We provide electrical and mechanical solutions to industrial, commercial and institutional customers primarily in the United States. We currently operate in three business segments:

· Industrial Services - We provide maintenance and repair services to several industries including electric motor and wind power; repairing, manufacturing, and remanufacturing industrial lifting magnets for the steel and scrap industries.

· Construction and Engineering Services - We provide a wide range of electrical and mechanical contracting services, mainly to industrial, commercial, and institutional customers.

· Rail Services - We manufacture and rebuild power assemblies, engine parts, and other components related to large diesel engines and provide locomotive maintenance, remanufacturing, and repair services for the rail industry.

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

Recent Developments

On February 6, 2009, Chief Financial Officer Richard J. Mullin, resigned his positions with MISCOR effective February 15, 2009. In conjunction with Mr. Mullin's resignation, the Employment Agreement dated September 30, 2005 between MISCOR and Mr. Mullin terminated, other than those provisions of the agreement that by their terms survive termination of employment.

On March 5, 2009, we received a default notification from Wells Fargo, due to the violation of a financial covenant regarding minimum net income for the year ended December 31, 2008. Additionally, we were in default of the debt service coverage ratio covenant. The defaults resulted in an increase in the interest rate on the revolving note, the real estate term note and the machinery and equipment note to the Prime rate (3.25% at April 5, 2009 and December 31, 2008) plus 3%. In addition, due to the covenant violation, Wells Fargo has reduced the loan availability on the revolving note related to certain receivable accounts held by Martell Electric and Ideal. The interest rate increase was made effective retroactively to January 1, 2009 and remained in effect until the default was subsequently waived on April 14, 2009.

On April 14, 2009, The Company and Wells Fargo signed a Fourth Amendment to the Credit Facility and waiver of the default notification received on March 5, 2009. The amendment and waiver amended the credit facility as follows:

· Waived our noncompliance with the minimum net income and debt service coverage ratio covenants for the year ending December 31, 2008

· Eliminated the minimum net income and debt service coverage ratio covenants for the year ending December 31, 2009

· Adjusted the minimum book net worth covenant to $38.75 million as of December 31, 2009

· Incorporated a monthly minimum EBITDA covenant commencing in April, 2009

· Reduced the revolving credit line limit to $11 million (from $13.75 million)

· Reset the interest rate on the revolving credit line and term notes to the Daily Three Month LIBOR plus 5.25% effective April 14, 2009

· Suspended interest payments on our subordinated debt to our CEO, John A.
Martell.

On April 14, 2009, our $3.0 million note payable to the CEO was amended whereby monthly principal and interest payments under the note were suspended until February 1, 2010. Interest will continue to accrue at the new rate of the greater of 5% or the prime rate plus 1%. All accrued interest on the note will be paid on February 1, 2010, and interest will be paid monthly thereafter. Monthly principal payments in the amount of $50,000 will commence on February 1, 2010.

Beginning in October 2008 and continuing throughout the first quarter of 2009, the Industrial Services and Rail Services segments have experienced a decline in backlog and revenues driven by the downturn in the current US economy. As a result, we are experiencing cash flow constraints resulting in an impairment of our ability to meet our short-term cash needs.

We initiated a number of actions beginning in the fourth quarter of 2008 to mitigate the impact on the company of the unprecedented deterioration of market conditions. These actions included:

· Downsized by the elimination of approximately 200 positions or approximately 27% of our work force

· Consolidated operations in certain groups where customer service would not be affected

· Centralized human resource and certain other administrative functions

· Initiated efforts to obtain additional equity investment and/or refinance part or all of our credit facilities

· Aligned core assets with strategic 2009 growth opportunities in wind power, transformer, traffic and telecommunication investments expected to result from governmental stimulus and energy independence initiatives

· Implemented 4 day work weeks and temporary plant shut downs in select facilities.

Critical Accounting Policies and Estimates

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

Principles of consolidation. The consolidated financial statements for the three months ended April 5, 2009 and March 30, 2008 include our accounts and those of our wholly-owned subsidiaries, Magnetech Industrial Services, Inc., Martell Electric, LLC, Ideal Consolidated, Inc., HK Engine Components, LLC, American Motive Power, Inc. ("AMP") and Magnetech Power Services LLC. All significant intercompany balances and transactions have been eliminated.

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

Revenue recognition. Revenue in our Industrial Services segment consists primarily of product sales and service of industrial magnets, and electric motors. Product sales revenue is recognized when products are shipped and both title and risk of loss transfer to the customer. Service revenue is recognized when all work is completed and the customer's property is returned. For services to a customer's property provided at our site, property is considered returned when the customer's property is shipped back to the customer and risk of loss transfers to the customer. For services to a customer's property provided at the customer's site, property is considered returned upon completion of work. We provide for an estimate of doubtful accounts based on specific identification of customer accounts deemed to be uncollectible and historical experience. Our revenue recognition policies are in accordance with Staff Accounting Bulletin No. 101 and No. 104.

Revenues from the Rail Services and Construction and Engineering Services segments are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs to complete for each contract. Costs incurred on contracts in excess of customer billings are recorded as part of other current assets. Amounts billed to customers in excess of costs incurred on contracts are recorded as part of other current liabilities.

Cash Equivalents. The Company considers all highly liquid investments with maturities of three months or less from the purchase date to be cash equivalents.

Concentration of credit risk. The Company maintains its cash and cash equivalents primarily in bank deposit accounts. The Federal Deposit Insurance Corporation insures these balances up to $250,000 per bank. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.

Earnings per share. We account for earnings (loss) per common share under the provisions of SFAS No. 128, Earnings Per Share, which requires a dual presentation of basic and diluted earnings (loss) per common share. Basic earnings (loss) per common share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per common share is computed assuming the conversion of common stock equivalents, when dilutive.

Foreign Currency Translation. The assets and liabilities of the Company's Canadian operations are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date, except for non-monetary assets and liabilities, which are translated using the historical exchange rate. Income and expense accounts are translated into U.S. dollars at the year-to-date average rate of exchange, except for expenses related to those balance sheet accounts that are translated using historical exchange rates

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

Goodwill and Intangibles. We account for goodwill and other intangible assets in accordance with FASB Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net assets at the dates of acquisition. Goodwill, which is not subject to amortization, is tested for impairment annually during the fourth quarter. We test goodwill and other intangible assets for impairment on an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Reporting units are determined based on our operating segments. The AMP, MIS, Ideal and 3-D operating segments, which were also determined to be reporting units under SFAS 142, contain goodwill and are thus tested for impairment. We re-evaluate our reporting units and the goodwill and intangible assets assigned to the reporting units annually, prior to the completion of the impairment testing. The fair value of our reporting units is determined based upon management's estimate of future discounted cash flows and other factors. Management's estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows.

Other intangible assets consisting mainly of customer relationships, a technical library, and non-compete agreements were all determined to have a definite life and are amortized over the shorter of the estimated useful life or contractual life of the these assets, which range from 1 to 20 years. Intangible assets with definite useful lives are periodically reviewed to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the recoverability of intangible assets is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets (See Note E, Intangible Assets).

Inventory. We value inventory at the lower of cost or market. Cost is determined by the first-in, first-out method. We periodically review our inventories and make adjustments as necessary for estimated obsolescence and excess goods. The amount of any markdown is equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demands, selling prices and market conditions.

Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets using the straight-line method. Useful lives of property, plant and equipment are as follows:

             Buildings                             30 years
             Leasehold                             Shorter of lease term or useful life
             improvements
             Machinery and                         5 to 10 years
             equipment
             Vehicles                              3 to 5 years
             Office 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 and revolving notes over the term of the financing, which is three years.

Advertising costs. Advertising costs consist mainly of product advertisements and announcements published in trade publications, and are expensed when incurred.

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 and FASB Interpretation No. 48.

Stock-based compensation. Effective January 1, 2006, we adopted SFAS No. 123R, Share-Based Payments (revised 2004), using the Modified Prospective Approach. SFAS No. 123R revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based upon their fair values at grant date, or the date of later modification, over the requisite service period. In addition, SFAS No. 123R requires unrecognized cost (based on the amounts previously disclosed in our pro forma footnote disclosure) related to options vesting after the initial adoption to be recognized in the financial statements over the remaining requisite service period.

Under the Modified Prospective Approach, the amount of compensation cost recognized includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, we accounted for our stock-based compensation plans under the recognition and measurement provisions of APB No. 25.

New Accounting Standards.

SFAS 141(R)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS No. 141(R)"). In SFAS No. 141(R), the FASB retained the fundamental requirements of SFAS No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires transaction costs to be expensed as incurred; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective for annual periods beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) did not have a material impact on the Company's consolidated financial statements, although the adoption of SFAS No. 141(R) will impact the recognition and measurement of future business combinations.

SFAS 157

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position No. 157-2, which deferred the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009. The adoption of SFAS No. 157 for financial assets and liabilities on January 1, 2008 and non-financial assets and liabilities on January 1, 2009 did not have a material impact on the Company's consolidated financial statements.

SFAS 159

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

SFAS No. 160

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

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. The Company will be required to provide enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Certain Hedging Activities ("SFAS No. 133"), and its related interpretations, and (c) how derivative instruments and related hedged items affects our financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 on January 1, 2009 did not have a material impact on the Company's consolidated financial statements.

FSP FAS 142-3

In April 2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3, "Determination of the Useful Life of Intangible Assets", ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets". FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP FAS 142-3 on January 1, 2009 did not have a material impact on the Company's consolidated financial statements. The Company does not expect the adoption of FSP FAS 142-3 to have a material impact on its accounting for future acquisitions of intangible assets.

SFAS No. 162

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles ("GAAP") in the United States. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect the adoption of SFAS No. 162 to have a material impact on the Company's consolidated financial statements.

FSP FAS 141(R)-1

In February 2009, the FASB issued FSP FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies" ("FSP 141R-1"), which amends the provisions related to the initial recognition and measurement, subsequent measurement, and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS 141R. FSP 141R-1 applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of SFAS No. 5, "Accounting for Contingencies", if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in FASB Statement No. 141R. FSP 141R-1 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP 141R-1, effective January 1, 2009, did not have an impact on the Company's consolidated financial statements.

FSP FAS 157-4

In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP 157-4"), which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 and will be adopted by the Company beginning in the second quarter of 2009. The adoption of FSP 157-4 is not expected to have a material impact on the Company's consolidated financial statements.

FSP FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 "Interim Disclosures about Fair Value of Financial Instruments". ("FSP FAS 107-1 and APB 28-1"). FSP FAS 107-1 and APB 28-1 requires fair value disclosures of financial instruments for interim reporting periods for publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion no. 28-1, "Interim Financial Reporting", to require those disclosures in summarized financial information at interim reporting periods and is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt FSP FAS 107-1 and APB 28-1 in the second quarter of 2009, and its adoption is not expected to have a material impact on the Company's consolidated financial statements.

Results of Operations

Three Months Ended April 5, 2009 Compared to Three Months Ended March 30, 2008

Revenues. Total revenues decreased by $6.3 million or 21% to $23.4 million in 2009 from $29.7 million in 2008. The decrease in revenues resulted from decreases in the Industrial Services ("IS") segment revenue of $5.1 million or 33%, the Construction and Engineering Services ("CES") segment revenues of $.7 million or 10%, and the Rail Services (RS) segment revenue of $.4 million or 6%.

The decline in revenue is generally related to the ongoing challenging global economic conditions as well as our continuing liquidity pressures (see liquidity section below). Specifically, the decrease in IS segment revenue of $5.1 million in 2009 resulted from the falloff in demand from the steel industry.

Gross Profit. Total gross profit in 2009 was $1.7 million or 7% of total revenues compared to $4.7 million or 16% of total revenues in 2008. The decrease of $3.0 million or 65% was due to decreased consolidated revenues and increased cost levels. Gross profit on IS segment revenue declined 80%, due mainly to unabsorbed overhead costs. Gross profit on CES revenue declined 44%, due to cost overruns on certain larger electrical contracts. Gross profit on RS segment revenue declined 6% due to unabsorbed overhead costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.1 million in 2009 compared to $4.0 million in 2008. The increase of $1.1 million was due mainly to the following: cost increases related to facilities that were opened after the first quarter of 2008 (RS Montreal and IS California); the creation of the Traffic division of Martell Electric, LLC; a higher level of administrative staffing designed to enable future growth and meet the regulatory requirements of a publicly traded company.

Interest Expense and Other Income. Interest expense and other income did not significantly change from 2008 to 2009.

Provision for Income Taxes. We experienced net operating losses in each year since we commenced operations. In January 2007, an ownership change occurred . . .