**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 April 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 of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
 
  **1125
        South Walnut Street**
 **South
        Bend, Indiana 46619**
 (Address
        of principal executive offices/zip code)
  Registrant’s
        telephone number, including area code: **(574)
        234-8131**
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. o Yes x No
  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 June 19, 2006, there were 105,454,796 shares outstanding of the issuer’s
        Common Stock, without par value** .
  
  
   **MISCOR
        GROUP, LTD.**
 
 **INDEX
        TO FORM 10-Q**
 
 Item
              
              PageNumber
              
              NumberPART
                  I - FINANCIAL INFORMATION1.
              Financial
                  Statements:Condensed
                  Consolidated Balance Sheets April 2, 2006 (Unaudited) and
                  December 31, 2005
              1Condensed
                  Consolidated Statements of Income (Unaudited) Three Months ended
                  April 2,
                  2006 and March 27, 2005
              2Condensed
                  Consolidated Statements of Cash Flow (Unaudited) Three Months ended
                  April
                  2, 2006 and March 27, 2005
              3Notes
                  to Consolidated Financial Statements
              42.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              173.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              254.
              Controls
                  and Procedures
              26PART
                  II - OTHER INFORMATION2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              266.
              Exhibits
              26Signatures
              27
 
 
 
  
 **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)**
  **April 2,
                  2006**
              
              **December 31,
                  2005****(Unaudited)****ASSETS**CURRENT
                  ASSETSCash
              
              $
              431
              
              $
              23Accounts
                  receivable, net of allowance for doubtful accounts of $334 and
                  $341,
                  respectively
              
              
              8,501
              
              
              8,677Inventories,
                  net
              
              
              8,413
              
              
              8,415Prepaid
                  expenses and other current assets
              
              
              967
              
              
              1,050Total
                  current assets
              
              
              18,312
              
              
              18,165PROPERTY
                  AND EQUIPMENT, net
              
              
              4,057
              
              
              4,110OTHER
                  ASSETSDeposits
              
              
              163
              
              
              89Debt
                  issue costs, net
              
              
              2,871
              
              
              3,354Other
                  intangibles, net
              
              
              3
              
              
              3Total
                  other assets
              
              
              3,037
              
              
              3,446**Total
                  Assets**
              
              $
              25,406
              
              $
              25,721**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIESRevolving
                  credit line, net of discount of $802 and $885,
                  respectively
              
              $
              4,432
              
              $
              3,961Current
                  portion of long-term debt
              
              
              1,224
              
              
              1,024Accounts
                  payable
              
              
              4,993
              
              
              5,356Accrued
                  expenses and other current liabilities
              
              
              2,135
              
              
              1,771Total
                  current liabilities
              
              
              12,784
              
              
              12,112LONG
                  TERM LIABILITIESLong-term
                  debt, net of discount of $377 and $484, respectively
              
              
              5,396
              
              
              5,603Long-term
                  debt, Stockholder
              
              
              3,000
              
              
              3,000Total
                  long-term liabilities
              
              
              8,396
              
              
              8,603Total
                  liabilities
              
              
              21,180
              
              
              20,715COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS'
                  EQUITYMISCOR
                  Preferred stock, no par value; 20,000,000 shares authorized; no
                  shares
                  issued and outstanding
              
              
              -
              
              
              -MISCOR
                  Common stock, no par value; 300,000,000 shares authorized; 105,454,796
                  and
                  104,608,962 shares issued and outstanding, respectively
              
              
              7,660
              
              
              7,659Additional
                  paid in capital
              
              
              8,840
              
              
              8,840Deferred
                  compensation
              
              
              (52
              )
              
              (57
              )Accumulated
                  deficit
              
              
              (12,222
              )
              
              (11,436
              )Total
                  Stockholders' equity
              
              
              4,226
              
              
              5,006**Total
                  Liabilities and Stockholders' Equity**
              
              $
              25,406
              
              $
              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 April 2, 2006**
              
              **For
                    the 3 months ended March 27, 2005****(Unaudited)**
              
              **(Unaudited)****REVENUES**Product
                  sales
              
              $
              5,160
              
              $
              2,279Service
                  revenue
              
              
              8,091
              
              
              6,757Total
                  revenues
              
              
              13,251
              
              
              9,036**COST
                  OF REVENUES**Product
                  sales
              
              
              3,853
              
              
              1,754Service
                  revenue
              
              
              6,687
              
              
              5,682Total
                  cost of
                  revenues
              
              
              10,540
              
              
              7,436Gross
                  Profit
              
              
              2,711
              
              
              1,600Selling,
                  general and administrative expenses
              
              
              2,531
              
              
              1,697Operating
                  income (loss)
              
              
              180
              
              
              (97
              )Interest
                  expense
              
              
              966
              
              
              121**NET
                  LOSS**
              
              $
              (786
              )
              $
              (218
              )Basic
                  and diluted loss per common share
              
              $
              (0.01
              )
              $
              -Weighted
                  average number of common shares
              
              
              105,178,981
              
              
              97,008,378
   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 3 months ended**
              ********
              ****
              **April
                  2, 2006**
              ****
              **March
                  27, 2005****(Unaudited)**
              
              **(Unaudited)**OPERATING
                  ACTIVITIESNet
                  cash provided (utilized) by operating activities
              
              $
              237
              
              $
              (676
              )INVESTING
                  ACTIVITIESAcquisition
                  of business assets
              
              
              -
              
              
              (2,398
              )Acquisition
                  of property and equipment
              
              
              (118
              )
              
              (97
              )Proceeds
                  from disposal of property and equipment
              
              
              3
              
              
              -Net
                  cash utilized by investing activities
              
              
              (115
              )
              
              (2,495
              )FINANCING
                  ACTIVITIESPayments
                  on capital lease obligations
              
              
              (3
              )
              
              -Short
                  term borrowings, net
              
              
              388
              
              
              203Advances
                  from Stockholder, net
              
              
              -
              
              
              200Repayment
                  of long-term debt, note
              
              
              (100
              )
              
              -Proceeds
                  from the issuance of debentures
              
              
              -
              
              
              3,015Debt
                  issuance costs - debentures
              
              
              -
              
              
              (341
              )Proceeds
                  from the issuance of shares and exercise of warrants
              
              
              1
              
              
              -Net
                  cash provided by financing activities
              
              
              286
              
              
              3,077**INCREASE
                  (DECREASE) IN CASH**
              
              
              408
              
              
              (94
              )Cash,
                  beginning of year
              
              
              23
              
              
              109Cash,
                  end of period
              
              $
              431
              
              $
              15SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Cash
                  paid during the year for:Interest
              
              $
              208
              
              $
              62
   The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
   3
  **MISCOR
        GROUP, LTD.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **THREE
        MONTHS IN THE PERIOD ENDED APRIL 2, 2006**
 
  **NOTE
        A - BASIS OF PRESENTATION**
  The
        unaudited interim consolidated financial statements as of and for the three
        months ended April 2, 2006 and March 27, 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 months
        ended
        April 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.
  *SFAS
        No. 123R*
  Effective
        January 1, 2006, the Company adopted SFAS 123R, Share-Based Payment, using
        the
        Modified Prospective Approach. See Note F for further detail regarding the
        adoption of this standard.
  *EITF
        05-4*
  The
        Senior Debt Financing (see Note E) has features that may be subject to the
        Emerging Issues Task Force (“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 No. 05-4 currently does not apply to us, but will apply to us
        upon the effectiveness of the registration statement and acceptance of our
        securities for trading on the OTC Bulletin Board (See Note M). We are currently
        in the process of evaluating the effect EITF No. 00-19 and EITF No. 05-4
        may
        have on our consolidated financial statements in the future.
   4
  **NOTE
        C - 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
        three months ended April 2, 2006, the Company’s common stock equivalents,
        consisting of warrants to purchase 21,080,332 shares of common stock, senior
        and
        subordinated debt convertible into 76,815,714 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 three months ended March 27, 2005, the
        Company’s common stock equivalents, consisting of warrants to purchase 7,687,736
        shares of common stock and subordinated debt convertible into 8,854,818 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 months ended April 2, 2006 and March 27, 2005, respectively, as
        there
        were no potentially dilutive securities outstanding.
  **NOTE
        D** **- INVENTORY**
  Inventory
        consists of the following:
  **April
                  2,****2006**
              
              **December
                  31,****2005**Raw
                  materials
              
              $
              2,170
              
              $
              2,666Work-in-process
              
              
              4,051
              
              
              3,887Finished
                  goods
              
              
              2,328
              
              
              1,9798,549
              
              
              8,532Less:
                  allowance for slow moving and obsolete inventories
              
              
              (136
              )
              
              (117
              )$
              8,413
              
              $
              8,415
  5
  **NOTE
        E - DEBT**
  *Long-term
        debt*
  Long-term
        debt consists of the following:
  **April
                  2,****2006**
              
              **December
                  31,****2005**Note
                  payable to its Stockholder, due December 2008, plus interest at
                  prime rate
                  less 1%; (6.75% and 6.25% at April 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 $377 and $484 at April 2,
                  2006 and
                  December 31, 2005, respectively)
              
              
              3,648
              
              
              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 $802 and $885 at April
                  2, 2006
                  and December 31, 2005, respectively) with interest payable monthly
                  at 1%
                  over the Wall Street Journal prime rate (8.75% and 8.25% at April
                  2, 2006
                  and December 31, 2005), secured by substantially all assets owned
                  by the
                  Company
              
              
              4,432
              
              
              3,961Term
                  note payable in monthly principal payments of $100 plus interest
                  at 1%
                  above the Wall Street Journal prime rate (8.75% and 8.25% at April
                  2, 2006
                  and December 31, 2005, respectively), secured by substantially
                  all assets
                  owned by the Company and maturing in August 2008
              
              
              2,900
              
              
              3,000Capital
                  lease obligations
              
              
              52
              
              
              5614,052
              
              
              13,588Less:
                  current portion
              
              
              (5,656
              )
              
              (4,985
              )$
              8,396
              
              $
              8,603
  6
  **NOTE
        E** **- DEBT (CONTINUED)**
  *Long-term
        debt, debentures*
  In
        January 2005, the Company commenced a private offering (the “Debenture
        Offering”) of a maximum of $4,025 principal amount of subordinated secured
        convertible debentures. The debentures are payable on February 28, 2007,
        bear
        interest at the rate of 6% per year, and are payable upon conversion or at
        redemption or maturity. Investors will receive interest in cash only if they
        elect not to convert their debentures. Each holder has the option any time
        prior
        to the redemption date to convert principal and accrued interest under the
        debentures into shares of our common stock at a fixed conversion price of
        $0.3404926 per share. If the number of our outstanding shares of common stock
        is
        increased because of a stock split or stock dividend, the conversion price
        will
        be proportionately reduced, and if the number is decreased because of a stock
        combination, the conversion price will be proportionately increased, except
        that
        any adjustment to the conversion price of less than $0.0001 is not required
        to
        be made. In April 2006, the debenture holders agreed to extend the maturity
        from
        February 28, 2007 to February 28, 2008.
  The
        Company reserved 11,821,108 shares of common stock for issuance upon conversion
        of the debentures. The Company issued the maximum $4,025 principal amount
        of
        debentures as of May 5, 2005. The debentures are secured by a second lien
        on
        substantially all of the Company’s assets which is subordinate to the lien of
        the Company’s primary lender.
  Upon
        written notice the Company can redeem any or all of the outstanding debentures
        prior to the maturity date at a redemption price, payable in cash, equal
        to 100%
        of the principal amount redeemed, plus accrued and unpaid interest through
        the
        redemption date. Any notice to redeem must be given to all holders no less
        than
        30 days or more than 45 days prior to the date set forth for redemption.
        The
        loan agreements with the senior secured lender restrict the Company’s ability to
        exercise this redemption right.
  Each
        purchaser of debentures received common stock purchase warrants for no
        additional consideration. Each warrant entitled its holder to purchase one
        share
        of common stock for a five year period at an exercise price of $0.001 per
        share.
        The Company has allocated 4,255,601 five-year common stock purchase warrants
        among all purchasers of the debentures. The Company used the Black-Scholes
        valuation model in estimating the fair value of common stock purchase warrants.
        The following assumptions were used for such estimates: no dividend yield,
        no
        expected volatility, risk-free interest rate of 3.3% and an expected life
        of the
        common stock purchase warrants of one year. The estimated fair value of these
        warrants is $836. This debt discount is amortized to interest expense over
        the
        term of the debentures. Interest expense was $107 and $26 for the three months
        ended April 2, 2006 and March 27, 2005, respectively. Net debt issue discount
        at
        April 2, 2006 related to this instrument was $377.
  For
        its
        services as placement agent in the Debenture Offering, MISCOR issued to its
        placement agent, ten-year common stock purchase warrants to purchase 6,182,992
        shares of MISCOR common stock at an exercise price of $0.001 per share. The
        Company used the Black-Scholes valuation model in estimating the fair value
        of
        common stock purchase warrants. The following assumptions were used for such
        estimates: no dividend yield, no expected volatility, risk-free interest
        rate of
        3.3% and an expected life of the common stock purchase warrants of one year.
        The
        estimated fair value of the warrants issued to the placement agent was
        $1,546.
  The
        Company also paid the placement agent a fee of 10% of the amount raised in
        the
        offerings, or $403. In addition, for its services as securities counsel in
        the
        Debenture Offering, MISCOR issued 50,000 shares of its common stock to its
        securities counsel, the fair value of these shares was $12. The summation
        of
        these debt issue costs was $2,095. Interest expense was $290 and $8 for the
        three months ended April 2, 2006 and March 27, 2005, respectively. Net debt
        issue cost at April 2, 2006 related to these instruments was
        $1,026.
   7
  **NOTE
        E - DEBT (CONTINUED)**
  *Sen**ior
        Debt Financing*
  In
        August
        2005, the Company entered into a Security and Purchase Agreement with Laurus
        Master Fund, LTD. (“Laurus”). The Agreement provides financing comprised of a
        $7,000 Revolving Note and a $3,000 Term Note. The Notes mature in August
        2008.
        Laurus agreed to advance funds under the Revolving Note in amounts up to
        90% of
        eligible trade accounts receivable. Interest is payable monthly under the
        Revolving and Term Notes at 1% over prime as published in the Wall Street
        Journal. The Notes are collateralized by a blanket security interest covering
        substantially all assets owned by the Company. Proceeds from the financing
        were
        used to repay the Company’s previous lender and for working
        capital.
  Laurus
        has the option to convert all or any portion of the outstanding principal
        amount
        and/or accrued interest under the Revolving Note into shares of MISCOR common
        stock at the Fixed Conversion Price. Fixed Conversion Price means (i) with
        respect to the first $3,500 of the aggregate principal amount converted,
        $0.19
        per share or 18,421,053 shares and (ii) with respect to the remaining principal
        amount converted, $0.32 per share or 10,937,500 shares. In September, 2005,
        the
        Company borrowed $4,000 under the Revolving Note which was convertible into
        19,983,553 shares of common stock at an average price of $0.2002 per share.
        Since the shares were valued at $0.25 per share, the intrinsic value of the
        beneficial conversion feature for the difference between the fair value per
        share and the conversion price per share is $996. The Company is accreting
        this
        debt discount to interest expense over the term of the Revolving Note in
        accordance with Emerging Issues Task Force Consensus (“EITF”) 98-5 and 00-27.
        Interest expense was $83 and $-0- for the three months ended April 2, 2006
        and
        March 27, 2005, respectively. Net debt issue discount at April 2, 2006 related
        to this instrument was $802.
  In
        the
        three months ended April 2, 2006, the Company drew down an additional $388
        under
        the revolving note with Laurus which was convertible into 1,212,500 shares
        of
        common stock at $0.32 per share. The total outstanding balance under the
        Laurus
        Debt financing was $8,134 at April 2, 2006. The Company had available an
        additional $1.3 million under the Revolving Note at April 2, 2006.
  Up
        to
        $4,000 of the Revolving Note may be segregated into a Minimum Borrowing Note
        to
        facilitate the conversion into the Company’s common stock. The Company may
        prepay all or a portion of the Minimum Borrowing Note by paying to Laurus
        one
        hundred fifteen percent (115%) of the principal amount of this Note together
        with interest.
  The
        provisions of the Revolving Note 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 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 this Revolving Note facility, 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 facility as a short-term obligation.
   8
  **NOTE
        E - DEBT (CONTINUED)**
  Under
        the
        Term Loan, the Company must make monthly principal payments of $100 with
        interest beginning March 2006. Payments may be made in cash or in the Company’s
        common stock. If (i) the average of the closing prices of the Common Stock
        as
        reported by Bloomberg, L.P. on the NASD Over The Counter Bulletin Board for
        the
        five (5) trading days immediately preceding the payment due date is greater
        than
        or equal to 110% of the Fixed Conversion Price of $0.26 per share and (ii)
        the
        amount of such conversion does not exceed twenty eight percent (28%) of the
        aggregate dollar trading volume of the Common Stock for the period of twenty-two
        (22) trading days immediately preceding such date then the payment of principal
        and interest shall be made in Common Stock. Otherwise, the Company shall
        pay
        Laurus an amount in cash equal to 101% of the principal and interest due.
        The
        Company reserved 11,538,462 shares of common stock for issuance upon the
        conversion of the Term Loan.
  If
        (i)
        the Company registers the shares of the Common Stock underlying the conversion
        of the Term Note and each Minimum Borrowing Note then outstanding on a
        registration statement declared effective by the Securities and Exchange
        Commission, and (ii) the average of the Closing Prices of the Common Stock
        as
        reported by Bloomberg, L.P. on the NASD Over The Counter Bulletin Board for
        the
        five (5) trading days immediately preceding each month end exceeds the then
        applicable Fixed Conversion Price by at least twenty-five percent (25%),
        the
        interest rate for the succeeding calendar month will be reduced by 200 basis
        points (200 b.p.) (2.0%) for each incremental twenty-five percent (25%) increase
        in the Closing Price Average of the Common Stock above the then applicable
        Fixed
        Conversion Price.
  As
        part
        of the financing, Laurus received $360 in cash and was issued 6,163,588 shares
        of the Common Stock at closing and warrants for 7,352,941 shares of the Common
        Stock with an exercise price of $0.34 per share. The 6,163,588 shares were
        valued at $0.25 per share or $1,541. The Company used the Black-Scholes
        valuation model in estimating the fair value of the common stock purchase
        warrants. The following assumptions were used for such estimates: no dividend
        yield, no expected volatility, risk-free interest rate of 4.11% and an expected
        life of the common stock purchase warrants of seven years. The Company also
        granted registration rights with respect to the shares issuable upon exercise
        of
        the warrants (Note F). Total debt issue costs were $2,303. Interest expense
        was
        $192 and $-0- for the three months ended April 2, 2006 and March 27, 2005,
        respectively. Net debt issue cost at April 2, 2006 related to this instrument
        was $1,845.
  None
        of
        the Company’s obligations to Laurus under the Revolving or Term Notes or
        warrants may be converted into Common Stock unless (a) either (i) an effective
        current Registration Statement covering the shares of Common Stock exists
        or
        (ii) an exemption from registration for resale of all of the Common Stock
        issued
        and issuable is available, and (b) no event of default exists and is continuing.
        Laurus is not permitted to own in excess of 9.99% of the issued and outstanding
        shares of MISCOR common stock.
  Aggregate
        maturities of long-term debt for the periods subsequent to April 2, 2006
        on a
        calendar year basis are as follows:
  **Years
                  Ending December 31,**2006
              
              
              $6,1452007
              
              
              1,2252008
              
              
              7,8512009
              
              
              11
 
  9
  **NOTE
        E - DEBT (CONTINUED)**
  Following
        is a summary of interest expense for the three months ended April 2, 2006
        and
        March 27, 2005:
  **Three
                  Months Ended****April
                  2, 2006**
              
              **March
                  27, 2005**Interest
                  expense on principal
              
              $
              294
              
              $
              87Amortization
                  of debt issue costs
              
              
              482
              
              
              8Amortization
                  of debt discount -debentures and revolving notes payable
              
              
              190
              
              
              26Total
                  interest expense
              
              $
              966
              
              $
              121
 
 **NOTE
        F - STOCKHOLDERS’ EQUITY**
  *Equity
        Issuance and Warrants*
  As
        part
        of the Senior Debt Financing (Note E) 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, no expected
        volatility, risk-free rate of 4.11% and an expected life of the common stock
        purchase warrants of seven years. Based on the Black-Scholes model, the warrant
        had no fair value.
  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, the Company would be in default of
        its
        credit facility with Laurus, and would be subject to certain penalties. As
        a
        result, the Company is accounting for these warrants as liabilities in
        accordance with EITF 00-19. At April 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.
  *Equity
        Incentive Plans*
  2005
        Stock Option Plan
  On
        September 30, 2005, the Company granted stock options to certain executives
        to
        acquire a total of 500,000 shares of the Company’s common stock at an exercise
        price of $0.25 per share under the 2005 Stock Option Plan (“the Plan”) adopted
        by the board of directors in August 2005. The options, which expire in five
        years, are exercisable in 25% cumulative increments on and after the first
        four
        anniversaries of their grant date. At the time of issuance of the stock options
        to acquire 500,000 shares of the Company’s common stock, the estimated fair
        value of the Company’s common stock was $0.25 per share. The fair value of the
        Company’s common stock was determined contemporaneously and based upon the most
        recent sale of the Company’s common stock. As a result, such stock options had
        no intrinsic value at the time of issuance.
  The
        Plan
        provides for the grant of up to 2,000,000 shares of Incentive Stock Options
        (“ISO”), within the meaning of Section 422 of the Internal Revenue Code, or
        non-statutory stock options (“NQSO”) to the Company’s executive employees who
        are materially responsible for the management and operation
   10
  **NOTE
        F - STOCKHOLDERS’ EQUITY (CONTINUED)**
  of
        its
        business, and to the Company’s directors. The exercise price of the ISOs and
        NQSOs granted under the Plan must be at least equal to 100% of the fair market
        value of the common stock of the Company at the date of grant. Also, ISOs
        may be
        granted to persons owning more than 10% of the voting power of all classes
        of
        stock, at a price no lower than 110% of the fair market value of the common
        stock at the date of grant.
  Effective
        January 1, 2006, the Company adopted SFAS No. 123R using the Modified
        Prospective Approach. SFAS No. 123R revises SFAS No. 123, *Accounting
        for Stock-Based Compensation* and
        supersedes Accounting Principles Opinion (“APB”) No. 25, *Accounting
        for Stock Issued to Employees* .
        SFAS
        No. 123R requires the cost of all share-based payments to employees, including
        grants of employee stock options, to be recognized in the financial statements
        based upon their fair values at grant date, or the date of later modification,
        over the requisite service period. In addition, SFAS No. 123R requires
        unrecognized cost (based on the amounts previously disclosed in the Company’s
        pro forma footnote disclosure) related to options vesting after the initial
        adoption to be recognized in the financial statements over the remaining
        requisite service period.
  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 for the three months ended April 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).
  *2005
        Restricted Stock Purchase Plan*
  On
        September 30, 2005, the Company issued offers to purchase 250,000 shares
        of
        common stock at a nominal price of $0.001 per share to certain executives
        under
        the 2005 Restricted Stock Purchase Plan adopted by the board of directors
        in
        August 2005. The Plan provides for the grant of offers to purchase up to
        1,000,000 shares of restricted stock to the Company’s directors, officers and
        key employees. A participant may not transfer shares acquired under the Plan
        except in the event of the sale or liquidation of the Company. If within
        three
        years after shares are acquired under the Plan, a participant terminates
        employment for any reason other than death, disability, retirement or good
        reason, the Company is required to purchase the participant’s shares for the
        same price the participant paid. If the participant terminates employment
        after
        three years or as a result of death, disability or retirement or for good
        reason, the Company is required to purchase the shares for a price equal
        to
        their fair market value. The issuance of the restricted stock was intended
        to
        lock-up key employees for a three-year period.
  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.
   11
  **NOTE
        F - STOCKHOLDERS’ EQUITY (CONTINUED)**
  *2005
        Restricted Stock Purchase Plan* *(Continued)*
  With
        the
        adoption of SFAS No. 123R on January 1, 2006, the Company recorded compensation
        cost of $5 for the three months ended April 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.
  **NOTE
        G - RELATED PARTY TRANSACTIONS**
  *Long-term
        debt, other*
  The
        Company was indebted to a former employee for a note payable with a balance
        of
        $20 at April 2, 2006 (see Note E). The unsecured note is payable in annual
        principal installments of $10 and is non-interest bearing.
  *Long-term
        debt, stockholder*
  The
        Company was indebted to its majority stockholder for a note payable with
        a
        balance of $3,000 at April 2, 2006 (see Note E). 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 $49 and
        $36 for
        the three months ended April 2, 2006 and March 27, 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
        April 2, 2006 and March 27, 2005, respectively.
  *Advances
        from stockholder*
  The
        majority stockholder has made other unsecured advances to the Company. The
        balance as of April 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 for the three months ended April 2, 2006 and March 27, 2005 was
        $-0-
        and $3, respectively.
   12
  **NOTE
        H** **- 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 April 2, 2006 and December 31, 2005, approximately 25% of gross
        accounts receivable were due from entities in the steel, metal working and
        scrap
        industries, and 26% 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 April 2, 2006 and December 31, 2005.
        Additionally, no single customer accounted for more than 10% of sales for
        the
        three months ended April 2, 2006 and March 27, 2005.
  **NOTE
        I** **- COMMITMENTS AND CONTINGENCIES**
  *Collective
        bargaining agreements*
  At
        April
        2, 2006 and December 31, 2005, approximately 39% and 42%, respectively, of
        the
        Company’s employees were covered by collective bargaining agreements. Two of the
        collective bargaining agreements expire in 2006 representing 24% of the
        Company’s employees at April 2, 2006.
  *Potential
        lawsuits*
  The
        Company is involved in disputes or legal actions arising in the ordinary
        course
        of business. Management does not believe the outcome of such legal actions
        will
        have a material adverse effect on the Company’s financial position or results of
        operations.
  **NOTE
        J** **- 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 April 2, 2006 and December 31, 2005, the
        aggregate fair value of debt, with an aggregate carrying value of $14,052
        and
        $13,588, respectively, is estimated at $17,851 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.
   13
  **NOTE
        K** **- SEGMENT INFORMATION**
  The
        Company reports segment information in accordance with SFAS No. 131, *Disclosures
        about Segments of an Enterprise* .
        The
        Company operated primarily in two segments, industrial services and electrical
        contracting services, through December 31, 2004. The Company’s wholly owned
        subsidiary, MIS, provides industrial services to its customers. Electrical
        contracting services are provided by the Company’s other wholly owned
        subsidiary, Martell Electric.
  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 MISCOR are
        not
        allocated to the segments but are presented separately.
  The
        industrial services segment is primarily engaged in providing maintenance
        and
        repair services to the electric motor industry, repairing and manufacturing
        industrial lifting magnets, providing engineering and repair services for
        electrical power distribution systems within industrial plants and commercial
        facilities, and providing custom and standardized training in the area of
        industrial maintenance. The electrical contracting segment provides a wide
        range
        of electrical contracting services, mainly to industrial, commercial and
        institutional customers. The diesel engine components segment manufactures,
        remanufactures, repairs and engineers power assemblies, engine parts, and
        other
        components related to large diesel engines for the rail, utilities and offshore
        drilling industries.
  The
        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 months ended April 2, 2006 and March 27,
        2005
        is shown in the following tables:
  ****
              **Industrial**
              ****
              **Electrical**
              ****
              **DieselEngine**
              ****
              ****
              ****
              **Intersegment**
              ****
              **April
                    2,2006**
              ******2006**
              ****
              **Services**
              ****
              **Contracting**
              ****
              **Components**
              ****
              **Corporate**
              ****
              **Eliminations**
              ****
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              2,574
              
              $
              -
              
              $
              2,586
              
              $
              -
              
              $
              -
              
              $
              5,160Service
                  revenue
              
              
              5,647
              
              
              2,444
              
              
              -
              
              
              -
              
              
              -
              
              
              8,091Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              -
              
              
              27
              
              
              -
              
              
              -
              
              
              (27
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              85
              
              
              22
              
              
              34
              
              
              -
              
              
              -
              
              
              141Gross
                  profit
              
              
              1,836
              
              
              333
              
              
              546
              
              
              -
              
              
              (4
              )
              
              2,711Other
                  depreciation & amortization
              
              
              8
              
              
              5
              
              
              1
              
              
              12
              
              
              -
              
              
              26Interest
                  expense
              
              
              49
              
              
              -
              
              
              -
              
              
              917
              
              
              -
              
              
              966Net
                  income (loss)
              
              
              533
              
              
              98
              
              
              154
              
              
              (1,571
              )
              
              -
              
              
              (786
              )Total
                  assets
              
              
              37,004
              
              
              10,264
              
              
              12,101
              
              
              54,575
              
              
              (88,538
              )
              
              25,406Capital
                  expenditures
              
              
              21
              
              
              45
              
              
              39
              
              
              13
              
              
              -
              
              
              118
  14
  **NOTE
        K** **- SEGMENT INFORMATION (continued)**
  ****
              **Industrial**
              ****
              **Electrical**
              ****
              **DieselEngine**
              ****
              ****
              ****
              **Intersegment**
              ****
              **March
                    27,2005**
              ******2005**
              ****
              **Services**
              ****
              **Contracting**
              ****
              **Components**
              ****
              **Corporate**
              ****
              **Eliminations**
              ****
              **Consolidated**External
                  revenue:Product
                  sales
              
              $
              2,085
              
              $
              -
              
              $
              194
              
              $
              -
              
              $
              -
              
              $
              2,279Service
                  revenue
              
              
              5,062
              
              
              1,695
              
              
              -
              
              
              -
              
              
              -
              
              
              6,757Intersegment
                  revenue:Product
                  sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Service
                  revenue
              
              
              -
              
              
              11
              
              
              -
              
              
              -
              
              
              (11
              )
              
              -Depreciation
                  included in cost of revenues
              
              
              71
              
              
              17
              
              
              14
              
              
              -
              
              
              -
              
              
              102Gross
                  profit
              
              
              1,454
              
              
              157
              
              
              (8
              )
              
              -
              
              
              (3
              )
              
              1,600Other
                  depreciation & amortization
              
              
              28
              
              
              3
              
              
              -
              
              
              -
              
              
              -
              
              
              31Interest
                  expense
              
              
              36
              
              
              -
              
              
              -
              
              
              85
              
              
              -
              
              
              121Net
                  loss
              
              
              (90
              )
              
              (22
              )
              
              (106
              )
              
              -
              
              
              -
              
              
              (218
              )Total
                  assets
              
              
              15,609
              
              
              5,071
              
              
              3,028
              
              
              10,475
              
              
              (17,599
              )
              
              16,584Capital
                  expenditures
              
              
              74
              
              
              23
              
              
              1,326
              
              
              -
              
              
              -
              
              
              1,423
 
  **NOTE
        L - SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
        ACTIVITIES**
  **Three
                  Months Ended****April
                  2, 2006**
              
              **March
                  27, 2005**Issuance
                  of common stock purchase warrants
              
              $
              -
              
              $
              630Issuance
                  of common stock in conjunction with asset acquisition
              
              $
              -
              
              $
              12Issuance
                  of note payable in conjunction with asset acquisition
              
              $
              -
              
              $
              30Assumption
                  of accrued liabilities in conjunction with asset
                  acquisition
              
              $
              -
              
              $
              105
 
 **NOTE
        M - SUBSEQUENT EVENTS**
  *Long-term
        debt, debentures*
  In
        April
        2006, the debenture holders agreed to extend the maturity of the $4,025 of
        subordinated debentures from February 28, 2007 to February 28, 2008. All
        other
        terms of the debentures remain the same. There were no fees or penalties
        associated with the extension.
  *Sen**ior
        Debt Financing*
  In
        May
        2006, the Company entered into a Security and Purchase Agreement with Laurus.
        The Agreement provides financing comprised of a $1,600 Revolving Note and
        a
        $2,100 Term Note. The
   15
  **NOTE
        M - SUBSEQUENT EVENTS (CONTINUED)**
  Notes
        mature in May 2009. Laurus agreed to advance funds under the Revolving Note
        in
        amounts up to 90% of eligible trade accounts receivable. Under the Term Loan,
        the Company must make monthly principal payments of $70 with interest beginning
        December 2006. In addition, the maximum outstanding balance allowable under
        the
        Revolving Note decreases $10 per month beginning December 2006. Interest
        is
        payable monthly at 2.5%, 1.5% and 1.0% over prime as published in the Wall
        Street Journal for the first $.3 million under the Revolving Note, the remaining
        $1.3 million under the Revolving Note, and the Term Notes,
        respectively.
  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. As a result, the Company is accounting
        for
        these warrants as a liability in accordance with EITF 00-19. The Company,
        using
        the Black-Scholes valuation model, estimates this liability to be approximately
        $92 at May 31, 2006.
  *Acquisition*
  On
        May
        31, 2006, the Company acquired substantially all of the assets of Smith Alabama
        pursuant to the terms and subject to the conditions included in an Asset
        Purchase Agreement dated May 31, 2006. The purchase price is the sum of $2,837,
        which was paid in cash at closing, plus an adjustment amount to be paid in
        cash
        seven days after the closing based on accounts receivable and accounts payable
        outstanding as of the closing date. Smith Alabama provided electric motor
        repair, preventative maintenance and refurbishment for industrial companies
        such
        as utilities and manufacturers. The purchased assets include Smith Alabama’s
        repair facility located in Saraland, Alabama.
  *Registration
        Statement*
  MISCOR
        completed an initial public registration of its common stock on Form S-1,
        which
        was deemed effective by the Securities and Exchange Commission on May 12,
        2006.
        The Company is currently pursuing a listing on the OTC Bulletin
        Board.
  
  16
  **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 will be 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.
   17
  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.
  *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
   18
  SFAS
        No.
        123R, we accounted for our 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, we recorded compensation
        cost of $1,000 for the three months ended April 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 $18,000 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 00-19 because, subject to certain
        exceptions, the conversion price of the notes issued to Laurus may be adjusted.
        As a result, we may become subject to the guidance of EITF 05-4 upon the
        acceptance of our securities for trading on the OTC Bulletin Board. We are
        currently in the process of evaluating the impact EITF No. 00-19 and EITF
        05-4
        may have on our consolidated financial statements.
  **Results
        of Operations**
  *Three
        Months Ended April 2, 2006 Compared to Three Months Ended March 27,
        2005*
  *Revenues* .
        Total
        revenues increased by $4.3 million or 47% to $13.3 million in 2006 from $9.0
        million in 2005. The increase in revenues resulted from increases in industrial
        services segment revenue of $1.1 million or 15% and electrical contracting
        segment revenues of $.8 million or 44%. The remainder of the increase in
        revenues resulted from the diesel engine components segment of $2.4 million,
        acquired in March 2005.
   19
  The
        increase in industrial services segment revenue resulted from an increase
        in
        product sales during 2006 to $2.6 million, which was $.5 million or 24% higher
        than product sales of $2.1 million during 2005, and an increase in service
        revenue during 2006 to $5.7 million, which was $.6 million or 12% higher
        than
        service revenue of $5.1 during 2005. The increase in product sales of $.5
        million resulted primarily from increased sales of new motors. The increase
        in
        service revenues of $.6 million resulted from increases of all services,
        including motor and magnet repairs and other industrial services. The increase
        in electrical contracting segment revenues during 2006 resulted primarily
        from
        market penetration facilitated by increasing name recognition and a strong
        local
        construction market.
  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. 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 $10.5 million or 80% of total revenues compared
        to
        $7.4 million or 82% of total revenues in 2005. The increase of $3.1 million
        in
        cost of revenues was due primarily to the overall increase in our total revenue.
        The decrease in cost of revenues as a percentage of total revenue from 2005
        to
        2006 of 2% was due to an increase in capacity utilization in the diesel engine
        components segment and improved performance in the electrical contracting
        segment.
  *Gross
        Profit.* Total
        gross profit in 2006 was $2.7 million or 20% of total revenues compared to
        $1.6
        million or 18% of total revenues in 2005. The increase of $1.1 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 $.8 million to $2.5
        million in 2006 from $1.7 million in 2005. Selling expenses increased 60%
        to $.8
        million in 2006 from $.5 million in 2005 primarily due to higher salaries,
        benefits, commissions and travel and entertainment required to support the
        growth in total revenues. General and administrative expenses increased 42%
        to
        $1.7 million in 2006 from $1.2 million in 2005, primarily due to higher salaries
        and benefits to support the growing business, including the acquisition of
        HK
        Engine Components, LLC. Professional fees also increased due to costs associated
        with becoming a public company under federal securities laws.
  *Interest
        Expense and Other Income* .
        Interest expense increased in 2006 to $966,000 from $121,000 in 2005. Interest
        on principal debt increased to $294,000 from $87,000 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
        $474,000 and $164,000, respectively.
  *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 $786,000 and $218,000 in 2006 and 2005, respectively. The increase in
        the
        net loss was due primarily to higher interest expense offset in part by higher
        operating income resulting from higher sales.
   20
  **Liquidity
        and Capital Resources**
  At
        April
        2, 2006 we had $431,000 of cash and approximately $5.5 million of working
        capital. Working capital decreased $525,000 from approximately $6.0 million
        at
        December 31, 2005. Our total debt to equity ratio increased from approximately
        4.1:1 to 5.0:1 from December 31, 2005 to April 2, 2006 due to increases in
        short
        term borrowings under the revolving note and the net loss incurred during
        the
        quarter ended April 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 three months ended April 2, 2006 of $786,000 included non-cash
        expenditures of depreciation and amortization of $167,000, and amortization
        related to debt issue and debt discount costs of $672,000.
  Net
        Cash
        provided by operating activities was $237,000 for the three months ended
        April
        2, 2006, and net cash used in operating activities was $676,000 for the three
        months ended March 27, 2005. For the three months ended April 2, 2006, net
        cash
        provided by operations resulted in part from decreases in accounts receivable
        and prepaid expenses totaling $232,000, while decreases in accounts payable
        were
        mostly offset by increases in accrued expenses and other current liabilities.
        Accounts receivable decreased due to improved collections and inventory did
        not
        materially change, despite higher sales. For the three months ended March
        27,
        2005, net cash used in operating activities was due to the net loss and an
        increase in accounts receivable, inventories and prepaid expenses totaling
        approximately $1.4 million, offset in part by increases in accounts payable
        and
        accrued expenses and other liabilities totaling $726,000. The changes in
        current
        assets and current liabilities resulted primarily from 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 three months ended April 2, 2006, net cash outflows from investing
        activities were $115,000, comprised mostly of the acquisition of machinery
        and
        equipment of $118,000. During the three months ended March 27, 2005, net
        cash
        outflows from investing activities were approximately $2.5 million comprised
        of
        the acquisition of certain assets related to the diesel engine operations
        of
        Hatch & Kirk, Inc. in March 2005 of approximately $2.4 million. We also
        acquired machinery and equipment of $97,000 during the three months ended
        March
        27, 2005.
  We
        generated $286,000 from financing activities during the three months ended
        April
        2, 2006 with net short term borrowings under the revolving note of $388,000,
        partially reduced by the repayment of $100,000 on the term note. We generated
        approximately $3.1 million from financing activities during the three months
        ended March 27, 2005 primarily from the issuance of convertible, subordinated
        debentures of approximately $3 million, short term borrowings and advances
        from
        stockholder in the amount of $403,000, offset by debt issuance costs associated
        with the subordinated debenture offering of $341,000.
  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
   21
  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
        April
        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 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 $8.1 million under
        the
        facility: $2.9 million under a term note, $4.0 million under a minimum borrowing
        note and $1.2 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
        provisions of the revolving note 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
   22
  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 facility as a short-term
        obligation.
  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 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
   23
  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
        July
        15, 2006, and other events described in our loan agreement with
        Laurus.
  The
        Laurus financing arrangement has features that may be subject to EITF No.
        00-19
        and EITF No. 05-4. EITF No. 05-4 currently does not apply to us, but will
        apply
        to us when we become a publicly traded company upon acceptance of our securities
        for trading on the OTC Bulletin Board. We are currently in the process of
        evaluating the effect EITF No. 00-19 and EITF No. 05-4 may have on our
        consolidated financial statements and do not know if the effect will be
        material.
  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
        April 2, 2006 (amounts in thousands):
  **As
                  of April 2, 2006**:
              
              
              
              **Payments
                  due by period**Less
                  than
              
              
              
              
              
              More
                  thanContractual
                  Obligations
              
              Total
              
              1
                  year
              
              1-3
                  years
              
              3-5
                  years
              
              5
                  yearsLong-Term
                  Debt
              
              $
              15,232
              
              $
              6,458
              
              $
              8,767
              
              $
              7
              
              $
              -Lease
                  Obligations
              
              
              3,919
              
              
              806
              
              
              1,546
              
              
              1,016
              
              
              551Total
              
              $
              19,151
              
              $
              7,264
              
              $
              10,313
              
              $
              1,023
              
              $
              551
 
 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
        $1.3 million available as of April 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 April 2, 2006,
        we
        did not have any material commitments for capital expenditures.
  In
        May
        2006, we entered into a Security and Purchase Agreement with Laurus. The
        agreement provides 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. Under the term note, we must make monthly principal payments
        of
        $70,000 with interest beginning December 2006. In addition, the maximum
        outstanding balance allowable under the revolving note decreases $10,000
        per
        month beginning December 2006. Interest is payable monthly at 2.5% over prime
        as
        published in the Wall Street Journal for the first $.3 million under the
        revolving note, 1.5% over prime as published in the Wall Street Journal for
        the
        remaining $1.3 million under the revolving note and 1.0% over prime as published
        in the Wall Street Journal for the term note.
  The
        notes
        are collateralized by a blanket security interest covering substantially
        all
        assets we own. Proceeds from the financing were used to acquire substantially
        all of the assets of Smith Alabama pursuant to the terms and subject to the
        conditions included in an Asset Purchase Agreement dated May 31,
        2006.
   24
  As
        part
        of the financing, Laurus received $133,000 in cash and was issued warrants
        for
        375,000 shares of our common stock with an exercise price of $0.01 per share.
        We
        will use the Black-Scholes valuation model in estimating the fair value of
        the
        common stock purchase warrants.
  Our
        future working capital needs and capital-expenditure requirements will depend
        on
        many factors, including our rate of revenue growth, the rate and size of
        future
        business acquisitions, the expansion of our marketing and sales activities,
        and
        the rate of development of new products and services. To the extent that
        funds
        from the sources described above are not sufficient to finance our future
        activities, we will need to improve future cash flows and/or raise additional
        capital through debt or equity financing or by entering into strategic
        relationships or making other arrangements. Any effort to improve cash flows,
        whether by increasing sales, reducing operating costs, collecting accounts
        receivable at a faster rate, reducing inventory and other means, may not
        be
        successful. Further, any additional capital we seek to raise might not be
        available on terms acceptable to us, or at all.
  **Discussion
        of Forward-Looking Statements**
  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 April 2, 2006 had a carrying value of approximately $14.1 million and
        a fair
        value of approximately $17.9 million. As of April 2, 2006, 73% of our total
        debt
        was subject to variable interest rates. As of April 2, 2006, the
        weighted-average interest rate of our debt was 7.59%. 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.
   25
  **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.
   **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, no 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.
  **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
              
              Section
                  1350 Certifications
 
  26
  **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.**June
                  21, 2006
              By:
              /s/
Richard
                J. MullinRichard
                  J. MullinChief
                  Financial Officer(Signing
                  on behalf of the registrant as Principal Financial
                  Officer)