On January 31, 2000, at 1645 central standard time, a McDonnell Douglas DC9-32, N203ME, operated by Midwest Express Airlines as flight 107, received minor damage during passenger boarding at the General Mitchell International Airport, Milwaukee, Wisconsin. The flight was being conducted under the provisions of 14 CFR Part 121. No injuries were reported. It is not known how many passengers had boarded the aircraft at the time of the incident. The intended destination was the Atlanta Hartsfield Airport, Atlanta, Georgia. During passenger boarding the flight crew was advised of smoke coming from the passenger lavatory. The flight crew instructed the flight attendants to evacuate the aircraft. All passengers and crew members exited normally. Inspection of the aircraft following the incident revealed that wiring internal to the water heater was discolored and melted adjacent to a terminal within the unit. The wire exhibited evidence of chafing in the area next to the terminal screw. Additionally, it was found that the water heater installation was missing a grounding strap. The Federal Aviation Administration Inspector in conjunction with Midwest Express personnel determined that the missing grounding strap prevented the circuit breaker for the water heater from tripping. Subsequent to the incident, Midwest Express Airlines has inspected their DC9 aircraft to insure that the ground strap is present.