RWY INCURSION AT MKE; WI; CAUSING A GAR BY A B727 ON AN ILS WITH WX AT 400 FT 3 DME. NO NOTIFICATION FROM TWR ABOUT THE INCURSION TO THE AIRBORNE ACFT.

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ATIS CALLED A 400 FT OVCST; 3 MI VISIBILITY IN LIGHT RAIN; 3 DEGS C. PREPARATIONS FOR THE FLT WENT WELL. I WENT THROUGH THE BEFORE TKOF DOWN TO THE LINE CHK AT THE REQUEST OF THE CAPT. OVER THE PA I ANNOUNCED WE WOULD BE UNDERWAY AS SOON AS WE TAXIED OUT TO RWY 1L AND I ASKED THE FLT ATTENDANT TO TAKE HER SEAT. GND CTL TOLD US TO PULL OVER INTO A HOLDING BLOCK FOR A 5 MIN DELAY. I ADVISED THE PAX OF THE DELAY. AS SOON AS I WAS FINISHED WITH THE PAX; WE WERE TOLD TO HOLD SHORT OF RWY 1L. THE CAPT STOPPED AT THE ILS CRITICAL HOLD LINE. THEN THE TWR CTLR TOLD US TO PULL UP AND HOLD SHORT OF RWY 1L; WHICH I READ BACK. I THOUGHT THE CAPT WAS CLR OF OUR INSTRUCTIONS AND EVERYTHING WAS GOING WELL. THE CAPT ASKED ME TO CHK OUR DEP FREQ; WHICH I DID AND I ALSO TURNED ON THE WING ANTI-ICE. THEN THE CAPT ASKED FOR THE BELOW LINE CHK; WHICH I ALSO COMPLETED. AT THIS POINT I FELT EVERYTHING WAS NORMAL AS WE TAXIED INTO POS ON RWY 1L. I GLANCED OUT ON FINAL AND NOTED THAT IT WAS CLR. AT THAT POINT I HAD THOUGHT WE WERE CLRED INTO POS. SHORTLY AFTER WE TOOK POS WE HEARD THE ENGS OF THE B727 GOING AROUND. MY FIRST THOUGHT WAS THE TWR MUST HAVE MADE A MISTAKE. THE TWR THEN CLRED US FOR TKOF. I THINK THE REASON FOR US PULLING OUT ON THE RWY WAS WE WERE IN THE HABIT OF; AFTER HOLDING SHORT; PULLING INTO POS OR BEING CLRED FOR TKOF. INSTEAD WE WERE TOLD TO HOLD SHORT AGAIN AT THE RWY HOLD LINES INSTEAD OF THE ILS HOLD LINES. CALLBACK CONVERSATION WITH RPTR REVEALED THE FOLLOWING INFO: RPTR SAID THAT TWR NEVER MENTIONED THE INCIDENT UNTIL THEY CALLED BACK FROM THEIR DEST. THE GAR WAS EXECUTED ON A SEE AND AVOID BASIS BY THE B727 WHEN HE BROKE OUT OF THE CLOUDS AT 400 FT.