**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, 2006





 ̈  **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)**





**Registrant’s
      telephone number (951) 943-4014**




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, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated file” in Rule 12b-2 of the Exchange
      Act. (Check one):





Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated
      filer x





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
      August 9, 2006 there were 19,018,855 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)
              3Condensed
                    Consolidated Balance Sheets As of June 30, 2006 and December 31,
                    2005
              4Condensed
                    Consolidated Statements of Operations For the Three and Six Months
                    Ended
                    June 30, 2006 and 2005
              5Condensed
                    Consolidated Statements of Cash Flows For the Six Months Ended
                    June 30,
                    2006 and 2005
              6Notes
                  to Unaudited Interim Condensed Consolidated Financial
                  Statements
              7-12Item 2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              13-18Item 3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              18-19Item 4.
              Controls
                  and Procedures
              19-20**PART
                  II. OTHER INFORMATION**Item 1.
              Legal
                  Proceedings
              21Item
                  1A.
              Risk
                  Factors
              21Item 2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              21Item 3.
              Defaults
                  upon Senior Securities
              21Item 4.
              Submission
                  of Matters to a Vote of Security Holders
              21Item 5.
              Other
                  Information
              21Item 6.
              Exhibits
              22-24Signatures
              
              25
  2


**MODTECH
      HOLDINGS, INC.**





**FORM
      10-Q**





**FOR
      THE QUARTER ENDED JUNE 30, 2006**





**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





The
      condensed consolidated financial statements included herein have been prepared
      by Modtech Holdings, Inc. and subsidiaries (“Modtech”, “we”, “our”, or 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, we believe 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 and six months ended June 30, 2006 and 2005 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, 2005, as filed with
      the Securities and Exchange Commission.




3





MODTECH
      HOLDINGS INC. AND SUBSIDIARIES


Condensed
      Consolidated Balance Sheets


(Unaudited)


**June
                  30,**
              
              **December
                  31,****2006**
              
              **2005**AssetsCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              182,000
              
              $
              3,263,000Restricted
                  cash - current portion
              
              
              5,000,000
              
              
              11,452,000Contracts
                  receivable, less allowance for contract adjustments of $616,000
                  in both
                  2006 and 2005
              
              
              32,687,000
              
              
              40,687,000Costs
                  and estimated earnings in excess of billings on contracts
              
              
              21,217,000
              
              
              16,050,000Inventories
              
              
              7,810,000
              
              
              12,047,000Prepaid
                  assets
              
              
              762,000
              
              
              960,000Income
                  tax receivable
              
              
              8,000
              
              
              6,000Other
                  current assets
              
              
              3,069,000
              
              
              1,373,000Total
                  current assets
              
              
              70,735,000
              
              
              85,838,000Property
                  and equipment, net
              
              
              14,829,000
              
              
              14,518,000Restricted
                  cash
              
              
              -
              
              
              5,000,000Goodwill
              
              
              71,903,000
              
              
              71,903,000Covenants
                  not to compete, net
              
              
              -
              
              
              4,000Debt
                  issuance costs, net
              
              
              1,914,000
              
              
              3,993,000Other
                  assets
              
              
              537,000
              
              
              577,000Total
                  assets
              
              $
              159,918,000
              
              $
              181,833,000Liabilities
                  and Shareholders’ EquityCurrent
                  liabilities:Accounts
                  payable
              
              $
              25,065,000
              
              $
              25,687,000Accrued
                  liabilities
              
              
              15,077,000
              
              
              28,498,000Billings
                  in excess of costs and estimated earnings on contracts
              
              
              4,476,000
              
              
              3,809,000Current
                  revolving credit line
              
              
              -
              
              
              4,819,000Current
                  maturities of long-term debt, net
              
              
              17,244,000
              
              
              19,831,000Total
                  current liabilities
              
              
              61,862,000
              
              
              82,644,000Long-term
                  debt, net, excluding current portion
              
              
              -
              
              
              14,628,000Total
                  liabilities
              
              
              61,862,000
              
              
              97,272,000Shareholders’
                  equity:Common
                  stock, $.01 par value. Authorized 55,000,000 shares; issued andoutstanding
                  18,665,044 and 17,062,219 in 2006 and 2005, respectively
              
              
              187,000
              
              
              170,000Additional
                  paid-in capital
              
              
              114,316,000
              
              
              96,640,000Accumulated
                  deficit
              
              
              (16,447,000
              )
              
              (12,249,000
              )Total
                  shareholders’ equity
              
              
              98,056,000
              
              
              84,561,000Total
                  liabilities and shareholders’ equity
              
              $
              159,918,000
              
              $
              181,833,000





*See
      notes to unaudited condensed consolidated financial
      statements.*




4





MODTECH
      HOLDINGS INC. AND SUBSIDIARIES


Condensed
      Consolidated Statements of Operations


(Unaudited)


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  sales
              
              $
              44,307,000
              
              $
              58,297,000
              
              $
              81,211,000
              
              $
              108,835,000Cost
                  of goods sold
              
              
              41,439,000
              
              
              52,216,000
              
              
              76,056,000
              
              
              100,432,000Gross
                  profit
              
              
              2,868,000
              
              
              6,081,000
              
              
              5,155,000
              
              
              8,403,000Selling,
                  general and administrative expenses
              
              
              3,556,000
              
              
              3,548,000
              
              
              6,854,000
              
              
              7,440,000Gain
                  on sale of property and equipment
              
              
              -
              
              
              (58,000
              )
              
              -
              
              
              (63,000
              )(Loss)
                  income from operations
              
              
              (688,000
              )
              
              2,591,000
              
              
              (1,699,000
              )
              
              1,026,000Other
                  (expense) income:Interest
                  expense
              
              
              (536,000
              )
              
              (2,713,000
              )
              
              (1,665,000
              )
              
              (3,854,000
              )Interest
                  income
              
              
              133,000
              
              
              -
              
              
              239,000
              
              
              3,000Gain
                  on warrant and embedded derivatives
              
              
              3,741,000
              
              
              3,155,000
              
              
              4,478,000
              
              
              2,103,000Amortization
                  of debt costs
              
              
              (143,000
              )
              
              (293,000
              )
              
              (2,511,000
              )
              
              (462,000
              )Accretion
                  on convertible debt discount
              
              
              (1,110,000
              )
              
              (262,000
              )
              
              (1,380,000
              )
              
              (524,000
              )Early
                  debt conversion fee
              
              
              (1,864,000
              )
              
              -
              
              
              (1,864,000
              )
              
              -Other
                  income, net
              
              
              170,000
              
              
              178,000
              
              
              204,000
              
              
              232,000391,000
              
              
              65,000
              
              
              (2,499,000
              )
              
              (2,502,000
              )Income
                  (loss) before income taxes
              
              
              (297,000
              )
              
              2,656,000
              
              
              (4,198,000
              )
              
              (1,476,000
              )Income
                  tax expense (benefit)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              (297,000
              )
              $
              2,656,000
              
              $
              (4,198,000
              )
              $
              (1,476,000
              )Basic
                  earnings (loss) per common share
              
              $
              (0.02
              )
              $
              0.18
              
              $
              (0.24
              )
              $
              (0.10
              )Basic
                  weighted-average shares outstanding
              
              
              18,079,000
              
              
              14,828,000
              
              
              17,571,000
              
              
              14,747,000Diluted
                  earnings (loss) per common share
              
              $
              (0.02
              )
              $
              0.18
              
              $
              (0.24
              )
              $
              (0.10
              )Diluted
                  weighted-average shares outstanding
              
              
              18,079,000
              
              
              14,849,000
              
              
              17,571,000
              
              
              14,747,000





*See
      notes to unaudited condensed consolidated financial
      statements.*




5





MODTECH
      HOLDINGS INC. AND SUBSIDIARIES


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)


**Six
                  Months Ended****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (4,198,000
              )
              $
              (1,476,000
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Depreciation
                  and amortization
              
              
              1,331,000
              
              
              1,324,000Write-off
                  of debt issuance costs
              
              
              2,058,000
              
              
              -Gain
                  on sale of equipment
              
              
              -
              
              
              (63,000
              )Stock
                  compensation expense
              
              
              376,000
              
              
              -Gain
                  on derivative liability
              
              
              (4,478,000
              )
              
              (2,103,000
              )Accretion
                  on convertible debt discount
              
              
              1,380,000
              
              
              524,000Early
                  debt conversion fees settled with shares of common stock
              
              
              1,864,000
              
              
              -Decrease
                  (increase) in assets:Contracts
                  receivable
              
              
              8,000,000
              
              
              (4,322,000
              )Costs
                  and estimated earnings in excess of billings
              
              
              (5,167,000
              )
              
              (9,242,000
              )Inventories
              
              
              4,237,000
              
              
              2,678,000Other
                  current and non-current assets
              
              
              (1,460,000
              )
              
              778,000(Decrease)
                  increase in liabilities:Accounts
                  payable and accrued liabilities
              
              
              (5,676,000
              )
              
              3,589,000Billings
                  in excess of costs
              
              
              667,000
              
              
              (403,000
              )Net
                  cash used in operating activities
              
              
              (1,066,000
              )
              
              (8,716,000
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (1,185,000
              )
              
              (720,000
              )Proceeds
                  from sale of equipment
              
              
              -
              
              
              104,000Net
                  cash used in investing activities
              
              
              (1,185,000
              )
              
              (616,000
              )Cash
                  flows from financing activities:Net
                  principal payments under revolving credit line
              
              
              (4,819,000
              )
              
              (14,152,000
              )Principal
                  payments on long-term debt
              
              
              (12,895,000
              )
              
              (5,000,000
              )Proceeds
                  from issuance of long-term debt
              
              
              -
              
              
              27,898,000Decrease
                  (increase) in restricted cash
              
              
              11,452,000
              
              
              (6,898,000
              )Payment
                  of debt issuance costs
              
              
              (432,000
              )
              
              (2,473,000
              )Net
                  proceeds from issuance of common stock
              
              
              5,864,000
              
              
              2,616,000Net
                  cash (used in) provided by financing activities
              
              
              (830,000
              )
              
              1,991,000Net
                  decrease in cash and cash equivalents
              
              
              (3,081,000
              )
              
              (7,341,000
              )Cash
                  and cash equivalents at beginning of period
              
              
              3,263,000
              
              
              11,799,000Cash
                  and cash equivalents at end of period
              
              $
              182,000
              
              $
              4,458,000Non-cash
                  financing activity:Issuance
                  of common stock in connection with the conversion of debt
              
              $
              5,700,000
              
              $
              -





*See
      notes to unaudited condensed consolidated financial statements*





6





MODTECH
      HOLDINGS, INC.


Notes
      to
      Unaudited Interim Condensed Consolidated Financial Statements


June
      30,
      2006





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, 2006 and
      2005
      are not necessarily indicative of the results to be expected for the full fiscal
      years.





2)  Inventories





Inventories
      consist of the following:


**June
                  30,**
              
              **December
                  31,****2006**
              
              **2005**Raw
                  materials
              
              $
              6,469,000
              
              $
              9,211,000Work-in-process
              
              
              925,000
              
              
              2,630,000Finished
                  goods
              
              
              416,000
              
              
              206,000$
              7,810,000
              
              $
              12,047,000


3)  Restricted
      Cash





Restricted
      cash as of June 30, 2006 consists of $5.0 million in cash collateral
      required under our $25.9 million Senior Subordinated Secured Convertible
      Note originally issued in 2004 (the “Convertible Note”) and is included in
      current assets as the related Convertible Note is recorded as a current
      liability.





4)  Accrued
      Liabilities





Accrued
      liabilities consist of the following:


**June
                  30,**
              
              **December
                  31,****2006**
              
              **2005**Accrued
                  compensation
              
              $
              2,330,000
              
              $
              2,634,000Accrued
                  insurance expense
              
              
              3,688,000
              
              
              3,688,000Provision
                  for estimated losses on contracts
              
              
              694,000
              
              
              3,790,000Embedded
                  derivative liability
              
              
              3,103,000
              
              
              7,849,000Warrant
                  derivative liability
              
              
              2,576,000
              
              
              6,192,000Accrued
                  warranty
              
              
              929,000
              
              
              930,000Other
                  accrued liabilties
              
              
              1,757,000
              
              
              3,415,000$
              15,077,000
              
              $
              28,498,000


5)  Debt





Credit
      Facility





On
      March
      31, 2006, we entered into a Loan and Security Agreement (the “B of A Credit
      Facility”) with Bank of America, N.A., and completed an additional amendment to
      our Convertible Note. The B of A Credit Facility was funded and closed on April
      4, 2006.





In
      connection with the B of A Credit Facility, we terminated our credit facility
      with Fortress Credit Corp. We paid off all amounts borrowed and due under the
      Fortress credit facility, which aggregated approximately $19.4 million,
      including approximately $0.3 million in accrued interest. There were no early
      termination penalties incurred by us in connection with the termination of
      the
      Fortress credit facility. Due to the replacement of the Fortress credit
      facility, approximately $2.1 million of unamortized debt issuance costs was
      written off and charged to expense for the quarter ended March 31,
      2006.




7





The
      B of
      A Credit Facility provides for revolving credit loans of up to a maximum
      principal amount of $25.0 million (the “Revolver Loans”) and a letter of
      credit subline in the maximum amount of $12.0 million. As of June 30, 2006
      no amounts are outstanding under the Revolver Loans and $7.2 million of the
      letter of credit subline is allocated for standby letters of credit. The
      Revolver Loans will bear interest per annum, payable monthly, at a variable
      rate
      equal to Bank of America’s announced prime rate, plus up to 0.75%. Under certain
      circumstances, we may elect a LIBOR rate plus 2.0% to 3.0%, in which case,
      interest will be payable in one, two, three or six month periods selected by
      us.
      The variable rates, plus an unused credit line fee of between 0.250% to 0.375%
      per annum, will depend on our quarterly EBITDA (“Earnings Before Interest Taxes
      Depreciation and Amortization”) measured on a trailing 12 month
      basis.





The
      principal amount of the Revolver Loans is due and payable in full on March
      31,
      2009. The Revolver Loans may be prepaid from time to time without penalty or
      premium, but if the B of A Credit Facility is terminated during the first two
      years, there is a termination fee equal to $500,000 in the first year and
      $250,000 in the second year. The B of A Credit Facility is secured by
      substantially all of our assets.








In
      connection with the B of A Credit Facility, the Convertible Note was amended
      to
      bring the financial covenants in the Convertible Note in line with those in
      the
      B of A Credit Facility, extend each redemption date by 45 days, to August 31,
      2006, August 31, 2007 and September 2, 2008, reduce one of the EBITDA
      measurement periods from 12 months to 6 months, and adjust the notice time
      periods for redemption. We also entered into a new Intercreditor Agreement
      with
      Bank of America and the holder of our Convertible Note that replaced the
      Intercreditor Agreement between Fortress Credit Corp and the holder of our
      Convertible Note. The replacement Intercreditor Agreement is on substantially
      the same terms as the original Intercreditor Agreement, but was modified to
      reflect the changes in the redemption provisions of the Convertible
      Note.





Our
      financial performance for the six month period ended June 30, 2006 resulted
      in
      the violation of certain financial covenants within the B of A Credit Facility
      and the Convertible Note. We currently continue to have access to our line
      of
      credit and are negotiating an amendment to the covenants that reflect expected
      performance. We have not yet reached an agreement with Bank of America and
      our
      Convertible Note holder on the terms of the amendment; therefore, the $17.2
      million balance of the Convertible Note is classified as a current
      liability.





Convertible
      Note





The
      Convertible Note bears interest at 7% per annum. Interest on the
      Convertible Note is payable quarterly in cash. The principal amount of the
      Convertible Note is due on December 31, 2009.





On
      May 4,
      2006, the Convertible Note holder converted $5.7 million of the principal amount
      of the Convertible Note into 728,900 shares of our common stock pursuant to
      an
      agreement to convert a total of $8.3 million of principal prior to the August
      31, 2006 redemption date set forth in the Convertible Note. The remaining $2.6
      million of principal was converted into 336,743 shares of our common stock
      on
      July 13, 2006. As consideration for the early conversion, we issued the holder
      189,189 additional shares of restricted common stock which was recorded as
      a
      $1.9 million early debt conversion fee for the quarter ended June 30,
      2006.





Following
      the conversion of $5.7 million of the principal amount of the Convertible Note
      on May 4, 2006, the principal balance of the Convertible Note as of June 30,
      2006 was $20.7 million with a discounted balance of $17.2 million.





The
      Convertible Note holder has the right to require us to redeem up to
      $9.2 million on August 31, 2007, and $8.3 million on September 2,
      2008.





The
      Convertible Note is secured by a first priority, perfected security interest
      in
      certain cash collateral placed in a restricted, segregated collateral account.
      As of June 30, 2006, the amount of cash collateral required to be maintained
      in
      this account is $5.0 million and is recorded as restricted cash on our
      condensed consolidated balance sheet as of June 30, 2006 (See Note 3). The
      cash
      collateral is not accessible for use by us until such time as it is released.
      The cash held in the cash collateral account will be reduced as certain
      financial milestones are met and can be used, in part, to fund redemptions
      that
      may be requested by the Convertible Note holder on the redemption dates
      described above, or upon an “event of default” as defined under the Convertible
      Note. The Convertible Note is also secured by a second priority security
      interest in our assets, subordinated only to the B of A Credit
      Facility.




8





As
      of
      June 30, 2006, the Convertible Note was convertible into 2,583,121 shares of
      common stock and the warrants issued in connection with the Convertible Note
      (the “Convertible Note Warrants”) were exercisable for 264,964 shares of common
      stock at a conversion and exercise price, respectively, of $7.82 per share.
      The
      conversion and exercise price and the number of shares to be acquired are
      subject to adjustment pursuant to customary anti-dilution provisions contained
      in the Convertible Note and Convertible Note Warrants. The Convertible Note
      and
      Convertible Note Warrants may be converted or exercised at any time or from
      time
      to time.





Embedded
      Derivatives





There
      are
      certain embedded derivatives associated with the Convertible Note. An embedded
      derivative is a derivative instrument that is embedded within another contract,
      which under the Convertible Note (the host contract) includes the right to
      convert the Convertible Note by the holder, certain default redemption right
      premiums and a change of control premium (payable in cash if a fundamental
      change occurs). In accordance with Financial Accounting Standards Board (“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. In connection
      with the May 4, 2006 conversion of $5.7 million of the underlying
      Convertible Notes, the relative fair value of the embedded derivative liability
      was reduced by $2.4 million, and was reclassified to additional paid-in
      capital. We conducted a valuation of the remaining embedded derivatives as
      of
      June 30, 2006 using various valuation methods, which included Black-Scholes
      option pricing models. Due to the decrease in our stock price from $8.75 at
      March 31, 2006 to $6.77 at June 30, 2006, the valuation conducted as of June
      30,
      2006 resulted in a non-cash gain of $2.3 million for the three month period
      ended June 30, 2006, with a corresponding decrease in the embedded derivative
      liability, which is included as a component of accrued liabilities at June
      30,
      2006. As of June 30, 2006, the fair value of the embedded derivative liability
      is $3.1 million.








The
      discounted balance on the Convertible Note totals $17.2 million as of June
      30, 2006. As described above, based on the violation of certain financial
      statement covenants the entire balance at June 30, 2006 is classified as
      current.





Release
      of $5.0 Million in Restricted Cash





In
      connection with the partial conversion of the Convertible Note, the holder
      agreed to cause the “Letter of Credit Amount” (as defined in the Convertible
      Note) to be reduced by $5.0 million in accordance with the terms of the
      Convertible Note as if we had achieved the performance standards set forth
      in
      the Convertible Note, as amended, by the August 31, 2006 date. This resulted
      in
      the release of $5.0 million of cash collateral to us on May 5,
      2006.





6)  Private
      placement issuance of common stock and warrant derivatives





On
      August 5, 2005, we completed a private placement of equity securities
      pursuant to which we raised $11.6 million through the sale of 2,046,000
      shares of our common stock and five-year warrants to purchase an additional
      1,023,000 shares of common stock (“2005 Equity Warrants”).





Between
      May 1, 2006 and May 12, 2006, outstanding warrants were exercised for a total
      of
      325,000 shares of common stock at an aggregate exercise price of
      $2.6 million.





The
      warrant activity for the six months ended June 30, 2006, is summarized
      below:


**Weighted-**
                **Average****Warrants**
              
              **Exercise
                  Price**Outstanding
                  options at beginning of period
              
              
              1,460,268
              
              $
              8.15Granted
                  (antidilution adjustment)
              
              
              37,830
              
              
              -Exercised
              
              
              (325,000
              )
              
              8.00Forfeited
              
              
              -
              
              
              -Outstanding
                  options at end of period
              
              
              1,173,098
              
              $
              7.93





The
      total
      intrinsic value of warrants exercised during the six months ended June 30,
      2006
      totaled $0.6 million.




9





Equity
      Warrants and the Convertible Note Warrants (See Note 5) require quarterly
      analysis 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”). EITF 00-19
      specifies the conditions 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 conditions under EITF 00-19 resulted in the determination
      that the 2005 Equity Warrants and the Convertible Note Warrants are classified
      as a derivative liability.





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. In connection
      with the May 2006 exercises of 325,000 warrants with proceeds of
      $2.6 million, the relative fair value of the derivative liability was
      reduced by $1.5 million, and was reclassified to additional paid-in
      capital. We valued the remaining warrant derivative liabilities as of June
      30,
      2006 using a Black-Scholes option pricing model using the following assumptions:
      expected dividend yield of 0.0%, expected stock price volatility ranging from
      40.1% to 41.5%, risk free interest rate ranging from of 4.97% to 4.99% and
      a
      remaining contractual life ranging from 3.5 years to 4.08 years. Due primarily
      to the decrease in our stock price from $8.75 at March 31, 2006 to $6.77 at
      June
      30, 2006, the valuation conducted as of June 30, 2006 resulted in a non-cash
      gain of $1.5 million for the three month periods ended June 30, 2006, with
      a corresponding decrease in the warrant derivative liability, which is included
      as a component of accrued liabilities at June 30, 2006. As of June 30, 2006,
      the
      total fair value of the warrant derivative liability is
      $2.6 million.





7)  Stock-Based
      Compensation





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. Refer to Note 11 of our consolidated financial statements in our Annual
      Report on Form 10-K for the year ended December 31, 2005, for additional
      information related to these stock-based compensation plans.





Effective
      January 1, 2006, the Company adopted SFAS No. 123 (revised), “Share-Based
      Payment” (“SFAS 123(R)”) utilizing the modified prospective approach permitted
      thereunder. Prior to the adoption of SFAS 123(R) we accounted for stock option
      grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued
      to Employees” (the intrinsic value method). Under this method, compensation
      expense was recorded on the date of grant only if the current market price
      of
      the underlying stock exceeded the exercise price. The exercise price of previous
      stock options granted has not been less than the fair market value at the date
      of grant, and accordingly, prior to January 1, 2006, we have not previously
      recognized compensation expense related to stock option grants.





Under
      the
      modified prospective approach, SFAS 123(R) applies to new awards and to awards
      that were outstanding on January 1, 2006 that are subsequently modified,
      repurchased or cancelled. Under the modified prospective approach, compensation
      cost recognized in the six months ended June 30, 2006 includes compensation
      cost for all share-based payments granted prior to, but not yet fully vested
      as
      of January 1, 2006, based on the grant-date fair value estimated in accordance
      with the original provisions of SFAS 123, and compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS
      123(R). Prior periods were not restated to reflect the impact of adopting the
      new standard.





As
      a
      result of adopting SFAS 123(R) on January 1, 2006, our net loss and basic and
      diluted loss per share for the six months ended June 30, 2006, were $376,000
      and
      $0.02 higher, respectively, than if we had continued to account for stock-based
      compensation under APB opinion No. 25 for our stock option grants. For the
      three months ended June 30, 2006, our net loss and basic and diluted loss per
      share were $213,000 and $0.01 higher, respectively, than if we had continued
      to
      account for stock-based compensation under APB opinion No. 25 for our stock
      option grants.








We
      receive a tax deduction for certain stock option exercises during the period
      the
      options are exercised, generally for the excess of the price at which the
      options are sold over the exercise prices of the options. The tax benefit for
      the six months ended June 30, 2006 was $137,000 and was recorded as a deferred
      tax asset with a full valuation allowance due to our continuing loss position.
      Prior to adoption of SFAS 123(R), we included these tax benefits resulting
      from
      the exercise of stock options as operating cash flows in our condensed
      consolidated statements of cash flows. In accordance with SFAS 123(R), future
      tax benefits arising from the exercise of stock options will be reported as
      financing cash flows rather than operating cash flows in our condensed
      consolidated statements of cash flows.




10


The
      following table illustrates the effect on operating results and per share
      information had the Company accounted for stock-based compensation in accordance
      with SFAS No. 148, "Accounting for Stock Based Compensation - Transition and
      Disclosure - an Amendment of SFAS No. 123," for the three and six months
      ended June 30, 2005:





**Three
                  Months**
              
              **Six
                  Months****Ended**
              
              **Ended****June
                  30, 2005**
              
              **June
                  30, 2005**Net
                  income (loss)As
                  reported
              
              $
              2,656,000
              
              $
              (1,476,000
              )Deduct
                    stock-based compensation expense determined under fair-value
                    based method,
                    net of tax
              
              
              (99,000
              )
              
              (198,000
              )Pro
                  forma
              
              $
              2,557,000
              
              $
              (1,674,000
              )Basic
                  and diluted earnings (loss) per common shareAs
                  reported
              
              $
              0.18
              
              $
              (0.10
              )Pro
                  forma
              
              $
              0.17
              
              $
              (0.11
              )





The
      per
      share weighted-average fair value of stock options granted during the three
      month period ended June 30, 2005 was $4.99. There were no stock options granted
      during the three month period ended June 30, 2005. The per share
      weighted-average fair value of stock options granted during the six months
      ended
      June 30, 2006 and 2005 were $4.79 and $3.47, respectively. We use the
      Black-Scholes option pricing model to estimate the fair value of stock-based
      awards, with the following weighted-average assumptions for the indicated
      periods:


**Three Months Ended**
              
              **Six Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Expected
                  dividend yield
              
              
              0
              %
              
              --
              
              
              0
              %
              
              0
              %Average
                  risk-free interest rate
              
              
              4.60
              %
              
              --
              
              
              4.68
              %
              
              3.50
              %Expected
                  volatility
              
              
              55.00
              %
              
              --
              
              
              54.45
              %
              
              45.44
              %Expected
                  life of options (in years)
              
              
              6.25
                  years
              
              
              --
              
              
              6.59
                  years
              
              
              4.0
                  years





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.





At
      June
      30, 2006, there was $4.6 million of unrecognized compensation cost related
      to share-based payments which is expected to be recognized over a
      weighted-average period of 2.6 years.





The
      following table represents stock option activity for the six months ended June
      30, 2006:


**Number
                  of**
              
              **Weighted-**
                **Average****Shares**
              
              **Exercise
                  Price**Outstanding
                  options at beginning of period
              
              
              1,373,303
              
              $
              9.79Granted
              
              
              50,000
              
              
              8.17Exercised
              
              
              (359,736
              )
              
              9.16Forfeited
              
              
              (259,324
              )
              
              13.03Outstanding
                  options at end of period
              
              
              804,243
              
              $
              8.94Outstanding
                  exercisable at end of period
              
              
              473,324
              
              $
              9.51




Between
      April 17, 2006 and May 9, 2006, outstanding options were exercised for a total
      of 359,736 shares at an aggregate exercise price of
      $3.3 million.





The
      weighted average remaining contractual life for options outstanding and
      exercisable was 6.29 years and 4.87 years, respectively, as of June 30, 2006.
      Shares available for future stock option grants were 1,264,948 at June 30,
      2006.
      At June 30, 2006, the total intrinsic value of options outstanding was $96,000,
      and the aggregate intrinsic value of options exercisable was also
      $96,000.




11





The
      following table summarizes our nonvested stock option activity for the six
      months ended June 30, 2006:


**Weighted-**
                **Average****Number
                  of**
              
              **Grant-Date****Shares**
              
              **Fair
                  Value**Nonvested
                  stock options at beginning of period
              
              
              443,107
              
              $
              3.61Granted
              
              
              50,000
              
              
              4.79Vested
              
              
              (75,940
              )
              
              4.65Forfeited
              
              
              (86,250
              )
              
              3.28Nonvested
                  stock options at end of period
              
              
              330,919
              
              $
              3.64





On
      June
      13, 2006 the stockholders approved an amendment to the 2002 Stock Option Plan
      to
      provide for the granting of (i) restricted stock and/or restricted stock units,
      (ii) stock appreciation rights, and (iii) stock bonuses (the “Amended Plan”).
      The Amended Plan also sets for the business criteria for “performance-based
      compensation” that is subject to Section 162(m) of the Internal Revenue Code of
      1986, as amended, restricts the number of shares that may be granted to any
      one
      recipient in any one fiscal year to 100,000, and defines termination for cause
      (which was previously subject to definition in each stock option grant). On
      June
      13, 2006, 464,778 shares of restricted stock were granted to certain officers
      and members of the management team. All restricted stock granted to employees
      under the 2002 Stock Option Plan vest over a four year period with one-third
      vesting at the end of two, three, and four years, respectively. As a result
      of this transaction, the $3.5 million intrinsic value of the restricted stock
      is
      required to be recognized as compensation expense ratably over the five year
      vesting period and therefore a charge of approximately $43,000 was recorded
      in
      the three month period ended June 30, 2006.





The
      restricted stock activity for the six months ended June 30, 2006, is summarized
      below:


**Weighted
                  Average****Number
                  of**
              
              **Grant
                  Date****Shares**
              
              **Fair
                  Value**Nonvested
                  shares at December 31, 2005
              
              
              -
              
              $
              -Granted
              
              
              464,778
              
              
              7.56Vested
              
              
              -
              
              
              -Canceled
              
              
              -
              
              
              -Nonvested
                  shares at June 30, 2006
              
              
              464,778
              
              $
              7.56





8)  Subsequent
      Events





On
      July
      18, 2006, the holder of our Convertible Note converted $2.6 million of the
      principal amount into 336,743 shares of our common stock.








12





**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.





**Forward
      Looking Statements**





This
      quarterly report contains statements which, to the extent that they are not
      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 annual
      report, including the Notes to the Consolidated Financial Statements and in
      the
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operation,” 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: a continuing labor shortage in California; our
      current default under the terms of our B of A Credit Facility which could impact
      our liquidity in the future; 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 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**





Our
      condensed consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America.
      As such, we are required to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent
      liabilities at the balance sheet dates and the reported amounts of revenue
      and
      expense during the reporting periods. The estimates and assumptions are based
      on
      historical experience and on various other factors that we believe are
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Actual results could significantly
      differ from such estimates. We believe that the following discussion addresses
      our most significant accounting policies, which aid in fully understanding
      and
      evaluating our reported financial results.





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





We
      are
      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 (“IBNR”) claims. Acutal claims often vary to some
      extent from our estimates. This variability may result in actual costs being
      either above or below the estimates recorded on our consolidated financial
      statements. In July 2006, we became fully insured for workers compensation
      with
      no deductible.




13





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 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.





Valuation
      of the Embedded and Warrant Derivatives





The
      valuation of our embedded derivatives associated with our $25.9 million
      convertible subordinated promissory note, and our warrant derivatives,
      associated principally with the 1,023,000 warrant shares issued in connection
      with our $11.6 million private equity placement on August 5, 2005, are
      determined primarily by the Black-Scholes option pricing model. An embedded
      derivative is a derivative instrument that is embedded within another contract,
      which under the convertible note (the host contract) includes the right to
      convert the note by the holder, certain default redemption right premiums and
      a
      change of control premium (payable in cash if a fundamental change occurs).
      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.





To
      determine the fair value of our embedded derivatives, management evaluates
      assumptions regarding the probability of certain future events. Other factors
      used to determine fair value 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.




Recent
      Accounting Pronouncements




*Uncertainty
      in Income Taxes*





In
      July
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (“FIN 48”). FIN 48 requires the use of a two-step approach for
      recognizing and measuring tax benefits taken or expected to be taken in a tax
      return and disclosures regarding uncertainties in income tax positions. We
      are
      required to adopt FIN 48 effective January 1, 2007. The cumulative effect of
      initially adopting FIN 48 will be recorded as an adjustment to opening retained
      earnings in the year of adoption and will be presented separately. Only tax
      positions that meet the more likely than not recognition threshold at the
      effective date may be recognized upon adoption of FIN 48. We are currently
      evaluating the impact this new standard; however, the standard is not expected
      to have a significant impact on the Company’s financial position, results of
      operation or cash flows.





14





*Leveraged
      Leases*





In
      July
      2006, the FASB issued Staff Position No. FAS 13-2, “Accounting for a Change or
      Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated
      by a Leveraged Lease Transaction” (“FSP 13-2”). FSP 13-2 requires that changes
      in the projected timing of income tax cash flows generated by a leveraged lease
      transaction be recognized as a gain or loss in the year in which change occurs.
      The pretax gain or loss is required to be included in the same line item in
      which the leveraged lease income is recognized, with the tax effect being
      included in the provision for income taxes. We are required to adopt FSP 13-2
      effective January 1, 2007. The cumulative effect of initially adopting this
      FSP
      will be recorded as an adjustment to opening retained earnings in the year
      of
      adoption and will be presented separately. FSP 13-2 is not expected to have
      any
      impact on the Company’s financial position, results of operation or cash
      flows.





**Company
      Overview**





Modtech
      manufactures and sells modular relocatable classrooms and commercial and light
      industrial modular buildings. We are 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. We continue to expand
      our
      classroom offerings in response to the increasing demand for new classroom
      products.





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 concerns.





The
      modular re-locatable 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.





**Results
      of Current Operations - Overview**





Revenues
      were $44.3 million and $81.2 million for the three and six months ended June
      30,
      2006, respectively, down 24.0% and 25.4%, respectively, from the corresponding
      periods of the prior year. The decline was due primarily to a return to normal
      production levels in Florida following a major classroom project in 2005 that
      resulted from the 2004 hurricanes and lower production volumes in California
      in
      part due to factory inefficiencies and periodic labor shortages.





As
      a
      result of smaller projects and a resulting quicker project turnover in
      2006 **,** our
      backlog of sales orders has declined from $164.3 million at July 31, 2005 to
      $78.1 million at July 31, 2006. We do not expect our backlog to return to the
      historically high level we experienced during late 2004 and the first half
      of
      2005.








**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 Ended June
                  30,**
              
              **Six Months Ended
                  June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  sales
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of goods sold
              
              
              93.5
              
              
              89.6
              
              
              93.7
              
              
              92.3Gross
                  profit
              
              
              6.5
              
              
              10.4
              
              
              6.3
              
              
              7.7Selling,
                  general and administrative expenses
              
              
              8.0
              
              
              6.1
              
              
              8.4
              
              
              6.8Gain
                  on sale of property and equipment
              
              
              -
              
              
              (0.1
              )
              
              -
              
              
              (0.1
              )(Loss)
                  income from operations
              
              
              (1.6
              )
              
              4.4
              
              
              (2.1
              )
              
              0.9Other
                  (expense) income:Interest
                  expense
              
              
              (1.2
              )
              
              (4.7
              )
              
              (2.1
              )
              
              (3.5
              )Interest
                  income
              
              
              0.3
              
              
              -
              
              
              0.3
              
              
              0.0Gain
                  (loss) on warrant and embedded derivatives
              
              
              8.4
              
              
              5.4
              
              
              5.5
              
              
              1.9Early
                  debt conversion fee
              
              
              (4.2
              )
              
              -
              
              
              (2.3
              )
              
              -Other
                  income, net
              
              
              0.4
              
              
              0.3
              
              
              0.3
              
              
              0.2Income
                  (loss) before income taxes
              
              
              (0.7
              )
              
              4.6
              
              
              (5.2
              )
              
              (1.4
              )Income
                  tax expense (benefit)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              
              (0.7
              )%
              
              4.6
              %
              
              (5.2
              )%
              
              (1.4
              )%





15




Revenue





Revenues
      were $44.3 million for the quarter ended June 30, 2006, down 24.0% from the
      record revenues of $58.3 million in the prior year period. Arizona and
      Texas sales for the quarter totaled $7.0 million for a combined shortfall of
      $4.5 million when compared to the same quarter last year. Florida revenue
      for the three months ended June 30, 2006 was $10.8 million, down
      $1.9 million or 14.6% from the corresponding quarter the prior year. The
      decrease in Florida was due to a return to prior levels of sales in the region
      as revenues during 2005 were higher due to a major classroom project in Florida
      stemming from the hurricanes in the fall of 2004. California revenue of
      $26.5 million for the quarter ended June 30, 2006 was $7.6 million or
      22.3% less than the corresponding quarter the prior year. The decrease in
      California was primarily due to lower production volumes in part due to factory
      inefficiencies and periodic labor shortages in California. In addition, in
      the
      prior year periods more of our California revenue was attributable to fieldwork
      on large school projects, in the current year period we were more reliant on
      revenue generated from the shipment of factory-built units for both schools
      and
      commercial customers.





For
      the
      six month ended June 30, 2006, revenues were $81.2 million, down 25.4% from
      the record revenues of $108.8 million in the prior year period. Arizona and
      Texas sales for the six months had a combined shortfall of $5.2 million
      when compared to the corresponding period last year. Florida revenue for the
      six
      months ended June 30, 2006 was $17.1 million, down $8.8 million or
      33.9% from the corresponding period the prior year. The decrease in Florida
      was
      due to a return to prior levels of sales in the region as the first half of
      2005
      revenues were bolstered by a major classroom project stemming from the
      hurricanes in the fall of 2004. California revenue of $48.5 million for the
      quarter ended June 30, 2006 was $13.6 million or 22.0% less than the
      corresponding period the prior year. The decrease in California was primarily
      due to lower production volumes in part due to factory inefficiencies and
      periodic labor shortages in California. In addition, in the prior year periods
      more of our California revenue was attributable to fieldwork on large school
      projects, in the current year period we were more reliant on revenue generated
      at the factory for both schools and commercial customers. Our goal in the second
      half of 2006 is to significantly improve our factory throughput by making
      changes on our assembly lines including kitting of sub-assembly
      components.





The
      demise of the piggyback contracting system in California appears to have had
      a
      short-term adverse affect on the sales volume in recent quarters. Prior to
      January 27, 2006 many school districts in California utilized “piggy-back”
contracts which allowed them to order buildings off of contracts bid and entered
      into by builders, including Modtech, with other school districts. Since January
      27, 2006, these piggyback contracts are no longer allowed to be used in this
      manner. As a result, more public bids will have to occur for the same volume
      of
      work. The public bidding process is a lengthy one. It is believed that this
      change has delayed some anticipated work into later 2006. In the long-term,
      we
      expect the demand for our products and services will not be significantly
      impacted by the change in the piggyback contracting system.




Our
      gross
      profit margin has declined year over year for the quarter and six months ended
      June 30, 2006. As a percent of sales, gross profit declined from 10.4% of sales
      for the quarter ended June 30, 2005 to 6.5% of sales for the quarter ended
      June
      30, 2006. For the six month period ended June 30, 2006, our gross profit margin
      declined to 6.3% from 7.7% in the prior year period. Our gross profit margin
      declined as revenues declined more than expected and fixed and certain variable
      costs were not reduced in line with reduced revenues. In addition, the prior
      year margins benefited from volume efficiencies related to record results in
      the
      three and six months ended June 30, 2005. Management anticipates an improvement
      in gross margins in the next two quarters as volume picks up, especially in
      California and Florida. In addition, in the third quarter management has taken
      actions to reduce fixed costs and overhead, primarily by a reduction of staffing
      in order to achieve profitability at current revenue levels.





As
      of
      July 31, 2006, the backlog of sales orders was approximately $78.1 million,
      down from approximately $164.3 million at July 31, 2005. Backlog that
      is expected to be converted to sales during the remainder of the current fiscal
      year is approximately $72.0 million. The backlog by region as of
      July 31, 2006 was as follows: California—$66.0 million;
      Arizona—$5.8 million; Texas—$1.5 million; and
      Florida—$4.9 million. This compares to the backlog by region as of
      July 31, 2005 was as follows: California—$131.2 million;
      Arizona—$10.1 million; Texas—$3.4 million; and
      Florida—$19.6 million.





Quicker
      project turnover and generally smaller projects are the primary reasons for
      the
      decline in backlog. We do not expect our backlog to return to the very high
      levels we experienced in late 2004 and early 2005. The rate of booking new
      contracts varies month to month, and customer changes in delivery schedules
      occur. For these reasons, among others, our backlog as of any particular date
      may not be representative of actual sales for any succeeding
      period.





16


Selling,
      General and Administrative Expense





Selling,
      general and administrative (“SG&A”) expenses were approximately flat for the
      quarter and down $0.6 million or 7.9% for the six months ended June 30, 2006
      compared to the corresponding periods of the prior year. The decrease in
      SG&A was primarily attributable to reduced legal, accounting and
      professional services as well as reduced sales commissions that resulted from
      lower sales. SG&A expenses for the quarter and six months ended June 30,
      2006 include $213,000 and $376,000, respectively, in stock compensation expense
      as a result of the implementation of SFAS 123(R). This expense was reported
      in
      the past on a pro forma basis pursuant to the predecessor to SFAS 123(R), SFAS
      123. As a result of the lower sales during the first half of 2006, selling,
      general, and administrative expenses increased as a percentage of net sales
      from
      6.1% in the second quarter of 2005 to 8.0% in the second quarter of 2006 and
      from 6.8% in the first half of 2005 compared to 8.4% in the first half of 2006.
      In the third quarter management has taken actions to reduce SG&A costs,
      primarily by a reduction of staffing in order to achieve profitability at
      current revenue levels.





Other
      income (expense)





Interest
      expense decreased for the three and six months ended June 30, 2006, by
      $2.2 million and $2.2 million, respectively when compared to the
      corresponding period in 2005. The decrease is attributable to lower debt when
      compared to the prior year.





We
      recognized a non-cash gain of $3.7 million and $4.5 million related to the
      embedded derivatives associated with the convertible debt agreement and warrants
      in the three and six months ended June 30, 2006, respectively.





Accretion
      on convertible debt discount for the three months ended June 30, 2006 was $1.1
      million, which included a $0.9 million incremental non-cash charge related
      to the discount on the $5.7 million conversion of a portion of the
      Convertible Notes in May 2006.





We
      recognized a non-cash early debt conversion fee of $1.9 million for the
      fair value of 189,189 restricted shares issued to the note holders as
      consideration for the early conversion of a portion of the Convertible
      Notes.





Due
      to
      the replacement of our previous credit facility, approximately $2.1 million
      of
      unamortized debt issue costs was written off and charged to interest expense
      for
      the quarter ended March 31, 2006.





Based
      upon our continued losses for the six months ended June 30, 2006, we continue
      to
      provide a valuation allowance on our deferred tax assets including deferred
      tax
      assets related to our net operating loss carryforward, which completely offsets
      the initial tax benefit calculation. The non-cash gains and losses from embedded
      derivatives are excluded from taxable income or loss.





Net
      Income (Loss)





The
      net
      loss of $0.3 million for the three months ended June 30, 2006 and the net
      loss of $4.2 million for the six months ended June 30, 2005 compare to net
      income of $2.7 million and a net loss of $1.5 million for the same periods,
      respectively, from the prior year. The changes in the periods compared are
      a
      direct result of the factors discussed above.





**Inflation**





We
      are
      subject to the effects of changing prices. During the six months ended June
      30,
      2006, there was no significant inflationary impact. While the cost outlook
      for
      commodities used in our products, in particular steel, dimensional lumber and
      plywood products is not certain, management believes it can manage these
      inflationary pressures with sales price adjustments as allowed by our contracts
      and by actively monitoring material costs and supply chain and inventory
      management.





**Liquidity
      and Capital Resources**





We
      have
      funded our operations and capital expenditures mostly with cash generated
      internally by operations and borrowings under various credit facilities as
      well
      as cash received from exercised options and warrants. At June 30, 2006 we had
      $0.2 million in unrestricted cash and an additional $5.0 million in
      restricted cash. The restricted cash is held as collateral for our Convertible
      Note. During the six months ended June 30, 2006 our operations used
      $1.1 million cash. During the second quarter of 2006 we received an
      aggregate of $17.3 million from the exercise of outstanding options and
      warrants and the release of restricted cash.





17




On
      March
      31, 2006, we entered into a Loan and Security Agreement (the “B of A Credit
      Facility”) with Bank of America, N.A. and we amended our Convertible Note again.
      The B of A Credit Facility was funded and closed on April 4, 2006.




In
      connection with the B of A Credit Facility, we terminated our credit facility
      with Fortress Credit Corp. On April 4, 2006, we paid off all amounts borrowed
      and due under the Fortress credit Facility, which aggregated approximately
      $19.4 million, including approximately $260,000 in accrued interest. There
      were no early termination penalties incurred by us in connection with the
      termination of the Fortress credit Facility.





The
      B of
      A Credit Facility provides for revolving credit loans of up to a maximum
      principal amount of $25,000,000 (the “Revolver Loans”) and a letter of credit
      subline in the maximum amount of $12,000,000. The Revolver Loans will bear
      interest per annum, payable monthly, at a variable rate equal to Bank of
      America’s announced prime rate, plus up to 0.75%. Under certain circumstances,
      we may elect a LIBOR rate plus 2.00% to 3.00%, in which case, interest will
      be
      payable in one, two, three or six month periods selected by us. The variable
      rates, plus an unused credit line fee between 0.250% to 0.375% per annum, will
      depend on our quarterly EBITDA measured on a trailing 12 month
      basis.





The
      principal amount of the Revolver Loans is due and payable in full on March
      31, 2009. The Revolver Loans may be prepaid from time to time without penalty
      or
      premium, but if the B of A Credit Facility is terminated during the first two
      years, there is a termination fee equal to $500,000 in the first year and
      $250,000 in the second year. The B of A Credit Facility is secured by
      substantially all of our assets.





Our
      financial performance for the six month period ended June 30, 2006 resulted
      in
      the violation of certain financial covenants within the B of A Credit Facility
      and the Convertible Note. We currently continue to have access to our line
      of
      credit and are negotiating an amendment to the covenants that reflect expected
      performance. We have not yet reached an agreement with Bank of America and
      our
      Convertible Note holder on the terms of the amendment; therefore, the
      $17.2 million balance of the Convertible Note is classified as a current
      liability.





On
      May 4,
      2006, the Convertible Note holder converted $5.7 million of the principal amount
      of the Convertible Note into 728,900 shares of our common stock pursuant to
      an
      agreement to convert a total of $8.3 million of principal prior to the August
      31, 2006 redemption date set forth in the Convertible Note. The remaining $2.6
      million of principal was converted into 336,743 shares of our common stock
      on
      July 13, 2006. As consideration for the early conversion, we issued the holder
      189,189 additional shares of restricted common stock which was recorded as
      a
      $1.9 million early debt conversion fee for the quarter ended June 30,
      2006.





In
      connection with the partial conversion of the Convertible Note, the holder
      agreed to cause the “Letter of Credit Amount” (as defined in the Convertible
      Note) to be reduced by $5.0 million in accordance with the terms of the
      Convertible Note as if we had achieved the performance standards set forth
      in
      the Convertible Note, as amended, by the August 31, 2006 date. This resulted
      in
      the release of $5.0 million of cash collateral to us on May 5, 2006. In
      connection with the change to the B of A Credit Facility restricted cash was
      reduced by $6.5 million, which was held as cash collateral for the letter of
      credit subfacility under our prior revolving credit loan.





Between
      May 1, 2006 and May 12, 2006, outstanding warrants were exercised for a total
      of
      325,000 shares of common stock at an aggregate exercise price of
      $2.6 million.





Between
      April 17, 2006 and May 9, 2006, outstanding options were exercised for a total
      of 359,736 shares at an aggregate exercise price of
      $3.3 million.





We
      anticipate a return to profitability in the second half of 2006. In the third
      quarter management has taken actions to reduce overhead and SG&A costs,
      primarily by a reduction of staffing in order to achieve profitability at
      current revenue levels. Management believes that existing capital, anticipated
      cash flow from operations, and current credit facilities will be sufficient
      to
      meet operating needs and capital expenditures for the foreseeable future.





**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
      do not hold any instruments that are subject to such risks, but we are exposed
      to the risk of increased interest rates on our credit facility the risk of
      loss
      on credit extended to our customers, and risk of fluctuations in the fair value
      of our derivative liabilities on certain instruments.





18


INTEREST
      RATE RISK





Through
      June 30, 2006, we were exposed to the risk of fluctuation in interest rates
      on
      the Fortress Credit Facility. During the quarter ended June 30, 2006, we did
      not
      use interest rate swaps or other types of derivative financial instruments.
      The
      carrying value of the Fortress Credit Facility approximated fair value as the
      interest rate was variable and reset frequently. We continue to be exposed
      to
      the risk of fluctuation in interest rates on our B of A Credit Facility that
      replaced the Fortress Credit Facility as of April 4, 2006. The carrying value
      of
      the B of A Credit Facility approximates fair value as the interest rate is
      variable and resets frequently. Indebtedness under the B of A Credit Facility
      bears interest at a variable rate of up to 0.75% per annum plus Bank of
      America’s announced prime rate. Interest is payable monthly. We estimate that
      the average amount of debt outstanding under the B of A Credit Facility for
      2006
      will be $7.0 million. Therefore, a one-percentage point increase in
      interest rates would result in an increase in interest expense of approximately
      $70,000 per annum.





CREDIT
      RISK





Our
      credit terms generally are “net 30” for dealer accounts and defined by contracts
      which vary for direct sales. We actively monitor this risk through a variety
      of
      control procedures involving senior management. Historically, credit losses
      have
      been less than 0.5% of sales and within our expectations.





DERIVATIVE
      LIABILITY RISK





We
      are
      exposed to the risk of fair value derivative liability fluctuations in the
      equity instruments we have issued, which include the Convertible Note and
      outstanding warrants. The fair value of these derivative liabilities is
      primarily determined by fluctuations in our stock price. As our stock price
      increases or decreases, the fair value of these derivative liabilities increase
      or decrease, resulting in a corresponding current period loss or gain to be
      recognized. Based on the balance on our convertible note, number of outstanding
      warrants, market interest rates and historical volatility of our stock price
      as
      of June 30, 2006, a $1 increase or decrease in our stock price results in a
      non-cash derivative loss or gain of approximately $2.0 million. During the
      quarter ended June 30, 2006, we experienced a $3.7 million non-cash gain on
      warrant and embedded derivatives.





**Item
      4. Controls And Procedures**





**a.**  **Evaluation
      of Disclosure Controls and Procedures**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the reports that we file under the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s rules and forms, and that such information
      is accumulated and communicated to management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure. Our management, with the participation of the
      Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
      of our disclosure controls and procedures (as such terms are defined in Rules
      13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2006 and
      concluded that our disclosure controls and procedures were not effective as
      of
      June 30, 2006, because certain material weaknesses in our internal controls
      over
      financial reporting described in Management’s Report On Internal Control Over
      Financial Reporting in Item 9A of our Annual Report on Form 10-K for the year
      ended December 31, 2005 (the “2005 10-K Report”), have not been
      remediated.





The
      material weaknesses reported in our 2005 10-K Report that had not been
      remediated as of June 30, 2006 were as follows:





1.
                During
                    the quarter ending December 31, 2005, there were multiple changes
                    in
                    personnel and an overall understaffing of the finance function.
                    Insufficient staff, at times, did not allow for timely completion
                    of
                    certain tasks, including analysis and review required for full
                    compliance
                    with internal controls. As a result, we identified the following
                    issues as
                    of December 31, 2005:




·
            A
                control failure occurred involving processing of accrual of open
                invoices
                and valuation of work-in-process inventory, resulting in misstatements
                to
                accrued liabilities, cost of sales and
                revenue.




·
            Our
                controls associated with accounting for our long-term contracts were
                not
                operating effectively. As a consequence, an error was identified
                relating
                to the accounting for a contract amount and one concerning the
                classification of a contract, resulting in misstatements to revenue
                and
                cost of sales.




19




2.
            The
                specific control deficiencies in information technology noted as
                of
                December 31, 2005, were as follows:




·
            We
                did not have a sufficiently comprehensive review of segregation of
                duties
                regarding access rights when employees changed positions.




·
            System
                limitations allow unrestricted access rights to certain applications.




·
            Removal
                of access rights for terminated employees was not always done on
                a timely
                basis. Although no security breaches occurred, the potential for
                such
                breaches exists.




·
            Inadequate
                monitoring of server backups allowed one location to not be properly
                backed up over one weekend.





**b.**  **Changes
      in Internal Control over Financial Reporting**





In
      order
      to remediate the material weaknesses described in the 2005 10-K Report, we
      hired
      a Director of Internal Control and SOX during the first quarter (this position,
      however, is currently vacant and we are actively seeking a replacement) and
      made
      the following changes during the fiscal quarter ended June 30, 2006 in our
      internal control over financing reporting:




·
            We
                implemented a new general ledger accounting package, Great Plains,
                on
                April 1, 2006 and will utilize the improved software in our internal
                control efforts.




·
            We
                have engaged an outside Information Technology consultant and began
                assessment and remediation of our control deficiencies in information
                technology





In
      light
      of the material weaknesses that remain as of June 30, 2006, we performed
      additional analysis and other post-closing procedures to ensure the Consolidated
      Financial Statements are prepared in accordance with generally accepted
      accounting principles. Accordingly, management believes that the financial
      statements included in this report fairly present in all material respects
      our
      financial condition, results of operations and cash flows for the periods
      presented.





Other
      than the remediation measures described above, there have been no changes in
      our
      internal control over financial reporting that occurred during the quarter
      ended
      June 30, 2006, that have materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.





**c.**  **Remediation
      Plan for Material Weaknesses in Internal Control over Financial
      Reporting**





Our
      plan
      to remediate those material weaknesses remaining as of June 30, 2006 is as
      follows:




·
            We
                continue to search for additional staff for our Internal Control
                department and operational finance teams. The searches are underway
                and
                the positions will be filled as soon as qualified candidates are
                identified.




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




·
            Remediate
                the deficiencies noted in Information Technology controls with the
                aid of
                an outside Information Technology consultant in connection with the
                implementation of our new general ledger accounting package, Great
                Plains.





20





PART
      II.
      OTHER INFORMATION





**Item
      1. Legal Proceedings**





None





**Item
      1A. Risk Factors**





There
      have been no material changes from the risk factors disclosed in our most
      recently file report on Form 10-K other than the risk factor described
      below:




**Violation
      of certain financial covenants in
      our credit facility may adversely impact our liquidity in the
      future.**




As
      disclosed in Item 3 below, we are now in violation
      of certain financial covenants under the B of A Credit Facility and the
      Convertible Note. This has resulted in $15.0 million of what would otherwise
      be
      classified as long term debt being classified as current. We are currently
      able
      to borrow under the B of A Credit Facility and are negotiating an amendment
      to
      the financial covenants in both instruments, but we may be unable to reach
      an
      agreement with Bank of America and our Convertible Note holder. If this were
      to
      occur, we would not have access to our credit line which could have a material
      adverse effect on our liquidity position.





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





None
      in
      the reporting period.





**Item
      3. Defaults upon Senior Securities**





Our
      financial performance for the six month period ended June 30, 2006 resulted
      in
      the violation of certain financial covenants within the B of A Credit Facility
      and the Convertible Note. We currently continue to have access to our line
      of
      credit and are negotiating an amendment to the covenants that reflect expected
      performance. We have not yet reached an agreement with Bank of America and
      our
      Convertible Note holder on the terms of the amendment; therefore, the
      $17.2 million balance of the Convertible Note is classified as a current
      liability.





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





The
      matters voted on at the Annual Meeting of Stockholders held June 13, 2006,
      and
      the results of the vote were as follows:





1.
            To
                elect a board of seven (7) directors, with each director so elected
                to
                hold office until the next Annual Meeting and until their successors
                have
                been duly elected and qualified.


**Nominee**
              
              **For**
              
              **Withheld**David
                  M. Buckley
              
              
              10,277,172
              
              
              141,125Robert
                  W. Campbell
              
              
              10,277,178
              
              
              141,119Daniel
                  J. Donahoe III
              
              
              10,386,753
              
              
              31,544Stanley
                  N. Gaines
              
              
              10,386,823
              
              
              31,474Charles
                  R. Gwirtsman
              
              
              10,380,548
              
              
              37,749Charles
                  C. McGettigan
              
              
              10,277,178
              
              
              141,119Myron
                  A. Wick III
              
              
              10,276,328
              
              
              141,969





2.
            To
                approve an amendment to the Company’s 2002 Nonstatutory Stock Option Plan
                to allow for the granting of additional forms of equity
                awards.




**For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                Non-vote**7,023,290
            
            
            4,432,766
            
            
            546,815
            
            
            6,395,173








3.
            To
                ratify the appointment of Peterson & Company as the independent
                auditors of the Company for the current fiscal year ending December
                31,
                2006


**For**
              
              **Against**
              
              **Abstain**
              
              **Broker
                  Non-vote**10,414,093
              
              
              3,104
              
              
              1,100
              
              
              7,979,747


**Item
      5. Other Information**





None





21


**Item
      6. Exhibits**





**Exhibit**
              **Number**
            
            **Name of
              Exhibit**  3.1(1)
            
            Certificate of Incorporation of the
              Company.  3.2(2)
            
            Bylaws of the Company.  10.1(3)
            
            Company’s 1994 Stock Option
              Plan.  10.2(3)
            
            Company’s 1996 Stock Option
              Plan.  10.3(3)
            
            Company’s 1999 Stock Option
              Plan.  10.4(3)
            
            Company’s 2002 Stock Option
              Plan.  10.5(2)
            
            Employment Agreement between the Company and Evan
              M.
              Gruber.  10.6(2)
            
            Employment Agreement between the Company and Michael
              G.
              Rhodes.  10.7(3)
            
            Separation Agreement between the Company and Evan
              M.
              Gruber.  10.8(3)
            
            Separation Agreement between the Company and Michael
              G.
              Rhodes.  10.9(3)
            
            Employment Agreement between the Company and David
              M.
              Buckley  10.10(4)
            
            Lease between the Company and Pacific Continental
              Modular
              Enterprises, relating to the Barrett property in Perris,
              California  10.11(4)
            
            Lease between the Company and BMG, relating to the
              property in Lathrop, California  10.12(5)
            
            Credit Agreement between the Company and Wells Fargo
              Bank, N.A., as administrative agent, dated December 26,
              2001  10.13(6)
            
            Securities Purchase Agreement, dated December 31,
              2004  10.14(6)
            
            Senior Subordinated Secured Convertible Note, dated
              December 31, 2004  10.15(6)
            
            Warrant to Purchase Common Stock issued December
              31,
              2004, dated December 31, 2004


10.16(6)
            
            Registration
                Rights Agreement, dated December 31,
                2004





10.17(6)
            
            Pledge
                and Security Agreement, dated December 31,
                2004





10.18(6)
            
            Intercreditor
                Agreement, dated December 31, 2004





10.19(6)
            
            Amendment
                and Forbearance Agreement among the Company, Wells Fargo Bank, N.A.,
                Union
                Bank of California, N.A. and Comerica Bank California, dated December
                29,
                2004.





10.20(7)
            
            Financing
                Agreement between the Company and Fortress Credit Corp. as administrative
                agent, dated February 25, 2005.





10.21(8)
            
            Amendment
                Number 1 to Industrial Real Estate Lease between Modtech Holdings,
                Inc.
                and BMG2 Enterprises, dated July 29,
                2005





10.22(8)
            
            Sublease
                between Modtech Holdings, Inc. and Boise Building Solutions Distribution,
                L.L.C., dated July 29, 2005




22





**Exhibit**
              **Number**
            
            **Name of
              Exhibit**


10.23(9)
            
            Securities
                Purchase Agreement, dated August 5,
                2005





10.24(9)
            
            First
                Amendment and Waiver of Financing Agreement between Fortress and
                Modtech
                Holdings, Inc., dated August 5,
                2005





10.25(9)
            
            First
                Amendment and Restated Registration Rights Agreement, dated August
                5,
                2005





10.26(9)
            
            Amended
                and Restated Senior Subordinated Secured Convertible Note, dated
                August 5,
                2005





10.27(9)
            
            Consent,
                Waiver, Amendment and Exchange Agreement, dated August 5, 2005
                (“Waiver”)





10.28(9)
            
            Form
                of Voting Agreement executed pursuant to
                Waiver





10.29(9)
            
            Form
                of Lock Up Letter executed pursuant to the Securities Purchase Agreement,
                dated August 5, 2005





10.30(9)
            
            Form
                of Warrant issued pursuant to the Securities Purchase Agreement,
                dated
                August 5, 2005





10.31(9)
            
            Warrant
                for 8,276 shares of common stock, dated August 5,
                2005





10.32(10)
            
            Second
                Amendment of Financing Agreement between Fortress and Modtech Holdings,
                Inc., dated September 19, 2005





10.32(11)
            
            Third
                Amendment of Financing Agreement between Fortress and Modtech Holdings,
                Inc., dated December 22, 2005





10.33(12)
            
            Intercreditor
                Agreement dated, March 31, 2006




10.34(12)
            
            Loan
                and Security Agreement, dated March 31,
                2006





10.35(12)
            
            Amendment
                Agreement, dated March 31, 2006





10.36
            
            Amendment
                to 2002 Stock Option Plan, dated June 13,
                2006





10.37
            
            Exchange
                of Senior Subordinated Secured Convertible Notes, dated May 3,
                2006





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





(3)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-Q filed with the
                Commission on November 12, 2004 (Commission File No.
                000-25161).




23




(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 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 8-K filed with the
                Commission on March 2, 2005 (Commission File No.
                000-25161).





(8)
            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).





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





(10)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on September 23, 2005 (Commission File No.
                000-25161).





(11)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 8-K filed with the
                Commission on December 29, 2005 (Commission File No.
                000-25161).





(12)
            Incorporated
                by reference to Modtech Holdings, Inc.’s Form 10-K filed with the
                Commission on April 4, 2006 (Commission File No.
                000-25161).





24


**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, 2006
            
            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**






25