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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(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, 2004



| ̈ | 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



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MODTECH HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



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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 an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No ̈



As of August 6, 2004, there were 13,850,855 of the Registrants Common Stock outstanding.



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MODTECH HOLDINGS, INC.



FORM 10-Q



FOR THE QUARTER ENDED JUNE 30, 2004



PART I. FINANCIAL INFORMATION



The condensed consolidated financial statements included herein have been prepared by Modtech Holdings, Inc. and subsidiaries (the Company),
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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, the Company believes that the condensed consolidated financial statements, including the disclosures herein, are adequate to make the information presented
not misleading. The results of operations for the three months and six months ended June 30, 2003 and 2004 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 the Companys consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission.



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MODTECH HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                      |  |                  |             |               |   |            
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | ------------- | - | -----------
|                                                                                                                                      |  | December 31,2003 |             | June 30, 2004
|Assets                                                                                                                                |  |                  |             |               |   |            
|Current assets:                                                                                                                       |  |                  |             |               |   |            
|Cash and cash equivalents                                                                                                             |  | $                | 1,122,000   |               | $ | 4,970,000  
|Contracts receivable, net, including costs in excess of billings of $9,535,000 and $13,643,000 in 2003 and 2004, respectively         |  |                  | 36,960,000  |               |   | 54,172,000 
|Inventories                                                                                                                           |  |                  | 6,841,000   |               |   | 14,227,000 
|Due from affiliates                                                                                                                   |  |                  | 1,867,000   |               |   | 422,000    
|Deferred tax assets                                                                                                                   |  |                  | 2,875,000   |               |   | 2,875,000  
|Other current assets                                                                                                                  |  |                  | 3,752,000   |               |   | 3,294,000  
|                                                                                                                                      |  |                  |             |               |   |            
|Total current assets                                                                                                                  |  |                  | 53,417,000  |               |   | 79,960,000 
|                                                                                                                                      |  |                  |             |               |   |            
|Property and equipment, net                                                                                                           |  |                  | 17,397,000  |               |   | 16,133,000 
|Other assets:                                                                                                                         |  |                  |             |               |   |            
|Goodwill                                                                                                                              |  |                  | 71,903,000  |               |   | 71,903,000 
|Covenants not to compete, net                                                                                                         |  |                  | 58,000      |               |   | 42,000     
|Debt issuance costs, net                                                                                                              |  |                  | 969,000     |               |   | 804,000    
|Deferred tax asset  non-current                                                                                                      |  |                  | 111,000     |               |   | 111,000    
|Other assets                                                                                                                          |  |                  | 1,191,000   |               |   | 1,391,000  
|                                                                                                                                      |  |                  |             |               |   |            
|Total assets                                                                                                                          |  | $                | 145,046,000 |               | $ | 170,344,000
|                                                                                                                                      |  |                  |             |               |   |            
|Liabilities and Shareholders Equity                                                                                                  |  |                  |             |               |   |            
|Current liabilities:                                                                                                                  |  |                  |             |               |   |            
|Accounts payable and accrued liabilities                                                                                              |  | $                | 14,720,000  |               | $ | 30,765,000 
|Billings in excess of costs                                                                                                           |  |                  | 3,817,000   |               |   | 6,763,000  
|Current revolving credit line                                                                                                         |  |                  | 7,400,000   |               |   | 19,900,000 
|Current maturities of long-term debt                                                                                                  |  |                  | 6,000,000   |               |   | 3,000,000  
|                                                                                                                                      |  |                  |             |               |   |            
|Total current liabilities                                                                                                             |  |                  | 31,937,000  |               |   | 60,428,000 
|Long-term debt, excluding current portion                                                                                             |  |                  | 6,000,000   |               |   | 3,500,000  
|                                                                                                                                      |  |                  |             |               |   |            
|Total liabilities                                                                                                                     |  |                  | 37,937,000  |               |   | 63,928,000 
|                                                                                                                                      |  |                  |             |               |   |            
|Shareholders equity:                                                                                                                 |  |                  |             |               |   |            
|Common stock, $.01 par. Authorized 25,000,000 shares; issued and outstanding 13,726,664 and 13,850,855 in 2003 and 2004,
respectively |  |                  | 137,000     |               |   | 138,000    
|Additional paid-in capital                                                                                                            |  |                  | 79,262,000  |               |   | 79,730,000 
|Retained earnings                                                                                                                     |  |                  | 27,710,000  |               |   | 26,548,000 
|                                                                                                                                      |  |                  |             |               |   |            
|Total shareholders equity                                                                                                            |  |                  | 107,109,000 |               |   | 106,416,000
|                                                                                                                                      |  |                  |             |               |   |            
|                                                                                                                                      |  | $                | 145,046,000 |               | $ | 170,344,000
|                                                                                                                                      |  |                  |             |               |   |            



The accompanying notes are an
integral part of these condensed consolidated financial statements.



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MODTECH HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)



|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                     |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                     |  | 2003                        |            |   | 2004                      |   |            | 2003 |  |   | 2004       |  
|Net sales                                            |  | $                           | 45,713,000 |   |                           | $ | 54,628,000 |      |  | $ | 85,998,000 |   |  | $ | 84,037,000 |  
|Cost of goods sold                                   |  |                             | 40,501,000 |   |                           |   | 51,082,000 |      |  |   | 77,012,000 |   |  |   | 80,721,000 |  
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                         |  |                             | 5,212,000  |   |                           |   | 3,546,000  |      |  |   | 8,986,000  |   |  |   | 3,316,000  |  
|Selling, general, and administrative expenses        |  |                             | (2,102,000 | ) |                           |   | (2,298,000 | )    |  |   | (3,910,000 | ) |  |   | (4,587,000 | )
|Covenant amortization                                |  |                             | (25,000    | ) |                           |   | (6,000     | )    |  |   | (63,000    | ) |  |   | (16,000    | )
|Gain on sale of PP&E                                 |  |                             |           |   |                           |   | 620,000    |      |  |   |           |   |  |   | 620,000    |  
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from operations                        |  |                             | 3,085,000  |   |                           |   | 1,862,000  |      |  |   | 5,013,000  |   |  |   | (667,000   | )
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Other income (expense):                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Interest expense, net                                |  |                             | (355,000   | ) |                           |   | (573,000   | )    |  |   | (703,000   | ) |  |   | (984,000   | )
|Other, net                                           |  |                             | (5,000     | ) |                           |   | 19,000     |      |  |   | 14,000     |   |  |   | 27,000     |  
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                     |  |                             | (360,000   | ) |                           |   | (554,000   | )    |  |   | (689,000   | ) |  |   | (957,000   | )
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                    |  |                             | 2,725,000  |   |                           |   | 1,308,000  |      |  |   | 4,324,000  |   |  |   | (1,624,000 | )
|Income tax expense (benefit)                         |  |                             | 1,145,000  |   |                           |   | 549,000    |      |  |   | 1,816,000  |   |  |   | (682,000   | )
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                    |  |                             | 1,580,000  |   |                           |   | 759,000    |      |  |   | 2,508,000  |   |  |   | (942,000   | )
|Series A Preferred stock dividend                    |  |                             |           |   |                           |   |           |      |  |   | 7,000      |   |  |   |           |  
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable for common stockholders |  | $                           | 1,580,000  |   |                           | $ | 759,000    |      |  | $ | 2,501,000  |   |  | $ | (942,000   | )
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic earnings (loss) per common share               |  | $                           | 0.12       |   |                           | $ | 0.05       |      |  | $ | 0.18       |   |  | $ | (0.07      | )
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic weighted-average shares outstanding            |  |                             | 13,707,000 |   |                           |   | 13,850,000 |      |  |   | 13,648,000 |   |  |   | 13,792,000 |  
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted earnings (loss) per common share             |  | $                           | 0.11       |   |                           | $ | 0.05       |      |  | $ | 0.18       |   |  | $ | (0.07      | )
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted weighted-average shares outstanding          |  |                             | 14,278,000 |   |                           |   | 14,091,000 |      |  |   | 14,224,000 |   |  |   | 13,792,000 |  
|                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



The accompanying notes are an
integral part of these condensed consolidated financial statements.



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MODTECH HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                                   |  |                           |            |   |      |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                                                   |  | Six Months Ended June 30, |           
|                                                                                                   |  | 2003                      |            |   | 2004 |  
|Cash flows from operating activities:                                                              |  |                           |            |   |      |   |             |  
|Net income (loss)                                                                                  |  | $                         | 2,508,000  |   |      | $ | (942,000    | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                           |            |   |      |   |             |  
|Depreciation and amortization                                                                      |  |                           | 1,034,000  |   |      |   | 1,229,000   |  
|(Gain) loss on sale of PP&E                                                                        |  |                           | 2,000      |   |      |   | (620,000    | )
|(Increase) decrease in assets                                                                      |  |                           |            |   |      |   |             |  
|Contracts receivable                                                                               |  |                           | (1,272,000 | ) |      |   | (17,212,000 | )
|Inventories                                                                                        |  |                           | (720,000   | ) |      |   | (7,386,000  | )
|Due from affiliates                                                                                |  |                           | 937,000    |   |      |   | 1,445,000   |  
|Other current and noncurrent assets                                                                |  |                           | (902,000   | ) |      |   | 258,000     |  
|Increase (decrease) in liabilities                                                                 |  |                           |            |   |      |   |             |  
|Accounts payable and accrued liabilities                                                           |  |                           | 1,487,000  |   |      |   | 16,319,000  |  
|Billings in excess of costs                                                                        |  |                           | 1,471,000  |   |      |   | 2,946,000   |  
|                                                                                                   |  |                           |            |   |      |   |             |  
|Net cash provided by (used in) operating activities                                                |  |                           | 4,545,000  |   |      |   | (3,963,000  | )
|                                                                                                   |  |                           |            |   |      |   |             |  
|Cash flows from investing activities:                                                              |  |                           |            |   |      |   |             |  
|Proceeds from sale of property and equipment                                                       |  |                           | 26,000     |   |      |   | 2,085,000   |  
|Purchase of property and equipment                                                                 |  |                           | (3,231,000 | ) |      |   | (1,015,000  | )
|                                                                                                   |  |                           |            |   |      |   |             |  
|Net cash provided by (used in) investing activities                                                |  |                           | (3,205,000 | ) |      |   | 1,070,000   |  
|                                                                                                   |  |                           |            |   |      |   |             |  
|Cash flows from financing activities:                                                              |  |                           |            |   |      |   |             |  
|Net principal borrowings under revolving credit line                                               |  |                           | 3,500,000  |   |      |   | 12,500,000  |  
|Principal payments on long-term debt                                                               |  |                           | (3,500,000 | ) |      |   | (5,500,000  | )
|Payment of debt issuance costs                                                                     |  |                           |           |   |      |   | (235,000    | )
|Series A dividend payment                                                                          |  |                           |           |   |      |   | (221,000    | )
|Proceeds from exercise of stock options                                                            |  |                           | 202,000    |   |      |   | 197,000     |  
|                                                                                                   |  |                           |            |   |      |   |             |  
|Net cash provided by financing activities                                                          |  |                           | 202,000    |   |      |   | 6,741,000   |  
|                                                                                                   |  |                           |            |   |      |   |             |  
|Net increase in cash and cash equivalents                                                          |  |                           | 1,542,000  |   |      |   | 3,848,000   |  
|Cash and cash equivalents at beginning of period                                                   |  |                           | 213,000    |   |      |   | 1,122,000   |  
|                                                                                                   |  |                           |            |   |      |   |             |  
|Cash and cash equivalents at end of period                                                         |  | $                         | 1,755,000  |   |      | $ | 4,970,000   |  
|                                                                                                   |  |                           |            |   |      |   |             |  



The accompanying notes are an
integral part of these condensed consolidated financial statements.



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MODTECH HOLDINGS, INC.



Notes to Condensed Consolidated Financial Statements



June 30, 2004



1) Basis of Presentation



In the opinion of management, the condensed consolidated financial statements reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations as of and for the periods presented.



The results of operations for the three and six months ended June 30, 2003 and 2004 are not necessarily indicative of the results to be expected for the
full fiscal years.



2) Inventories



Inventories consist of the following:



|                |  |                   |           |               |   |           
|--------------- |  | ----------------- | --------- | ------------- | - | ----------
|                |  | December 31, 2003 |           | June 30, 2004
|Raw materials   |  | $                 | 5,614,000 |               | $ | 12,335,000
|Work in process |  |                   | 1,227,000 |               |   | 1,892,000 
|                |  |                   |           |               |   |           
|                |  | $                 | 6,841,000 |               | $ | 14,227,000
|                |  |                   |           |               |   |           



3) Earnings (Loss) Per Share



The following table illustrates the calculation of basic and
diluted earnings (loss) per common share:



|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|-------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                   |  | Three Months Ended June 30, |            | Six Months Ended June 30, |  
|                                                   |  | 2003                        |            | 2004                      |   | 2003       |  |   | 2004       |  
|Basic                                              |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Net income (loss)                                  |  | $                           | 1,580,000  |                           | $ | 759,000    |  | $ | 2,508,000  |   |  | $ | (942,000   | )
|Dividends on preferred stock                       |  |                             |           |                           |   |           |  |   | (7,000     | ) |  |   |           |  
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Net income (loss) available to common stockholders |  | $                           | 1,580,000  |                           | $ | 759,000    |  | $ | 2,501,000  |   |  | $ | (942,000   | )
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Basic weighted-average common shares outstanding   |  |                             | 13,707,000 |                           |   | 13,850,000 |  |   | 13,648,000 |   |  |   | 13,792,000 |  
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Basic earnings (loss) per common share             |  | $                           | 0.12       |                           | $ | 0.05       |  | $ | 0.18       |   |  | $ | (0.07      | )
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Diluted                                            |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Net income (loss)                                  |  | $                           | 1,580,000  |                           | $ | 759,000    |  | $ | 2,508,000  |   |  | $ | (942,000   | )
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Weighted-average common shares outstanding         |  |                             | 13,707,000 |                           |   | 13,850,000 |  |   | 13,648,000 |   |  |   | 13,792,000 |  
|Add:                                               |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Conversion of preferred stock                      |  |                             |           |                           |   |           |  |   | 35,000     |   |  |   |           |  
|Exercise of stock options                          |  |                             | 571,000    |                           |   | 241,000    |  |   | 541,000    |   |  |   |           |  
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Diluted weighted-average shares outstanding        |  |                             | 14,278,000 |                           |   | 14,091,000 |  |   | 14,224,000 |   |  |   | 13,792,000 |  
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Diluted earnings (loss) per common share           |  | $                           | 0.11       |                           | $ | 0.05       |  | $ | 0.18       |   |  | $ | (0.07      | )
|                                                   |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  



Options to purchase 1,104,000 and
1,422,000 shares of common stock were outstanding during the three and six months ended June 30, 2003, respectively, and options to purchase 1,518,000 and 1,290,000 shares of common stock were outstanding during the three and six months ended June
30, 2004 but were not included in the computation of diluted earnings (loss) per share because the option exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive.



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4) Debt



The company amended its credit facility in May 2004, continuing the relationship with the previous lenders. Reflecting the continuing reduction of overall
debt, the revolving loan commitment was reduced from $35,000,000 to $30,000,000 with the overall credit facility reduced from $47,000,000 to $42,000,000. The amendment also modified certain terms and covenants to better reflect the current credit
needs of the Company. The Company was in compliance with the amended facility and its covenants as of June 30, 2004.



5) Goodwill and Intangible Assets



The changes in the carrying amount of goodwill are as follows:



|                                                             |  |   |           
|------------------------------------------------------------ |  | - | ----------
|Balance as of December 31, 2003                              |  | $ | 71,903,000
|Goodwill acquired during three months ended March 31, 2004   |  |   |          
|Impairment loss during the three months ended March 31, 2004 |  |   |          
|                                                             |  |   |           
|Balance as of March 31, 2004                                 |  | $ | 71,903,000
|Goodwill acquired during three months ended June 30, 2004    |  |   |          
|Impairment loss during the three months ended June 30, 2004  |  |   |          
|                                                             |  |   |           
|Balance as of June 30, 2004                                  |  | $ | 71,903,000
|                                                             |  |   |           



6) Stock Options Plans



The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation  as amended, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above,
and has adopted only the disclosure requirements of Statement 123, as amended. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period.



|                                                                                             |  |                             |           |                           |   |         |  |      |           |  |   |            |  
|-------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | - | ------- |  | ---- | --------- |  | - | ---------- | -
|                                                                                             |  | Three Months Ended June 30, |           | Six Months Ended June 30, |  
|                                                                                             |  | 2003                        |           | 2004                      |   | 2003    |  | 2004 |          
|Net income (loss)                                                                            |  |                             |           |                           |   |         |  |      |           |  |   |            |  
|As reported                                                                                  |  | $                           | 1,580,000 |                           | $ | 759,000 |  | $    | 2,508,000 |  | $ | (942,000   | )
|Deduct stock-based compensation expense determined under fair-value based method, net of tax |  |                             | 202,000   |                           |   | 96,000  |  |      | 377,000   |  |   | 218,000    |  
|                                                                                             |  |                             |           |                           |   |         |  |      |           |  |   |            |  
|Pro forma                                                                                    |  | $                           | 1,378,000 |                           | $ | 663,000 |  | $    | 2,131,000 |  | $ | (1,160,000 | )
|                                                                                             |  |                             |           |                           |   |         |  |      |           |  |   |            |  
|Basic earnings (loss) per share                                                              |  |                             |           |                           |   |         |  |      |           |  |   |            |  
|As reported                                                                                  |  | $                           | 0.12      |                           | $ | 0.05    |  | $    | 0.18      |  | $ | (0.07      | )
|Pro forma                                                                                    |  | $                           | 0.10      |                           | $ | 0.05    |  | $    | 0.16      |  | $ | (0.08      | )
|Diluted earnings (loss) per share                                                            |  |                             |           |                           |   |         |  |      |           |  |   |            |  
|As reported                                                                                  |  | $                           | 0.11      |                           | $ | 0.05    |  | $    | 0.18      |  | $ | (0.07      | )
|Pro forma                                                                                    |  | $                           | 0.10      |                           | $ | 0.05    |  | $    | 0.15      |  | $ | (0.08      | )



The per share
weighted-average fair value of stock options granted during the three months ended June 30, 2003 and 2004 were $4.85 and $3.50 respectively. The per share weighted-average fair value of stock options granted during the six months ended June 30, 2003
and 2004 were $4.81 and $3.91 respectively. The fair value of stock options on the date of grant was estimated using the Black Scholes option-pricing model with the following weighted-average assumptions:



---

|                                |  |                             |   |  |                           |   |  |         |   |  |         |  
|------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ------- | - |  | ------- | -
|                                |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|                                |  | 2003                        |   |  | 2004                      |   |  | 2003    |   |  | 2004    |  
|Expected dividend yield         |  | 0                           | % |  | 0                         | % |  | 0       | % |  | 0       | %
|Average risk-free interest rate |  | 2.3                         | % |  | 3.1                       | % |  | 2.6     | % |  | 3.0     | %
|Volatility factor               |  | 65.08                       | % |  | 58.91                     | % |  | 65.54   | % |  | 59.48   | %
|Expected life                   |  | 4 years                     |   |  | 4 years                   |   |  | 4 years |   |  | 4 years |  



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 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.



Company Overview



Modtech manufactures and sells modular
relocatable classrooms and commercial and light industrial modular buildings. The Company is a leading provider of modular classrooms in the State of California and a significant provider of commercial and light industrial modular buildings in
California, Nevada, Arizona, New Mexico, Utah, Colorado, Texas, Florida and other neighboring states. The Company continues to expand its classroom offerings in all locations in response to the increasing demand for new classroom products.



At June 30, 2004, the Company had six manufacturing facilities. Two are
located in Southern California, in Perris, California, which is approximately 60 miles east of Los Angeles. The Company has another facility in Lathrop, California. Lathrop is located approximately 75 miles east of San Francisco. The fourth
manufacturing facility is located in Phoenix, Arizona. The Company has another facility in Glen Rose, Texas. Glen Rose is located approximately 75 miles southwest of Dallas. The Companys sixth manufacturing facility is located in Plant City,
Florida, northeast of Tampa. All of the locations manufacture and sell products into the classroom, commercial and light industrial markets.



Forward Looking Statements



This report contains statements which, to the extent that they are not recitations of historical fact, such as our belief that we have sufficient liquidity to meet our
near-term operating needs, 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 quarterly report, including the Notes to the Condensed
Consolidated Financial Statements and in this 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: the ability 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; and declines in available funding for modular classroom construction and other risks and uncertainties that are described 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. We will not update these 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



The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statement and reported amounts of net revenue and expenses during the
reporting period.



Management continually evaluates its estimates and
assumptions including those related the Companys most critical accounting policies. Management bases its estimates and assumptions on historical experience and other factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or conditions. Changes in economic conditions could have an impact on these estimates and the Companys actual results. Management believes that the following may involve a
higher degree of judgment or complexity:



Allowances for Contract
Adjustments



The Company maintains allowances for contract adjustments
that result from the inability of its 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 the Companys customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required.



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 complete. Revenue recognized is that percentage of the total contract price that cost expended to date bears to anticipated final
total cost, based on current estimates of costs 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 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.



---

Overview of Three Months ended June 30, 2004



Net sales of $54.6 million in the second quarter of 2004 were $8.9 million greater than last year on the strength of Florida classroom sales
and other commercial and light industrial sales throughout the company. In addition, California classroom sales recovered from their very slow start in the first quarter of 2004 and are back on pace with last year. Gross profit improved for the
quarter based on the improved volume across the Company and was further helped by the higher margins resulting from the direct sales in the non-California classroom business. Affecting the margins adversely were the significantly higher commodity
prices for steel, lumber and plywood that could not be recovered on projects existing under firm, fixed-price contracts.



Backlog continued to rise during the second quarter and is now at a new record-level $163 million, up 42% from $115 million at December 31, 2003. As a direct result of
the new direct-sales strategy implemented during the fourth quarter of 2003, backlog for non-California classroom products was up more than 350% over year-end 2003. The Company reports as backlog those projects which have firm orders and are
scheduled to generate revenue within the next 18 months.



The Company believes
that the record-level backlog with improving margins will result in higher production levels; improved efficiencies; and improved cost-absorption in the upcoming quarters. As a result, the Company anticipates both higher sales and profits in the
second half of 2004.



Results of Operations



The following table sets forth certain items in the Condensed Consolidated
Statements of Operations as a percent of net sales.



|                                             |  |                            |   |  |                          |   |  |       |   |  |       |  
|-------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                             |  | Percent of Net Sales       |   |  | Percent of Net Sales     |  
|                                             |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                             |  | 2003                       |   |  | 2004                     |   |  | 2003  |   |  | 2004  |  
|Net sales                                    |  | 100.0                      | % |  | 100.0                    | % |  | 100.0 | % |  | 100.0 | %
|Gross profit                                 |  | 11.4                       |   |  | 6.5                      |   |  | 10.4  |   |  | 3.9   |  
|Selling, general and administrative expenses |  | 4.6                        |   |  | 4.2                      |   |  | 4.5   |   |  | 5.5   |  
|Covenant amortization                        |  |                           |   |  |                         |   |  |      |   |  |      |  
|Gain on sale of PP&E                         |  |                           |   |  | 1.1                      |   |  |      |   |  | 0.7   |  
|Income (loss) from operations                |  | 6.7                        |   |  | 3.4                      |   |  | 5.8   |   |  | (0.8  | )
|Interest expense, net                        |  | (0.8                       | ) |  | (1.0                     | ) |  | (0.8  | ) |  | (1.2  | )
|Other, net                                   |  |                           |   |  |                         |   |  |      |   |  |      |  
|Income (loss) before income taxes            |  | 6.0                        |   |  | 2.4                      |   |  | 5.0   |   |  | (1.9  | )
|Income taxes (benefit)                       |  | 2.5                        |   |  | 1.0                      |   |  | 2.1   |   |  | (0.8  | )
|Net income (loss)                            |  | 3.5                        |   |  | 1.4                      |   |  | 2.9   |   |  | (1.1  | )



Net sales for the three months ended
June 30, 2004, increased by $8,915,000 or 19.5% and decreased by $1,961,000 or 2.3%, for the six months ended June 30, 2004, when compared to the same periods in 2003. The significant increase in sales for the three months ended June 30, 2004, when
compared to the prior year is primarily attributable to increased sales in Arizona and Florida. These increased sales are due to long anticipated classroom projects in Florida and other major direct-sales projects in Florida and Arizona. When
comparing sales for the six months ended June 30, 2004, with the prior year, the shortfall is due to delays in California classroom projects.



---

Gross profit as a percentage of net sales for the three and six months ended June 30, 2004 decreased to 6.5% and 3.9%,
respectively, from 11.4% and 10.4%, for the same periods in 2003. A primary contributor to these lower margins was the unexpected significantly increased costs for steel, lumber and plywood which occurred over a very short period of time and were
not able to be passed on due to fixed-price contracts in California. New contracts reflect current commodity costs. Increased direct labor costs also contributed to the lower margins.



Selling, general and administrative expenses (SG&A) increased for the three and six months ended June 30, 2004 by $196,000 or 9.3% and
$677,000 or 17.3%, respectively. The increase in SG&A expenses for the three months ended June 30, 2004 were in line with expectations and with the increase of sales. The increase during the six months ended June 30, 2004 was primarily due to
the early 2004 ramp-up to prepare for the volume related needs as the company transitioned to a greater direct sales approach.



The gain on the sale of PP&E was from the sale of a plant in Florida. The Company had previously combined the operations of this facility into the Plant City, Florida
facility.



Net interest expense increased for the three and six months ended
June 30, 2004 by $218,000 or 61.4% and $281,000 or 40.0%, respectively, when compared to the same periods in 2003. The increased net interest expense for both periods is attributable to amortization of deferred amendment fees, the write-off of
certain loan issuance costs due to the reduced borrowing capacity and to higher average outstanding debt.



Based on an effective tax rate of 42%, a tax provision of $549,000 and a tax benefit of $682,000 were recorded for the three and six months ended June 30, 2004. The effective tax rate has not changed from the prior
year.



The net income of $759,000 for the three months ended June 30, 2004 and
the net loss of $942,000 for the six months ended June 30, 2004 compare to net income of $1,580,000 and $2,508,000 for the same periods, respectively, from the prior year. The changes year-over-year are a direct result of the factors discussed
above.



Inflation



The Company was adversely affected by steel, lumber and plywood price increases during the
three and six months ended June 30, 2004. Although the Company aggressively pursued means of offsetting the impact of these price increases, the Company estimates that there was a negative impact exceeding $2,000,000 and $3,000,000 for the three and
six months ended June 30, 2004, respectively. Although the Company uses the most recently available cost information when evaluating pricing and margin decisions, in entering contracts with customers there can be no assurance that the Companys
business will not be affected by unusually volatile inflation in the future.



Liquidity and Capital Resources



Historically, the Company has
financed its operations almost exclusively with cash flow generated from operations and bank borrowings. At June 30, 2004, the Company had $4,970,000 in cash and cash equivalents. During the six months ended June 30, 2004, the Companys
operating activities used net cash of $3,963,000.



The Company amended its
credit facility in May 2004, continuing the relationship with the previous lenders. Reflecting the continuing reduction of overall debt, the revolving loan commitment was reduced from $35,000,000 to $30,000,000 with the overall credit facility
reduced from $47,000,000 to $42,000,000. The amendment also modified certain terms and covenants to better reflect the current credit needs of the Company. These modifications included the early repayment of $4,000,000 of term debt in addition to
the regularly scheduled quarterly payments. This early repayment partially accounts for the increased level of the revolver during the three months ended June 30, 2004.



Management believes that the Companys existing product lines and manufacturing capacity will enable the Company to generate sufficient
cash through operations, supplemented by periodic use of its existing bank line of credit, to finance the Companys business at current levels over the next 12 months. Additional cash resources may be required if the Company is able to expand
its business beyond current levels. For example, it will be necessary for the Company to construct or acquire additional manufacturing facilities in order for the Company to compete effectively in new market areas or states which are beyond a 300
mile radius from one of its production facilities. The construction or acquisition of new facilities would require significant additional capital. For these reasons, among others, the Company may need additional debt or equity financing in the
future. There can be, however, no assurance that the Company will be successful in obtaining such additional financing, or that any such financing will be available on terms acceptable to the Company.



---

Item 3. Quantitative And Qualitative Disclosures About Market Risk



Market risk refers to the risk that a change in the level of one or more market factors such
as interest rates, foreign currency exchange rates, or equity prices will result in losses for a certain financial instrument of group of instruments. We are principally exposed to interest rate and credit risks. We are not exposed to foreign
currency exchange rate risk.



INTEREST RATE
RISK



We are exposed to market risks related to fluctuation in interest rates
on our $42 million credit facility. During the quarter ended June 30, 2004, we did not use interest rate swaps or other types of derivative financial instruments. The carrying value of the credit facility approximates fair value as the interest rate
is variable and resets frequently. Indebtedness under the credit facility bears interest at LIBOR plus additional interest of between 1.25% and 2.75%, or the Federal Funds rate plus additional interest of between 0.25% to 1.25%. The additional
interest charge is based upon certain financial ratios. We estimate that the average amount of debt outstanding under the credit facility for the second half of 2004 will be $25 million. Therefore, a one-percentage point increase in interest rates
would result in an increase in interest expense of $125,000 for the remaining six months of 2004.



CREDIT RISK



We are currently exposed to credit risk on credit extended to customers. We actively monitor this risk through a variety of control procedures involving senior
management. Historically, credit losses have been small and within our expectations.



Item 4. Controls And Procedures



As of
the end of the period covered by this report, our management carried out an evaluation, with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures pursuant. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis,
the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934. No change occurred during the quarter ended June 30, 2004, in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



---

PART II. OTHER INFORMATION



|        |  |                                                                                                                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1. |  | Legal Proceedings.                                                                                                                                                                                                                                                                                   
|        |  | We are party to various claims, complaints and other legal actions that have arisen 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 operations or financial position.
|Item 2. |  | Changes in Securities, use of Proceeds and Issuer Purchases of Equity Securities                                                                                                                                                                                                                     
|        |  | None                                                                                                                                                                                                                                                                                                 
|Item 3. |  | Defaults upon Senior Securities                                                                                                                                                                                                                                                                      
|        |  | None                                                                                                                                                                                                                                                                                                 
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                  
|        |  | None                                                                                                                                                                                                                                                                                                 
|Item 5. |  | Other Information                                                                                                                                                                                                                                                                                    
|        |  | None                                                                                                                                                                                                                                                                                                 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                                     



(a) Exhibits



|       |  |                                                                                                                                                  
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Name of Exhibit                                                                                                                                  
|3.11   |  | Certificate of Incorporation of Modtech Holdings, Inc.                                                                                           
|       | 
|3.26   |  | Bylaws of Modtech Holdings, Inc.                                                                                                                 
|       | 
|10.12  |  | Modtech, Inc.s 1996 Stock Option Plan.                                                                                                          
|       | 
|10.23  |  | Transaction Advisory Agreement.                                                                                                                  
|       | 
|10.36  |  | Employment Agreement between the Company and Evan M. Gruber.                                                                                     
|       | 
|10.56  |  | Employment Agreement between the Company and Michael G. Rhodes.                                                                                  
|       | 
|10.64  |  | Lease between the Company and Pacific Continental Modular Enterprises, relating to the Barrett Street property in Perris, California.            
|       | 
|10.74  |  | Lease between the Company and BMG, relating to the property in Lathrop, California.                                                              
|       | 
|10.84  |  | Form of Indemnity Agreement between the Company and its executive officers and directors.                                                        
|       | 
|10.93  |  | Financial Advisory Services Agreement.                                                                                                           
|       | 
|10.115 |  | Credit Agreement, dated December 26, 2001                                                                                                        
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|       | 
|32.1   |  | 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 2002
|       | 
|32.2   |  | 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

---

|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).
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Incorporated by reference to Modtech, Inc.s Registration Statement on form S-8 filed with the Commission on December 11, 1996 (Commission File No. 333-17623).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Incorporated by reference to Amendment No. 2 to Modtech Holdings, Inc.s Registration Statement on Form S-4, filed with the Commission on January 11, 1999
(Commission File No. 333-69033).
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 10-K filed with the Commission on April 1, 2002 (Commission File No. 000-25161).
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|6 | Incorporated by reference to Modtech Holdings, Inc.s Form 10-K filed with the Commission on March 15, 2004 (Commission File No. 000-25161).
|- | --------------------------------------------------------------------------------------------------------------------------------------------

|
|



(b) Reports
on Form 8-K



Form 8-K, dated May 7, 2004, and regarding press
release furnished by Modtech Holdings, Inc. on May 7, 2004 announcing its financial results for the quarter ended March 31, 2004.



Form 8-K, dated May 4, 2004, and regarding press release furnished by Modtech Holdings, Inc. on April 29, 2004 announcing its preliminary financial
results for the quarter ended March 31, 2004.



---

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 9, 2004 |  | by:                    |  | /s/ Dennis L. Shogren  
|                     |  |                        |  | Dennis L. Shogren      
|                     |  |                        |  | Chief Financial Officer
|                     |  |                       
|                     |  | by:                    |  | /s/ Evan M. Gruber     
|                     |  |                        |  | Evan M. Gruber         
|                     |  |                        |  | Chief Executive Officer