**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 MARCH 31, 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.    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 May
      8, 2006, there were 18,637,233 of the Registrant’s Common Stock outstanding.











**Modtech
      Holdings, Inc.**


**Index
      to Form 10-Q**





**Page
                #****PART
                I. FINANCIAL INFORMATION**ITEM 1
                - Financial Statements
            1Condensed
                Consolidated Balance Sheets (Unaudited) as of March 31, 2006 and
                December 31, 2005
            2Condensed
                Consolidated Statements of Operations (Unaudited) for the three-month
                periods ended March 31, 2006 and 2005
            3Condensed
                Consolidated Statements of Cash Flows (Unaudited) for the three-month
                periods ended March 31, 2006 and 2005
            4Notes
                to Unaudited Consolidated Financial Statements
            5-10ITEM 2
                - Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            10-15ITEM 3
                - Quantitative and Qualitative Disclosures About Market
                Risk
            15-16ITEM 4
                - Controls and Procedures
            16-17**PART
                II. OTHER INFORMATION**ITEM 1
                - Legal Proceedings
            18ITEM
                1A - Risk Factors
            18ITEM 2
                - Unregistered Sales of Equity Securities and Use of
                Proceeds
            18ITEM 3
                - Defaults upon Senior Securities
            18ITEM 4
                - Submission of Matters to a Vote of Security Holders
            18ITEM 5
                - Other Information
            18ITEM 6
                - Exhibits
            18-20Signatures
            21EXHIBIT
                31.1EXHIBIT
                31.2EXHIBIT
                32.1EXHIBIT
                32.2








**MODTECH
      HOLDINGS, INC.**





**FORM
      10-Q**





**FOR
      THE QUARTER ENDED MARCH 31, 2006**





**PART
      I. FINANCIAL INFORMATION**





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 months ended March 31, 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.




















**MODTECH
      HOLDINGS, INC.**


Condensed
      Consolidated Balance Sheets


(Unaudited)




**March
                31,**
              **2006**
            
            **December
                31,**
              **2005**AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            4,530,000
            
            $
            3,263,000Restricted
                cash - current portion
            
            
            11,452,000
            
            
            11,452,000Contracts
                receivable, less contract adjustments of $616,000 in both 2006 and
                2005
            
            
            30,995,000
            
            
            40,687,000Costs
                and estimated earnings in excess of billings on contracts
            
            
            11,660,000
            
            
            16,050,000Inventories
            
            
            8,885,000
            
            
            12,047,000Prepaid
                assets
            
            
            1,118,000
            
            
            960,000Income
                tax receivable
            
            
            6,000
            
            
            6,000Other
                current assets
            
            
            1,932,000
            
            
            1,373,000Total
                current assets
            
            
            70,578,000
            
            
            85,838,000Property
                and equipment, net
            
            
            14,655,000
            
            
            14,518,000Other
                assetsRestricted
                cash
            
            
            5,000,000
            
            
            5,000,000Goodwill
            
            
            71,903,000
            
            
            71,903,000Covenants
                not to compete, net
            
            
            --
            
            
            4,000Debt
                issuance costs, net
            
            
            1,625,000
            
            
            3,993,000Other
                assets
            
            
            562,000
            
            
            577,000Total
                assets
            
            $
            164,323,000
            
            $
            181,833,000Liabilities
                and Shareholders’ EquityCurrent
                liabilities:Accounts
                payable
            
            $
            14,569,000
            
            $
            25,687,000Accrued
                liabilities
            
            
            23,822,000
            
            
            28,498,000Billings
                in excess of costs
            
            
            4,200,000
            
            
            3,809,000Current
                revolving credit line
            
            
            7,846,000
            
            
            4,819,000Current
                maturities of long-term debt
            
            
            18,251,000
            
            
            19,831,000Total
                current liabilities
            
            
            68,688,000
            
            
            82,644,000Long-term
                debt, excluding current portion
            
            
            14,812,000
            
            
            14,628,000Total
                liabilities
            
            
            83,500,000
            
            
            97,272,000Shareholders’
                equity:Common
                stock, $.01 par value. Authorized 55,000,000 shares; issued and
                outstanding 17,062,219 and 17,062,219 in 2006 and 2005,
                respectively
            
            
            170,000
            
            
            170,000Additional
                paid-in capital
            
            
            96,803,000
            
            
            96,640,000Accumulated
                deficit
            
            
            (16,150,000
            )
            
            (12,249,000
            )Total
                shareholders’ equity
            
            
            80,823,000
            
            
            84,561,000$
            164,323,000
            
            $
            181,833,000





*See
      accompanying notes to condensed consolidated financial statements.*


2


**MODTECH
      HOLDINGS, INC.**


Condensed
      Consolidated Statements of Operations


(Unaudited)




**Three
                Months Ended**
              **March
                31,****2006**
            
            **2005**Net
                sales
            
            $
            36,904,000
            
            $
            50,538,000Cost
                of goods sold
            
            
            34,617,000
            
            
            48,216,000Gross
                profit
            
            
            2,287,000
            
            
            2,322,000Selling,
                general and administrative expenses
            
            
            3,298,000
            
            
            3,887,000Loss
                from operations
            
            
            (1,011,000
            )
            
            (1,565,000
            )Other
                (expense) income:Interest
                expense, net
            
            
            (1,021,000
            )
            
            (1,137,000
            )Gain
                (loss) on warrant and embedded derivatives
            
            
            737,000
            
            
            (1,052,000
            )Amortization
                - debt costs and debt accretion discount
            
            
            (2,640,000
            )
            
            (431,000
            )Other
                income, net
            
            
            34,000
            
            
            53,000(2,890,000
            )
            
            (2,567,000
            )Loss
                before income taxes
            
            
            (3,901,000
            )
            
            (4,132,000
            )Income
                tax benefit
            
            
            —
            
            
            —Net
                loss
            
            $
            (3,901,000
            )
            $
            (4,132,000
            )Basic
                and diluted loss per common share
            
            $
            (0.23
            )
            $
            (0.28
            )Basic
                and diluted weighted-average common shares outstanding
            
            
            17,062,219
            
            
            14,665,185





*See
      accompanying notes to condensed consolidated financial statements.*















3


**MODTECH
      HOLDINGS, INC.**





Condensed
      Consolidated Statements of Cash Flows





(Unaudited)




**Three
                Months Ended**
              **March
                31,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (3,901,000
            )
            $
            (4,132,000
            )Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            755,000
            
            
            600,000Write-off
                of debt issuance costs
            
            
            2,058,000
            
            
            —Gain
                on sale of equipment
            
            
            —
            
            
            (5,000
            )Stock
                compensation expense
            
            
            163,000
            
            
            —Non-cash
                (gain) loss on derivative liability
            
            
            (737,000
            )
            
            1,052,000Accretion
                on convertible debt discount
            
            
            271,000
            
            
            262,000Decrease
                (increase) in assets:Contracts
                receivable
            
            
            9,692,000
            
            
            2,856,000Costs
                and estimated earnings in excess of billings
            
            
            4,390,000
            
            
            (1,560,000
            )Inventories
            
            
            3,162,000
            
            
            2,542,000Other
                current and non-current assets
            
            
            (702,000
            )
            
            500,000(Decrease)
                increase in liabilities:Accounts
                payable
            
            
            (11,118,000
            )
            
            (1,261,000
            )Accrued
                liabilities
            
            
            (3,913,000
            )
            
            865,000Billings
                in excess of costs
            
            
            391,000
            
            
            1,471,000Net
                cash provided by operating activities
            
            
            511,000
            
            
            3,190,000Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (577,000
            )
            
            (224,000
            )Proceeds
                from sale of equipment
            
            
            —
            
            
            8,000Net
                cash used in investing activities
            
            
            (577,000
            )
            
            (216,000
            )Cash
                flows from financing activities:Net
                principal borrowings (payments) under revolving credit
                line
            
            
            3,000,000
            
            
            (14,152,000
            )Principal
                payments on long-term debt
            
            
            (1,667,000
            )
            
            (5,000,000
            )Proceeds
                from issuance of long-term debt
            
            
            —
            
            
            27,898,000Increase
                in restricted cash
            
            
            —
            
            
            (6,898,000
            )Payment
                of debt issuance costs
            
            
            —
            
            
            (2,305,000
            )Net
                proceeds from issuance of common stock
            
            
            —
            
            
            2,344,000Net
                cash provided by financing activities
            
            
            1,333,000
            
            
            1,887,000Net
                increase in cash and cash equivalents
            
            
            1,267,000
            
            
            4,861,000Cash
                and cash equivalents at beginning of period
            
            
            3,263,000
            
            
            11,799,000Cash
                and cash equivalents at end of period
            
            $
            4,530,000
            
            $
            16,660,000





*See
      accompanying notes to condensed consolidated financial statements*


4


**MODTECH
      HOLDINGS, INC.**





Notes
      to
      Condensed Consolidated Financial Statements





March
      31,
      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 months ended March 31, 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:




**March
                31,**
              **2006**
            
            **December
                31,**
              **2005**Raw
                materials
            
            $
            7,203,000
            
            $
            9,211,000Work
                in process
            
            
            968,000
            
            
            2,630,000Finished
                goods
            
            
            714,000
            
            
            206,000$
            8,885,000
            
            $
            12,047,000





3)
      Restricted Cash





Restricted
      cash as of March 31, 2006 consists of $10.0 million in cash collateral required
      under our $25.9 million convertible note and $6.5 million in cash collateral
      required by a letter of credit subfacility under the revolving credit loan
      (Note
      4). A $5.0 million portion of the $10.0 million cash collateral is classified
      as
      short-term as defined in the convertible note agreement. This $5.0 million
      short-term portion was subsequently made available upon the partial conversion
      of the convertible note on May 4, 2006 (See Note 8). The $6.5 million cash
      collateral required by the letter of credit subfacility is classified as
      short-term due to the debt refinancing which closed on April 4, 2006 (See Note
      8). The remaining $5 million in restricted cash is classified as long-term
      as of
      March 31, 2006 according to the terms of the convertible note agreement.





4)
      Debt





As
      of
      March 31, 2006, we had outstanding a $38 million credit facility with Fortress
      Credit Corporation (the “Fortress Credit Facility”) and a $25.9 million
      subordinated convertible promissory note with another lender (the “Convertible
      Note”). The Fortress Credit Facility was entered into during the quarter ended
      March 31, 2005, and the Convertible Note was issued on December 31, 2004 and
      was
      amended and restated on August 5, 2005. The Fortress Credit Facility was
      subsequently amended and replaced with a new credit facility on April 4, 2006
      (See Note 8). On May 4, 2006, $5.7 million of the principal amount of the
      Convertible Note was redeemed and converted into common stock (See Note
      8).





Fortress
      Credit Facility





The
      Fortress Credit Facility provided for revolving credit loans in an aggregate
      principal amount not to exceed $17.0 million at any time (the “Revolving Credit
      Loan”) and a term loan in the aggregate principal amount of $21.0 million (the
“Term Loan”) through March 31, 2006. The Revolving Credit Loan also provided for
      a letter of credit subfacility in the maximum amount of $10.0 million, of which
      $6.1 million was outstanding as of March 31, 2006. This letter of credit
      subfacility was also secured by a cash collateral account, which was recorded
      as
      restricted cash on our condensed consolidated balance sheet as of March 31,
      2006
      (Note 3). The Fortress Credit Facility was secured by substantially all of
      the
      assets of Modtech.


5


Through
      March 31, 2006, we were required to pay down the Revolving Credit Loan whenever
      cash and cash equivalents exceeded $5.0 million and we were prohibited from
      accumulating cash and cash equivalents in excess of $5.0 million until the
      Revolving Credit Loan was paid in full.





Through
      March 31, 2006, the Revolving Credit Loan bore interest per annum, payable
      monthly, at a variable rate of 3.75% to 4.75% plus the greater of 5% or JPMorgan
      Chase Bank’s prime rate. The Term Loan bore interest per annum, payable monthly,
      at the 30-day LIBOR rate plus a variable rate of 7.5% to 8.5%. The variable
      rates depended on our senior secured leverage ratio. Through March 31, 2006,
      principal payments on the Term Loan in the amount of $333,000 are due monthly,
      commencing on February 1, 2006. Prior to February 1, 2006, principal payments
      of
      $1 million were made quarterly on the first day of each quarter. As of March
      31,
      2006, both loans matured and were due and payable on February 25, 2008. As
      of March 31, 2006 the applicable annual interest rates for the Revolving Credit
      Loan, Term Loan and letter of credit subfacility were 12.25%, 13.13%, and 5.5%,
      respectively.





The
      Term
      Loan balance totaled $11.2 million, and the Revolving Credit Loan balance
      totaled $7.8 million as of March 31, 2006. The entire balance for both the
      Term
      Loan and the Revolving Credit Loan was classified as current as we were in
      default of certain financial covenants. We did not seek waivers for this default
      due to the replacement of the Fortress Credit Facility with a new credit
      facility. Agreement for the new credit facility was reached on March 31, 2006
      and the new facility was subsequently funded on April 4, 2006 (See Note 8).





Convertible
      Note and Embedded Derivatives





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. The Convertible Note holder
      has the right to require us to redeem up to $8.33 million face amount of the
      Note on June 30, 2006, $9.23 million on June 30, 2007, and $8.33
      million on June 30, 2008. The face amount of $8.33 million, or $7 million
      net discounted value, is therefore classified as current as of March 31, 2006,
      as this portion may become due and payable within one year at the option of
      the
      Convertible Note holder. In connection with the replacement of the Fortress
      Credit Facility on April 4, 2006, the redemption dates under the convertible
      Note were changed to August 31, 2006, August 31, 2007 and September 2, 2008.
      On
      May 4, 2006, the Convertible Note holder converted $5.7 million of the principal
      amount of the Convertible Note into shares of common stock (See Note
      8).





The
      Convertible Note is secured by a first priority, perfected security interest
      in
      certain cash collateral placed in a restricted, segregated collateral account.
      The amount of cash collateral required to be maintained in this account is
      $10.0
      million and is recorded as restricted cash on our condensed consolidated balance
      sheet as of March 31, 2006 (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 certain of our senior indebtedness, including the Fortress
      Credit Facility.





On
      January 3, 2006, in connection with the 2005 Equity Issuance (See Note 5),
      special shareholder approval was obtained to reduce the conversion price of
      the
      Convertible Note and the Convertible Note Warrants from $8.57 and $8.56 per
      share, respectively, to $7.82. This adjustment in the exercise price
      correspondingly increased the number of shares of common stock into which the
      Convertible Note could be converted to 3,312,021 shares of common stock,
      and the total number of shares of common stock the Convertible Note Warrants
      are
      exercisable to 264,964 shares of common stock. The Convertible Note holder
      may
      convert the Convertible Note or exercise the related Convertible Note Warrants
      at any time or from time-to-time.





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. We conducted
      a valuation of these embedded derivatives as of March 31, 2006 using
      various valuation methods, which included Black-Scholes option pricing models.
      Due to the decrease in our stock price from $9.34 at December 31, 2005 to $8.75
      at March 31, 2006 and the decrease in the conversion price of the Convertible
      Note from $8.57 to $7.82 (as described above), the valuation conducted as of
      March 31, 2006 resulted in a non-cash gain of $93,000 for the three month period
      ended March 31, 2006, with a corresponding decrease in the embedded derivative
      liability, which is included as a component of accrued liabilities at March
      31,
      2006. As of March 31, 2006, the fair value of the embedded derivative liability
      is $7,756,000.


6


The
      discounted balance on the Convertible Note totals $21.8 million as of March
      31,
      2006, with $7 million classified as current (as described above) and the
      remaining $14.8 million classified as long-term.




5)
      Private placement issuance of common stock and warrant derivatives





On
      August 5, 2005, we completed a private placement of equity securities
      (“2005 Equity Issuance”) 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”).





The
      2005
      Equity Warrants issued in connection with the 2005 Equity Issuance and the
      related Convertible Note Warrants (Note 4) 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. We valued
      all
      warrant derivative liabilities as of March 31, 2006 using a Black-Scholes option
      pricing model using the following assumptions: expected dividend yield of 0.0%,
      expected stock price volatility ranging from 40.7% to 40.9%, risk free interest
      rate of 4.72% and a remaining contractual life ranging from 3.75 years to 4.33
      years. Due primarily to the decrease in our stock price from $9.34 at December
      31, 2005 to $8.75 at March 31, 2006, the valuation conducted as of March 31,
      2006 resulted in a non-cash gain of $644,000 for the three month periods ended
      March 31, 2006, with a corresponding increase in the warrant derivative
      liability, which is included as a component of accrued liabilities at March
      31,
      2006. As of March 31, 2006, the total fair value of the warrant derivative
      liability is $5,548,000.





6)
      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 first quarter of fiscal 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 three months ended March 31, 2006, were $163,000
      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.


7


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. There were no stock
      options exercised for the three months ended March 31, 2006, therefore no tax
      benefit was recorded. 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.





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 123(R) for the three months ended March 31, 2005:





**Three
                Months Ended**
              **March
                31,****2005**Net
                lossAs
                reported
            
            $
            (4,132,000
            )Deduct
                stock-based compensation expense determined under fair-value based
                method,
                net of tax
            
            
            (99,000
            )Pro
                forma pursuant to SFAS 123R
            
            $
            (4,231,000
            )Basic
                and diluted loss per common shareAs
                reported
            
            $
            (0.28
            )Pro
                forma pursuant to SFAS 123R
            
            $
            (0.29
            )




The
      per
      share weighted-average fair value of stock options granted during the three
      months ended March 31, 2006 and 2005 were $4.50 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**
              **March
                31,****2006**
            
            **2005**Expected
                dividend yield
            
            
            0%
            
            
            0%Average
                risk-free interest rate
            
            
            4.6%
            
            
            3.5%Expected
                volatility
            
            
            53.62%
            
            
            45.44%Expected
                life of options (in years)
            
            
            7.1
                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
      March
      31, 2006, there was $1,086,000 of unrecognized compensation cost related to
      share-based payments which is expected to be recognized over a weighted-average
      period of 2.4 years.





The
      following table represents stock option activity for the three months ended
      March 31, 2006:




**Number
                of**
              **Shares**
            
            **Weighted-Average**
              **Exercise
                Price**Outstanding
                options at beginning of period
            
            
            1,373,300
            
            $
            9.79Granted
            
            
            20,000
            
            $
            7.50Exercised
            
            
            —
            
            $
            —Forfeited
            
            
            —
            
            $
            —Outstanding
                options at end of period
            
            
            1,393,300
            
            $
            9.77Outstanding
                exercisable at end of period
            
            
            1,004,881
            
            $
            10.44





8


The
      weighted average remaining contractual life for options outstanding and
      exercisable was 5.67 years and 4.62 years, respectively, as of March 31, 2006.
      Shares available for future stock option grants were 1,520,402 at March 31,
      2006. At March 31, 2006, the total intrinsic value of shares outstanding was
      $802,000, and the aggregate intrinsic value of options exercisable was
      $452,000.





The
      following table summarizes our nonvested stock option activity for the three
      months ended March 31, 2006:







**Number
                of**
              **Shares**
            
            **Weighted-Average**
              **Grant-Date
                Fair Value**Nonvested
                stock options at beginning of period
            
            
            393,419
            
            $
            5.22Granted
            
            
            20,000
            
            $
            4.50Vested
            
            
            (25,000
            )
            $
            6.96Forfeited
            
            
            —
            
            $
            —Nonvested
                stock options at end of period
            
            
            388,419
            
            $
            5.07




7)
      Liquidity





We
      experienced a net loss during the three month period ended March 31, 2006,
      however our operating cash flow was a positive $511,000 for the three month
      period ended March 31, 2006. In addition, we successfully completed refinancing
      our senior debt on April 4, 2006, and gained access to $5 million in cash on
      May
      5, 2006, due to the partial release of restricted cash in conjunction with
      the
      $8.33 million converted to common stock on the Convertible Note (See Note
      8).





8)
      Subsequent Events





New
      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 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. 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. Due to the replacement of the Fortress 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.





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 2.0% 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.


9


In
      connection with the B of A Credit Facility, we entered into an Amendment
      Agreement dated March 31, 2006 with the holder of the Convertible Note. The
      Amendment Agreement brought the financial covenants in the Convertible Note
      in
      line with those in the B of A Credit Facility and modified the redemption
      provisions of the Convertible Note by extending each redemption date by 45
      days,
      to August 31, 2006, August 31, 2007 and September 2, 2008, reducing one of
      the
      EBITDA measurement periods from 12 months to 6 months, and adjusting 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 three month period ended March 31, 2006 resulted
      in the violation of certain financial covenants within the B of A Credit
      Facility (revolver) and the Convertible Note. We have obtained waivers for
      these
      violations covering the period ended March 31, 2006 and are negotiating an
      amendment to the covenants that reflect expected performance. We believe we
      will
      reach an agreement with Bank of America and our Convertible Note holder on
      the
      terms of the amendment, but have not done so yet.




Convertible
      Note and Release of $5 Million in Restricted Cash





On
      May 3,
      2006, we entered into an agreement with the holder of our $25.9 million Senior
      Subordinated Secured Convertible Note (the "Convertible Note"), pursuant to
      which the holder agreed to convert $8.3 million of the principal amount of
      the
      Convertible Note (the "Conversion Amount") prior to the August 31, 2006
      redemption date set forth in the amended Convertible Note. The Convertible
      Note
      was originally issued in December 2004 in connection with a previously announced
      private placement of our securities. The Convertible Note was subsequently
      restated and amended. Under the terms of the Convertible Note, the Conversion
      Amount will be converted into 1,065,643 shares at a conversion price of $7.82
      per share. As consideration for the early conversion, we agreed to issue the
      holder approximately 189,189 additional shares of restricted common
      stock.





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 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 million of cash collateral to us on May 5, 2006.





On
      May 4,
      2006, the Convertible Note holder converted $5.7 million of the Conversion
      Amount into 728,900 shares of our common stock. We anticipate that the remaining
      $2.6 million of the Conversion Amount will be converted into 336,743 shares
      of
      our common stock on or about July 6, 2006. The conversion of this additional
      amount will not result in the release of any additional cash
      collateral.





Exercise
      of Options and Warrants





Between
      April 17, 2006 and May 4, 2006, outstanding warrants were exercised for a total
      of 325,000 shares of common stock at an aggregate exercise price of $2.6 million
      and outstanding options were exercised for a total of 327,750 shares at an
      aggregate exercise price of $3.0 million.








**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.


10


**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: 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. We will not update these forward-looking
      statements, even though our situation may change in the future. We qualify
      all
      of our forward-looking statements by these cautionary statements.





**USE
      OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES**





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.





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.


11


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




In
      December 2004, the Financial
      Accounting Standards Board(“FASB”) issued Statement No. 123R,
*Share-Based Payment, a revision to Statement No. 123*, *Accounting
      for Stock-Based Compensation*("SFAS No. 123R"). This statement replaces
      Statement No. 123 and supersedes APB No. 25. This statement addresses the
      accounting for transactions in which an entity exchanges its equity instruments
      for goods or services with a primary focus on transactions in which an entity
      obtains employee services in share-based payment transactions. SFAS No. 123R
      requires us to measure the cost of employee services received in exchange for
      an
      award of equity instruments based on the grant-date fair value of the award.
      We
      adopted SFAS No. 123R, using the modified prospective application method,
      effective January 1, 2006 and recognized compensation expense of $163,000.
      Although not material for the three months ended March 31, 2006, this change
      in
      accounting treatment will likely result in the recognition of material
      compensation expense in future periods.


In
        February 2006, the FASB released Statement No. 155, *Accounting for Certain
        Hybrid Financial Instruments,*("SFAS No. 155"). SFAS No. 155 is an
        amendment of Statement No. 133,*Accounting for Derivative Instruments and
        Hedging Activities,*and Statement No. 140, A*ccounting for Transfers and
        Servicing of Financial Assets and Extinguishments**of**Liabilities.*SFAS No. 155 establishes, among other items, the
        accounting for certain derivative instruments embedded within other types
        of
        financial instruments; and, eliminates a restriction on the passive derivative
        instruments that a qualifying special-purpose entity may hold. Effective
        for the
        Company beginning January 1, 2007, SFAS No. 155 is not expected to have any
        impact on the Company's financial position, results of operations or cash
        flows.
 In
          March
          2006, the FASB released Statement No. 156, Accounting
          for Servicing of Financial Assets, anamendmentof *FASB
          Statement No. 140,*("SFAS No. 156").
          SFAS No. 156
          amends SFAS
          No.
          140 to require that all separately recognized servicing assets and liabilities
          in accordance with SFAS No. 140
          be
          initially measured at fair value, if practicable. Furthermore, this standard
          permits, but does not require, fair value measurement for separately recognized
          servicing assets and liabilities in subsequent reportingperiods.SFAS No.
          156 is also effective for the Company beginning January 1, 2007; however,
          thestandard
          is not expected to have any impact on the Company's financial position,
          results
          of operation or cash flows.
 In
          the
          first quarter of 2006, the Company adopted Statement No. 154, Accounting for
          Changes and ErrorCorrections-a
          replacementofAPB
          Opinion No. 20 and FASB StatementNo. 3, ("SFAS
          No. 154") which changed
          the requirements for the accounting for and reporting of a voluntary change
          in
          accounting principle. The
          Compan y
          also
          adopted Statement No. 151, InventoryCosts-an
          amendment of ARB No. 43, *Chapter
          4*("SFAS No. 151 ") which,
          among other changes, requires certain abnormal expenditures to be recognized
          as expenses in the current period versus capitalized as a component of
          inventory. The adoption of
          SFAS
          No, 154 did not impact the results presented and the impact on any future
          periods will depend on the
          nature and significance of any future accounting changes subject to the
          provisions of the statement. The adoption of SFAS No. 151 did not have
          any
          impact on the Company's financial position, results of operations
          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.


12


**Results
      of Current Operations — Overview**





Revenues
      were $36.9 million for the quarter ended March 31, 2006, down 27% from the
      record revenues of $50.5 million the prior year. Arizona and Texas sales for
      the
      quarter had a combined shortfall of $0.7 million when compared to the same
      quarter last year. Florida revenue for the three months ended March 31, 2006
      was
      $6.3 million, down $6.9 million or 52.2% from than the corresponding quarter
      the
      prior year. The decrease in Florida was due to a return to a normal level of
      production in the state. During the first quarter of 2005, we were involved
      in a
      major classroom project stemming from the hurricanes in the fall of 2004.
      California revenue of $22.0 million for the quarter ended March 31, 2006 was
      $6.0 million or 21.6% less than the corresponding quarter the prior year. The
      decrease in California was primarily due to a continuing labor shortage in
      California.





Our
      gross
      profit was essentially flat year over year for the quarter ended March 31,
      2006.
      As a percent of sales, gross profit improved from 4.6% of sales for the quarter
      ended March 31, 2005 to 6.2% of sales for the quarter ended March 31, 2006.





As
      of
      April 30, 2006, the backlog of sales orders was approximately $99.1 million,
      down from approximately $179.5 million at April 30, 2005. Backlog that is
      expected to be converted to sales during the remainder of the current fiscal
      year is approximately $95.0 million. The backlog by region as of April 30,
      2006
      was as follows: California—$82.2 million; Arizona—$4.6 million; Texas—$0.7
      million; and Florida—$11.6 million. This compares to the backlog by region as of
      April 30, 2005 was as follows: California—$139.4 million; Arizona—$14.2 million;
      Texas—$4.5 million; and Florida—$21.4 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.








**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**
              **Three Months Ended**
              **March
                31,****2006**
            
            **2005**Net
                sales
            
            
            100.0
            %
            
            100.0
            %Gross
                profit (loss)
            
            
            6.2
            
            
            4.6Selling,
                general and administrative expenses
            
            
            8.9
            
            
            7.7Loss
                from operations
            
            
            (2.7
            )
            
            (3.1
            )Interest
                expense, net
            
            
            (2.8
            )
            
            (3.1
            )Loss
                before income taxes
            
            
            (10.6
            )
            
            (8.2
            )Income
                tax benefit
            
            
            —
            
            
            —Net
                loss
            
            
            (10.6
            )
            
            (8.2
            )





Revenue





Net
      sales
      for the three months ended March 31, 2006, decreased to $36.9 million from
      $50.5
      million for the corresponding period of the prior year, a decrease of $13.6
      million or 27.0% when compared to the corresponding period of the prior year.
      All regions saw an decrease in revenue from the record setting three-month
      period ended March 31, 2005. California revenue was $22.0 million, a decrease
      of
      21.6%; Arizona revenue was $5.2 million, a decrease of 6.9%; Texas revenue
      was
      $3.4 million, a decrease of 7.1% and Florida revenue was $6.3 million a decrease
      in revenue of 52.2%. The modest decrease in revenue for Arizona and Texas were
      due to local market conditions. The decrease in Florida revenues was due to
      a
      return to normal production volume. Production was unusually high in the first
      quarter of 2005 as a result of a major classroom project stemming from the
      hurricanes in the fall of 2004. California revenue of $22.0 million was $6.0
      million or 21.6% less than the same quarter the prior year. The shortfall in
      California was primarily due to a continuing labor shortage in California.
      Historically the first quarter of the year tends to be more variable than other
      quarters and is traditionally one of our lower-revenue quarters of the year.
      We
      returned to that pattern for the quarter ended March 31, 2006 and expect volume
      in the second and third quarters to be higher than the recently completed
      quarter.





However,
      the demise of the piggyback contracting system in California may adversely
      affect the anticipated increase in volume in the upcoming 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 expected that this
      change will delay some anticipated work into later 2006 and could impact the
      anticipated growth in revenues from fiscal 2005 to 2006.


13


Gross
      profit as a percentage of net sales for the three months ended March 31, 2006
      increased to 6.2% from 4.6% for the same period in 2005. The impact from the
      elimination of major project cost overruns was offset by the lower volume in
      the
      three months ended March 31, 2006. Management anticipates a significant
      improvement in gross margins in the next two quarters as volume picks up,
      especially in California and Florida.





SG&A





Selling,
      general and administrative (SG&A) expenses decreased for the three months
      ended March 31, 2006 by $0.6 million, a decrease of 15.2% over the corresponding
      period 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. SG&A expenses for the three months ended March 31, 2006 include
      $163,000 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 quarter, selling, general, and administrative expenses increased
      as a
      percentage of net sales from 7.7% in the first three months of 2005 to 8.9%
      in
      the first three months of 2006.





Net
      interest, decreased for the three months ended March 31, 2006, by $0.1 million,
      or 10.2% when compared to the corresponding period in 2005. The decrease is
      attributable to lower debt during the three months ended March 31, 2006.





Other
      expense for the quarter ended March 31, 2006 includes a non-cash loss of $2.4
      million from the amortization of debt costs which includes $2.1 million related
      to the replacement of the Fortress Credit Facility and a gain of $0.7 million
      related to the embedded derivatives associated with the convertible debt
      agreement entered into in December.





Based
      upon our continued losses for the three months ended March 31, 2006, we continue
      to provide a valuation allowance which completely offsets the initial tax
      benefit calculation. Effective tax rates, before effect of the valuation
      allowance, of 31% and 29% were used for the quarters ended March 31, 2006 and
      2005, respectively.





Loss





Net
      loss
      for the three months ended March 31, 2006 was $3.9 million, a decrease of $0.2
      million from the net loss of $4.1 million for the corresponding period of the
      prior year. This decrease resulted from lower costs on reduced revenue as
      discussed above.





**Inflation**





We
      are
      subject to the effects of changing prices. During the quarter ended March 31,
      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 March 31, 2006 we
      had
      $4.5 million in unrestricted cash and an additional $16.5 million in restricted
      cash. During the three months ended March 31, 2006 our operations contributed
      $0.5 million cash. Between April 17 2006 and May 4, 2006 we received an
      aggregate of $10.6 million from the exercise of outstanding options and warrants
      and the partial conversion of the Convertible Note as described
      below.





Management
      believes that existing capital, anticipated cash flow from operations, and
      current credit facilities will be sufficient to meet operating needs and capital
      expendiutures for the foreseeable future.





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.


14


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.





On
      May 3,
      2006, we entered into an agreement with the holder of the Convertible Note,
      pursuant to which the holder agreed to convert $8.3 million of the principal
      amount of the Convertible Note (the "Conversion Amount") prior to the August
      31,
      2006 redemption date set forth in the Convertible Note. Under the terms of
      the
      Convertible Note, the Conversion Amount will be converted into 1,065,643 shares
      at a conversion price of $7.82 per share. As consideration for the early
      conversion, we agreed to issue the holder approximately 189,189 additional
      shares of restricted common stock.





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 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 million of cash collateral to us on May 5, 2006.





On
      May 4,
      2006, $5.7 million of the $8.3 million Conversion Amount was converted into
      728,900 shares of our common stock.





Between
      April 17, 2006 and May 4, 2006, outstanding warrants were exercised for a total
      of 325,000 shares of common stock at an aggregate exercise price of $2.6 million
      and outstanding options were exercised for a total of 327,750 shares at an
      aggregate exercise price of $3.0 million.





**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 and the risk
      of
      loss on credit extended to our customers.





INTEREST
      RATE RISK





Through
      March 31, 2006, we were exposed to the risk of fluctuation in interest rates
      on
      the Fortress Credit Facility. During the quarter ended March 31, 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 million. Therefore, a one-percentage point increase in interest
      rates
      would result in an increase in interest expense of approximately $70,000 per
      annum.





15


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 a $25.9 million 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 March 31, 2006, a $1 increase or decrease in our stock price results in
      a
      non-cash derivative loss or gain of approximately $4.5 million. During the
      quarter ended March 31, 2006, we experienced a $737,000 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 March 31, 2006 and
      concluded that our disclosure controls and procedures were not effective as
      of
      March 31, 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 March 31, 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.





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.





16


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





In
      order
      to remediate the material weaknesses described in the 2005 10-K Report, we
      made
      the following changes during the fiscal quarter ended March 31, 2006 in our
      internal control over financing reporting:


·
              To
                  begin to address the understaffing issue we hired a Director of
                  Internal
                  Control and SOX during the first quarter.




In
      light
      of the material weaknesses that remain as of March 31, 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
      March 31, 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 March 31, 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.·
            Plans
                to remediate the deficiencies noted in Information Technology controls
                are
                being developed by the Director of Internal Control with the aid
                of an
                outside Information Technology consultant and will be further disclosed
                in
                future reports.·
            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.


17


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





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





None
      in
      the reporting period.





**Item
      3. Defaults upon Senior Securities**





None





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





None





**Item
      5. Other Information**





None





**Item
      6. Exhibits**





**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. Buckley10.10(4)
            
            Lease
                between the Company and Pacific Continental Modular Enterprises,
                relating
                to the Barrett property in Perris, California10.11(4)
            
            Lease
                between the Company and BMG, relating to the property in Lathrop,
                California10.12(5)
            
            Credit
                Agreement between the Company and Wells Fargo Bank, N.A., as
                administrative agent, dated December 26, 200110.13(6)
            
            Securities
                Purchase Agreement, dated December 31, 200410.14(6)
            
            Senior
                Subordinated Secured Convertible Note, dated December 31,
                200410.15(6)
            
            Warrant
                to Purchase Common Stock issued December 31, 2004, dated December
                31,
                2004




18




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


10.16(6)
            
            Registration
                Rights Agreement, dated December 31, 200410.17(6)
            
            Pledge
                and Security Agreement, dated December 31, 200410.18(6)
            
            Intercreditor
                Agreement, dated December 31, 200410.19(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, 200510.22(8)
            
            Sublease
                between Modtech Holdings, Inc. and Boise Building Solutions Distribution,
                L.L.C., dated July 29, 200510.23(9)
            
            Securities
                Purchase Agreement dated August 5, 200510.24(9)
            
            First
                Amendment and Waiver of Financing Agreement between Fortress and
                Modtech
                Holdings, Inc., dated August 5, 200510.25(9)
            
            First
                Amendment and Restated Registration Rights Agreement, dated August
                5,
                200510.26(9)
            
            Amended
                and Restated Senior Subordinated Secured Convertible Note, dated
                August 5,
                200510.27(9)
            
            Consent,
                Waiver, Amendment and Exchange Agreement, dated August 5, 2005
                (“Waiver”)10.28(9)
            
            Form
                of Voting Agreement executed pursuant to Waiver10.29(9)
            
            Form
                of Lock Up Letter executed pursuant to the Securities Purchase Agreement,
                dated August 5, 200510.30(9)
            
            Form
                of Warrant issued pursuant to the Securities Purchase Agreement,
                dated
                August 5, 200510.31(9)
            
            Warrant
                for 8,276 shares of common stock, dated August 5, 200510.32(10)
            
            Second
                Amendment of Financing Agreement between Fortress and Modtech Holdings,
                Inc., dated September 19, 200510.32(11)
            
            Third
                Amendment of Financing Agreement between Fortress and Modtech Holdings,
                Inc., dated December 22, 200510.33(12)
            
            Intercreditor
                Agreement dated March 31, 200610.34(12)
            
            Loan
                and Security Agreement dated March 31, 200610.35(12)
            
            Amendment
                Agreement dated March 31, 200631.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002




(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).




19


(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).





(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).


20


**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:
                May 14, 2006
            
            by:
            /s/
                DENNIS L. SHOGREN**Dennis
                L. Shogren**
              **Chief
                Financial Officer and Chief Accounting Officer**by:
            /s/
                DAVID M. BUCKLEY**David
                M. Buckley**
              **Chief
                Executive Officer**
















21