**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form
      10-Q**





(Mark
      One)





x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934** For
              the quarterly period ended June 30,
              2008




 ̈
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
                the transition period from N/A to
                N/A





Commission
      File Number 000-25161





**MODTECH
      HOLDINGS, INC.**


**(Exact
      name of registrant as specified in its charter)**




**Delaware**
            **33
                - 0825386****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            **(I.R.S.
                Employer**
              **Identification
                No.)****2830
                Barrett Avenue, Perris, CA**
            **92571****(Address
                of principal executive office)**
            **(Zip
                Code)**





**(951)
      943-4014**


**(Registrant’s
      telephone number including area code)**




Indicate
      by check mark, whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  ̈ Accelerated filer  ̈ Non-accelerated filer  ̈ Smaller reporting company x


(Do
      not
      check if a smaller reporting company)





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No x





As
      of
      July 31, 2008 there were 21,552,759 Shares of the Registrant’s Common Stock
      outstanding.













**Modtech
      Holdings, Inc.**


**Index
      to Form 10-Q**





Page
                #**PART
                I.**
            **FINANCIAL
                INFORMATION**Item 1.
            Financial
                Statements (Unaudited)Condensed
                Consolidated Balance Sheets
              As
                of June 30, 2008 and December 31, 2007
            3Condensed
                Consolidated Statements of Operations
              For
                the Three and Six Months Ended June 30, 2008 and 2007
            4Condensed
                Consolidated Statements of Cash Flows
              For
                the Six Months Ended June 30, 2008 and 2007
            5Notes
                to Interim Condensed Consolidated Financial Statements
            6-15Item 2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            16-22Item 3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            23Item 4T.
            Controls
                and Procedures
            24**PART
                II.**
            **OTHER
                INFORMATION**Item 1.
            Legal
                Proceedings
            25Item
                1A.
            Risk
                Factors
            25Item 2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item 3.
            Defaults
                upon Senior Securities
            25Item 4.
            Submission
                of Matters to a Vote of Security Holders
            25Item 5.
            Other
                Information
            25Item 6.
            Exhibits
            26-29Signatures
            30




2


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**MODTECH
      HOLDINGS INC. AND SUBSIDIARIES**


Condensed
      Consolidated Balance Sheets


(Unaudited)




**June
                  30,**
              
              **December
                  31,****2008**
              
              **2007**AssetsCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              2,155,000
              
              $
              409,000Restricted
                  cash
              
              
              2,176,000
              
              
              3,377,000Contracts
                  receivable, less allowance for contract adjustments of $756,000
                  and
                  $2,251,000 in 2008 and 2007, respectively
              
              
              13,522,000
              
              
              14,056,000Costs
                  and estimated earnings in excess of billings on contracts
              
              
              6,297,000
              
              
              7,289,000Inventories
              
              
              4,831,000
              
              
              5,923,000Prepaid
                  assets
              
              
              279,000
              
              
              617,000Insurance
                  receivable
              
              
              86,000
              
              
              2,955,000Other
                  current assets
              
              
              23,000
              
              
              22,000Total
                  current assets
              
              
              29,369,000
              
              
              34,648,000Property
                  and equipment, net
              
              
              9,185,000
              
              
              9,928,000Debt
                  issuance costs, net
              
              
              498,000
              
              
              740,000Other
                  assets
              
              
              1,873,000
              
              
              1,904,000Total
                  assets
              
              $
              40,925,000
              
              $
              47,220,000Liabilities
                  and Shareholders’ EquityCurrent
                  liabilities:Accounts
                  payable
              
              $
              14,524,000
              
              $
              13,209,000Accrued
                  liabilities
              
              
              5,816,000
              
              
              6,292,000Billings
                  in excess of costs and estimated earnings on contracts
              
              
              2,123,000
              
              
              1,686,000Current
                  maturities of long-term debt, net
              
              
              2,044,000
              
              
              1,315,000Total
                  current liabilities
              
              
              24,507,000
              
              
              22,502,000Long-term
                  debt, net, excluding current portion
              
              
              9,070,000
              
              
              10,209,000Other
                  long-term liabilities
              
              
              1,397,000
              
              
              1,437,000Total
                  liabilities
              
              
              34,974,000
              
              
              34,148,000Shareholders’
                  equity:Preferred
                  stock, $0.01 par value, Authorized 5,000,000 shares; Series A preferred
                  stock, $0.01 par value. Authorized 500,000 shares; no shares issued
                  and
                  outstanding in 2008 and 2007, respectively
              
              
              -
              
              
              -Series
                  B convertible preferred stock, $0.01 par value. Authorized 50,000
                  shares;
                  14,190 and zero shares issued and outstanding in 2008 and 2007,
                  respectively
              
              
              -
              
              
              -Series
                  C convertible preferred stock, $0.01 par value. Authorized 50,000
                  shares;
                  2,206 and zero shares issued and outstanding in 2008 and 2007,
                  respectively
              
              
              -
              
              
              -Common
                  stock, $0.01 par value. Authorized 55,000,000 shares; issued and
                  outstanding 21,419,415 in both 2008 and 2007
              
              
              214,000
              
              
              214,000Additional
                  paid-in capital
              
              
              139,130,000
              
              
              136,706,000Accumulated
                  deficit
              
              
              (133,393,000
              )
              
              (123,848,000
              )Total
                  shareholders’ equity
              
              
              5,951,000
              
              
              13,072,000Total
                  liabilities and shareholders’ equity
              
              $
              40,925,000
              
              $
              47,220,000




*See
      accompanying notes to interim condensed consolidated financial
      statements.*


3


**MODTECH
      HOLDINGS INC. AND SUBSIDIARIES**


Condensed
      Consolidated Statements of Operations


(Unaudited)





**Three Months Ended**
            
            **Six Months Ended****June
                30,**
            
            **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                sales
            
            $
            13,410,000
            
            $
            24,031,000
            
            $
            26,132,000
            
            $
            51,531,000Cost
                of goods sold
            
            
            14,099,000
            
            
            24,560,000
            
            
            28,161,000
            
            
            50,971,000Gross
                (loss) profit
            
            
            (689,000
            )
            
            (529,000
            )
            
            (2,029,000
            )
            
            560,000Selling,
                general and administrative expenses
            
            
            3,614,000
            
            
            3,736,000
            
            
            6,708,000
            
            
            7,381,000Impairment
                loss on goodwill
            
            
            -
            
            
            38,303,000
            
            
            -
            
            
            38,303,000Loss
                from operations
            
            
            (4,303,000
            )
            
            (42,568,000
            )
            
            (8,737,000
            )
            
            (45,124,000
            )Other
                (expense) income:Interest
                expense
            
            
            (335,000
            )
            
            (497,000
            )
            
            (678,000
            )
            
            (1,058,000
            )Interest
                income
            
            
            22,000
            
            
            62,000
            
            
            51,000
            
            
            139,000Gain
                on warrant and embedded derivatives
            
            
            412,000
            
            
            931,000
            
            
            1,258,000
            
            
            5,769,000Amortization
                of debt issuance costs
            
            
            (122,000
            )
            
            (121,000
            )
            
            (243,000
            )
            
            (385,000
            )Accretion
                of debt discount
            
            
            (667,000
            )
            
            (770,000
            )
            
            (1,250,000
            )
            
            (1,788,000
            )Other
                income, net
            
            
            42,000
            
            
            35,000
            
            
            54,000
            
            
            47,000(648,000
            )
            
            (360,000
            )
            
            (808,000
            )
            
            2,724,000Loss
                before income taxes
            
            
            (4,951,000
            )
            
            (42,928,000
            )
            
            (9,545,000
            )
            
            (42,400,000
            )Income
                tax benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            $
            (4,951,000
            )
            $
            (42,928,000
            )
            $
            (9,545,000
            )
            $
            (42,400,000
            )Basic
                and diluted loss per common share
            
            $
            (0.23
            )
            $
            (2.00
            )
            $
            (0.45
            )
            $
            (1.99
            )Basic
                and diluted weighted-average shares outstanding
            
            
            21,419,000
            
            
            21,419,000
            
            
            21,419,000
            
            
            21,290,000




*See
      accompanying notes to interim condensed consolidated financial
      statements.*


4





**MODTECH
      HOLDINGS INC. AND SUBSIDIARIES**


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)




**Six Months Ended June 30,****2008**
            
            **2007**Cash
                flows from operating activities:Net
                loss
            
            $
            (9,545,000
            )
            $
            (42,400,000
            )Adjustments
                to reconcile loss to net cash provided by (used in) operating activities:Depreciation
                and amortization
            
            
            1,023,000
            
            
            1,180,000Provision
                for contract adjustments
            
            
            -
            
            
            163,000Gain
                on sale of equipment
            
            
            -
            
            
            (50,000
            )Stock
                compensation expense
            
            
            831,000
            
            
            838,000Impairment
                loss on goodwill
            
            
            -
            
            
            38,303,000Gain
                on derivative liability
            
            
            (1,258,000
            )
            
            (5,769,000
            )Accretion
                of debt discount
            
            
            1,249,000
            
            
            1,788,000Decrease
                (increase) in assets:Restricted
                cash
            
            
            336,000
            
            
            849,000Contracts
                receivable
            
            
            534,000
            
            
            7,234,000Costs
                and estimated earnings in excess of billings on contracts
            
            
            992,000
            
            
            2,919,000Inventories
            
            
            1,092,000
            
            
            789,000Other
                current and non-current assets
            
            
            3,237,000
            
            
            (480,000
            )Increase
                (decrease) in liabilities:Accounts
                payable
            
            
            1,315,000
            
            
            (9,651,000
            )Accrued
                liabilities
            
            
            (127,000
            )
            
            (1,565,000
            )Billings
                in excess of costs and estimated earnings on contracts
            
            
            437,000
            
            
            (24,000
            )Net
                cash provided by (used in) operating activities
            
            
            116,000
            
            
            (5,876,000
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (78,000
            )
            
            (825,000
            )Proceeds
                from sale of property and equipment
            
            
            -
            
            
            551,000Net
                cash used in investing activities
            
            
            (78,000
            )
            
            (274,000
            )Cash
                flows from financing activities:Principal
                payments on long-term debt
            
            
            (750,000
            )
            
            (1,646,000
            )Decrease
                in restricted cash
            
            
            865,000
            
            
            4,201,000Net
                proceeds from issuance of preferred stock
            
            
            1,593,000
            
            
            -Net
                cash provided by financing activities
            
            
            1,708,000
            
            
            2,555,000Net
                increase (decrease) in cash and cash equivalents
            
            
            1,746,000
            
            
            (3,595,000
            )Cash
                and cash equivalents at beginning of period
            
            
            409,000
            
            
            6,292,000Cash
                and cash equivalents at end of period
            
            $
            2,155,000
            
            $
            2,697,000Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            709,000
            
            $
            1,051,000Non-cash
              financing activity:Conversion
                of convertible debt to common stock
            
            $
            -
            
            $
            1,466,000Debt
                discount recorded in connection with debt modification
            
            $
            750,000
            
            $
            -Warrant
                derivative liability recorded in connection with debt modification
            
            $
            909,000
            
            $
            -




*See
      accompanying notes to interim condensed consolidated financial
      statements*


5


**MODTECH
      HOLDINGS, INC. AND SUBSIDIARIES**


Notes
      to
      Interim Condensed Consolidated Financial Statements


June
      30,
      2008




**1)**
            **Description
                of Business and Basis of
                Presentation**





***Description
      of Business***





Modtech
      Holdings, Inc. and its subsidiaries (“Modtech”, “we”, “our”, or the “Company”)
      design, manufacture, market and install modular and relocatable classrooms,
      commercial and light industrial modular buildings, and custom residential
      modular houses.





Our
      classrooms are sold primarily to California school districts. Our modular
      classrooms include standardized units prefabricated at our manufacturing
      facilities, as well as customized units that are modular in design but
      constructed on site using components we manufacture. We also sell both standard
      and custom classrooms outside California, principally in Florida and
      Nevada.





We
      also
      design and manufacture modular, portable buildings to customer specifications
      for a wide array of uses, including governmental, military, healthcare,
      educational, airport and correctional facilities; office and retail space;
      daycare centers, libraries, churches, construction trailers, golf clubhouses,
      police stations, convenience stores, fast food restaurants, sales offices,
      motels and custom single family houses. The buildings are sold direct through
      an
      internal sales group, through leasing companies and through a dealer network
      to
      a wide range of end users.





*Basis
      of Presentation*




The
      condensed consolidated financial statements included herein have been prepared
      by Modtech, without audit, pursuant to the rules and regulations of the U.S.
      Securities and Exchange Commission (“SEC”). Certain information normally
      included in consolidated financial statements prepared in accordance with
      accounting principles generally accepted in the United States of America has
      been omitted pursuant to such rules and regulations. However, we believe that
      the condensed consolidated financial statements, including the disclosures
      herein, are adequate to make the information presented not misleading. The
      condensed consolidated balance sheet as of December 31, 2007 was derived from
      the Company’s audited financial statements. The results of operations for the
      three and six months ended June 30, 2008 and 2007 are not necessarily
      indicative of the results to be expected for the full fiscal years. The
      condensed consolidated financial statements should be read in conjunction with
      our consolidated financial statements and notes thereto included in our Annual
      Report on Form 10-K for the year ended December 31, 2007, as filed with the
      U.S.
      Securities and Exchange Commission.





***Reclassification***





Certain
      prior year amounts have been reclassified to conform to the 2008
      presentation.





***Reporting
      of Taxes Included in Sales***





The
      Company has historically presented and will continue to present sales taxes
      on a gross sales
      basis.
      For the
      three and six months ended June 30, 2008 such amounts totaled $290,000 and
      $395,000, respectively. For the three and six months ended June 30, 2007 such
      amounts totaled $455,000 and $833,000, respectively.





**2)**
            **Restricted
                Cash**





Restricted
      cash as of June 30, 2008 includes approximately $2.2 million in cash collateral
      required for certain letters of credit. The amounts as of June 30, 2008 are
      classified as current assets.


6




**3)**
            **Inventories**





Inventories
      consist of the following:





**June
                30,**
            
            **December
                31,****2008**
            
            **2007**Raw
                materials
            
            $
            3,984,000
            
            $
            4,715,000Work-in-process
            
            
            742,000
            
            
            584,000Finished
                goods
            
            
            105,000
            
            
            624,000$
            4,831,000
            
            $
            5,923,000





**4)**
            **Accrued
                Liabilities**





Accrued
      liabilities consist of the following:




**June
                30,**
            
            **December
                31,****2008**
            
            **2007**Accrued
                compensation
            
            $
            1,639,000
            
            
            1,221,000Accrued
                insurance expense
            
            
            1,033,000
            
            
            1,517,000Provision
                for estimated losses on contracts
            
            
            307,000
            
            
            588,000Warrant
                derivative liability
            
            
            163,000
            
            
            512,000Accrued
                warranty
            
            
            917,000
            
            
            975,000Accrued
                sales taxes
            
            
            862,000
            
            
            666,000Other
                accrued liabilities
            
            
            895,000
            
            
            813,000$
            5,816,000
            
            $
            6,292,000




**5)**
            **Long-term
                Debt**





Long-term
      debt consists of the following term-loans:





**June
                30,**
            
            **December
                31,****2008**
            
            **2007**Term
                Loans due in 2009
            
            $
            14,354,000
            
            $
            14,354,000Less:
                unamortized discount on Term Loans
            
            
            (3,240,000
            )
            
            (2,830,000
            )Term
                loans, net
            
            
            11,114,000
            
            
            11,524,000Less:
                current portion of Term Loans, net
            
            
            (2,044,000
            )
            
            (1,315,000
            )Long-term
                debt
            
            $
            9,070,000
            
            $
            10,209,000





*Term
      Loans*





We
      have
      two term notes as of June 30, 2008 (the “Notes”) with an aggregate principal
      balance of approximately $14.4 million as of that date. The Notes are held
      by Laurus Master Fund, Ltd. (“Laurus”), Valens U.S. SPV I, LLC (“Valens U.S.”)
      and Valens Offshore SPV I, Ltd (“Valens Offshore”). The original principal
      amounts of the Notes were $5 million and $13 million, respectively, and the
      Notes were originally issued on December 28, 2006 and October 31, 2006,
      respectively. The $5 million note and the $13 million note bear interest at
      an
      adjustable rate equal to the prime rate as published in the Wall Street Journal,
      plus 2.5% and 3.75%, respectively (the “Contract Rates”). These interest rates
      adjust with each adjustment in the prime rate. Principal payments of $271,000
      commenced under the $13 million note on February 28, 2007 and continue on
      the same day of each month thereafter. Principal payments of $104,000 commenced
      under the $5 million note on April 1, 2007 and continue on the same day of
      each
      month thereafter. The maturity dates of the $13 million note and the $5 million
      note are October 31, 2009 and December 28, 2009, respectively. The Notes may
      be
      prepaid in whole, but not in part or separately, at any time by paying the
      holders of the Notes 124% of the then aggregate outstanding principal balance
      and accrued interest. The Notes are secured by substantially all of our
      assets.


7





Amounts
      owed under the Notes may be accelerated and are subject to default rate interest
      charges under various circumstances, including, but not limited to, the failure
      to make principal or interest payments when due under the Notes, breaches of
      certain covenants, representations, conditions and warranties set forth in
      the
      Notes and the purchase agreement pursuant to which they were issued, including,
      without limitation, the failure to maintain on a monthly basis at least $9
      million in cash and eligible accounts receivable (the “Minimum Balance”), the
      occurrence of certain insolvency or bankruptcy events affecting us, a change
      of
      control in the Company, and certain judgments, liens and attachments in excess
      of permitted amounts.





*2008
      Amendment and Waiver Agreement*





On
      February 26, 2008, we were notified by Laurus, Valens U.S. and Valens Offshore
      that an “Event of Default” occurred under the Notes as a result of a failure to
      meet the Minimum Balance requirement.





On
      February 29, 2008, Modtech entered into an Amendment and Waiver Agreement (the
      “Waiver”) with Laurus, Valens US and Valens Offshore, which cured the Event of
      Default.





Pursuant
      to the Waiver, Modtech issued to Laurus, Valens U.S. and Valens Offshore three
      separate warrants on March 21, 2008 to purchase an aggregate of 3,000,000
      shares of Modtech’s common stock at an exercise price of $0.40 per share (the
“Warrants”) and three separate promissory notes in the aggregate principal
      amount of $750,000 (the “Additional Notes”). In return, Laurus, Valens U.S. and
      Valens Offshore agreed to defer the aggregate principal payments of $375,000
      per
      month under the original Notes for the period March 1, 2008 through June 30,
      2008, for a total deferral of $1.5 million, eliminate the Minimum Balance
      requirement as of December, 31, 2007 through February 29, 2008, reduce the
      Minimum Balance from $9 million to $5.4 million for the period March 1, 2008
      through March 31, 2008 and to $6.6 million for the period April 1, 2008 through
      June 30, 2008. The aggregate monthly interest payments on the original Notes
      of
      approximately $110,000 per month would continue without deferral or abatement
      and, commencing July 1, 2008, the monthly principal payments would resume on
      the
      original Notes and the Minimum Balance will again be $9 million.





The
      Waiver revised the optional redemption rate to 105% if the Notes and the
      Additional Notes are prepaid in full by February 28, 2009. The Waiver also
      required that proceeds of at least $1.5 million from the issuance of preferred
      stock of the Company be received by no later than March 10, 2008, the failure
      of
      which would be considered an Event of Default. The Company completed an issuance
      of preferred stock, receiving proceeds of $1.6 million by March 10, 2008 (see
      Note 6).





The
      Additional Notes were issued to Laurus, Valens U.S. and Valens Offshore in
      the
      principal amounts of $634,414.36, $48,983.58 and $66,602.06, respectively.
      The
      principal amounts of the Additional Notes are due and payable December 28,
      2009.
      Interest shall accrue on the principal of the Additional Notes at the greater
      of
      8% per annum or a rate per annum equal to the prime rate published by The Wall
      Street Journal, plus 2.5%. Interest on the Additional Notes shall be payable
      monthly in arrears.





The
      Warrants issued to Laurus, Valens U.S. and Valens Offshore were for 2,537,657
      shares, 195,935 shares, and 266,408 shares, respectively. Modtech entered into
      separate registration rights agreements on February 29, 2008 with Laurus, Valens
      U.S. and Valens Offshore, pursuant to which it agreed to register for resale
      the
      common stock to be issued upon exercise of the Warrants (the “Warrant
      Registration Rights Agreement”). The Warrant Registration Rights Agreement
      provide for liquidated damages of 1%, not to exceed a maximum of 10%, of the
      original principal amount of the Additional Notes for every 30 days that a
      registration statement is not filed by the required filing date of May 29,
      2008
      or not declared effective by the required effective date of August 27, 2008.
      Liquidated damages could also be incurred if the registration agreement for
      the
      Warrants ceases to be effective or if the common stock is not listed or quoted,
      or is suspended from trading on any trading market, as defined, for a period
      of
      three consecutive trading days (provided the Company shall not have been able
      to
      cure such trading suspension within thirty days of notification or list the
      common stock on another trading market) prior to the Warrants being exercised.
      At its option, the Company may pay up to 50% of the liquidated damages (“Equity
      Damage Amount”) by delivering additional warrants at an exercise price at par
      value to purchase the equivalent number of shares of common stock whose
      aggregate fair market value, as defined, equals the Equity Damage Amount. The
      registration statement was filed with the SEC on May 7, 2008, but has not yet
      been declared effective by the SEC.





On
      February 29, 2008, Modtech also entered into a Reaffirmation and Ratification
      Agreement with Laurus, Valens U.S. and Valens Offshore with respect to the
      original Notes and the related agreements ratifying and confirming the original
      Notes and related agreements, except as modified by the Waiver, Additional
      Notes, Warrants and the Warrant Registration Rights Agreements. Laurus, Valens
      U.S. and Valens Offshore agreed, pursuant to a letter agreement entered into
      the
      same date, to refrain until May 1, 2008 from selling on any trading day shares
      of Modtech’s common stock that exceed 20% of the daily trading volume.


8




The
      Waiver was accounted for under the provisions of Emerging Issues Task Force
      (“EITF”) No. 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt
      Instruments” (“EITF 96-19”). In accordance with EITF 96-19, the Waiver was
      determined to be a debt modification.





We
      evaluated the new Warrants pursuant to EITF Issue No. 00-19, “Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock” (“EITF 00-19”) which states the criteria which must be met
      in order to classify warrants issued in a company’s own stock as either equity
      or as a derivative liability. Evaluation of these criteria resulted in the
      determination that the warrants should be classified as derivative
      liabilities.





In
      accordance with EITF 00-19, we valued the new Warrants as of February 29, 2008,
      determined as the measurement date, using a Black-Scholes-Merton option pricing
      model with the following assumptions: expected dividend yield of 0.0%, expected
      stock price volatility of 63.1%, risk free interest rate of 2.76% and a
      remaining contractual life of 6.92 years. The valuation resulted in an initial
      fair value of $909,000, with a corresponding increase in the warrant derivative
      liability, which is included as a component of accrued liabilities. See also
      Note 8 - Warrants and Warrant Derivative Liability.





In
      accordance with EITF 96-19, the fair value of the Warrants and the Additional
      Notes were recorded as an additional debt discount on the original Notes and
      will be accreted to interest expense over the remaining term of the original
      Notes using the effective interest method.





**6)**
            **2008
                Equity Financing**





On
      March
      10, 2008, Modtech issued 14,190 shares of its Series B Preferred Stock to
      existing shareholders and new investors and 2,206 shares of its Series C
      Preferred Stock (collectively the “Preferred Shares”) to its officers, directors
      and executives for an aggregate purchase price of $1.6 million.





The
      Series B Preferred Stock is convertible into the company’s common stock at $0.40
      per share and accrues dividends at 8% per annum, payable in additional shares
      of
      Series B Preferred Stock. The Series C Preferred Stock is convertible into
      Modtech common stock at $0.49 per share. Dividends do not accrue on the Series
      C
      Preferred Stock.





The
      Preferred Shares are convertible into an aggregate of 3,997,704 shares of
      Modtech’s common stock. The Preferred Shares may be converted at any time, in
      whole or in part, at the election of the holders and are subject to redemption
      at Modtech’s option at any time after the closing price of Modtech’s common
      stock has been $2.00 or more for 20 consecutive trading days.





Pursuant
      to a Registration Rights Agreement with the buyers, Modtech agreed to register
      for resale the shares of its common stock to be issued upon conversion of the
      Preferred Shares, subject to the right to include in any registration statement
      filed certain additional shares to be registered on behalf of Laurus Master
      Fund, Ltd. and certain of its affiliates and to remove the common shares
      registered on behalf of the preferred stockholders if necessary to comply with
      positions taken by the Securities and Exchange Commission (“SEC”) concerning the
      maximum allowable number of shares to be covered by the registration statement.
      The registration statement has been filed and all of the shares of common stock
      to be issued upon conversion of the Preferred Shares have been removed from
      the
      registration statement in order to comply with positions taken by the SEC
      concerning the maximum allowable number of shares to be covered by the
      registration statement.





**7)**
            **Income
                Taxes**





On
      July
      13, 2006, the Financial Accounting Standards Board (“FASB”) issued
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
      Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the
      accounting for uncertainty in income taxes recognized in an entity’s financial
      statements in accordance with FASB Statement No. 109, “Accounting for Income
      Taxes” and prescribes a recognition threshold and measurement attributes for
      financial statement disclosure of tax positions taken or expected to be taken
      on
      a tax return. Under FIN 48, the impact of an uncertain income tax position
      on
      the income tax return must be recognized at the largest amount that is
      more-likely-than-not to be sustained upon audit by the relevant taxing
      authority. An uncertain income tax position will not be recognized if it has
      less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition. FIN 48 is effective for fiscal
      years
      beginning after December 15, 2006.


9





The
      Company adopted the provisions of FIN 48 on January 1, 2007. We had no material
      unrecognized tax benefits as of the date of adoption or as of December 31,
      2007.
      As a result of the implementation of FIN 48, the Company did not recognize
      a
      decrease in net deferred tax assets.





The
      Company’s practice is to recognize interest and/or penalties related to income
      tax matters in income tax expense. During the years ended December 31, 2007,
      2006 and 2005, the Company did not recognize any interest or penalties. Upon
      adoption of FIN 48 on January 1, 2007, the Company did not record any interest
      or penalties.





The
      Company is subject to taxation in the U.S. and various state jurisdictions
      and
      is subject to examination due to the carryforward of unutilized net operating
      losses. During 2006, the Company satisfactorily completed an Internal Revenue
      Service tax audit covering the tax years 2002, 2003 and 2004, leaving the tax
      years for 2005 and forward subject to examination by the Internal Revenue
      Service. The Company’s tax years for 2002 and forward are subject to examination
      by California tax authorities.





The
      adoption of FIN 48 did not impact the Company’s consolidated financial
      condition, results of operations or cash flows. At June 30, 2008, the Company
      had net deferred tax assets of $27.5 million. The deferred tax assets are
      primarily composed of federal and state tax net operating loss (“NOL”)
      carryforwards. Due to uncertainties surrounding the Company’s ability to
      generate future taxable income to realize these assets, a full valuation has
      been established to offset our net deferred tax assets. Additionally, the future
      utilization of our NOL carryforwards to offset future taxable income may be
      subject to a substantial annual limitation as a result of ownership changes
      that
      may have occurred previously or that could occur in the future (“Section 382”).
      The Company recently completed an ownership change analysis study under
      Section 382 regarding the limitation of our NOL carryforwards. This
      analysis determined that for purposes of Section 382 there was an ownership
      change, but that it is more likely than not that our NOL carryforwards would
      not
      be limited to offset future taxable income. The results of this analysis did
      not
      affect our unrecognized tax benefits under FIN 48.





**8)**
            **Warrants
                and Warrant Derivative
                Liability**





We
      granted 3,000,000 new Warrants pursuant to the Waiver agreement (see Note 5).
      No
      warrants were exercised or forfeited for the six months ended June 30, 2008.
      As
      of June 30, 2008, outstanding warrants to purchase our common stock totaled
      7,354,679 at a weighted-average exercise price of $3.92 per share.





Pursuant
      to the antidilution terms of certain warrant agreements, we amended such warrant
      agreements resulting in 410,975 additional warrant shares outstanding and a
      reduced average exercise price.





EITF
      00-19 requires quarterly analysis of criteria which must be met in order to
      classify warrants issued in a company’s own stock as either equity or as a
      derivative liability. Evaluation of these criteria as of June 30, 2008 resulted
      in the determination that the outstanding warrants, including the new Warrants,
      should continue to be classified as derivative liabilities.





In
      accordance with EITF 00-19, warrants which are determined to be classified
      as
      derivative liabilities are marked-to-market each reporting period, with a
      corresponding non-cash gain or loss charged to the current period. We valued
      all
      warrant derivative liabilities as of June 30, 2008 using a Black-Scholes-Merton
      option pricing model using the following assumptions: expected dividend yield
      of
      0.0%, expected stock price volatility ranging from 72.3% to 127.5%, risk free
      interest rate ranging from of 1.58% to 2.76% and a remaining contractual life
      ranging from 1.5 to 6.67 years. Due primarily to the decrease in our stock
      price
      from $0.28 at March 31, 2008 to $0.11 at June 30, 2008, the valuation conducted
      as of June 30, 2008 resulted in a non-cash gain of $0.4 million for the
      three month period ended June 30, 2008, with a corresponding decrease in the
      warrant derivative liability, which is included as a component of accrued
      liabilities at June 30, 2008. As of June 30, 2008, the total estimated fair
      value of the warrant derivative liability was approximately
      $0.2 million.




10


The
      warrant activity for the period ended June 30, 2008 is summarized
      below:





**Number of**
              
              **Weighted-**
                **Average****Shares**
              
              **Exercise Price**Outstanding
                  warrants at December 31, 2007
              
              
              3,943,704
              
              $
              7.00Granted
              
              
              3,000,000
              
              
              0.40Antidilution
                  adjustment
              
              
              410,975
              
              
              -Exercised
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -Outstanding
                  warrants at June 30, 2008
              
              
              7,354,679
              
              $
              3.92




**9)**
            **Basic
                and Diluted Net (Loss) income per
                Share**




Basic
      net
      (loss) income per share is computed using the weighted average number of common
      shares outstanding during the period, excluding any unvested restricted stock.
      Diluted net (loss) income per share is computed using the weighted average
      number of common shares and, if dilutive, potential common shares outstanding
      during the period. Potential common shares consist of unvested restricted stock
      (using the treasury stock method), the incremental common shares issuable upon
      the exercise of stock options and warrants (using the treasury stock
      method).





The
      following table sets forth the computation of basic and diluted net (loss)
      income per share:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Basic
                and diluted net loss per share:Numerator:Net
                loss
            
            $
            (4,951,000
            )
            $
            (42,928,000
            )
            $
            (9,545,000
            )
            $
            (42,400,000
            )Denominator:Weighted
                average common shares outstanding - basic and diluted
            
            
            21,419,000
            
            
            21,419,000
            
            
            21,419,000
            
            
            21,290,000Loss
                per common share - basic and diluted
            
            $
            (0.23
            )
            $
            (2.00
            )
            $
            (0.45
            )
            $
            (1.99
            )





Due
      to
      the net losses reported for the three and six month periods ended June 30,
      2008,
      basic and diluted net loss per common share are the same, as the effect of
      any
      potential dilutive shares would be anti-dilutive to reported loss per common
      share. Therefore, for the three and six month periods ended June 30, 2008,
      9,363,066 options and warrants to purchase common stock were excluded from
      diluted loss per share. Diluted loss per share also excludes 3,977,704 shares
      for the three and six month periods ended June 30, 2008, for shares issuable
      upon conversion of convertible preferred stock. Additionally, 507,087 shares
      in
      unvested restricted stock are excluded from diluted loss per share for the
      three
      and six month periods ended June 30, 2008.





**10)**
            **Stock-Based
                Compensation**





***Stock
      options***





Our
      stock-based compensation consists of various stock option plans which grant
      stock options to employees, non-employee officers and directors, consultants,
      vendors, customers and others expected to provide significant services to the
      Company.




11


The
      per
      share weighted-average fair value of stock options granted during the six months
      ended June 30, 2008 was $0.19. We use the Black-Scholes-Merton (“BSM”) option
      pricing model to estimate the fair value of stock-based awards, with the
      following weighted-average assumptions for the periods ended June 30, 2008
      and
      2007:





**Six Months Ended****June 30,****2008**
            
            **2007**Expected
                dividend yield
            
            
            0
            %
            
            0
            %Average
                risk-free interest rate
            
            
            2.54
            %
            
            4.46
            %Expected
                volatility
            
            
            66.19
            %
            
            46.51
            %Expected
                life of options (in years)
            
            
            5.75 years
            
            
            5.75 yearsForfeiture
                rate
            
            
            35
            %
            
            35
            %





The
      assumptions above are based on multiple factors, including historical exercise
      patterns of employees in relatively homogeneous groups with respect to exercise
      and post-vesting employment termination behaviors, expected future exercising
      patterns for these same homogeneous groups and the implied volatility of our
      stock price.





The
      following table represents stock option activity for the six months ended June
      30, 2008:




**Number
                of**
            
            **Weighted-**
              **Average****Shares**
            
            **Exercise
                Price**Outstanding
                options at December 31, 2007
            
            
            1,106,951
            
            $
            6.66Granted
            
            
            925,000
            
            
            0.31Exercised
            
            
            -
            
            
            -Forfeited
            
            
            (23,564
            )
            
            15.38Outstanding
                options at June 30, 2008
            
            
            2,008,387
            
            $
            3.63




There
      were no options exercised during the six months ended June 30, 2008. Therefore,
      the aggregate intrinsic value of options exercised was zero for the six months
      ended June 30, 2008.





Shares
      available for future stock option grants were 137,445 at June 30, 2008. At
      June
      30, 2008, there was no intrinsic value for options outstanding or for options
      exercisable.





***Restricted
      Stock Rights***





The
      rights to acquire shares of restricted stock are granted to certain officers
      and
      members of the management team and vest following the completion of a number
      of
      years of employment. The restricted stock activity for the six months ended
      June
      30, 2008, is summarized below:




**Weighted-**
              **Average****Number
                of**
            
            **Grant-Date****Shares**
            
            **Fair
                Value**Outstanding
                restricted stock at December 31, 2007
            
            
            507,087
            
            $
            6.63Granted
            
            
            -
            
            
            -Canceled
            
            
            -
            
            
            -Outstanding
                restricted stock at June 30, 2008
            
            
            507,087
            
            $
            6.63




During
      the three and six months ended June 30, 2008 and 2007, we recognized $416,000
      and $831,000, respectively, and $410,000 and $838,000, respectively, in
      stock-based compensation expense. As of June 30, 2008, there was
      $2.4 million in unrecognized compensation cost related to share-based
      payments which is expected to be recognized over a weighted average period
      of
      1.7 years.




12


**11)**
            **Recent
                Accounting Pronouncements**




*Disclosures
      about Derivative Instruments and Hedging Activities*





In
      March
      2008, the FASB issued Statement of Financial Accounting Standards No. 161,
      “Disclosures about Derivative Instruments and Hedging Activities - an amendment
      of FASB Statement No. 133,” (“SFAS 161”), which requires enhanced disclosures
      about an entity’s derivative and hedging activities and thereby improves the
      transparency of financial reporting. Disclosing the fair values of derivative
      instruments and their gains and losses in a tabular format provides a more
      complete picture of the location in an entity’s financial statements of both the
      derivative positions existing at period end and the effect of using derivatives
      during the reporting period. Entities are required to provide enhanced
      disclosures about (a) how and why an entity uses derivative instruments, (b)
      how
      derivative instruments and related hedged items are accounted for under
      Statement 133 and its related interpretations, and (c) how derivative
      instruments and related hedged items affect an entity’s financial position,
      financial performance, and cash flows. SFAS 161 is effective for financial
      statements issued for fiscal years and interim periods beginning after November
      15, 2008. Early adoption is permitted. The Company does not expect SFAS 161
      to
      have a material impact on its financial statements.





*Determination
      of Useful Life of Intangible Assets*





In
      April
      2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
      Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
      factors that should be considered in developing the renewal or extension
      assumptions used to determine the useful life of a recognized intangible asset
      under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also
      requires expanded disclosure related to the determination of intangible asset
      useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
      December 15, 2008. Earlier adoption is not permitted. The Company does not
      expect FSP FAS 142-3 to have a material impact on its financial
      statements.





*The
      Hierarchy of Generally Accepted Accounting Policies*





In
      May
      2008, the FASB issued Statement of Financial Accounting Standards No. 162,
“The
      Hierarchy of Generally Accepted Accounting Policies” (“SFAS 162”), which
      reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
      financial reporting by providing a consistent framework for determining what
      accounting principles should be used when preparing the U.S. GAAP financial
      statements. The standard is effective 60 days after the SEC’s approval of the
      PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
      impact on our financial position or results of operations.





*Convertible
      Debt Instruments That May Be Settled in Cash upon Conversion*





In
      May
      2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”) No. 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
      Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires
      the issuer of certain convertible debt instruments that may be settled in cash
      (or other assets) on conversion to separately account for the liability (debt)
      and equity (conversion option) components of the instrument in a manner that
      reflects the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 will be
      effective for the Company on January 1, 2009 and will require retroactive
      disclosure. The Company is currently evaluating the impact of adopting FSP
      APB
      14-1 on its consolidated financial position, cash flows, and results of
      operations.




*Instruments
      Granted in Share-Based Payment Transactions*





In
      June
      2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
      Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
      EITF 03-6-1”), which requires entities to apply the two-class method of
      computing basic and diluted earnings per share for participating securities
      that
      include awards that accrue cash dividends (whether paid or unpaid) any time
      common shareholders receive dividends and those dividends do not need to be
      returned to the entity if the employee forfeits the award. FSP EITF 03-6-1
      will
      be effective for the Company on January 1, 2009 and will require retroactive
      disclosure. The Company is currently evaluating the impact of adopting FSP
      EITF
      03-6-1 on its consolidated financial position, cash flows, and results of
      operations.




13


**12)**
            **Adoption
                of Statement of Financial Accounting Standards No. 157 and
                159**





*Fair
      Value Measurements*





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value as used
      in numerous accounting pronouncements, establishes a framework for measuring
      fair value under U.S. GAAP, and expands disclosures related to the use of fair
      value measures in financial statements. SFAS 157 does not expand the use of
      fair
      value measurements in financial statements, but standardizes its definition
      and
      guidance in U.S. GAAP. SFAS 157 emphasizes that fair value is a market-based
      measurement and not an entity-specific measurement, based on an exchange
      transaction in which the entity sells an asset or transfers a liability (exit
      price). SFAS 157 establishes a fair value hierarchy from observable market
      data
      as the highest level to an entity’s own fair value assumptions about market
      participant assumptions as the lowest level. In February 2008, the FASB issued
      FSP FAS 157-2, to defer the effective date of SFAS 157 for all nonfinancial
      assets and liabilities, except those items recognized or disclosed at fair
      value
      on an annual or more frequently recurring basis, until years beginning after
      November 15, 2008. We adopted SFAS 157 for our financial assets and liabilities
      effective January 1, 2008 (see Note 13 - Fair Value Measurements for more
      information related to the adoption of SFAS 157 for financial assets and
      liabilities). We are currently reviewing the adoption requirements related
      to
      our nonfinancial assets and liabilities and have not yet determined the impact,
      if any, on our financial position or results of operations.





*The
      Fair Value Option for Financial Assets and Financial
      Liabilities*





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an amendment to FASB Statement No. 115 (“SFAS 159”). This statement
      permits companies to choose to measure many financial instruments and other
      items at fair value. The objective is to improve financial reporting by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. This Statement is expected
      to expand the use of fair value measurement of accounting for financial
      instruments. This statement applies to all entities, including not for profit.
      The fair value option established by this statement permits all entities to
      measure eligible items at fair value at specified election dates. We adopted
      SFAS 159 as of January 1, 2008. Upon adoption, the Company did not elect the
      fair value option for any of the eligible financial instruments, and as such,
      the adoption of SFAS 159 did not have a material effect on our condensed
      consolidated financial statements.





**13)**
            **Fair
                Value Measurements**





We
      adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities
      measured on a recurring basis. On February 6, 2008, the FASB deferred the
      effective date of SFAS 157 for all nonfinancial assets and nonfinancial
      liabilities, except those that are recognized or disclosed at fair value in
      the
      financial statements on a recurring basis. SFAS 157 defines fair value,
      establishes a framework for measuring fair value and generally accepted
      accounting principles and expands disclosures about fair value measurements.
      This standard applies in situations where other accounting pronouncements either
      permit or require fair value measurements. SFAS 157 does not require any new
      fair value measurements.





Fair
      value is defined in SFAS 157 as the price that would be received to sell an
      asset or paid to transfer a liability in an orderly transaction between market
      participants at the measurement date. Fair value measurements are to be
      considered from the perspective of a market participant that holds the asset
      or
      owes the liability. SFAS 157 also establishes a fair value hierarchy which
      requires an entity to maximize the use of observable inputs and minimize the
      use
      of unobservable inputs when measuring fair value.





The
      standard describes three levels of inputs that may be used to measure fair
      value:





Level
                1:
            Quoted
                prices in active markets for identical or similar assets and
                liabilities.Level
                2:
            Quoted
                prices for identical or similar assets and liabilities in markets
                that are
                not active or observable inputs other than quoted prices in active
                markets
                for identical or similar assets and liabilities.Level
                3:
            Unobservable
                inputs that are supported by little or no market activity and that
                are
                significant to the fair value of the assets or
                liabilities.




14





At
      June
      30, 2008, we had outstanding warrants to purchase common shares of our stock
      with an estimated fair value of $163,000. The warrants are valued using Level
      3
      inputs, because there are significant unobservable inputs associated with them.
      We consider the warrants to be derivatives and classified as a derivative
      liability in accordance with EITF 00-19 (see Note 8 - Warrants and Warrant
      Derivative Liability), and follow Statement of Financial Accounting Standards
      No. 133, Accounting for Derivative Instruments and Hedging Activities, as
      amended and interpreted (“SFAS 133”), which requires that all derivatives be
      carried at fair value. In accordance with SFAS 133 these embedded derivatives
      are marked-to-market each reporting period, with a corresponding non-cash gain
      or loss charged to the current period.





The
      carrying value of our other financial assets and liabilities, including cash,
      accounts receivable, accounts payable and short-term loans payable approximate
      fair value, without being discounted, due to the short periods during which
      these amounts are outstanding.




15


**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





**Cautionary
      Statement**





You
      should read the following discussion and analysis with our audited Consolidated
      Financial Statements, and related notes thereto, and Management’s Discussion and
      Analysis of Financial Condition and Results of Operations contained in our
      Form
      10-K for the year ended December 31, 2007, and the Unaudited Condensed
      Consolidated Financial Statements and related notes thereto contained elsewhere
      in this report. We urge you to carefully review and consider the various
      disclosures made in this report and in our other reports filed with the
      Securities and Exchange Commission.




**Forward
      Looking Statements**





This
      quarterly report contains statements which, to the extent that they are not
      explanatory or recitations of historical fact, constitute forward-looking
      statements within the meaning of the Securities Act of 1933 and the Securities
      Exchange Act of 1934. The words “believe,” “estimate,” “anticipate,” “project,”
“intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “will,” “should,”
“continue,” “predict” and similar expressions are intended to identify
      forward-looking statements. Such forward-looking statements are intended to
      be
      subject to the safe harbor protection within the meaning of that term in Section
      27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
      Act
      of 1934. Future events and actual results could differ materially from those
      set
      forth in, contemplated by, or underlying the forward-looking statements.
      Statements in this report, including the Notes to the Condensed Consolidated
      Financial Statements and in the “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations,” describe factors, among others,
      that could contribute to or cause such differences. In addition, the accuracy
      of
      such forward looking statements may be impacted by a number of business risks
      and uncertainties that could cause actual results to differ materially from
      those projected or anticipated, including but not limited to: unanticipated
      delays in the awarding of contracts on jobs bid on by the Company; customer
      delays in placing orders under awarded contracts; customer cancellations or
      deferrals of contracts; declining school enrollments; the inability to
      adequately pass through to customers unanticipated future increases in raw
      material costs; an unanticipated change in the types of classrooms required
      by
      school districts; declines in available funding for modular classroom
      construction and other risks and uncertainties that are described elsewhere
      in
      this report and in our other filings with the Securities and Exchange
      Commission, including our reports on Form 10-K. Although we believe the
      expectations reflected in our forward-looking statements are based upon
      reasonable assumptions, there is no assurance that our expectations will be
      attained. The forward-looking statements are current only as of the date of
      this
      report. We do not undertake any obligation to update or revise publicly any
      forward-looking statements, even though our situation may change in the future.
      We qualify all of our forward-looking statements by these cautionary
      statements.





**Use
      of Estimates and Critical Accounting Policies**





In
      the
      preparation of our consolidated financial statements, we are required to make
      estimates and assumptions that affect the amount of assets, liabilities, revenue
      and expense reported in the statements. We base our estimates and assumptions
      on
      historical experience and other factors believed to be reasonable under the
      circumstances and continually evaluate our estimates and assumptions,
      nevertheless, estimates are inherently uncertain and actual results could
      significantly differ from our estimates. We believe that the following
      discussion addresses our most significant accounting policies.





***Allowances
      for Contract Adjustments***





We
      maintain allowances for contract adjustments that result from the inability
      of
      our customers to make their required payments. Management bases its allowances
      on analysis of the aging of accounts receivable, by account, at the date of
      the
      financial statements, assessments of historical collection trends, and an
      evaluation of the impact of current economic conditions. If the financial
      condition of our customers were to deteriorate, resulting in an impairment
      of
      their ability to make payments, additional allowances may be
      required.





***Accrual
      for Worker’s Compensation Reserve***





Prior
      to
      July 31, 2006, we were self-insured for workers compensation under a high
      deductible program. Management bases its accrual estimate on input from the
      insurance carrier which includes information regarding open and closed cases,
      historical costs associated with those claims, certain developed costs and
      an
      estimate of Incurred But Not Reported claims. Variation from the estimates
      of
      future liability claims from the pre-July 31, 2006 claims is not only possible,
      but probable. The inherent variability may result in actual costs being either
      above or below the estimates recorded on our consolidated financial
      statements.


16




***Revenue
      Recognition on Construction Contracts***





Contracts
      are recognized using the percentage-of-completion method of accounting and,
      therefore, take into account the costs, estimated earnings and revenue to date
      on contracts not yet completed. Revenue recognized is that percentage of the
      total contract price that cost incurred to date bears to the anticipated final
      total cost, based on current estimates of the cost to complete. The
      percentage-of-completion methodology generally results in the recognition of
      reasonably consistent profit margins over the life of a contract. Cumulative
      revenues recognized may be less or greater than cumulative costs and profits
      billed at any point in time during a contract’s term. The resulting difference
      is recognized as unbilled or deferred revenue.





Any
      estimation process, including that used in preparing contract accounting models,
      involves inherent risk. We attempt to reduce the inherent risk relating to
      revenue and cost estimates in percentage-of-completion models through corporate
      policy, approval and monitoring processes. Risks relating to project delivery,
      productivity and other factors are considered in the estimation process. Our
      estimates of revenues and costs on construction contracts change periodically
      in
      the normal course of business due to factors such as productivity and
      modifications of contractual arrangements. Such changes are reflected in the
      results of operations as a change in accounting estimate in the period the
      revisions are determined. Provisions for estimated losses are made in the period
      in which the loss first becomes apparent.





***Revenue
      Recognition for Other Product Sales***





Sales
      of
      other products are recognized when products are shipped and the customer takes
      ownership and assumes risk of loss, collection of the related accounts
      receivable is probable, persuasive evidence of an arrangement exists and the
      sales price is fixed or determinable.





***Valuation
      of the Embedded and Warrant Derivatives***





The
      valuation of our warrant derivatives are determined primarily by the
      Black-Scholes option pricing model. In accordance with FASB Statement No. 133,
      as amended, Accounting for Derivative Instruments and Hedging Activities, these
      embedded derivatives are marked-to-market each reporting period, with a
      corresponding non-cash gain or loss charged to the current period. A warrant
      derivative liability is determined in accordance with Emerging Issues Task
      Force
      (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”).
      Based on EITF 00-19, warrants which are determined to be classified as
      derivative liabilities are marked-to-market each reporting period, with a
      corresponding non-cash gain or loss charged to the current period. The practical
      effect of this has been that when our stock price increases so does our
      derivative liability, resulting in a non-cash loss charge that reduces our
      earnings and earnings per share. When our stock price declines, we record a
      non-cash gain, increasing our earnings and earnings per share.





Certain
      factors are used to determine the fair value of our warrant derivatives, which
      include our period end stock price, historical stock volatility, risk free
      interest rate and derivative term. The fair value recorded for the derivative
      liability varies from period to period. This variability may result in the
      actual derivative liability for a period either above or below the estimates
      recorded on our consolidated financial statements, resulting in significant
      fluctuations in other income (expense) because of the corresponding non-cash
      gain or loss recorded.





**New
      Accounting Standards**





In
      March
      2008, the FASB issued Statement of Financial Accounting Standards No. 161,
      “Disclosures about Derivative Instruments and Hedging Activities - an amendment
      of FASB Statement No. 133,” (“SFAS 161”), which requires enhanced disclosures
      about an entity’s derivative and hedging activities and thereby improves the
      transparency of financial reporting. Disclosing the fair values of derivative
      instruments and their gains and losses in a tabular format provides a more
      complete picture of the location in an entity’s financial statements of both the
      derivative positions existing at period end and the effect of using derivatives
      during the reporting period. Entities are required to provide enhanced
      disclosures about (a) how and why an entity uses derivative instruments, (b)
      how
      derivative instruments and related hedged items are accounted for under
      Statement 133 and its related interpretations, and (c) how derivative
      instruments and related hedged items affect an entity’s financial position,
      financial performance, and cash flows. SFAS 161 is effective for financial
      statements issued for fiscal years and interim periods beginning after November
      15, 2008. Early adoption is permitted. The Company does not expect SFAS 161
      to
      have a material impact on its financial statements.





In
      April
      2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
      Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
      factors that should be considered in developing the renewal or extension
      assumptions used to determine the useful life of a recognized intangible asset
      under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also
      requires expanded disclosure related to the determination of intangible asset
      useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
      December 15, 2008. Earlier adoption is not permitted. The Company does not
      expect FSP FAS 142-3 to have a material impact on its financial
      statements.


17




In
      May
      2008, the FASB issued Statement of Financial Accounting Standards No. 162,
“The
      Hierarchy of Generally Accepted Accounting Policies” (“SFAS 162”), which
      reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
      financial reporting by providing a consistent framework for determining what
      accounting principles should be used when preparing the U.S. GAAP financial
      statements. The standard is effective 60 days after the SEC’s approval of the
      PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
      impact on our financial position or results of operations.





In
      May
      2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”) No. 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
      Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires
      the issuer of certain convertible debt instruments that may be settled in cash
      (or other assets) on conversion to separately account for the liability (debt)
      and equity (conversion option) components of the instrument in a manner that
      reflects the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 will be
      effective for the Company on January 1, 2009 and will require retroactive
      disclosure. The Company is currently evaluating the impact of adopting FSP
      APB
      14-1 on its consolidated financial position, cash flows, and results of
      operations.




In
      June
      2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
      Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
      EITF 03-6-1”), which requires entities to apply the two-class method of
      computing basic and diluted earnings per share for participating securities
      that
      include awards that accrue cash dividends (whether paid or unpaid) any time
      common shareholders receive dividends and those dividends do not need to be
      returned to the entity if the employee forfeits the award. FSP EITF 03-6-1
      will
      be effective for the Company on January 1, 2009 and will require retroactive
      disclosure. The Company is currently evaluating the impact of adopting FSP
      EITF
      03-6-1 on its consolidated financial position, cash flows, and results of
      operations.





**Overview**





Modtech
      manufactures and sells modular relocatable classrooms and commercial and light
      industrial modular buildings. We are a leading provider of modular classrooms
      in
      California and Florida and a significant provider of commercial and light
      industrial modular buildings in California, Florida, Arizona, Nevada and other
      neighboring states.





In
      California and Florida, we market and sell our modular classrooms to school
      districts. Virtually all of our classroom sales are dependent upon public
      funding. Such funding is sourced in multiple ways which are strongly influenced
      by educational policies that are subject to political factors.





The
      modular relocatable classroom industry is highly competitive with the market
      divided among a number of privately-owned companies whose share of the market
      is
      smaller than ours. The nonresidential modular building industry is highly
      competitive and fragmented. It is composed primarily of regionally based private
      companies, each with a single manufacturing facility.





Revenues
      were $13.4 million and $26.1 million for the three and six months ended June
      30,
      2008, respectively, down 44.2% and 49.3%, respectively, from the corresponding
      period of the prior year. The decline was due primarily to a continuing general
      slowdown in the California education and commercial markets, customer imposed
      delays on certain large educational projects, increased competitive pressure
      in
      all markets, and declining school enrollment in Florida.





As
      of
      July 31, 2008, the backlog of sales orders was $73.7 million, up from $51.3
      million at July 31, 2007. The backlog by region as of July 31, 2008 was as
      follows: California - $67.5 million; Arizona - $1.5 million; and Florida -
      $4.7
      million. This compares to the backlog by region as of July 31, 2007, which
      was
      as follows: California - $41.9 million; Arizona - $2.1 million; and Florida
      -
      $7.3 million. The increase in backlog is primarily due to increased residential
      and military orders in California. As of July 31, 2008 approximately $31.2
      million of the residential backlog is subject to final developer or end-user
      financing for the projects.


18


**Results
      of Operations**





The
      following table sets forth, for the periods indicated, the percentages of net
      sales represented by certain items in our statements of operations.




**Percent of Net Sales**
            
            **Percent of Net Sales****Three Months Ended June 30,**
            
            **Six Months Ended June 30,****2008**
            
            **2007**
            
            **2007**
            
            **2006**Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of goods sold
            
            
            105.1
            
            
            102.2
            
            
            107.8
            
            
            98.9Gross
                (loss) profit
            
            
            (5.1
            )
            
            (2.2
            )
            
            (7.8
            )
            
            1.1Selling,
                general and administrative expenses
            
            
            27.0
            
            
            15.5
            
            
            25.7
            
            
            14.3Impairment
                loss on goodwill
            
            
            -
            
            
            159.4
            
            
            -
            
            
            74.3Loss
                from operations
            
            
            (32.1
            )
            
            (177.1
            )
            
            (33.4
            )
            
            (87.6
            )Other
                (expense) income:Interest
                expense
            
            
            (2.5
            )
            
            (2.1
            )
            
            (2.6
            )
            
            (2.1
            )Interest
                income
            
            
            0.2
            
            
            0.3
            
            
            0.2
            
            
            0.3Gain
                on warrant and embedded derivatives
            
            
            3.1
            
            
            3.9
            
            
            4.8
            
            
            11.2Amortization
                of debt issuance costs
            
            
            (0.9
            )
            
            (0.5
            )
            
            (0.9
            )
            
            (0.7
            )Accretion
                of debt discount
            
            
            (5.0
            )
            
            (3.2
            )
            
            (4.8
            )
            
            (3.5
            )Other
                income, net
            
            
            0.3
            
            
            0.1
            
            
            0.2
            
            
            0.1(4.8
            )
            
            (1.5
            )
            
            (3.1
            )
            
            5.3Loss
                before income taxes
            
            
            (36.9
            )
            
            (178.6
            )
            
            (36.5
            )
            
            (82.3
            )Income
                tax expense (benefit)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            
            (36.9)
            %
            
            (178.6)
            %
            
            (36.5)
            %
            
            (82.3)
            %





***Net
      Sales***





Net
      sales
      for the quarter ended June 30, 2008, decreased to $13.4 million from $24.0
      million for the quarter ended June 30, 2007, a decrease of $10.6 million or
      44.2%. When compared to the corresponding period in the prior year, in the
      quarter ended June 30, 2008 California sales of $12.3 million were down 17.8%;
      Florida sales of $0.3 million were down 82.4% and Arizona sales of $0.8
      million were down 93.1%.





Net
      sales
      for the six months ended June 30, 2008, decreased to $26.1 million from $51.5
      million for the six months ended June 30, 2007, a decrease of $25.4 million
      or 49.3%. When compared to the corresponding period in the prior year, in the
      six months ended June 30, 2008 California sales of $20.4 million were down
      37.1%; Florida sales of $2.2 million were down 76.5% and Arizona sales of
      $3.5 million were down 63.4%.





The
      decrease in sales in 2008 in California was primarily due to a continuing
      general slowdown in the education and commercial markets. The change in the
      education market was caused primarily by delays imposed by our customers on
      various large educational projects, a relative flattening of California school
      enrollment in recent years and general economic conditions. It appears that
      the
      State of California’s current budget deficit and current proposed budget cuts
      have caused delays in school construction projects, in spite of voter-approved
      bond measures for classroom and school construction. The decrease in the
      commercial market can be attributed to the slowdown in the construction and
      housing markets.




California
      public school enrollment has been essentially flat over the last three years
      and, while funds from recently enacted bond measures are available, spending
      for
      new schools has slowed from prior years. This leveling off of school enrollment
      has led to decreased demand for new school construction, causing a higher
      percentage of school bond funds to be utilized for modernization of existing
      structures and less on new permanent construction or facilities. Even the fast
      growing school districts are proceeding more conservatively in light of the
      slowdown in other districts. The modernization work has not benefited us due
      to
      the availability of temporary classrooms from existing stock of leasing
      companies.





The
      sales
      decrease in Florida in 2008 was due to slowness in the education market as
      a
      result of declining school enrollment.





The
      sales
      decrease in Arizona in 2008 was due to the decreased volume of orders in the
      education markets for Arizona and Nevada.




19


***Gross
      (Loss) Profit***





Gross
      loss for the quarter ended June 30, 2008 was $0.7 million compared to
      $0.5 million for the corresponding prior year period, a decline of $0.2
      million. Gross loss as a percentage of net sales was (5.1%) in the quarter
      ended
      June 30, 2008, compared to a (2.2%) in the quarter ended June 30, 2007.





Gross
      loss for the six months ended June 30, 2008 was $2.0 million compared to a
      gross
      profit of $0.6 million for the corresponding prior year period, a decline
      of $2.6 million. Gross loss as a percentage of net sales was (7.8%) in the
      six
      months ended June 30, 2008, compared to a gross profit margin of 1.1% in the
      six
      months ended June 30, 2007.





Our
      gross
      profit margin declined as revenues declined because we were not able to
      adequately cover our fixed manufacturing costs, particularly due to continued
      production delays in key education projects and decreased sales volume in the
      education markets in California, Florida and Arizona.





***Selling,
      General and Administrative Expenses***





In
      the
      quarter ended June 30, 2008, selling, general and administrative (“SG&A”)
      expenses decreased $0.1 million over the prior year to $3.6 million. The
      decrease in SG&A was attributable to our cost cutting efforts over the last
      two quarters, resulting in lower salary expense. SG&A has increased as a
      percentage of sales from 15.5% of net sales for the quarter ended June 30,
      2007
      to 27.0% of net sales for the quarter ended June 30, 2008 due to the decrease
      in
      sales discussed above.





In
      the
      six months ended June 30, 2008, SG&A expenses decreased $0.7 million over
      the prior year to $6.7 million. The decrease in SG&A was attributable to our
      cost cutting efforts over the last two quarters, resulting in lower salary
      expense, lower professional fees and lower discretionary spending. SG&A has
      increased as a percentage  from
      14.3% of net sales for the quarter ended June 30, 2007 to 25.7% of net sales
      for
      the six months ended June 30, 2008 of sales due to the decrease in sales
      discussed above.





***Loss
      from Operations***





Loss
      from
      operations for the three and six months ended June 30, 2008, totaled $4.3
      million and $8.7 million, respectively. Operating losses were 32.1% of net
      sales
      for the quarter ended June 30, 2008 down from $42.6 million in losses, or
      177.1% of net sales, for the quarter ended June 30, 2007. Operating losses
      were
      33.4% of net sales for the six months ended June 30, 2008 down from
      $45.1 million in losses, or 87.6% of net sales, for the six months ended
      June 30, 2007. When excluding the $38.3 million goodwill impairment loss in
      the
      prior year periods, loss from operations totaled $4.3 million and $6.8 million
      for the three and six months ended June 30, 2007, respectively. Excluding the
      impact of the prior year goodwill impairment loss, the increases in operating
      losses were the result of the decline in net sales and gross margins, partially
      offset by the decrease in SG&A expenses as discussed above.





***Other
      (Expense) Income***





Interest
      expense decreased by $0.2 million and $0.4 million in the three and six months
      ended June 30, 2008, respectively, compared to the prior year periods due to
      lower debt levels and lower interest rates over the same periods.





We
      recognized a non-cash gain of $0.4 million and $1.3 million related to warrant
      derivatives during the three and six month periods ended June 30, 2008,
      respectively. This compared to a gain recognized of $0.9 million and $5.8
      million for the three and six month periods ended June 30, 2007, respectively.
      These gains were due to a decrease in the trading price of our stock for the
      respective periods, which caused our warrant derivative liability to
      decrease.





Amortization
      of debt issuance costs was $0.1 million for the three months ended June 30, 2008
      and 2007 and $0.2 million and $0.4 million for the six months ended June 30,
      2008 and 2007, respectively.





Accretion
      of debt discount for the three months ended June 30, 2008 was $0.7 million,
      compared to an accretion of $0.8 million for the three months ended June 30,
      2007. Accretion of debt discount for the six months ended June 30, 2008 was
      $1.3
      million, compared to an accretion of $1.8 million for the six months ended
      June
      30, 2007. Accretion on debt discount for the six months ended June 30, 2007
      included $0.5 million in incremental non-cash charges related to the
      conversion of convertible notes.




20


***Income
      Tax Benefit***





No
      benefit for income tax was recorded for the three and six months ended June
      30,
      2008. No tax benefit has been recognized because under applicable accounting
      standards our cumulative losses for the three years ended December 31, 2007
      are
      deemed to have created significant negative evidence that it is more likely
      than
      not that we will not be able to realize our net deferred tax assets. Therefore,
      a valuation allowance has been recorded against our net deferred tax
      assets.





**Liquidity
      and Capital Resources**





In
      recent
      years we have funded our operations and capital expenditures primarily with
      cash
      generated internally by operations, borrowings under various credit facilities,
      cash received from exercised options and private placements of equity.





Cash
      and
      cash equivalents were $2.2 million at June 30, 2008 compared to $0.4 million
      at
      December 31, 2007. The increase was primarily due to proceeds from the issuance
      of preferred stock, as well as, positive cash flow from operating activities
      partially offset by principal payments on long-term debt.





Cash
      totaling $0.1 million was provided by operating activities during the six months
      ended June 30, 2008 compared to cash used of $5.9 million during the six months
      ended June 30, 2007. During the six months ended June 30, 2008, the net loss,
      adjusted for non-cash expenses from depreciation and amortization, stock
      compensation expense, gain on derivative liability and accretion on debt
      discount used $7.7 million of operating cash. Changes in remaining working
      capital balances during this period provided $7.8 million in cash which includes
      the collection of $2.9 million of the insurance receivable.





Net
      cash
      used by investing activities, consisting primarily of the purchase of property
      and equipment, was $0.1 million in the six months ended June 30, 2008 and
      $0.3 million in the six months ended June 30, 2007.





Net
      cash
      provided by financing activities was $1.7 million in the six months ended June
      30, 2008, consisting of proceeds from the issuance of convertible preferred
      stock of $1.6 million, proceeds from the reduction of restricted cash of
      $0.9 million, offset by $0.8 million in principal payments on long-term
      debt. This compares to net cash provided by financing activities of $2.5 million
      in the six months ended June 30, 2007, which consisted of proceeds from
      reduction of restricted cash of $4.2 million, offset by $1.6 million in
      principal payments on long-term debt.





On
      February 26, 2008, we were notified by our lender Laurus Master Fund, Ltd.
      (“Laurus”) and two of its related entities that we were not in compliance with
      all covenants. In March 2008, we entered into an agreement with Laurus and
      its
      two related entities pursuant to which we obtained a waiver of the event of
      default and restructured certain other provisions of the promissory notes issued
      to Laurus in 2006, as further described below and in Note 5 to the interim
      condensed consolidated financial statements herein.





Management
      has taken the following actions, among others to address liquidity and operating
      performance issues:





•  In
      March
      2008 we entered into an amendment and waiver agreement with Laurus and its
      related entities. Pursuant to the waiver, we issued warrants to purchase
      3,000,000 shares of Modtech’s common stock at an exercise price of $0.40 per
      share and additional promissory notes in the aggregate principal amount of
      $750,000, on which the principal amount plus related interest are due and
      payable on December 29, 2009. In return Laurus and its related entities agreed
      to defer principal payments of $375,000 per month for the period March 1, 2008
      through June 30, 2008, for a total deferral of $1.5 million, temporarily
      eliminate the covenant to maintain on a monthly basis at least $9 million in
      cash and eligible accounts receivable (the “Minimum Balance”) from December, 31,
      2007 through February 29, 2008, reduce the Minimum Balance from $9 million
      to $5.4 million for the period March 1, 2008 through March 31, 2008 and to
      $6.6
      million for the period April 1, 2008 through June 30, 2008. The monthly interest
      payments of approximately $110,000 per month continued without deferral or
      abatement and, commencing July 1, 2008, the monthly principal payments resumed
      and the Minimum Balance was again $9 million.





•  In
      March
      2008, we completed an equity financing with existing shareholders, new investors
      and directors and executives of the company, pursuant to which we issued 14,190
      shares of newly created Series B Preferred Stock and 2,206 shares of newly
      created Series C Preferred Stock, each at $100 per share for an aggregate
      purchase price of $1.6 million.





•  We
      significantly reduced production staffing, overhead and selling general and
      administrative expenses.





•  We
      have
      developed an operating plan to manage costs in line with estimated total
      revenues for fiscal 2008, including contingencies for further cost reductions
      if
      projected revenue and improvement in operating results are not fully
      realized.


21




•  We
      have
      identified additional financing alternatives, including public or private
      offerings of equity or debt securities that we plan to pursue if necessary
      during 2008.





Based
      on
      the actions taken to date, and based on our current backlog and projections
      of
      future contracts, management believes that existing cash resources, working
      capital and cash flow from operations will be sufficient to meet our operating
      and liquidity requirements for the balance of 2008. We may, however, not be
      able
      to comply with the minimum cash balance and accounts receivable provisions
      of
      the modified promissory note agreements in each of the remaining months of
      2008.




22


**Item
      3. Quantitative And Qualitative Disclosures About Market
      Risk**





As
        a
        Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and
        in
        item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
        obligations and therefore are not required to provide the information requested
        by this Item.


23


**Item
      4T. Controls And Procedures**





**(a)
      Evaluation of Disclosure Controls and Procedures**





As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and our Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures (as such
      terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
      Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, and
      because of the material weaknesses discussed below, our Chief Executive Officer
      and Chief Financial Officer concluded that, as of June 30, 2008, our disclosure
      controls and procedures were not effective in ensuring that the information
      required to be filed or submitted under the Exchange Act is recorded, processed,
      summarized and reported as specified in the Securities and Exchange Commission’s
      rules and forms, and accumulated and communicated to our management, including
      our Chief Executive Officer and Chief Financial Officer, as appropriate to
      allow
      timely decisions regarding required disclosure. We believe, however, that the
      accompanying consolidated financial statements presented in this Form 10-Q
      fairly present the financial condition and results of operations for the periods
      indicated.





The
      identified material weaknesses in our internal control over financial reporting
      relate to the following matters:





·
            We
                lack the necessary depth of personnel with sufficient technical accounting
                expertise to ensure that the preparation of interim and annual financial
                statements are without material
                misstatements.





·
            Our
                procedures associated with accounting for our long-term revenue contracts
                continue to be insufficient to ensure that revenue and costs are
                properly
                reflected in our consolidated financial
                statements.





Our
      plan
      to remediate those material weakness remaining as of June 30, 2008 is as
      follows:





·
            We
                plan to either hire additional staff for our operational finance
                teams or
                utilize outside consulting resources for further documentation, testing
                and monitoring of key controls.





·
            We
                are currently re-evaluating all finance personnel to ensure that
                appropriate skills and training are maintained in all critical
                positions.





**(b)
      Changes in Internal Control over Financial Reporting**





There
      were no changes in our internal controls over financial reporting that occurred
      during the quarter ended June 30, 2008, that have materially affected or are
      reasonably likely to materially affect our internal control over financial
      reporting.




24


**PART
      II. OTHER INFORMATION**


**Item
      1. Legal Proceedings**





We
      are a
      party to various claims, complaints and other legal actions that arise in the
      normal course of business from time to time. We believe the outcome of these
      pending legal proceedings, in the aggregate, will not have a material adverse
      effect on our results of operations or financial position.





**Item
      1A. Risk Factors**





There
      have been no material changes from the risk factors disclosed in our most
      recently filed report on Form 10-K, except as follows:





On
      July
      24, 2008, our shares ceased trading on The Nasdaq Global Market and began
      trading on the Over-the-Counter (“OTC”) Bulletin Board. Shares trading on the
      OTC Bulletin Board tend to be more volatile and trade at lower prices than
      shares traded on The Nasdaq Global Market. Our shares were delisted from The
      Nasdaq Global Market because the closing price of our common stock failed to
      equal at least $1 per share for 10 consecutive trading days between January
      16,
      2008 and July 14, 2008.





Because
      of California’s current budget deficit, the state is considering a $207 million
      cut in its 2008-2009 budget for the Classroom Size Reduction Program which,
      if
      implemented, will have a further negative impact on demand for our product
      in
      California.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





None,
      except those previously reported on a current report on Form 8-K.




**Item
      3. Defaults upon Senior Securities**





None,
      except those previously reported on a current report on Form
      8-K.





**Item
      4. Submission of Matters to a Vote of Security Holders**





At
      the
      Annual Meeting of Stockholders held on June 17, 2008, the six nominees for
      the
      board of directors were elected based on the following votes:




Nominee
            
            For
            
            WithheldRobert
                W. Campbell
            
            15,965,922
            
            529,476Daniel
                J. Donahoe III
            
            16,241,104
            
            254,294Stanley
                N. Gaines
            
            15,966,022
            
            529,376Charles
                C. McGettigan
            
            15,985,639
            
            509,759Dennis
                L. Shogren
            
            15,985,639
            
            509,759Myron
                A. Wick III
            
            15,965,997
            
            529,401




There
      are
      no other members of the board of directors. No other matters were voted on
      at
      the meeting.





**Item
      5. Other Information**





None


25


**Item
      6. Exhibits**




**Exhibit****Number**
            
            **Name
                of Exhibit**3.1(1)
            
            Certificate
                of Incorporation of the Company.3.2(1.1)
            
            Bylaws
                of the Company.3.3(15)
            
            Certificate
                of Amendment of Certificate of Incorporation4.1(15)
            
            Certificate
                of Designation of Preferences4.2(15)
            
            Amended
                and Restated Certificate of Designation of Preferences4.3(16)
            
            Second
                Amended and Restated Certificate of Designation of
                Preferences10.1(2)
            
            Company’s
                1994 Stock Option Plan.10.2(2)
            
            Company’s
                1996 Stock Option Plan.10.3(2)
            
            Company’s
                1999 Stock Option Plan.10.4(2)
            
            Company’s
                2002 Stock Option Plan.10.5(3)
            
            Employment
                Agreement between the Company and Dennis L. Shogren.10.6(3.1)
            
            Employment
                Agreement between the Company and Ronald Savona.10.7(3.2)
            
            Employment
                Agreement between the Company and Kenneth S. Cragun.10.8(4)
            
            Lease
                between the Company and Pacific Continental Modular Enterprises,
                relating
                to the Barrett property in Perris, California10.9(4)
            
            Lease
                between the Company and BMG, relating to the property in Lathrop,
                California10.10(5)
            
            Conversion
                and Repurchase Agreement, dated October 31, 200610.11(6)
            
            Warrant
                to Purchase Common Stock issued December 31, 200410.12(7)
            
            Amendment
                Number 1 to Industrial Real Estate Lease between Modtech Holdings,
                Inc.
                and BMG2 Enterprises, dated July 29, 200510.13(7)
            
            Sublease
                between Modtech Holdings, Inc. and Boise Building Solutions Distribution,
                L.L.C., dated July 29, 200510.14(8)
            
            Warrant
                for 8,276 shares of common stock, dated August 5, 200510.15(9)
            
            Intercreditor
                Agreement with Bank of America, N.A., dated, March 31,
                200610.16(9)
            
            Loan
                and Security Agreement with Bank of America, N.A., dated March 31,
                200610.17(9)
            
            Amendment
                Agreement, dated March 31, 200610.18(10)
            
            Amendment
                to 2002 Stock Option Plan, dated June 13, 200610.19(11)
            
            Exchange
                of Senior Subordinated Secured Convertible Notes, dated May 3,
                200610.20(12)
            
            Securities
                Purchase Agreement with Laurus Master Fund, Ltd. (and attached exhibits),
                dated October 21, 2006




26





**Exhibit****Number**
            
            **Name
                of Exhibit**10.21(12)
            
            Intellectual
                Property Security Agreement, dated October 31, 200610.22(12)
            
            Master
                Security Agreement with Laurus Master Fund, Ltd., dated October 31,
                200610.23(12)
            
            Registration
                Rights Agreement with Laurus Master Fund, Ltd., dated October 31,
                200610.24(12)
            
            Sale
                and Purchase Agreement and Joint Escrow Instructions with NL Ventures
                V,
                L.P. dated November 1, 200610.25(12)
            
            Lease
                Agreement with NL Ventures V Plant City, L.P. dated November 1,
                200610.26(13)
            
            Registration
                Rights Agreement with Amphora Limited, dated October 31,
                200610.27(13)
            
            Conversion
                and Repurchase Agreement, dated October 31, 200610.28(14)
            
            Amendment
                and Waiver Agreement with Laurus Master Fund, Ltd., dated December
                28,
                200610.29(14)
            
            Securities
                Purchase Agreement with Laurus Master Fund, Ltd., dated December
                28,
                200610.30(14)
            
            Secured
                Term Note issued to Laurus Master Fund, Ltd., dated December 28,
                200610.31(14)
            
            Common
                Stock Purchase Warrant issued to Laurus Master Fund, Ltd., dated
                December
                28, 200610.32(14)
            
            Amended
                and Restated Registration Rights Agreement with Laurus Master Fund,
                Ltd.,
                dated December 28, 200610.33(15)
            
            Amendment
                and Waiver Agreement with Laurus Master Fund, Ltd., Valens Offshore
                SPV I,
                Ltd. and Valens U.S. SPV I, LLC, dated February 29,
                200810.34(15)
            
            Promissory
                Note issued to Laurus Master Fund, Ltd. in the amount of $634,414.36,
                dated February 29, 200810.35(15)
            
            Promissory
                Note issued to Valens Offshore SPV I, Ltd. in the amount of $66,602.06,
                dated February 29, 200810.36(15)
            
            Promissory
                Note issued to Valens U.S. SPV I, LLC in the amount of $48,983.58,
                dated
                February 29, 200810.37(15)
            
            Common
                Stock Purchase Warrant issued to Laurus Master Fund, Ltd. for up
                to
                2,537,657 shares of stock, dated February 29, 200810.38(15)
            
            Common
                Stock Purchase Warrant issued to Valens Offshore SPV I, Ltd. for
                up to
                266,408 shares of stock, dated February 29, 200810.39(15)
            
            Common
                Stock Purchase Warrant issued to Valens U.S. SPV I, LLC for up to
                195,935
                shares of stock, dated February 29, 200810.40(15)
            
            Registration
                Rights Agreements with Laurus Master Fund, Ltd., Valens Offshore
                SPV I,
                Ltd. and Valens U.S. SPV I, LLC, dated February 29,
                200810.43(15)
            
            Reaffirmation
                and Ratification Agreement with Laurus Master Fund, Ltd., Valens
                Offshore
                SPV I, Ltd. and Valens U.S. SPV I, LLC, dated February 29,
                200810.44(15)
            
            Lock-Up
                Letter Agreement with Laurus Master Fund, Ltd., Valens Offshore SPV
                I,
                Ltd. and Valens U.S. SPV I, LLC, dated February 29,
                2008


27





**Exhibit****Number**
            
            **Name
                of Exhibit**10.45(15)
            
            Subscription
                Agreement with the "Buyers" (as defined therein), dated March 10,
                200810.46(15)
            
            Registration
                Rights Agreement with the Buyers as described in Exhibit 10.45 above,
                dated March 10, 200810.47(15)
            
            Amended
                and Restated Common Stock Purchase Warrant issued to Laurus Master
                Fund,
                Ltd. for up to 2,537,657 shares of stock, dated March 21,
                200810.48(15)
            
            Amended
                and Restated Common Stock Purchase Warrant issued to Valens Offshore
                SPV
                I, Ltd. for up to 266,408 shares of stock, dated March 21,
                200810.49(15)
            
            Amended
                and Restated Common Stock Purchase Warrant issued to Valens U.S.
                SPV I,
                LLC for up to 195,935 shares of stock, dated March 21,
                200810.50*
            
            Amendment
                to subscription agreement with the “Buyers” (as defined therein), dated
                March 10, 200831.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002







*
            Filed
                herewith - see attachment





(1)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Registration Statement on Form
                S-4 filed with the Commission on October 27, 1998 (Commission File
                No.
                333-69033).





(1.1)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-K filed with the
                Commission on March 15, 2004 (Commission File No.
                000-25161).




(2)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-Q filed with the
                Commission on November 12, 2004 (Commission File No.
                000-25161).





(3)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on September 22, 2006 (Commission File No.
                000-25161).





(3.1)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on February 13, 2006 (Commission File No.
                000-25161).





(3.2)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on June 25, 2007 (Commission File No.
                000-25161).





(4)
            Incorporated
                by reference to Modtech, Inc.’s Registration Statement on Form S-1 filed
                with the Commission on June 6, 1990 (Commission File No.
                033-35239).





(5)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on November 1, 2002 (Commission File No.
                000-25161).





(6)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on January 3, 2005 (Commission File No.
                000-25161).





(7)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-Q/A filed with the
                Commission on October 17, 2005 (Commission File No.
                000-25161).


28




(8)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on August 9, 2005 (Commission File No.
                000-25161).




(9)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-K filed with the
                Commission on April 4, 2006 (Commission File No.
                000-25161).





(10)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Definitive Proxy Statement filed
                with the Commission on May 5, 2006 (Commission File No.
                000-25161).





(11)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-Q filed with the
                Commission on August 14, 2006 (Commission File No.
                000-25161).





(12)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-Q filed with the
                Commission on November 14, 2006.





(13)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on November 1, 2006 (Commission File No.
                000-25161).





(14)
            Incorporated
                by reference to Modtech Holdings, Inc. Form 8-K filed with the Commission
                on January 4, 2007 (Commission File No.
                000-25161).





(15)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-K filed with the
                Commission on April 14, 2008 (Commission File No.
                000-25161).





(16)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on May 23, 2008 (Commission File No.
                000-25161).


29




**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.




MODTECH
                HOLDINGS, INC.Date:
                August 14, 2008
            
            by:
            /s/
                KENNETH S. CRAGUN**Kenneth
                S. Cragun**
              **Chief
                Financial Officer****and
                Chief Accounting Officer**by:
            /s/
                DENNIS L. SHOGREN**Dennis
                L. Shogren**
              **President
                and Chief Executive
                Officer**




30