of $62 will be recognized over the three year restriction period
        during which the employees are required to provide services in exchange for
        the
        award.
  *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.
  **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 July 2, 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 $52 and
        $43 for
        the three months ended, and $101 and $71 for the six months ended July 2,
        2006
        and June 26, 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 $78 and $70 for the three months
        ended,
        and $162 and $139 for the six months ended July 2, 2006 and June 26, 2005,
        respectively.
  *Advances
        from stockholder*
  The
        majority stockholder has made other unsecured advances to the Company. The
        balance as of July 2, 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 $5 for the three months ended and $-0- and $9 for
        the
        six months ended July 2, 2006 and June 26, 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 July 2, 2006 and December 31, 2005, approximately 21% and 25% of
        gross
        accounts receivable were due from entities in the steel, metal working and
        scrap
        industries, and 24% 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 July 2, 2006 and December 31, 2005.
        Additionally, no single customer accounted for more than 10% of sales for
        the
        three and six months ended July 2, 2006 and June 26, 2005.
  **NOTE
        J** **- COMMITMENTS AND CONTINGENCIES**
  *Collective
        bargaining agreements*
  At
        July
        2, 2006 and December 31, 2005, approximately 36% and 42%, respectively, of
        the
        Company’s employees were covered by collective bargaining agreements. Two of the
        collective bargaining agreements, representing 23% of the Company’s employees,
        expired as of July 2, 2006. The Company and unions are working without a
        contract until an agreement is reached.
  *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 July 2, 2006 and December 31, 2005, the
        aggregate fair value of debt, with an aggregate carrying value of $17,336
        and
        $13,588, respectively, is estimated at $21,838 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 six months ended July 2, 2006 and June
        26,
        2005 is shown in the following tables:
  **Industrial**
              
              **Electrical**
              
              **Diesel
                  Engine**
              
              
              
              **Intersegment**
              
              **Three
                  Months Ended July 2, 2006****2006**
              
              **Services**
              
              **Contracting**
              
              **Components**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              2,197
              
              $
              -
              
              $
              2,574
              
              $
              -
              
              $
              -
              
              $
              4,771Service
                  revenue
              
              
              6,704
              
              
              3,011
              
              
              -
              
              
              -
              
              
              
              
              
              9,715Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              -
              
              
              34
              
              
              -
              
              
              -
              
              
              (34
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              107
              
              
              25
              
              
              39
              
              
              -
              
              
              -
              
              
              171Gross
                  profit
              
              
              2,310
              
              
              413
              
              
              324
              
              
              -
              
              
              (7
              )
              
              3,040Other
                  depreciation & amortization
              
              
              11
              
              
              6
              
              
              1
              
              
              13
              
              
              -
              
              
              31Interest
                  expense
              
              
              78
              
              
              -
              
              
              -
              
              
              694
              
              
              -
              
              
              772Net
                  income (loss)
              
              
              1,020
              
              
              131
              
              
              (89
              )
              
              (2,184
              )
              
              -
              
              
              (1,122
              )Total
                  assets
              
              
              50,760
              
              
              13,570
              
              
              14,521
              
              
              68,307
              
              
              (117,153
              )
              
              30,005Capital
                  expenditures
              
              
              2,769
              
              
              58
              
              
              2
              
              
              14
              
              
              -
              
              
              2,843
  12
  **NOTE
        L** **- SEGMENT INFORMATION (continued)**
  **Industrial**
              
              **Electrical**
              
              **Diesel
                  Engine**
              
              
              
              **Intersegment**
              
              **Three
                  Months Ended**
                **June
                  26, 2005****2005**
              
              **Services**
              
              **Contracting**
              
              **Components**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              2,346
              
              $
              -
              
              $
              1,998
              
              $
              -
              
              $
              -
              
              $
              4,346Service
                  revenue
              
              
              4,625
              
              
              2,146
              
              
              -
              
              
              -
              
              
              -
              
              
              6,771Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              -
              
              
              60
              
              
              -
              
              
              -
              
              
              (60
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              85
              
              
              18
              
              
              25
              
              
              -
              
              
              -
              
              
              128Gross
                  profit
              
              
              1,671
              
              
              316
              
              
              253
              
              
              -
              
              
              (18
              )
              
              2,222Other
                  depreciation & amortization
              
              
              15
              
              
              4
              
              
              1
              
              
              18
              
              
              -
              
              
              38Interest
                  expense
              
              
              43
              
              
              -
              
              
              -
              
              
              378
              
              
              -
              
              
              421Net
                  income (loss)
              
              
              118
              
              
              134
              
              
              (117
              )
              
              (640
              )
              
              -
              
              
              (505
              )Total
                  assets
              
              
              18,629
              
              
              6,150
              
              
              5,096
              
              
              13,362
              
              
              (21,993
              )
              
              21,244Capital
                  expenditures
              
              
              199
              
              
              22
              
              
              149
              
              
              -
              
              
              -
              
              
              370
 
  **Industrial**
              
              **Electrical**
              
              **Diesel
                  Engine**
              
              
              
              **Intersegment**
              
              **Six
                  Months Ended July 2, 2006****2006**
              
              **Services**
              
              **Contracting**
              
              **Components**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              4,771
              
              $
              -
              
              $
              5,160
              
              $
              -
              
              $
              -
              
              $
              9,931Service
                  revenue
              
              
              12,351
              
              
              5,455
              
              
              -
              
              
              -
              
              
              -
              
              
              17,806Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              -
              
              
              61
              
              
              -
              
              
              -
              
              
              (61
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              192
              
              
              47
              
              
              73
              
              
              -
              
              
              -
              
              
              312Gross
                  profit
              
              
              4,146
              
              
              746
              
              
              870
              
              
              -
              
              
              (11
              )
              
              5,751Other
                  depreciation & amortization
              
              
              19
              
              
              11
              
              
              2
              
              
              25
              
              
              -
              
              
              57Interest
                  expense
              
              
              127
              
              
              -
              
              
              -
              
              
              1,611
              
              
              -
              
              
              1,738Net
                  income (loss)
              
              
              1,553
              
              
              229
              
              
              65
              
              
              (3,755
              )
              
              -
              
              
              (1,908
              )Total
                  assets
              
              
              50,760
              
              
              13,570
              
              
              14,521
              
              
              68,307
              
              
              (117,153
              )
              
              30,005Capital
                  expenditures
              
              
              2,790
              
              
              103
              
              
              41
              
              
              27
              
              
              -
              
              
              2,961
  13
  **NOTE
        L** **- SEGMENT INFORMATION (continued)**
  **Industrial**
              
              **Electrical**
              
              **Diesel
                  Engine**
              
              
              
              **Intersegment**
              
              **Six
                  Months Ended**
                **June
                  26, 2005****2005**
              
              **Services**
              
              **Contracting**
              
              **Components**
              
              **Corporate**
              
              **Eliminations**
              
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              4,433
              
              $
              -
              
              
              2,192
              
              $
              -
              
              $
              -
              
              $
              6,625Service
                  revenue
              
              
              9,687
              
              
              3,841
              
              
              -
              
              
              -
              
              
              -
              
              
              13,528Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              -
              
              
              71
              
              
              -
              
              
              -
              
              
              (71
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              156
              
              
              35
              
              
              39
              
              
              -
              
              
              -
              
              
              230Gross
                  profit
              
              
              3,125
              
              
              473
              
              
              245
              
              
              -
              
              
              (21
              )
              
              3,822Other
                  depreciation & amortization
              
              
              25
              
              
              7
              
              
              1
              
              
              36
              
              
              -
              
              
              69Interest
                  expense
              
              
              79
              
              
              -
              
              
              -
              
              
              463
              
              
              -
              
              
              542Net
                  income (loss)
              
              
              607
              
              
              112
              
              
              (223
              )
              
              (1,219
              )
              
              -
              
              
              (723
              )Total
                  assets
              
              
              18,629
              
              
              6,150
              
              
              5,096
              
              
              13,362
              
              
              (21,993
              )
              
              21,244Capital
                  expenditures
              
              
              273
              
              
              45
              
              
              1,475
              
              
              -
              
              
              -
              
              
              1,793
 
  **NOTE
        M - SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
        ACTIVITIES**
  **Six
                  Months Ended****July
                  2, 2006**
              
              **June
                  26, 2005**Issuance
                  of common stock purchase warrants
              
              $
              -
              
              $
              2,382Issuance
                  of common stock in conjunction with issuance of debentures
              
              $
              -
              
              $
              12Issuance
                  of common stock in conjunction with asset acquisition
              
              $
              -
              
              $
              12Issuance
                  of note payable in conjunction with asset acquisition
              
              $
              -
              
              $
              30Amounts
                  payable to seller in conjunction with asset acquisition
              
              $
              732
              
              $
              -Assumption
                  of accounts payable and accrued liabilities in conjunction with
                  asset
                  acquisition
              
              $
              384
              
              $
              105
 
  14
  
 **NOTE
        N - SUBSEQUENT EVENTS**
  *Sen**ior
        Debt Financing*
  On
        July
        14, 2006, the Company and Laurus entered into an amendment to the Senior
        Debt
        Financing for the purpose of extending the time allowed for the Company to
        cause
        its common stock to be listed on the OTC Bulletin Board or a National Exchange
        from July 15, 2006 to August 31, 2006.
  On
        July
        31, 2006, the Company and Laurus entered into an amendment to the Registration
        Rights Agreement dated May 31 2006, for the purpose of extending to August
        31,
        2006 the time allowed for the Company to file a registration statement required
        to be filed to register the shares of common stock issuable to Laurus upon
        exercise of certain warrants held by Laurus.
  *OTC
        Bulletin Board*
  On
        August
        1, 2006 the Company received approval from the National Association of
        Securities Dealers, Inc. for the quotation of it common stock on the OTC
        Bulletin Board.
  
  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 $2,000 for the three and six months ended July 2, 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. SFAS151
        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 *Acounting
        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 July 2, 2006 Compared to Three Months Ended June 26,
        2005*
  *Revenues* .
        Total
        revenues increased by $3.4 million or 31% to $14.5 million in 2006 from $11.1
        million in 2005. The increase in revenues resulted from increases in industrial
        services segment revenue of $1.9 million or 28% and electrical contracting
        segment revenues of $.9 million or 40%, and diesel engine components segment
        revenues of $.6 million or 29%.
  The
        increase in industrial services segment revenue resulted from a decrease
        in
        product sales during 2006 to $2.2 million, which was $.1 million or 4% lower
        than product sales of $2.3 million during 2005, and an increase in service
        revenue during 2006 to $6.7 million, which was $2.1 million or 46% higher
        than
        service revenue of $4.6 million during 2005. The increase in service
        revenues of $2.1 million resulted from increases of all services, including
        motor and magnet repairs of $1.2 million and $.4 million, respectively and
        various other industrial services. Motor repairs increased in part due to
        the
        acquisition of certain assets of Smith Alabama in May 2006.
  The
        increase in electrical contracting segment revenues during 2006 resulted
        primarily from market penetration facilitated by increasing name recognition,
        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 $11.5 million or 79% of total revenues compared
        to
        $8.9 million or 80% of total revenues in 2005. The increase of $2.6 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 improved operating performance in the industrial services
        segment.
  *Gross
        Profit.* Total
        gross profit in 2006 was $3.0 million or 21% of total revenues compared to
        $2.2
        million or 20% of total revenues in 2005. The increase of $.8 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 $.3 million or 11%
        to
        $2.6 million in 2006 from $2.3 million in 2005. Selling expenses increased
        14%
        to $.8 million in 2006 from $.7 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 13% to $1.8 million in 2006 from $1.6 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.* I n
        accordance with EITF 00-19 and EITF 05-4, we incurred a loss on warrant
        liability of $826 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 increased in 2006 to $772,000 from $421,000 in 2005. Interest
        on principal debt increased to $312,000 from $146,000 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 $460,000 in 2006 from $275,000 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 $1,122,000 and $505,000 in 2006 and 2005, respectively. The increase
        in the
        net loss was due primarily to the loss on warrant liability and higher interest
        expense, partially offset by higher operating income generated from higher
        sales.
  *Six
        Months Ended July 2, 2006 Compared to Six Months Ended June 26,
        2005*
  *Revenues* .
        Total
        revenues increased by $7.6 million or 38% to $27.7 million in 2006 from $20.1
        million in 2005. The increase in revenues resulted from increases in industrial
        services segment revenue of $3.0 million or 21%, electrical contracting segment
        revenues of $1.6 million or 42%, and diesel engine components segment of
        $3.0 or
        135%.
  The
        increase in industrial services segment revenue resulted from an increase
        in
        product sales during 2006 to $4.8 million, which was $.3 million or 8% higher
        than product sales of $4.5 million during 2005, and an increase in service
        revenue during 2006 to $12.4 million, which was $2.7 million or 28% higher
        than
        service revenue of $9.7 during 2005. The increase in product sales of $.3
        million resulted primarily from increased sales of new magnets. The increase
        in
        service revenues of $2.7 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
        increase in electrical contracting segment revenues during 2006 of $1.6 million
        resulted primarily from continued market penetration facilitated by increasing
        name recognition, geographic expansion and a strong local construction
        market.
  The
        increase in diesel engine component segment revenues resulted primarily from
        having six months sales in 2006 compared to only four 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 $22.0 million or 79% of total revenues compared
        to
        $16.3 million or 81% of total revenues in 2005. The increase of $5.7 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 2% was due to an increase in capacity utilization in the diesel engine
        components segment and improved operating performance in the industrial services
        and electrical contracting segments.
   20
  *Gross
        Profit.* Total
        gross profit in 2006 was $5.7 million or 21% of total revenues compared to
        $3.8
        million or 19% of total revenues in 2005. The increase of $1.9 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 $1.1 million or 27%
        to
        $5.1 million in 2006 from $4.0 million in 2005. Selling expenses increased
        33%
        to $1.6 million in 2006 from $1.2 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 25% to $3.5 million in 2006 from $2.8 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.* I n
        accordance with EITF 00-19 and EITF 05-4, we incurred a loss on warrant
        liability of $826 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 increased in 2006 to $1.7 million from $.5 million in 2005.
        Interest on principal debt increased to $.6 million from $.2 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 $1.1 million in 2006 from $.3 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 $1.9 million and $.7 million in 2006 and 2005, respectively. The increase
        in
        the net loss was due primarily to the loss on warrant liability and higher
        interest expense offset in part by higher operating income resulting from
        higher
        sales.
  **Liquidity
        and Capital Resources**
  At
        July
        2, 2006 we had $1.1 million of cash and approximately $4.3 million of working
        capital. Working capital decreased $1.7 million from approximately $6.0 million
        at December 31, 2005. Our total debt to equity ratio increased from
        approximately 4.1:1 to 8.6:1 from December 31, 2005 to July 2, 2006 due to
        increases in short term borrowings under the revolving note and the net loss
        incurred during the quarter ended July 2, 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 six months ended July 2, 2006 of $1.9 million included non-cash
        expenditures of depreciation and amortization of $.4 million, loss on warrant
        liability of $.8 million and amortization related to debt issue and debt
        discount costs of $1.1 million.
   21
  Net
        Cash
        provided by operating activities was $.8 million for the six months ended
        July
        2, 2006, and net cash used in operating activities was $3.9 million for the
        six
        months ended June 26, 2005. For the six months ended July 2, 2006, net cash
        provided by operations resulted in part from increases in accrued expenses
        and
        other current liabilities of $.6 million and decreases in inventories of
        $.2
        million offset in part by increases in accounts receivable of $.4 million
        .
        Accounts receivable increased due to higher sales. Inventory declined, despite
        higher sales, as a result of improved inventory turnover. For the six months
        ended June 26, 2005, net cash used in operating activities was due primarily
        to
        increases in accounts receivable and inventories of $2.7 million and $1.2
        million, respectively, due primarily to the increase in sales and slower
        collections of accounts receivable. 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 six months ended July 2, 2006 and June 26, 2005, net cash outflows from
        investing activities were $3.2 million and $2.9 million, respectively. In
        2006
        we acquired certain assets from E.T. Smith Services, Inc. for $3.0 million
        and
        we also acquired machinery and equipment of $.2 million. In 2005, we acquired
        certain assets from Hatch & Kirk, Inc. for $2.5 million. We also acquired
        machinery and equipment of $.4 million.
  We
        generated $3.4 million from financing activities during the six months ended
        July 2, 2006 primarily from the Laurus financing of $3.4 million for the
        acquisition in May 2006. We generated approximately $6.8 million from financing
        activities during the six months ended June 26, 2005 primarily from the issuance
        of convertible, subordinated debentures of approximately $4 million and
        increased short term borrowings from bank of $2.6 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
        July
        2, 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.
  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
   22
  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. At April 2, 2006, we had borrowed an aggregate of $7.9 million under
        the
        facility: $2.6 million under a term note, $4.0 million under a minimum borrowing
        note and $1.3 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. We have discussed with Laurus the possibility of postponing
        the monthly principal payment for three to six months to preserve working
        capital while we strive to achieve profitability and adequate cash flow to
        support continued growth, capital expenditures and term debt repayment. We
        have
        not come to mutually acceptable terms and cannot predict the outcome of future
        discussions.
  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.
  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:
  **·**
            (i)
                an effective current registration statement covering the shares of
                common
                stock exists or (ii) an exemption from registration for resale of
                all of
                the common stock is available pursuant to Rule 144 of the Securities
                Act
                of 1933; and  **·**
            no
                event of default exists and is
                continuing.  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
   23
  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 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 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.
  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
   24
  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 *Acounting
        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.
  Following
        is a summary of fixed payments related to certain contractual obligations
        as of
        July 2, 2006 (amounts in thousands):
  **As
                  of July 2, 2006**:
              
              
              
              **Payments
                  due by period**Less
                  than
              
              
              
              
              
              More
                  thanContractual
                  Obligations
              
              Total
              
              1
                  year
              
              1-3
                  years
              
              3-5
                  years
              
              5
                  yearsLong-Term
                  Debt
              
              $
              18,383
              
              $
              8,303
              
              $
              10,077
              
              $
              3
              
              $
              -Lease
                  Obligations
              
              
              3,847
              
              
              860
              
              
              1,559
              
              
              949
              
              
              479Total
              
              $
              22,230
              
              $
              9,163
              
              $
              11,636
              
              $
              952
              
              $
              479
 
 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
        $.6 million available as of July 2, 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 July 2, 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.
   25
  **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.
        333-12354), “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 July 2, 2006 had a carrying value of approximately $17.3 million and a
        fair
        value of approximately $21.8 million. As of July 2, 2006, 78% of our total
        debt
        was subject to variable interest rates. As of July 2, 2006, the weighted-average
        interest rate of our debt was 8.26%. 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.
   26
   **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, 851,120 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 $851 upon the exercise
        of
        warrants.
  
  **ITEM
                  6.  EXHIBITS**31.1
              Certification
                  by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)
                  of the
                  Exchange Act31.2
              Certification
                    by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)
                    of the
                    Exchange Act32
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of
                  the
                  Sarbanes-Oxley Act of 2002
  27
  **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.**August
                  16, 2006
              By:
              /s/
Richard
                J. MullinRichard
                  J. MullinChief
                  Financial Officer(Signing
                  on behalf of the registrant as Principal Financial
                  Officer)










28




**INDEX
        TO EXHIBITS**
 
 
 Regulation
                  S-K ExhibitNumber
              
              Document31.1
              
              Certification
                    by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)
                    of the
                    Exchange Act31.2
              
              Certification
                    by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)
                    of the
                    Exchange Act32
              
              Section
                906 Certification