**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**FORM 10-Q**

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

**Forthe quarterly period ended September 30, 2006**

**OR**

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

**Forthe transition period from                         to                           **

**CommissionFile No. 0-28582**

**CHANNELL COMMERCIAL CORPORATION**

(Exact name of Registrantas specified in its charter)

**DELAWARE**

(State or otherjurisdiction of incorporation or organization)

**95-2453261**

(I.R.S. EmployerIdentification No.)

**26040 Ynez Road,Temecula, California**

(Address of principalexecutive offices)

**92591**

(Zip Code)

**(951) 719-2600**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes x**  **No o

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

| Large Accelerated Filer o | Accelerated  Filer o | Non- accelerated  Filer **x** |
|--------------------------------|---------------------------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o**  **No x

9,543,584shares of common stock of the registrant were outstanding at November 3, 2006.

 

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**PART 1- FINANCIAL INFORMATION**

**ITEM 1.**                 FINANCIAL STATEMENTS

CHANNELL COMMERCIAL CORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

*(amountsin thousands, except per share data)*
| ** **                                          | ** ** | **Nine months ended  September 30,** | ** ** | **Three months ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                |       |                                                |       |                                                 |       |   |   |   |   |
| Net sales                                           |       | $                                                   | 84,476     |                                                 | $          | 92,666 |   | $ | 29,376 |   | $ | 27,506 |   |
| Cost of goods sold                                  |       | 57,354                                              |       | 64,095                                               |       | 20,179 |   | 20,319 |   |
| Gross profit                                        |       | 27,122                                              |       | 28,571                                               |       | 9,197 |   | 7,187 |   |
|                                                |       |                                                |       |                                                 |       |   |   |   |   |
| Operating expenses                                  |       |                                                |       |                                                 |       |   |   |   |   |
| Selling                                             |       | 16,822                                              |       | 17,137                                               |       | 5,748 |   | 5,808 |   |
| General and  administrative                         |       | 8,878                                               |       | 7,983                                                |       | 2,700 |   | 2,419 |   |
| Research and  development                           |       | 1,856                                               |       | 2,205                                                |       | 658 |   | 699 |   |
| Impairment of  goodwill                             |       | 4,829                                               |       | —                                               |       | — |   | — |   |
|                                                |       | 32,385                                              |       | 27,325                                               |       | 9,106 |   | 8,926 |   |
|                                                |       |                                                |       |                                                 |       |   |   |   |   |
| Income (loss)  from operations                      |       | (5,263                                              | )          | 1,246                                                |       | 91 |   | (1,739 | ) |
|                                                |       |                                                |       |                                                 |       |   |   |   |   |
| Interest expense, net                               |       | 502                                                 |       | 327                                                  |       | 216 |   | 97 |   |
| Income (loss)  before income tax expense            |       | (5,765                                              | )          | 919                                                  |       | (125 | ) | (1,836 | ) |
|                                                |       |                                                |       |                                                 |       |   |   |   |   |
| Income tax expense  (benefit)                       |       | (265                                                | )          | (235                                                 | )          | 13 |   | (1,161 | ) |
| Net income  (loss) before minority interest         |       | (5,500                                              | )          | 1,154                                                |       | (138 | ) | (675 | ) |
| Minority  interest in income (loss) of subsidiaries |       | (1,452                                              | )          | 9                                                    |       | (32 | ) | (117 | ) |
| Net income  (loss)                                  |       | $                                                   | (4,048     | )                                                    | $          | 1,145 |   | $ | (106 | ) | $ | (558 | ) |
|                                                |       |                                                |       |                                                 |       |   |   |   |   |
| Net income  (loss) per share                        |       |                                                |       |                                                 |       |   |   |   |   |
| Basic                                               |       | $                                                   | (0.42      | )                                                    | $          | 0.12 |   | $ | (0.01 | ) | $ | (0.06 | ) |
| Diluted                                             |       | $                                                   | (0.42      | )                                                    | $          | 0.12 |   | $ | (0.01 | ) | $ | (0.06 | ) |
|                                                |       |                                                |       |                                                 |       |   |   |   |   |
| Net income (loss)                                   |       | $                                                   | (4,048     | )                                                    | $          | 1,145 |   | $ | (106 | ) | $ | (558 | ) |
| Other comprehensive  income (loss), net of tax      |       |                                                |       |                                                 |       |   |   |   |   |
| Foreign currency  translation adjustment            |       | 295                                                 |       | (390                                                 | )          | 437 |   | 83 |   |
| Comprehensive income (loss)                         |       | $                                                   | (3,753     | )                                                    | $          | 755 |   | $ | 331 |   | $ | (475 | ) |

 

The accompanyingnotes are an integral part of these financial statements.

2

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CHANNELL COMMERCIALCORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

*(amountsin thousands)*
| ** **                                                                                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ASSETS                                                                                                                                                                                                      |       |                   |       |                  |       |
| Current assets                                                                                                                                                                                              |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                   |       | $                      | 3,369      |                  | $          | 3,148 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $220 at September 30, 2006 and $396 at December 31, 2005                                                                                    |       | 12,071                 |       | 8,317                 |       |
| Inventories, net                                                                                                                                                                                            |       | 12,165                 |       | 11,411                |       |
| Prepaid expenses and other current assets                                                                                                                                                                   |       | 1,567                  |       | 1,000                 |       |
| Income taxes receivable                                                                                                                                                                                     |       | 1,332                  |       | 67                    |       |
| Deferred income taxes, net                                                                                                                                                                                  |       | 915                    |       | 948                   |       |
| Total current assets                                                                                                                                                                                        |       | 31,419                 |       | 24,891                |       |
|                                                                                                                                                                                                        |       |                   |       |                  |       |
| Property and  equipment, net                                                                                                                                                                                |       | 17,365                 |       | 18,929                |       |
| Goodwill                                                                                                                                                                                                    |       | 9,392                  |       | 13,947                |       |
| Intangible  assets, net                                                                                                                                                                                     |       | 2,058                  |       | 2,132                 |       |
| Other assets                                                                                                                                                                                                |       | 615                    |       | 807                   |       |
| Total assets                                                                                                                                                                                                |       | $                      | 60,849     |                  | $          | 60,706 |   |
|                                                                                                                                                                                                        |       |                   |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                   |       |                   |       |                  |       |
| Current  liabilities                                                                                                                                                                                        |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                            |       | $                      | 8,606      |                  | $          | 8,677 |   |
| Short-term debt (including current maturities of  long-term debt)                                                                                                                                           |       | 13,042                 |       | 7,459                 |       |
| Current maturities of capital lease obligations                                                                                                                                                             |       | 59                     |       | 87                    |       |
| Accrued expenses                                                                                                                                                                                            |       | 5,133                  |       | 5,494                 |       |
| Total current liabilities                                                                                                                                                                                   |       | 26,840                 |       | 21,717                |       |
|                                                                                                                                                                                                        |       |                   |       |                  |       |
| Long-term debt,  less current maturities                                                                                                                                                                    |       | —                 |       | —                |       |
| Capital lease  obligations, less current maturities                                                                                                                                                         |       | 28                     |       | 78                    |       |
| Deferred gain on  sale leaseback transaction                                                                                                                                                                |       | 347                    |       | 393                   |       |
| Deferred income  taxes, net                                                                                                                                                                                 |       | 80                     |       | 77                    |       |
| Commitments and  contingencies, (notes 9 and 12)                                                                                                                                                            |       | —                 |       | —                |       |
| Minority  interest                                                                                                                                                                                          |       | 1,087                  |       | 2,482                 |       |
|                                                                                                                                                                                                        |       |                   |       |                  |       |
| Stockholders’  equity                                                                                                                                                                                  |       |                   |       |                  |       |
| Preferred stock, par value $.01 per share,  authorized - 1,000 shares, none issued and outstanding                                                                                                          |       | —                 |       | —                |       |
| Common stock, par value $.01 per share, authorized -  19,000 shares, issued 9,787 shares at September 30, 2006 and December 31,  2005, outstanding 9,543 shares at September 30, 2006 and December 31, 2005 |       | 98                     |       | 98                    |       |
| Additional paid-in capital                                                                                                                                                                                  |       | 31,011                 |       | 30,750                |       |
| Treasury stock - 244 shares in 2006 and 2005                                                                                                                                                                |       | (1,871                 | )          | (1,871                | )          |
| Retained earnings                                                                                                                                                                                           |       | 2,621                  |       | 6,669                 |       |
| Accumulated other comprehensive income -                                                                                                                                                                    |       |                   |       |                  |       |
| Foreign currency translation                                                                                                                                                                                |       | 608                    |       | 313                   |       |
| Total stockholders’ equity                                                                                                                                                                             |       | 32,467                 |       | 35,959                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                            |       | $                      | 60,849     |                  | $          | 60,706 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

3

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CHANNELL COMMERCIAL CORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(UNAUDITED)

*(amountsin thousands)*
| ** **                                                                            | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
|                                                                                  |       |                                                    |       |   |   |
| Cash flows from  operating activities:                                                |       |                                                    |       |   |   |
| Net income (loss)                                                                     |       | $                                                       | (4,048     | ) | $ | 1,145 |   |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                         |       | 3,454                                                   |       | 3,621 |   |
| Stock-based compensation                                                              |       | 261                                                     |       | — |   |
| (Gain) on disposal of fixed assets                                                    |       | (2                                                      | )          | (6 | ) |
| Amortization of deferred gain on sale leaseback                                       |       | (45                                                     | )          | (45 | ) |
| Impairment of goodwill                                                                |       | 4,829                                                   |       | — |   |
| Deferred income taxes                                                                 |       | 58                                                      |       | (15 | ) |
| Provision for doubtful accounts                                                       |       | (56                                                     | )          | 47 |   |
| Provision for inventory obsolescence                                                  |       | —                                                  |       | 563 |   |
| Minority interest in income (loss) of subsidiaries                                    |       | (1,452                                                  | )          | 9 |   |
| Changes in operating assets and liabilities:                                          |       |                                                    |       |   |   |
| Accounts receivable                                                                   |       | (3,350                                                  | )          | 2,922 |   |
| Inventories                                                                           |       | (573                                                    | )          | 975 |   |
| Prepaid expenses and other current assets                                             |       | (559                                                    | )          | (588 | ) |
| Income taxes receivable                                                               |       | (1,278                                                  | )          | (658 | ) |
| Other assets                                                                          |       | 111                                                     |       | 234 |   |
| Accounts payable                                                                      |       | (312                                                    | )          | (3,869 | ) |
| Restructuring liability                                                               |       | —                                                  |       | (104 | ) |
| Accrued expenses                                                                      |       | (441                                                    | )          | (1,329 | ) |
| Net cash provided by (used in) operating activities                                   |       | (3,403                                                  | )          | 2,902 |   |
|                                                                                  |       |                                                    |       |   |   |
| Cash flows from  investing activities:                                                |       |                                                    |       |   |   |
| Purchase of property and equipment                                                    |       | (1,620                                                  | )          | (3,972 | ) |
| Proceeds from the sales of property and equipment                                     |       | 60                                                      |       | 24 |   |
| Net cash used in investing actitivities                                               |       | (1,560                                                  | )          | (3,948 | ) |
|                                                                                  |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                                |       |                                                    |       |   |   |
| Repayment of debt                                                                     |       | (1,517                                                  | )          | (2,964 | ) |
| Borrowings from credit facilities                                                     |       | 6,954                                                   |       | 1,277 |   |
| Repayment of obligations under capital lease                                          |       | (80                                                     | )          | (27 | ) |
| Exercise of employee stock options                                                    |       | —                                                  |       | 687 |   |
| Net cash provided by (used in) financing activities                                   |       | 5,357                                                   |       | (1,027 | ) |
|                                                                                  |       |                                                    |       |   |   |
| Effect of  exchange rates on cash                                                     |       | (173                                                    | )          | (27 | ) |
| Increase (decrease) in cash and cash equivalents                                      |       | 221                                                     |       | (2,100 | ) |
| Cash and cash  equivalents, beginning of period                                       |       | 3,148                                                   |       | 5,453 |   |
| Cash and cash  equivalents, end of period                                             |       | $                                                       | 3,369      |   | $ | 3,353 |   |
| Cash paid during  the period for:                                                     |       |                                                    |       |   |   |
| Interest                                                                              |       | $                                                       | 605        |   | $ | 381 |   |
| Income taxes                                                                          |       | $                                                       | 567        |   | $ | 282 |   |
| Non-cash  investing activities:                                                       |       |                                                    |       |   |   |
| Purchases of  property and equipment which are included in accounts payable           |       | $                                                       | 57         |   | $ | — |   |

 

The accompanyingnotes are an integral part of these financial statements.

4

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CHANNELL COMMERCIALCORPORATION

CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY

Nine months endedSeptember 30, 2006

*(amountsin thousands)*

 
| ** **                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **              | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-----------------|------------|------------|------------|
| ** **                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**          | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **other**       | ** ** | **Total**  | ** ** |
| ** **                    | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **Treasury stock** | ** ** | **Retained** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**             | ** ** | **Shares**   | ** ** | **Amount**        | ** ** | **earnings**           | ** ** | **income**      | ** ** | **equity** | ** ** |
| Balance, January  1, 2006     |       | 9,787                 |       | $           | 98         |                    | $          | 30,750       |       | 244               |       | $                      | (1,871     | )               | $          | 6,669      |       | $ | 313 |   | $ | 35,959 |   |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |            |       |       |       |
| Stock-based  compensation     |       | —                |       | —      |       | 261                     |       | —       |       | —            |       | —                 |       | —          |       | $          | 261        |   |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |            |       |       |       |
| Foreign currency  translation |       | —                |       | —      |       | —                  |       | —       |       | —            |       | —                 |       | 295             |       | $          | 295        |   |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |            |       |       |       |
| Net loss for the  period      |       | —                |       | —      |       | —                  |       | —       |       | —            |       | (4,048                 | )          | —          |       | $          | (4,048     | ) |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |            |       |       |       |
| Balance, September 30,  2006  |       | 9,787                 |       | $           | 98         |                    | $          | 31,011       |       | 244               |       | $                      | (1,871     | )               | $          | 2,621      |       | $ | 608 |   | $ | 32,467 |   |

 

The accompanyingnotes are an integral part of these financial statements.

5

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CHANNELLCOMMERCIAL CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)September 30, 2006 and 2005*(amounts in thousands, except per share data)*

**1.****              *Unauditedfinancial statements.**** *In the opinion of management, theaccompanying unaudited condensed consolidated financial statements contain alladjustments (consisting only of normal, recurring adjustments) that arenecessary to present fairly the consolidated financial position of Channell CommercialCorporation (the “Company”) as of September 30, 2006 and the results of itsoperations for the nine months and three months ended September 30, 2006 and2005 and cash flows for the nine months ended September 30, 2006 and 2005.  The results of operations for the nine monthsand three months ended September 30, 2006 and cash flows for the nine monthsended September 30, 2006 are not necessarily indicative of the results to beexpected for any other interim period or the full year.  These condensed consolidated financialstatements should be read in combination with the audited consolidatedfinancial statements and notes thereto for the year ended December 31, 2005.

***Reclassifications.*** In thethird quarter of 2006, the Company corrected the classification of shippingcosts charged to customers in its Americas segment in order to comply withgenerally accepted accounting principles. The Company had previously nettedsuch revenues with the related shipping costs. These costs are in addition to, but significantly less than, thoseshipping costs not charged to customers. Such reclassified shipping costs charged to customers totaled $2.2million and $2.1 million for the nine months ended September 30, 2006 and 2005,respectively, and $0.8 million and $0.6 million for the three months endedSeptember 30, 2006 and 2005, respectively, resulting in an increase in netsales, gross profit and selling expenses in the accompanying condensedconsolidated statements of operations and comprehensive income (loss).  These reclassifications had no impact on the Company’snet income for any period.

The Company’s net sales, gross profit and sellingexpenses, and any ratio calculated therefrom, as used throughout this QuarterlyReport for the period ended September 30, 2006, reflect the reclassificationsdescribed above.

**2.**              ***Change in Accounting forStock-Based Compensation.* **EffectiveJanuary 1, 2006 the Company adopted Statement of Financial Accounting Standards(“SFAS”) No. 123R, *Share-Based Payment*,utilizing the “modified prospective” method as described in SFAS No. 123R.  In the “modified prospective” method,compensation cost is recognized for all share-based payments granted after theeffective date and for all unvested awards granted prior to the effectivedate.  In accordance with SFAS No. 123R,prior period amounts were not restated. SFAS No. 123R also requires cash retained as a result of excess taxbenefits associated with these share-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows as required under previous accounting principles.  The Company recorded no excess tax benefitsfor the nine months and three months ended September 30, 2006.

Share-based compensation expense recognized during a period is based onthe value of the portion of share-based payment awards that is ultimatelyexpected to vest during the period. Share-based compensation expense recognized in the Company’s condensedconsolidated statements of operations for the nine months and three monthsended September 30, 2006 included compensation expense for share-based paymentawards granted prior to, but not yet vested as of, December 31, 2005 based onthe grant date fair value estimated in accordance with the pro forma provisionsof SFAS No. 123,  *Accounting forStock Based Compensation,* and share-based payment awards grantedsubsequent to December 31, 2005 based on the grant date fair value estimated inaccordance with SFAS No. 123R.  For shareawards granted in 2006, expenses are amortized under the straight-lineattribution method over the requisite service period.  For share awards granted prior to 2006,expenses are amortized under the straight-line method over the vesting periodprescribed by SFAS No.123.

In July 1996, the Company adopted the 1996 Incentive Stock Plan (the “1996Stock Plan”), under which it was authorized to issue non-qualified stockoptions and incentive stock options to key employees, directors and consultantsto purchase up to an aggregate of 750 shares of the Company’s commonstock.  The options have a term of tenyears and generally become fully vested by the end of the third year.  In May 1999, the 1996 Stock Plan was amendedto increase the authorized number of shares to 1,500.

In January 2003, theBoard of Directors approved an offer allowing current employees andnon-employee directors to exchange all of their outstanding options grantedunder the 1996 Stock Plan for new options to be granted under the Company’s2003 Incentive Stock Plan or any other stock option plan that may be adopted bythe Company.  The 2003 Incentive StockPlan was approved at the Annual Meeting of Stockholders on April 25, 2003.  The authorized shares under the 2003Incentive Stock Plan are 3,100.

6

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A total of 1,327 optionsto purchase shares of the Company were accepted for exchange and cancelled onMarch 20, 2003.  On September 24, 2003, atotal of 1,324 new options were exchanged for options cancelled in March 2003.

Eligible option holderswho participated in the offer received a new option on the new grant date inexchange for each old option that was validly tendered and accepted forexchange.  The number of shares coveredby each new option was equal to the number of shares covered by the oldoptions, and the vested status and vesting schedule of the old options waspreserved and continued.  The exerciseprice of the new options was equal to the closing sale price of the Company’scommon stock as reported on the NASDAQ Global Market on the grant date of thenew options.

At September 30, 2006, under the two plans described above, the Companyhad total unvested stock-based compensation expense of $364.  The unvested stock options will vest atvarious intervals over the next 2.7 years. Total stock-based compensation expense, recognized in general andadministrative expenses during the third quarter and first nine months of 2006is shown in the following table:

|                                                          | ** ** | **Nine months ended**  | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
|                                                     |       |                             |       |                             |       |
| Stock-based  compensation expense included in net income |       | $                                | 261        |                             | $          | 75 |   |
|                                                     |       |                             |       |                             |       |
| Effect on diluted  income (loss) per share               |       | $                                | (0.03      | )                                | $          | (0.01 | ) |

 

Prior to the adoption of SFAS No. 123R, the stock-based compensationplans were accounted for using the intrinsic value method under AccountingPrinciples Board Opinion (“APB”) No. 25, *Accounting for StockIssued to Employees*, and related interpretations.  Pro forma information regarding the impact oftotal stock-based compensation on net income and income per share for priorperiods is required by SFAS No. 123R.

Such pro forma information, determined as if the Company had accountedfor its employee stock options under the fair value method according to SFASNo. 123, during the third quarter and first nine months of 2005, is illustratedin the following table:

|                                                                                                  | ** ** | **Nine months ended**  | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                       | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
|                                                                                             |       |                             |       |                             |       |
| Reported net  income (loss)                                                                      |       | $                                | 1,145      |                             | $          | (558 | ) |
| Add stock-based  compensation expense reported in net income                                     |       | —                           |       | —                           |       |
| Less total stock-based  compensation expense, determined under the fair value method, net of tax |       | 391                              |       | 148                              |       |
| Pro forma net  income (loss)                                                                     |       | $                                | 754        |                             | $          | (706 | ) |
|                                                                                             |       |                             |       |                             |       |
| Reported basic  net income (loss) per share                                                      |       | $                                | 0.12       |                             | $          | (0.06 | ) |
| Add stock-based  compensation expense reported in net income                                     |       | —                           |       | —                           |       |
| Less total  stock-based compensation expense, determined under the fair value method             |       | 0.04                             |       | 0.01                             |       |
| Pro forma basic  net income (loss) per share                                                     |       | $                                | 0.08       |                             | $          | (0.07 | ) |
|                                                                                             |       |                             |       |                             |       |
| Reported diluted  net income (loss) per share                                                    |       | $                                | 0.12       |                             | $          | (0.06 | ) |
| Add stock-based  compensation expense reported in net income                                     |       | —                           |       | —                           |       |
| Less total  stock-based compensation expense, determined under the fair value method             |       | 0.04                             |       | (0.01                            | )          |
| Pro forma diluted net  income (loss) per share                                                   |       | $                                | 0.08       |                             | $          | (0.07 | ) |

 

7

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The fair value of options at the date of grant was estimated using theBlack-Scholes option valuation model with the following weighted averageassumptions for all options granted during the period:

|                          | ** ** | **SFAS No. 123R** | ** ** | **SFAS No. 123** | ** ** |
|--------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **Expense**                 | ** ** | **Pro forma**         | ** ** |
| ** **               | ** ** | **2006**                    | ** ** | **2005**                   | ** ** |
| Expected term            |       | 5  years                    |       | 5  years                   |       |
| Risk-free  interest rate |       | 4.5  - 5.0%                 |       | 3.9%                       |       |
| Expected  volatility     |       | 65%                         |       | 50%                        |       |
| Expected dividend yield  |       | —                      |       | —                     |       |

 

The weighted-average grant-date fair value of options granted duringthe nine months ended September 30, 2006 and September 30, 2005 was $2.40 and$3.52, respectively.  The expectedvolatility is based on the historical volatility of the Company’s common stock.

A summary of option activity under the Company’s two stock plans, as ofSeptember 30, 2006 and changes during the nine months then ended is presentedbelow:

|                                                                            | ** ** | ** **            | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                                                                 | ** ** | **Shares of**    | ** ** | **Weighted-** | ** ** | **average**     | ** ** | ** **    | ** ** |
| ** **                                                                 | ** ** | **common stock** | ** ** | **average**   | ** ** | **remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                                                 | ** ** | **under**             | ** ** | **exercise**  | ** ** | **contractual** | ** ** | **intrinsic** | ** ** |
| ** **                                                                 | ** ** | **options**           | ** ** | **price**     | ** ** | **term**        | ** ** | **value**     | ** ** |
| Outstanding at  January 1, 2006                                            |       | 1,934                 |       | $             | 5.10       |            |       |          |       |   |
| Options granted                                                            |       | 17                    |       | 4.10          |       |            |       |          |       |
| Options  forfeited or expired                                              |       | (194                  | )          | 8.35          |       |            |       |          |       |
| Options  exercised                                                         |       | —                |       | —        |       |            |       |          |       |
| Outstanding at  September 30, 2006                                         |       | 1,757                 |       | $             | 4.73       |            | 7.2        |          | $          | — |   |
| Exercisable at  September 30, 2006                                         |       | 1,480                 |       | $             | 4.78       |            | 7.1        |          | $          | — |   |
| Ending vested  and expected to vest in the future as of September 30, 2006 |       | 1,745                 |       | $             | 4.73       |            | 7.2        |          | $          | — |   |
| Available for grant at  September 30, 2006                                 |       | 1,194                 |       |          |       |            |       |          |       |

 

A summary of the status of the Company’s nonvested shares as ofSeptember 30, 2006 and changes during the nine months then ended is presentedbelow:

|                                  | ** ** | ** ** | ** ** | **Weighted-**       | ** ** |
|----------------------------------|------------|------------|------------|---------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                       | ** ** | ** ** | ** ** | **Grant-Date**      | ** ** |
| **Nonvested Shares**        | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|                             |       |       |       |                |       |
| Nonvested at  January 1, 2006    |       | 563        |       | $                   | 1.96       |   |
| Granted                          |       | 17         |       | 2.40                |       |
| Vested                           |       | (220       | )          | 1.82                |       |
| Forfeited or  expired            |       | (83        | )          | 3.55                |       |
| Nonvested at September  30, 2006 |       | 277        |       | $                   | 1.62       |   |

 

8

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**3.*****              Inventories.**** *Inventories stated at the lower ofcost (first-in, first-out method) or market are summarized as follows:

|                                   | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                              |       |                             |       |                            |       |
| Raw Materials                     |       | $                                | 5,435      |                            | $          | 5,567 |   |
| Work-in-Process                   |       | 3,270                            |       | 2,642                           |       |
| Finished Goods                    |       | 4,705                            |       | 4,926                           |       |
|                              |       | 13,410                           |       | 13,135                          |       |
| Less inventory  valuation reserve |       | (1,245                           | )          | (1,724                          | )          |
|                              |       | $                                | 12,165     |                            | $          | 11,411 |   |

 

**4.****              *Income(loss) per share.***  Basicincome (loss) per share excludes dilution and is computed by dividing netincome (loss) available to common stockholders by the weighted average numberof common shares outstanding for the nine months and three months endedSeptember 30, 2006 and 2005*. *Diluted income (loss) per sharereflects the potential dilution that could occur if dilutive options to acquirecommon stock were exercised, the proceeds of which are then presumed to havebeen used to repurchase outstanding stock using the treasury stock method.  The following is a reconciliation of thenumber of shares (denominator) used in the basic and diluted income (loss) pershare computations for the nine months and three months ended September 30,2006 and 2005:

|                                   | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                              | ** ** | **Per Share** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                        | ** ** | **Shares**                                              | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic income  (loss) per share    |       | 9,543                                                   |       | $ | (0.42 | ) | 9,416 |   | $ | 0.12 |   |
| Effect of  dilutive stock options |       | —                                                  |       | — |   | 418 |   | — |   |
| Diluted income (loss)  per share  |       | 9,543                                                   |       | $ | (0.42 | ) | 9,834 |   | $ | 0.12 |   |

 

|                                   | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                               | ** ** | **Per Share** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                        | ** ** | **Shares**                                               | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic income  (loss) per share    |       | 9,543                                                    |       | $ | (0.01 | ) | 9,475 |   | $ | (0.06 | ) |
| Effect of  dilutive stock options |       | —                                                   |       | — |   | — |   | — |   |
| Diluted income (loss)  per share  |       | 9,543                                                    |       | $ | (0.01 | ) | 9,475 |   | $ | (0.06 | ) |

 

The following options were not included in the computation of dilutedincome (loss) per share due to their antidilutive effect.

|                                             | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Options to  purchase shares of common stock |       | 1,757                                                   |       | 79 |   |
| Exercise prices                             |       | $3.25 - $13.75                                          |       | $7.05 - $13.75 |   |
| Expiration dates                            |       | July 2010 — June 2016                              |       | July 2006 — August 2015 |   |

 

9

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|                                             | ** ** | **Three months ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| Options to  purchase shares of common stock |       | 1,757                                                    |       | 1,203 |   |
| Exercise prices                             |       | $3.25 - $13.75                                           |       | $3.25 - $13.75 |   |
| Expiration dates                            |       | July 2010 — June 2016                               |       | July 2006 — August 2015 |   |

 

***5.******              Segments.***  The operating segments of the Company havebeen aggregated into two geographical reporting segments: Americas andInternational.  Americas includes theUnited States, Central and South America and Canada.  International includes Europe, Africa, MiddleEast, Australia and Asia.  The followingtable summarizes segment information for the nine months and three months endedSeptember 30, 2006 and 2005:

|                                         | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Revenues from  unrelated entitities(1): |       |                                                    |       |   |   |
| Americas                                |       | $                                                       | 46,886     |   | $ | 54,779 |   |
| International                           |       | 37,590                                                  |       | 37,887 |   |
|                                    |       | $                                                       | 84,476     |   | $ | 92,666 |   |
| Income (loss)  from operations:         |       |                                                    |       |   |   |
| Americas                                |       | $                                                       | 735        |   | $ | 768 |   |
| International                           |       | (5,998                                                  | )          | 478 |   |
|                                    |       | $                                                       | (5,263     | ) | $ | 1,246 |   |
| Interest  expense, net:                 |       |                                                    |       |   |   |
| Americas                                |       | $                                                       | 303        |   | $ | 148 |   |
| International                           |       | 199                                                     |       | 179 |   |
|                                    |       | $                                                       | 502        |   | $ | 327 |   |

----

(1) Note:              Revenues fromAustralia exceeded 10% of total revenues for the nine month ended September 30,2006 and 2005. Revenues from Australia totaled $33,526 and $32,296 for the ninemonth periods in 2006 and 2005, respectively.

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|                                         | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| Revenues from  unrelated entitities(1): |       |                                                     |       |   |   |
| Americas                                |       | $                                                        | 15,710     |   | $ | 14,981 |   |
| International                           |       | 13,666                                                   |       | 12,525 |   |
|                                    |       | $                                                        | 29,376     |   | $ | 27,506 |   |
| Income (loss)  from operations:         |       |                                                     |       |   |   |
| Americas                                |       | $                                                        | 355        |   | $ | (1,175 | ) |
| International                           |       | (264                                                     | )          | (564 | ) |
|                                    |       | $                                                        | 91         |   | $ | (1,739 | ) |
| Interest  expense, net:                 |       |                                                     |       |   |   |
| Americas                                |       | $                                                        | 126        |   | $ | 46 |   |
| International                           |       | 90                                                       |       | 51 |   |
|                                    |       | $                                                        | 216        |   | $ | 97 |   |

----

(1) Note:              Revenues from Australia exceeded 10% oftotal revenues for the three month ended September 30, 2006 and 2005.  Revenues from Australia totaled $12,151 and$11,126 for the three month periods in 2006 and 2005, respectively.

The Company has revenues from external customers fromthe following product lines:

|                        | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------|------------|---------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Product lines:         |       |                                                    |       |   |   |
| Enclosures             |       | $                                                       | 40,101     |   | $ | 41,174 |   |
| Water related products |       | 36,847                                                  |       | 44,088 |   |
| Connectivity           |       | 6,517                                                   |       | 6,842 |   |
| Other                  |       | 1,011                                                   |       | 562 |   |
|                   |       | $                                                       | 84,476     |   | $ | 92,666 |   |

 

|                        | ** ** | **Three months ended September 30,** | ** ** |
|------------------------|------------|----------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| Product lines:         |       |                                                     |       |   |   |
| Enclosures             |       | $                                                        | 13,402     |   | $ | 11,611 |   |
| Water related products |       | 12,886                                                   |       | 13,339 |   |
| Connectivity           |       | 2,549                                                    |       | 2,271 |   |
| Other                  |       | 539                                                      |       | 285 |   |
|                   |       | $                                                        | 29,376     |   | $ | 27,506 |   |

 

***6.******             ******Recent Accounting Pronouncements.******* InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements.  This Statement will beeffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating therequirements of this new standard and has not concluded its analysis on theimpact to the Company’s consolidated financial position or results ofoperations.

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In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin (“SAB”) 108, *QuantifyingFinancial Statement Misstatements*. In SAB 108, the Securities and Exchange Commission’s staff establishesan approach for consideration of the effect of financial statement errors oneach of the Company’s financial statements. SAB 108 will be effective for the Company as of December 31, 2006;however it is not expected to have a material effect on the Company’s financialstatements.

In July 2006, the FASB issued FASB Interpretation (“FIN”)No. 48, *Accounting for Uncertainty in IncomeTaxes*, which becomes effective for fiscal years beginning afterDecember 15, 2006.  FIN No. 48 prescribesa recognition threshold and measurement process for recording in the financialstatements uncertain tax positions taken or expected to be taken in a taxreturn.  Additionally, FIN No. 48provides guidance on derecognition, classification, accounting in interimperiods and disclosure requirements for uncertain tax positions.  Management of the Company has not completedits assessment of the effects of FIN No. 48 on the consolidated financialstatements.

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections — a replacement of APB OpinionNo. 20 and FASB Statement No. 3.*  SFAS No. 154 replaces APBOpinion No. 20, *Accounting Changes,* and FASBStatement No. 3, *Reporting Accounting Changes in InterimFinancial Statements,* and changes the requirements for theaccounting for and reporting of a change in accounting principle.  This statement applies to all voluntarychanges in accounting principle.  It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions.  When a pronouncementincludes specific transition provisions, those provisions should befollowed.  SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 31, 2005.The Company adopted SFAS No. 154 on January 1, 2006, and its implementation didnot have a material effect on the Company’s consolidated financial position,results of operations or cash flows.

In November 2004, the FASB issued SFAS No. 151, *Inventory Costs, an Amendment of ARB No. 43, Chapter 4.*  SFAS No. 151 retains the general principle ofARB No.43, Chapter 4, *Inventory Pricing,*that inventories are presumed to be stated at cost; however, it amends ARB No.43 to clarify that abnormal amounts of idle facilities, freight, handling costsand spoilage should be recognized as current period expenses.  Also, SFAS No. 151 requires fixed overheadcosts be allocated to inventories based on normal production capacity.  The guidance in SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  The Company adopted SFAS No. 151on January 1, 2006, and its implementation did not have a material impact onits consolidated financial condition, results of operations or cash flows.

**7.****              *SaleLeaseback Agreement.***  InJune, 2002, the Company entered into a sale and leaseback agreement for afacility located in Temecula, California. The proceeds from the sale totaled approximately $6,200 and resulted ina pretax deferred gain of $604.  Theresulting lease is being accounted for as an operating lease.  The lease base term is ten years with twofive-year options at rental amounts to be adjusted to the fair market rentalvalue at the end of the base term.  Theunamortized balance of the deferred gain is being amortized over the ten-yearlease base term, and as of September 30, 2006, such balance was $347.  The Company recorded income of $45 in each ofthe first nine months of 2006 and 2005, related to the amortization of thedeferred gain.

**8.****              *Income Taxes.***  Theeffective tax rate was 4.6% and (10.4%) for the nine months and three monthsended September 30, 2006, respectively, compared to the statutory rate of34%.  The effective rate is based on theexpected rate for the year. The largest impact to foreign income or loss was$4,829 related to the impairment of goodwill during the nine months endedSeptember 30, 2006, which is a non-deductible item for determining income taxesand treated as a permanent difference, resulting in a decrease in the effectivetax benefit rate of 25.1% for the nine months ended September 30, 2006.  The tax expense recorded in the third quarterof the current year was a result of an adjustment of $47 associated with thetrue up of the tax provision and the deferred tax balances for the 2005 taxfiling of the Canadian subsidiary.  Thisamount was offset by a $34 tax benefit as a result of the loss in foreignoperations.  The $265 tax benefit for thenine months ended September 30, 2006 was primarily related to the foreignentities as there was no tax benefit recorded for the domestic losses, asexplained below.

As the Company has no domestic income taxes payable, the recognition ofa deferred tax asset would be required for any tax benefit recognized as aresult of a current net loss.  However,under SFAS No. 109, *Accounting for IncomeTaxes,* the Company is required to record a valuation allowance toreduce its net deferred tax asset to the amount that management believes ismore likely than not to be realized. Accounting guidance allows the Company to look to future earnings tosupport the realizability of net deferred assets.  However, since the Company has had cumulativelosses in recent years in its domestic operations, the Company is unable tosupport the realizability of domestic deferred tax assets based on forecastedfuture earnings.  As a result, managementhas concluded that a full

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valuation allowance against net domestic deferred tax assets isnecessary.  As such, no tax benefit hasbeen recorded for the domestic losses of the Company in the nine months endedSeptember 30, 2006.

**9.*****              Commitments andContingencies*.**  *Employment Agreements**—***In December, 2003, the Company entered into a five-year employment agreement, renewable every five years, with the Company’sPresident and Chief Executive Officer, William H. Channell, Jr.  Mr. Channell, Jr.’s annual salary for 2005was $760.  Mr. Channell, Jr. is entitledto participate in the Company’s stock plans, the Company’s 401(k) Plan and theCompany’s Incentive Bonus Plan. Additionally, the employment agreement provides for incentivecompensation to Mr. Channell, Jr., based upon personal performance objectivesand increases in the Company’s market capitalization over a three-year period,to be paid under Mr. Channell, Jr.’s Long-Term Incentive Plan.  Mr. Channell, Jr. is also entitled to certainother benefits paid for by the Company, including an automobile allowance,health insurance and sick leave, in accordance with the Company’s customarypractices for senior executive officers. In the event that the Company were to terminate Mr. Channell, Jr.’semployment without cause (as defined in the agreement), or Mr. Channell, Jr.were to terminate his employment for good reason (also as defined in theagreement and including, without limitation, a change of control of theCompany), Mr. Channell, Jr. would be entitled to a lump sum payment equal tothree times his then current base salary, all health and life insurancebenefits for three years, and accelerated vesting of any stock options orrestricted stock granted to him.

In December, 2003, theCompany amended the employment agreement with Mr. William H. Channell, Sr.originally entered into in July, 1996. Mr. Channell, Sr.’s annual salary starting in December, 2003 is$50.  Mr. Channell, Sr.’s benefitsinclude (i) during the term of the agreement, the payment of premiums for aterm disability policy providing for $250 in annual benefits in the case of histemporary or permanent disability, (ii) during the lifetime of Mr. Channell,Sr. and his wife, Jacqueline M. Channell, medical insurance for each of Mr. andMrs. Channell comparable to that provided to the Company’s senior executiveofficers,  (iii) during Mr. Channell, Sr.’slifetime, a portion of the premiums on a $1,500 life insurance policy owned byMr. Channell, Sr., under which Mrs. Channell is the beneficiary, and (iv) anautomobile allowance.

*Taxes**—***TheFederal income tax returns of the Company for the years ended December 31,1997, 1999, 2000, 2001 and 2002 are currently under examination by the InternalRevenue Service (“IRS”).  As of September30, 2006, the Company and the IRS have resolved all outstanding issues exceptfor the credit for increasing research and development expenditures.  The amount of the credit under dispute isapproximately $500.  As the Company hasestablished a full valuation allowance on the net benefit to be obtained fromthis credit, the resolution of the research and development tax credit will nothave a material adverse impact on the Company’s results of operations orfinancial position.  In addition, thecredit has not been utilized on the Company’s tax returns.  Also, on August 4, 2006 the Company receivednotification from the IRS that its income tax returns for the years endedDecember 31, 2003 and 2004 have been selected for examination.  The Company expects that the results of theseexaminations will not have a material impact on the Company’s results ofoperations or financial condition.

The Company has accruedsales and use tax assessments for previous years, including interest, from thestate of Georgia of $119 and the state of Massachusetts of $15.  The Company expects to pay these amounts inthe fourth quarter of 2006.

*Bank Guarantees—*Duringthe quarter ended September 30, 2006 the Company relocated one of itsAustralian office and manufacturing facilities. As part of the relocation the Company incurred certain costs to restorethe exited facilities to their original condition.  Subsequent to the end of the quarter theCompany’s former landlord drew AUD$240 from the Company’s bank guarantee facilityto fund additional restoration costs that the landlord contends the Company isresponsible for.  The Company believesthe costs cited by the landlord are inappropriate and excessive, and plans tocontest the amount drawn from the bank guarantee facility.  Final resolution of this matter is notexpected to materially affect the Company’s operating results and workingcapital.

*Termination of Transportation andLogistics Services by Primary Freight Provider for Bushman Tanks Business—*Asof October 12, 2006, the primary freight provider for the Company’s Bushmanwater storage tank manufacturing and distribution business unilaterallywithdrew its transportation and logistics services.   Accordingly, the agreement with the freightprovider has been terminated, and Bushman has reserved its rights in relationto any damages it suffers as a result of the termination of such services.  The freight provider claims that Bushman hasbreached the agreement.  Although theCompany does not believe Bushman has breached the terms of the agreement, ithas accrued for all amounts in dispute. If the dispute with the freight provider cannot be resolved, eitherBushman or the freight provider may pursue legal action. In addition, as Bushmantransitions its transportation and logistics services, the timing of scheduleddeliveries may be temporarily pushed out to subsequent periods.  The disruption in transportation andlogistics services due to the termination of such services by the formerfreight provider, the

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timing of theimplementation of the contingency plan for transition of transportation andlogistics services, the legal cost associated with potential litigation relatedto the termination of such services, and any settlements as a result of legaldisputes related thereto could negatively affect the Company’s working capitaland results of operations.

*Legal Proceedings**—** Carson Industries LLC v. Channell Commercial Corporation(Calif. Superior Court Case No. BC334759)*.  For a number of years the Company purchasedgrade level boxes from Carson Industries LLC (“Carson”) for resale to theCompany’s customers.  In 2004, theCompany’s customers reported the failure of a number of Carson boxes in thefield.  The Company determined thatcertain boxes sold to the Company by Carson in 2004 and thereafter did notconform to certain specifications.  OnJune 9, 2005, Carson filed the above-captioned lawsuit against the Company,principally seeking approximately $360 for product sold to the Company but notyet paid for.  On July 26, 2005, theCompany cross-complained against Carson for, among other things, breach ofcontract, breach of express and implied warranties, fraud and intentionalinterference with contractual relations.

During court orderedmediation on March 21, 2006, the parties agreed to settle the lawsuit.  The final agreement was signed on April 17,2006 whereby the Company paid to Carson $290 and returned to Carsonapproximately $70 of inventory previously purchased by the Company.  Carson agreed to indemnify the Company againstcertain product warranty claims for five years from the date of sale.  The Company had $307 accrued for thisliability as of March 31, 2006, which was reduced to $0 as of June 30, 2006.

In addition, the Company is from time to time involved in ordinaryroutine litigation incidental to the conduct of its business.  The Company regularly reviews all pendinglitigation matters in which it is involved and establishes reserves deemedappropriate for such litigation matters. Management believes that no presently pending litigation matters arelikely to have a material adverse effect on the Company’s financial statementsor results of operations, taken as a whole.

On August 2, 2004, the Company, through a majority-owned subsidiary,acquired a controlling interest in Bushman Tanks, a manufacturer anddistributor of rotational molded plastic (polyethylene) water storage tanks,for a purchase price of $16,838.  BushmanTanks currently operates out of six leased facilities in Australia, located inSydney, Dalby, Orange, Terang, Townsville, and Adelaide.  The original Share and Asset PurchaseAgreement provided for total contingent consideration of approximately $2,900if the Bushman Tanks business was to achieve certain sales and cost reductiontargets.  Any amounts paid as contingentconsideration were to result in additional goodwill.  Management assessed that an earn out ofapproximately $760 was earned for achieving the 2005 sales targets as of July31, 2005, and this amount was accrued as an increase to goodwill during thethird quarter of 2005.  In the fourthquarter of 2005, $380 of this earn out was paid, and $380 remained as anaccrued liability as of March 31, 2006. Also, under the original agreement, if certain cost reduction targetswere to be achieved, the sellers were to receive one-half of the amounts of thecost reductions in the specified cost items. In the event that the costs incurred for these items exceeded apredetermined threshold, the seller was to be liable to the Company for theamount of the costs exceeding the threshold. Accordingly, $146 was recorded as a receivable for warranty claimsduring 2005 and recorded as a reduction to goodwill.  During the quarter ended June 30, 2006, theCompany and the sellers entered into an agreement that modified the originalterms of the contingent consideration. Pursuant to the agreement, the Company paid approximately $148 to thesellers to settle all current claims between the parties.  The sellers will forgo any additional earnout payments, and the Company will forgo any future warranty claims.  As a result of the settlement agreement, anet amount of $86 was recorded as a reduction to goodwill.  The Company believes that any impact of thisagreement will not have a material effect on its financial condition or resultsof operations.

**10.****    *Related Party Transactions. ***InMay, 2002, the Company sold its Radio Frequency (“RF”) line of passiveelectronic devices to RMS Communications, Inc., which is owned by GaryNapolitano, a former officer of the Company. A sale in the amount of $800 was recorded.  RMS Communications, Inc. paid the Company$125 in cash at the time of sale, and the remaining $675 was payable in monthlyinstallments through June 30, 2003, bearing interest at 7% per annum.  A revised secured promissory note supersedingthe previous promissory note with RMS Communications, Inc. and Gary Napolitanopersonally has been entered into with RMS Communications, Inc. and GaryNapolitano personally.  The revisedsecured promissory note is dated December 31, 2005 and called for the balanceowed to the Company of $206 plus accrued interest of $46 to be paid in monthlyinstallments of $3.5 until the entire amount of the note is paid.  The Company has security interest in theinventory and a personal guarantee from Mr. Napolitano.  A reserve of approximately $118 has beenrecorded against the receivable as of September 30, 2006 according to theCompany’s policy for accounts receivable allowances.  The RF devices purchased from Mr. Napolitano’sfirm in 2005 and 2004 approximated $10 and $87, respectively, and were used inthe Company’s product lines.  Thepurchases in 2005 and 2004 did not result in a cash payment to Mr. Napolitanoas the amounts were used to reduce the accounts receivable.  The balance owed at September 30, 2006 was$234.  There were no purchases from Mr.Napolitano’s company in the nine months ended September 30, 2006.

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The Company has twoleases for approximately 261,000 square feet of manufacturing, warehouse andoffice space in Temecula, California, with the Channell Family Trust, anaffiliate of William H. Channell, Sr., the Company’s principal stockholder andChairman of the Board, and Jacqueline M. Channell, a director and the Companysecretary.  The term of the lease datedDecember 22, 1989 (as amended), for 108,000 square feet, expires on December31, 2015.  The term of the lease datedMay 29, 1996, for 153,000 square feet, expires on December 30, 2010 and has afive-year renewal option. Both leases provide for payments of insurance,repairs, maintenance and property taxes. Rent expense paid under the leases was $1,038 and $1,001 for the ninemonths ended September 30, 2006 and 2005, respectively.  The Company believes that at the time theleases were entered into, the terms of these leases were no less favorable tothe Company than could have been obtained from an independent third party.

In the first nine monthsof 2006, the Company paid Carolyn Channell $54. On June 1, 2005, Mrs. Channell was hired as an employee to handlespecific insurance matters for the Company. Prior to being hired as an employee of the Company, Mrs. Channellconsulted on insurance matters for the Company. In the first nine months of 2005, Mrs. Channell was paid $31 forconsulting services and received compensation of $19 after becoming anemployee.  Mrs. Channell is the wife ofWilliam H. Channell, Jr., the Company’s President and Chief Executive Officer.

The Company’s facilitiesin Dalby, Terang and Adelaide, Australia, are leased from stockholders of theCompany.  These stockholders are formerowners of Bushman Tanks.  The facilitiescomprise 74,000 square feet of manufacturing, warehouse and office space.  The lease term on all three facilities isthrough February 28, 2010 with a five-year renewal option.  The rent expense paid under leases with the stockholdersin the nine months ended September 30, 2006 was $228.  The Company hired an independent firm toappraise the market lease rates for these facilities and it was determined thatthe existing leases are in excess of fair market value by approximately $27 peryear.  Included in liabilities atSeptember 30, 2006 is $147 accrued for purchase accounting related to theseunfavorable leases.

**11.****       *Concentrations.***  Sales to Verizon of $7,214 in the first ninemonths of 2006 represented 8.5% of the Company’s sales in the period.  Sales to Verizon of $19,430 in the first ninemonths of 2005 represented 21.0% of the Company’s sales.

Sales to Verizon of $1,655 in the third quarter of 2006 represented5.6% of the Company’s sales in the period. Sales to Verizon of $3,257 in the third quarter of 2005 represented11.8% of the Company’s sales in the period.

Accounts receivable from Verizon of $993 represented 8.2% of Companyaccounts receivable at September 30, 2006. Accounts receivable from Verizon of $307 represented 3.7% of Companyaccounts receivable at December 31, 2005.

**12.****       *Guarantees.* **In 1997, the Company guaranteed debt ofthe Channell Family Trust of approximately $754 incurred in connection withconstruction of the facilities leased to the Company, and such guaranteed debtis collateralized by said facilities. The loan amount subject to the guarantee is expected to decline beforeexpiring in 2017.  The Company has notrecorded a liability for this guarantee. At September 30, 2006, the outstanding loan balance subject to theguarantee totaled approximately $529. The Channell Family Trust does not qualify as a “variable interestentity” subject to consolidation under FIN 46(R), *Consolidationof Variable Interest Entities,* since (a) there are sufficient assetsheld by the Trust that the lender could attach in the event of default on theloan, (b) the total equity investment at risk in the Trust is sufficient topermit financing without additional financial support from the Company and (c)William Channell, Sr., the administrator of the Channell Family Trust, has thedirect ability to make decisions about the Trust’s activities.

**13.**       ***Goodwill and OtherIntangible Assets.***  Thebalance of goodwill and intangible assets on the Company’s balance sheetfluctuates from period to period due to the application of foreign currencytranslation to United States dollars in calculating the balance of goodwill andother intangible assets of the Company’s foreign subsidiaries.  SFAS No. 142, *Goodwill andOther Intangible Assets,* requires that goodwill and certainintangibles no longer be amortized, but instead be reviewed at least annuallyfor impairment.

The Company tests the value of goodwill for impairment annually(December 31 for the Canadian reporting unit and June 30 for the Bushman  Tanks reporting unit) or whenever events orchanges in circumstance indicate that a condition of impairment may exist.  As such, the goodwill for the Bushman Tanksreporting unit was reassessed for impairment on June 30, 2006.  The test involves significant judgment inestimating projections of fair value generated through future performance ofthe operating segment.  In calculatingthe fair value, the Company relies on

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factors such as operating results, business plans, economicprojections, and anticipated cash flows used in discounting the cashflows.  Inherent uncertainties exist indetermining and applying such factors.

Based on the impairment test, as of June 30, 2006, the Company recordeda $4,829 impairment related to the carrying value of goodwill related to theBushman Tanks reporting unit in Australia. The primary cause for this impairment of goodwill is the decrease ingross margins and operating income, which have been negatively impacted byincreasing prices in petroleum-based raw materials and other factors, resultingin revisions of projected future earnings and cash flows.  The fair value of the Bushman Tanks reportingunit was estimated using a combination of valuation techniques, including the discountedcash flow method.  Measurement of theimpairment loss is an estimate, and continued increases in raw materials costsin excess of the expectations of management, or other negative events orcircumstances, could result in additional impairment of goodwill in futurereporting periods.  There was no impairmentto the carrying value of goodwill in 2005.

The changes in the carrying amount of goodwill in the Company’sCanadian reporting unit, which is part of the Americas segment, and in itsBushman Tanks reporting unit, which is part of the International segment, aresummarized as follows:

|                                            | ** ** | **Americas** | ** ** | **International** | ** ** |
|--------------------------------------------|------------|--------------|------------|-------------------|------------|
| Balance at  December 31, 2005              |       | $            | 674        |              | $          | 13,273 |   |
| Adjustment for  final settlement agreement |       | —       |       | (86               | )          |
| Impairment of  goodwill                    |       | —       |       | (4,829            | )          |
| Effect of  foreign currency translation    |       | 35           |       | 325               |       |
| Balance at September  30, 2006             |       | $            | 709        |              | $          | 8,683 |   |

 

In the original Share and Asset Purchase Agreement, the sellers ofBushman Tanks agreed to a “non-compete” clause whereby the sellers of BushmanTanks would not directly or indirectlycarry on or be engaged or involved in any trade, business or undertaking thatis in competition with the Bushman  Tanksbusiness.  The Company performed anevaluation of the non-compete agreement and determined the fair value at thedate of the Bushman Tanks acquisition to be $1,600.  The non-compete agreement is recorded in thereporting unit of Bushman Tanks, which is part of the International segment, asa separately identifiable intangible asset and is being amortized overthe ten-year contractual term on a straight line basis.

During the quarter ended June 30, 2006, the Company reclassified anonamortizing indefinite-life trademark intangible asset from goodwill tointangible asset, including the December 31, 2005 amounts for comparativepurposes, which resulted in an increase in intangible assets of $657 and $655,a decrease in goodwill of $460 and $459, and an increase in deferred taxliabilities of $197 and $196, as of June 30, 2006 and December 31, 2005,respectively.  The difference in amountsbetween the two balance sheet dates is because of a difference in the foreigncurrency translation rate at those dates. This reclassification occurred in the Bushman reporting unit, which ispart of the International segment.

Amortization expense for the nine months ended September 30, 2006 was$130.  The estimated amortization expensebased on current intangible balances and the September 30, 2006 foreigncurrency exchange rates, is $173 per year for the next five fiscal years, and$521 thereafter.

**14.**       ***Loan and Security Agreements.***  The Company has a Loan and Security Agreementwith an asset-based lender in the United States.  This Agreement contains a term loan and arevolving credit facility.  On February28, 2006, the Loan and Security Agreement was amended, among other things, toextend the term of the loans through March 31, 2007; to eliminate the fixedcharge coverage ratio financial covenant; and to reduce the maximum revolverborrowings to $10,000.  The loans underthe Loan and Security Agreement are secured by all of the assets of theCompany.  The maximum amount availableunder the revolver is based on the level of certain qualifying assets.  The revolver under this Agreement has a$1,000 sub-limit for letters of credit. As of September 30, 2006, outstanding letters of credit totaled$986.  The Agreement contains variousfinancial and operating covenants that impose limitations on the Company’sability, among other things, to incur additional indebtedness, merge orconsolidate, sell assets except in the ordinary course of business, makecertain investments, enter into leases and pay dividends.  The Agreement requires the Company tomaintain a lockbox on the revolving credit facility.  The Agreement also contains a subjectiveacceleration clause should the Company come into a default, which allows theasset-based lender to terminate the facility and require that any outstandingobligation to be repaid.  The balance

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outstanding at September30, 2006 under the revolving line of credit was $6,161 and under the term loanwas $1,178.  The revolving line of creditand the term loan have been classified as a current liability.

Channell Bushman Pty Ltdand controlled entities, collectively known as Channell Bushman Group, whichare subsidiaries of the Company, entered into a Loan and Security Agreementwith a commercial bank in Australia in August 2004.  Channell Bushman Group has from time to timeentered into new Loan and Security Agreements with the bank, which have amendedand superseded the prior Loan and Security Agreements.  Channell Bushman Group signed a new Loan andSecurity Agreement with the bank dated as of April 26, 2006 that amended (andsuperseded) the Loan and Security Agreement then in place.  That agreement, among other things, revisedthe financial covenants and increased the maximum borrowings under the revolvingcredit facility.  Effective August 25,2006, Channell Bushman Group entered into a new Loan and Security Agreementwith the bank that amended and superseded the April 26, 2006 Loan and SecurityAgreement.  The August 2006 Loan andSecurity Agreement revised the financial covenants applicable to ChannellBushman Group, but otherwise generally contains the same borrowing limits andother terms and provisions (other than the financial covenants) as the previousLoan and Security Agreement.  As ofSeptember 30, 2006, the facilities under the current Loan and SecurityAgreement included the following: a term loan that expires in July 2009; arevolving credit facility with maximum borrowings of AUD $3,200 that expires inNovember 2006; a facility to fund future “earn-out” payments to the sellers ofBushman Tanks that expires in July 2008; a capital expenditure facility thatexpires in July 2009; and a master asset finance agreement facility thatexpires in November 2006.  The loansunder the Loan and Security Agreement are secured by all the assets of ChannellBushman Group.  The Loan and SecurityAgreement contains various operating covenants that impose limitations onChannell Bushman Group’s ability, among other things, to merge or consolidate,sell assets except in the ordinary course of business, and pay dividends.  In addition, Channell Bushman Group isrequired to comply with certain financial covenants relating to sales, grossprofit and operating profit.  In addition,the Agreement contractually obligates Channell Bushman Group to repay the revolvingcredit facility as it receives payments from its customers.  The Agreement also contains a subjectiveacceleration clause should Channell Bushman Group come into a default, whichallows the bank to terminate the facility and require any outstandingobligations to be repaid.  The aggregatebalance outstanding under the revolving line of credit, “earn-out” facility,and capital expenditure facility at September 30, 2006 was $2,117.  As of September 30, 2006, Channell BushmanGroup was not in compliance with various financial covenants and has notreceived a waiver of noncompliance from the bank.  The Company is currently renegotiating thefinancial covenants under its current Australian Loan and Security Agreementand expects the borrowing limits and the terms other than the financialcovenants to generally remain the same.  TheCompany has not been precluded from drawing on its credit facilities during thenegotiation period, however, in the event the Company is not able tosuccessfully renegotiate the financial covenants then the bank may take furtheraction against the Company as described above. As the renegotiations have not been completed, the Company hasreclassified approximately $3.1 million of long-term debt to short-term debt.

**ITEM 2.**                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

### **Introductionand Overview**

ChannellCommercial Corporation (the “Company”) is a designer and manufacturer oftelecommunications equipment supplied to communications network operatorsworldwide and water storage tanks distributed in consumer markets throughoutAustralia.  Major product lines include a complete line of thermoplasticand metal fabricated enclosures, advanced copper termination andconnectorization products, fiber-optic cable management systems andpolyethylene water storage tanks.

During the last fiveyears, demand for communications infrastructure equipment has fluctuateddramatically.  At various times in the past there have been significantslowdowns in capital spending by both cable and telecom network operators dueto several factors including, but not limited to, service providerconsolidation, delays in outside plant upgrade/rebuild projects, and enhancingfree cash flow to strengthen their balance sheets and pay down debt. These changes had a significant negative impact on overall demand forinfrastructure products, and at various times have directly reduced demand forthe Company’s products and increased price competition within its industry,which has led to reductions in our revenues and contributed to our reportedoperating losses.

Within the water storageportion of the Company’s business, demand continues to grow in Australia due tothe country’s generally arid climate and the widespread water conservationefforts.  Demand for the Company’s water storage products is also drivenby regulatory factors at the local, state, and federal government levels. Recently, portions of Australia have experienced significant rainfall which, ifcontinued, could negatively affect the sales of the Company’s product.

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Within both thecommunications infrastructure market and water storage market, the historicallyhigh price of oil has had a negative impact on the Company’s grossmargins.  The products manufactured in both of the markets in which theCompany operates are primarily composed of polyethylene resins, which areprimarily derived from commodities such as oil and natural gas.  TheCompany is limited in its ability to pass on incremental price increases to itscustomers.  Continued commodity price increases would have a negativeimpact on the Company’s performance.

The Company continues toinvest in the development of new communications infrastructure products andwater storage tanks and believes that in both markets it has the leadingproduct portfolios in terms of performance and features.

During the latter part of2005 and in 2006, the Company focused on cost savings while at the same timeexpanding and diversifying its market opportunities.  The Company measuresits success by monitoring net sales and gross margins with a near-term goal ofmaintaining positive cash flows, while striving to achieve long-term operatingprofits.  The Company believes that there continue to be long-term growthopportunities within both the communications infrastructure equipment and watertank markets.

The Company’s net sales,gross profit and selling expenses, and any ratio calculated therefrom, as usedthroughout this report, reflect the correction of the classification of certainshipping costs charged to customers. See Note 1 to the condensed consolidatedfinancial statements included in Item 1, Financial Statements.

### **Results ofOperations**

In August of 2004 theCompany acquired 75% of the Bushman Tanks business.  Bushman Tanks is Australia’s largestmanufacturer of plastic water storage tanks. The Bushman Tanks’ financial results have been consolidated in theCompany’s financial statements for the nine months ended September 30, 2006 andSeptember 30, 2005.  A minority interesthas been recorded for the 25% equity owned by ANZ Private Equity, a unit ofAustralia and New Zealand Banking Group Ltd.

**Comparison of the Nine MonthsEnded September 30, 2006 with the Nine Months Ended September 30, 2005**

***NetSales*.**  Net salesin the first nine months of 2006 were $84.5 million, a decrease of $8.2 millionor 8.8% compared to the first nine months of 2005.  The decrease is due to lower demand from theCompany’s Americas telecom and cable customers.

Americas net sales were$46.9 million in the first nine months of 2006, a decrease of $7.9 million or14.4% over the same period in 2005.  Thedecrease was due primarily to lower volume of sales to the Company’s coretelecom and cable customers.  Sales to largetelecom and cable service providers fluctuate period to period based on thestatus of such customers’ infrastructure projects and therefore are difficultto predict.

International net saleswere $37.6 million in the first nine months of 2006, a decrease of $0.3 millionor 1.0% over the same period in 2005.

During the first ninemonths of 2006, there were no customers that represented over 10% of theCompany’s sales.  Sales to Verizon of$19.4 million in the first nine months of 2005 represented 21.0% of the Company’ssales.

***GrossProfit*.**  Grossprofit in the first nine months of 2006 was $27.1 million, a decrease of $1.5million or 5.2% compared to the first nine months of 2005.  The decrease was primarily due to a lowergross profit percentage in the International segment.  Gross profit dollars in the Americas segmentincreased $0.3 million from $14.9 million in the first nine months of 2005 to$15.2 million in the first nine months of 2006. Gross profit of $11.9 million in the first nine months of 2006 in theInternational segment was $1.8 million lower than in the 2005 period.

As a percentage of netsales, gross profit increased from 30.8% in the first nine months of 2005 to32.1% in the first nine months of 2006. The increase is primarily due to a higher gross profit percentage in theAmericas segment from 27.2% in the first nine months of 2005 to 32.4% in thefirst nine months of 2006.  This increaseis primarily due to a more favorable product mix.  Offsetting the increase in the Americassegment was a decrease in the gross profit percentage in the Internationalsegment from 36.2% in the first nine months of 2005 to 31.7% in the first ninemonths of 2006.  This decrease wasprimarily due to higher raw material costs related to increased commodity prices,and to a lesser extent,

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labor costs due toovertime associated with the local move of one of the Australian manufacturingoperations to a new facility.

***Selling*.**  Selling expenses were $16.8 million in thefirst nine months of 2006, a decrease of $0.3 million or 1.8% from the firstnine months of 2005.

As a percentage of netsales, selling expense increased from 18.5% in the 2005 period to 19.9% in the2006 period.  The higher percentage isprimarily due to increase in freight costs in both the Americas andInternational segments due to fuel surcharges in addition to inefficienciesassociated with the management and operation of the Company’s internationalshipping activities.

***Generaland Administrative*.** General and administrative expenses were $8.9 million in the first ninemonths of 2006, an increase of $0.9 million or 11.3% from the first nine monthsof 2005.  The increase is due primarilyto stock-based compensation expense of $0.3 million, accrued severance expenses,and other various expenses.

As a percentage of netsales, general and administrative expense increased from 8.6% in the 2005period to 10.5% in the 2006 period.  Theincrease is due to the decreased sales level without a proportional decrease ingeneral and administrative costs that are relatively fixed in nature.

***Researchand Development*.** Research and development expenses were $1.9million in the first nine months of 2006, a decrease of $0.3 million or 13.6%from the first nine months of 2005. Spending on new product development programs was slightly less than theprevious year.

As a percentage of netsales, research and development expenses decreased from 2.4% in the first ninemonths of 2005 to 2.2% in the first nine months of 2006.

***Impairmentof Goodwill.*** Goodwill impairment expense was $4,829 in the first nine months of 2006compared to no impairment in the same 2005 period.  The impairment was related to the Company’sBushman Tanks operations in Australia. The primary cause for this impairment of goodwill was the decrease ingross margins and operating income in the Bushman Tanks business, which havebeen negatively impacted by increasing prices in raw materials.  The primary raw materials used in themanufacture of Bushman Tanks products are petroleum-based resins.  The price of these resins has beencontinually increasing as the price of oil increases. The valuation methodologyis summarized in Note 13 to the Condensed Consolidated FinancialStatements.

***Income(Loss) from Operations*.** As a result of the items discussed above, income (loss) from operationswas ($5.3) million in the first nine months of 2006 compared to income fromoperations of $1.2 million in the first nine months of 2005.  Operating margin as a percent of sales was(6.2%) in the 2006 period compared to 1.3% in the 2005 period.

***InterestExpense, Net*.** Interest expense, net of interest income, was $0.5 million in the firstnine months of 2006 and $0.3 million in the first nine months of 2005.

***IncomeTaxes*.**  There wasan income tax benefit of $0.3 million in the first nine months of 2006 comparedto an income tax benefit of $0.2 million in the first nine months of 2005.  The effective tax rate was 4.6% in the firstnine months of 2006 and (25.6 %) for the same period in 2005.  Since the Company has a full valuation allowanceon the realization of the domestic net deferred tax asset, no tax expense orbenefit is currently being recorded on the results of operations in theU.S.  The tax benefit recorded in thecurrent year was a result of the loss in foreign operations.  The largest impact to foreign income or lossin the current year was $4,829 related to the impairment of goodwill, which isa non-deductible item for determining income taxes.  The tax benefit recorded in 2005 was theresult of a net operating loss carry-forward for tax purposes in the domestictax entity, along with the tax benefits for tax losses generated from foreignsubsidiaries.

**Comparison of the Three MonthsEnded September 30, 2006 with the Three Months Ended September 30, 2005**

***NetSales*.**  Net salesin the third quarter of 2006 were $29.4 million, an increase of $1.9 million or6.9% compared to the third quarter of 2005. The increase is due to higher product volume in both the Americas andInternational segments.

Americas net sales were$15.7 million in the third quarter of 2006, an increase of $0.7 million or 4.7%compared to the same period in 2005.  Theincrease was due primarily to higher sales to the Company’s cable serviceprovider customers that offset the lower sales to Verizon.  Sales to large customers fluctuate period toperiod based on the status of such customers’ infrastructure projects, andtherefore are difficult to predict.

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International net saleswere $13.7 million in the third quarter of 2006, an increase of $1.2 million or9.6% compared to the same period in 2005. The increase is due to increased product volume due to higher demand ofwater related products.

During the third quarterof 2006, no customers represented over 10% of sales.  Sales to Verizon of $3.3 million in the thirdquarter of 2005 represented 11.8% of the Company’s sales.

***GrossProfit*.**  Grossprofit in the third quarter of 2006 was $9.2 million, an increase of $2.0million or 27.8% compared to the third quarter of 2005.  The increase was primarily due to increasedsales volume in the Americas segment and a more favorable product mix.  Gross profit dollars in the Americas segmentincreased $2.1 million from $2.9 million in the third quarter of 2005 to $5.0million in the third quarter of 2006. Gross profit of $4.2 million in the third quarter of 2006 in theInternational segment was unchanged compared to the third quarter of 2005.

As a percentage of netsales, gross profit increased from 26.1% in the third quarter of 2005 to 31.3%in the third quarter of 2006.  The increaseis primarily due to a higher gross profit percentage in the Americas segmentfrom 19.6% in the third quarter of 2005 to 31.7% in the third quarter of2006.  This increase is primarily due toa stronger mix of the higher margin enclosure product line in the Americassegment.  Offsetting the increase in theAmericas segment was a decrease in the gross profit percentage in theInternational segment from 33.9% in the third quarter of 2005 to 30.9% in thethird quarter of 2006.  This decrease isprimarily due to higher raw material cost related to higher oil prices.

***Selling*.**  Selling expenses were $5.7 million in thethird quarter of 2006, a decrease of $0.1 million or 1.0% from the thirdquarter of 2005.

As a percentage of netsales, selling expenses decreased from 21.1% in the 2005 period to 19.6% in the2006 period.  The lower percentage isprimarily due to a reduction in the selling expenses in the Americas segment asa result of the cost cutting initiatives that were implemented in late 2005 andearly 2006.

***Generaland Administrative*.** General and administrative expenses were $2.7million in the third quarter of 2006, an increase of $0.3 million or 12.5% fromthe third quarter of 2005.  The increaseis due primarily to stock-based compensation expense of $0.1 million andadditional personnel costs.

As a percentage of netsales, general and administrative expenses increased from 8.8% in the 2005period to 9.2% in the 2006 period.

***Researchand Development*.** Research and development expenses remained the same at $0.7 million inthe third quarter of 2006 and in the same period of 2005.

As a percentage of netsales, research and development expenses decreased from 2.5% in the thirdquarter of 2005 to 2.2% in the third quarter 2006.

***Income(Loss) from Operations*.** As a result of the items discussed above, income (loss) from operationswas $0.1 million in the third quarter of 2006 compared to ($1.7) million in thethird quarter of 2005.  Operating marginas a percent of sales was 0.3% in the 2006 period compared to (6.3%) in the2005 period.

***InterestExpense, Net*.** Interest expense, net of interest income, was $0.2 million in the thirdquarter of 2006 and $0.1 million in the third quarter of 2005.

***IncomeTaxes*.**  There wasan income tax expense of $0.01million in the third quarter of 2006 compared toan income tax benefit of $1.2 million in the third quarter of 2005.  The effective tax rate was (10.4%) in thethird quarter of 2006 and 63.2% for the same period in 2005.  Since the Company has a full valuation allowanceon the realization of the domestic net deferred tax asset, no tax expense orbenefit is currently being recorded on the results of operations in theUS.  The tax expense recorded in thethird quarter of the current year was a result of an adjustment of $47associated with the true up of the tax provision and the deferred tax balancesfor the 2005 tax filing of the Canadian subsidiary.  This amount was offset by a $34 tax benefitas a result of the loss in foreign operations. The 2005 tax rate benefited from the use of net operating losscarryforwards.

**Liquidity and Capital Resources**

Net cash used inoperating activities was ($3.4) million for the nine months ended September 30,2006, compared to net cash provided by operating activities of $2.9 million insame period ended 2005.  The cash used inoperating activities in

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2006 is primarily due toan increase in accounts receivable and inventories of $3.9 million, an increasein the income tax receivable of $1.3 million, and a decrease in accountspayable and accrued expenses of $0.7 million. The increase in accounts receivable and inventories is due to theincreased volume of activity at the end of the current period compared to theend of the same period in 2005.  The useof cash in operating activities described above was partially offset byapproximately $7.0 million in non-cash deductions, including depreciation andgoodwill impairment.

Net cash used ininvesting activities was ($1.6) million for the nine months ended September 30,2006, compared to ($3.9) million in the 2005 period.  The decrease in 2006 is due to a decrease inthe acquisition of property and equipment resulting from the Company’s effortsto reduce non-critical cash expenditures in the 2006 period.

Net cash provided byfinancing activities was $5.4 million for the nine months ended September 30,2006, compared to net cash used in financing activities of ($1.0) million inthe same period of 2005.  The increase isdue to additional borrowings under the Company’s credit facilities needed tofund operations in the 2006 period.

Cash and cash equivalentson September 30, 2006 were $3.4 million, compared to $3.1 million at December2005.

Net accounts receivableincreased to $12.1 million at September 30, 2006 from $8.3 million at December31, 2005.  In terms of days salesoutstanding, accounts receivable increased from 32 days at December 31, 2005 to37 days at September 30, 2006.  Theincrease in days sales outstanding is due to a higher percentage of salesoccurring at the end of the third quarter in 2006 as compared to 2005.

Inventories increased to$12.2 million at September 30, 2006 from $11.4 million at December 31,2005.  Days inventory decreased from 60days at December 31, 2005 to 54 days at September 30, 2006.

Accounts payable decreasedfrom $8.7 million at December 31, 2005 to $8.6 million at September 30,2006.  Days payables were 46 days atDecember 31, 2005 and 38 days at September 30, 2006.

The Company is activelymanaging expenditures for capital assets and working capital requirements toreduce cash needs for 2006 and beyond. The Company has reduced most expenditures for capital assets topurchases for projects that will provide positive long-term cash flow.  In addition, the Company is pursuing marketopportunities and designing products that will consume idle or slow movinginventory to further reduce the need for current and long-term cash flow.  The Company believes that cash flow fromoperations coupled with available borrowings under the credit facilitiesdescribed in Note 14 will be sufficient to fund the Company’s capitalexpenditure and working capital requirements through 2007.

The Company’s U.S. Loanand Security Agreement expires on March 31, 2007.  The Company believes that it will be able toextend the agreement through the end of 2007.

As of September 30, 2006the Company’s Australian operations were not in compliance with variousfinancial covenants under its Australian Loan and Security Agreement.  A waiver of noncompliance has not been issuedby the lender.  The Company is currentlyrenegotiating the financial covenants under that Agreement and expects theborrowing limits and terms other than the financial covenants to generallyremain the same.  The Company has notbeen precluded from drawing on its credit facilities during the negotiationperiod, however, in the event the Company is not able to successfullyrenegotiate the financial covenants then the bank may take further actionagainst the Company as described in Note 14. Accordingly, related borrowings are classified as current liabilities asof September 30, 2006.

**Off-Balance Sheet Arrangements**

The Company’s off-balancesheet arrangements consist of operating leases, employment contracts andpurchase obligations.  In addition, theCompany guaranteed the debt of the Channell Family Trust of approximately$754,000 in 1997.  The guaranteed debtwas incurred in connection with construction of the facilities leased to theCompany and is collateralized by said facilities.  The loan amount subject to the unsecured guaranteeis expected to decline before expiring in 2017. The Company does not anticipate that it will incur losses as a result ofthis guarantee and has not recorded a liability.  If the Channell Family Trust were to defaulton the outstanding loan balance, the Company might be required to repay theremaining principal balance.  The maximumpotential amount the Company would be required to pay is equal to theoutstanding principal and interest balance of the loan to the Channell FamilyTrust.  At September 30, 2006, theoutstanding loan balance subject to the guarantee totaled $529,000.

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**Critical Accounting Policies**

The Company’s discussionand analysis of its financial condition and results of operations are basedupon its consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.

The Company believes thatthe estimates, assumptions and judgments involved in the accounting policiesdescribed in the “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section of its most recent Annual Report on Form10-K have the greatest potential impact on its financial statements, so itconsiders these to be its critical accounting policies.  Because of the uncertainty inherent in thesematters, actual results could differ from the estimates the Company uses inapplying the critical accounting policies. Certain of these critical accounting policies affect working capital accountbalances, including the policies for revenue recognition, the reserve foruncollectible accounts receivable, inventory reserves, income taxes andimpairment of goodwill and other long-lived assets.  These policies require that the Company makeestimates in the preparation of its financial statements as of a given date.

Within the context ofthese critical accounting policies, the Company is not currently aware of anyreasonably likely events or circumstances that would result in materiallydifferent amounts being reported.

**Forward-Looking Statements**

Certain statementscontained herein are “forward-looking” statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 (the “Act”), which providescertain “safe harbor” provisions for forward-looking statements.  All forward-looking statements made hereinare made pursuant to the Act. Forward-looking statements include statements which are predictive innature; which depend upon or refer to future events or conditions; or whichinclude words such as “expects”, “anticipates”, “intends”, “plans”, “believes”,“estimates”, or variations or negatives thereof or by similar or comparablewords or phrases.  In addition, anystatement concerning future financial performance, ongoing business strategiesor prospects, and possible future Company actions that may be provided bymanagement are also forward-looking statements as defined by the Act.  Forward-looking statements are based oncurrent expectations and projections about future events and are subject torisks, uncertainties, and assumptions about the Company; and economic andmarket factors in the countries in which the Company does business, among otherthings.  These statements are notguarantees of future performance, and the Company has no specific intentions toupdate these statements.  Actual eventsand results may differ materially from those expressed or forecasted inforward-looking statements due to a number of factors including, among others:(1) the communications industry is in a state of rapid technological change, whichcan render the Company’s products obsolete or unmarketable; (2) any failure bythe Company to anticipate or respond to technological developments or changesin industry standards or customer requirements, or any significant delays inproduct development or introduction, could have a material adverse effect onthe Company’s business, operating results and financial condition; (3) arelatively small number of telecommunications customers account for a largepercentage of the Company’s available market; (4) the Company expects thatsales to the telecommunications industry will continue to represent asubstantial portion of its total sales, and the demand for products within thisindustry depends primarily on capital spending by service providers; (5) the Company’scost of sales may be materially affected by increases in the market prices ofthe raw materials used in the Company’s manufacturing processes;  (6) the Company’s water related sales could be materially affected byweather conditions and government regulation; (7) the Company is subject to therisks of conducting business internationally; and (8) the industries in whichthe Company operates are highly competitive. Additional risks and uncertainties are outlined in the Company’s filingswith the Securities and Exchange Commission, including its most recent AnnualReport on Form 10-K.

**ITEM 3.**                    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The risk inherent in theCompany’s market sensitive instruments is the potential loss arising from adversechanges in interest rates and foreign currency exchange rates.  All financial instruments held by the Companydescribed below are held for purposes other than trading.

**Interest Rate Sensitivity**

The Company and itssubsidiaries have entered into two financing agreements.  In September 2002, the Company entered into athree-year Loan and Security Agreement with an asset based lender in the UnitedStates that has been

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extended through March31, 2007.  The agreement contains a termloan and a revolving line of credit.  InAugust 2004, the Company’s Australian subsidiaries entered into a Loan andSecurity Agreement with a commercial bank in Australia, which contains a termloan that expires in July 2009, a revolving line of credit that expires inNovember 2006, an “earn-out” facility that expires in July 2008, a capitalexpenditure facility that expires in July 2009 and a master asset financeagreement facility that expires in November 2006.  The loan and security agreements allow for theoutstanding balance to bear interest at a variable rate based on the lender’sbase rate.  The credit facilities exposethe Company to changes in short-term interest rates since the interest rates onthe credit facility are variable.

Based upon the amount ofvariable rate debt outstanding at the end of the quarter, and holding thevariable rate debt balance constant, each one percentage point increase ininterest rates occurring on the second day of a quarterly period would resultin an increase in interest expense of approximately $0.03 million perquarter.  This analysis does not considerthe effects of economic activity on the Company’s sales and profitability insuch an environment.

**Exchange Rate Sensitivity**

The Company has assetsand liabilities outside the United States that are subject to fluctuations inforeign currency exchange rates.  Assetsand liabilities outside the United States are primarily located in the UnitedKingdom, Australia, and Canada.  TheCompany’s investment in foreign subsidiaries with a functional currency otherthan the U.S. dollar is generally considered long-term.  Accordingly, the Company does not hedge theseinvestments.  The Company also purchasesa limited portion of its raw materials from foreign countries.  These purchases are generally denominated inU.S. dollars and are accordingly not subject to exchange ratefluctuations.  The Company has minimalforeign currency transaction gains or losses. The Company has not engaged in forward purchases of foreign currency andother similar contracts to reduce its economic exposure to changes in exchangerates because the associated risk is not considered significant.

**ITEM 4.**                    CONTROLS ANDPROCEDURES

**Evaluationof Disclosure Controls and Procedures**

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934 (the “Exchange Act”) thatare designed to ensure that information required to be disclosed in the Company’sExchange Act reports is recorded, processed, summarized, and reported withinthe time periods specified in rules and forms of the Securities and ExchangeCommission regulations, and that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  As ofSeptember 30, 2006, the management of the Company carried out an assessment ofthe Company’s disclosure controls and procedures and concluded that they were noteffective because of the material weaknesses described below.

During the fiscal yearended December 31, 2005, and continuing into 2006 the Company did not haveeffective controls to accurately calculate current income tax expense.  Specifically, the Company did not haveeffective controls to monitor the difference between the income tax basis andthe financial reporting basis of assets and liabilities and reconcile thedifference to its deferred income tax asset and liability balances.  This control deficiency resulted in restatementsto the Company’s 2002, 2003, and 2004 annual consolidated financial statementsto correct deferred taxes and the tax provisions.  In addition, the Company did not haveeffective controls to accurately calculate current income tax expense and the effecton additional paid in capital for the exercise of non-qualified stockoptions.  These control deficienciescould result in a misstatement of deferred taxes, tax accruals and the taxprovision that would result in a material misstatement to the Company’s interimor annual consolidated financial statements that would not be prevented ordetected.  Accordingly, management haddetermined that this control deficiency constituted a material weakness.

During the first ninemonths of 2006, the Company identified and gathered the necessary financialinformation and set up a procedure to accurately prepare and review itsaccounting for income taxes and the determination of income taxes

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payable, deferred incometax assets and liabilities and the related income tax provision.  The Company has also engaged additionalpersonnel qualified as Certified Public Accountants to assist in thepreparation of the Company’s income tax provision as well as general accountingmatters.

Also, during the fiscalyear ended December 31, 2005, due to the limited tenure of the Company’sdomestic and Australian accounting staff, additional reconciliations and postclosing adjustments were necessary to properly account for certain items ofincome and expense that the staff was not fully aware of.  The most significant manifestations of thismaterial weakness involved the accounting of the Company’s workers’compensation liability as well as the Company’s unvouchered accounts payablebalance.

During the first ninemonths of 2006, the Company has continued to employ many of the same accountingpersonnel involved with the 2005 fiscal year financial statements.  The current staff has been trained withregard to the accounting for the workers’ compensation liability as well as theCompany’s unvouchered accounts payable balance.

The Company is in theprocess of remediating the deficiencies in the design of its internal controlsto address the material weaknesses in its accounting for income taxes, theworkers’ compensation liability and the unvouchered accounts payablebalance.  However, the Company has notyet tested the effectiveness of these remediated controls.

In addition, the Company’ssubsidiary, Bushman Tanks, was previously a closely held, family run businesswith mostly manual controls in place. During the process of assessing the status of the internal controlinfrastructure, the Company has identified significant deficiencies in internalcontrols that rise to the level of “material weaknesses” in the revenue andpurchasing cycles.

Due to the materialweaknesses described above, the Company’s management performed additionalanalyses and other post-closing procedures including reviewing all significantaccount balances and disclosures in the consolidated financial statementscontained in this Quarterly Report on Form 10-Q, to ensure the Company’sconsolidated financial statements are in accordance with accounting principlesgenerally accepted in the United States of America.  Accordingly, management believes that theconsolidated financial statements included in this Quarterly Report, fairlypresent in all material respects, the Company’s financial condition, results ofoperations, and cash flows for all periods presented.

**Changesin Internal Control Over Financial Reporting**

As disclosed in theCompany’s report on Form 10-Q for the quarter ended June 30, 2006, the Company’sChief Financial Officer, Jerry Collazo, resigned in August 2006.  The Board of Directors of the Companyappointed a new Chief Financial Officer, Patrick E. McCready, as announced in theCompany’s Form 8-K filed on September 8, 2006.

There has been no changein the Company’s internal control over financial reporting that occurred in thequarterly period covered by this report that has materially affected, or isreasonably likely to materially affect the Company’s internal control overfinancial reporting.

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**PART II - OTHER INFORMATION**

**ITEM 1.**                    LEGALPROCEEDINGS

The Company is from timeto time involved in ordinary routine litigation incidental to the conduct ofits business.  The Company regularlyreviews all pending litigation matters in which it is involved and establishesreserves deemed appropriate for such litigation matters.  Management believes that no presently pendinglitigation matters are likely to have a material adverse effect on the Company’sfinancial statements or results of operations, taken as a whole.

**ITEM 1A.**           RISK FACTORS

The Company’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005 includes a detailed discussion of our risk factors.  The information presented below updates andshould be read in conjunction with the risk factors and information disclosedin that Form 10-K.

*Termination of Transportation andLogistics Services by Primary Freight Provider for Bushman Tanks Business*—Asof October 12, 2006, the primary freight provider for our Bushman water storagetank manufacturing and distribution business unilaterally withdrew itstransportation and logistics services. Accordingly, the agreement with the freight provider has beenterminated, and Bushman has reserved its rights in relation to any damages itsuffers as a result of the termination of such services.  The freight provider claims that Bushman hasbreached the agreement.  Although we donot believe Bushman has breached the terms of the agreement, we have accruedfor all amounts in dispute.  If thedispute with the freight provider cannot be resolved, either Bushman or thefreight provider may pursue legal action. In addition, as Bushman transitionsits transportation and logistics services, the timing of scheduled deliveriesmay be temporarily pushed out to subsequent periods.  The disruption in transportation andlogistics services due to the termination of such services by the formerfreight provider, the timing of the implementation of our contingency plan fortransition of transportation and logistics services, the legal cost associatedwith potential litigation related to the termination of such services, and anysettlements as a result of legal disputes related thereto could negativelyaffect our working capital and results of operations.

***Price Fluctuations of RawMaterials. ***Our cost ofsales, gross margins and results of operations have been and may continue to bematerially affected by increases in the market prices of the raw materials usedin our manufacturing processes.  Inparticular, the products we manufacture for sale in both our communicationsinfrastructure market and our water storage market are primarily composed ofpolyethylene resins, which are derived from oil.  The increasing price of oil has significantlyincreased our raw materials cost within these markets and, as a result, hassignificantly reduced our gross margins.

Because we are limited in our ability to pass on incremental priceincreases to our customers, and because we do not engage in hedgingtransactions for our raw materials, we may not be able to effectively offsetincreases in the prices of raw materials. Accordingly, continued increases in these costs, particularly continuedincreases in the cost of oil, will continue to reduce our gross margins andnegatively impact our results of operations.

***Availabilityof Complementary Products. ***In order toposition ourselves as a full-line product supplier, we rely on certainmanufacturers to supply products, including grade level boxes that complementthe products manufactured by us. Although we believe there are multiple sourcesof supply for these products, disruptions or delays in the supply of suchproducts could have a material adverse effect on sales of our own products.

**ITEM 2.**                    UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS

Not applicable.

**ITEM 3.**                    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

**ITEM 4.**                    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

Not applicable.

**ITEM 5.**                    OTHER INFORMATION

Not applicable.

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**ITEM 6.**                    EXHIBITS
| 3.1    |   | Restated Certificate  of Incorporation of the Company (Exhibit 3.1)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2    |   | Bylaws of the  Company (Exhibit 3.2)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4      |   | Form of Common  Stock Certificate (Exhibit 4)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1   |   | Tax Agreement  between the Company and the Existing Stockholders (Exhibit 10.1)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2*  |   | Channell  Commercial Corporation 1996 Incentive Stock Plan (including forms of Stock  Option Agreements and Restricted Stock Agreement) (Exhibit 10.2)(1)                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.3*  |   | Channell  Commercial Corporation 2003 Incentive Stock Plan (including forms of Stock  Option Agreement and Restricted Stock Agreement)(7)                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4*  |   | Channell  Commercial Corporation 2004 Incentive Bonus Plan(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5   |   | Loan and  Security Agreement dated as of September 25, 2002 by and among the Company,  Channell Commercial Canada Inc., Fleet Capital Corporation, Fleet Capital  Canada Corporation and, under the circumstances set forth therein, Fleet  National Bank, London U.K. Branch, trading as Fleet Boston Financial, and the  U.K. Borrowers (as defined therein, if any) (Exhibit 99)(6)                                                                                                                                                                             |
| 10.6   |   | Loan and  Security Agreement dated October 24, 2003 by and between Channell Pty Ltd and  National Australia Bank Ltd (Exhibit 10.3.1)(11)                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7   |   | Loan and  Security Agreement dated August 2, 2004 by and between Channell Bushman Pty  Ltd and National Australia Bank Ltd (Exhibit 10.3.2)(11)                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.8   |   | Loan and  Security Agreement dated August 2, 2004 by and between Channell Pty Ltd and  National Australia Bank Ltd (Exhibit 10.3.3)(11)                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9   |   | Investment and  Shareholders Agreement dated August 2, 2004 by and among Channell Bushman Pty  Ltd and Australia and New Zealand Banking Group Ltd (Exhibit 10.3.4)(11)                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10* |   | Employment  Agreement dated July 8, 1996 between the Company and William H. Channell, Sr.  (Exhibit 10.8)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11* |   | Channell  Commercial Corporation 1996 Performance-Based Annual Incentive Compensation  Plan (Exhibit 10.10)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12  |   | Lease dated  December 22, 1989 between the Company and the Channell Family Trust (as  successor in interest to William H. Channell, Sr.), as amended (Exhibit  10.11)(1)                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13  |   | Lease dated May  29, 1996 between the Company and the Channell Family Trust (Exhibit 10.12)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14  |   | Lease dated  October 26, 2000 between the Company and Belston Developments Inc. (Exhibit  10.15)(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.15  |   | Third Amendment  to Lease dated December 22, 1989 between the Company and the Channell Family  Trust (as successor in interest to William H. Channell, Sr.), effective as of  June 1, 2005 (Exhibit 99.1)(12)                                                                                                                                                                                                                                                                                                                                                      |
| 10.16  |   | Form of  Indemnity Agreement (Exhibit 10.17)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.17  |   | Form of  Agreement Regarding Intellectual Property (Exhibit 10.18)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.18  |   | 401(k) Plan of  the Company (Exhibit 10.19)(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.19  |   | A.C. Egerton  (Holdings) PLC Share Purchase Agreement (Exhibit 2)(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.20  |   | Lease dated June  27, 2002 between the Company and Ynez Street, Ltd.(Exhibit 10.29)(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21* |   | Amendment to  Employment Agreement dated December 9, 2003 between the Company and William  H. Channell, Sr. (Exhibit 10.19)(8)                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.22* |   | Employment  Agreement dated December 9, 2003 between the Company and William H. Channell,  Jr. (Exhibit 10.20)(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23  |   | Share and Asset  Purchase Agreement dated as of July 14, 2004 by and among Australia’s Bushman  Tanks Pty Ltd, Douglas Robin Young, Richard James Young, Lokan Nominees Pty  Ltd and Lenbridge Grange Pty Ltd, Belsiasun Pty Ltd and Elcarva Pty Ltd, the  holders of all the outstanding shares of Bushmans Group Pty Ltd, Hold-On  Industries Australia Pty Ltd, Australian Bushman Tanks Pty Ltd, and Polyrib  Tanks Pty Ltd, on the one hand, and Channell Commercial Corporation and  Channell Bushman Pty Limited, on the other hand (Exhibit 99.2)(10) |

 

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| 10.24* |   | Employment  Letter dated June 27, 2005 between the Company and Jerry Collazo (Exhibit  99.2)(13)                                                                                                                                                                                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25* |   | Employment  Letter dated June 30, 2005 between the Company and Greg Balla (Exhibit  10.23)(14)                                                                                                                                                                                                                                                                                                                  |
| 10.26* |   | Long-Term  Incentive Plan for William H. Channell, Jr. (Exhibit 10.1)(15)                                                                                                                                                                                                                                                                                                                                       |
| 10.27  |   | Waiver and Third  Amendment to Loan and Security Agreement dated as of November 18, 2005 by and  among the Company, Channell Commercial Canada Inc., Channell Limited,  Channell Commercial Europe Limited, Bank of America, N.A., BABC Global  Finance Inc., Bank of America, N.A., and the lenders party to the Loan and  Security Agreement dated as of September 25, 2002 (as amended) (Exhibit  10.25)(16) |
| 10.28  |   | Assignment and  Assumption Agreement dated November 18, 2005 by and between Banc of America  Leasing and Capital, LLC and Bank of America, N.A. (relating to U.S. Loan and  Security Agreement) (Exhibit 10.26)(16)                                                                                                                                                                                             |
| 10.29  |   | Waiver and  Fourth Amendment to Loan and Security Agreement dated as of February 28, 2006  by and among Channell Commercial Corporation, Bank of America, N.A., BABC  Global Finance Inc., Bank of America, N.A. and the lenders party to the Loan  and Security Agreement dated as of September 25, 2002 (as amended) (Exhibit  10.1)(18)                                                                      |
| 10.30  |   | Loan and Security  Agreement dated as of December 1, 2005, by and among Channell Bushman Pty  Ltd, Bushmans Group Pty Ltd, Channell Pty Ltd, certain other subsidiaries of  the Company and National Australia Bank Ltd (Exhibit 10.30)(19)                                                                                                                                                                     |
| 10.31  |   | Loan and  Security Agreement dated April 26, 2006, by and among Channell Bushman Pty  Ltd, Bushmans Group Pty Ltd, certain other subsidiaries of the Company, and  National Australia Bank Ltd (Exhibit 10.31)(19)                                                                                                                                                                                              |
| 10.32  |   | Lease dated July  13, 2006 between Channell Pty Ltd and Ing Management Ltd (Exhibit 10.32)(20)                                                                                                                                                                                                                                                                                                                  |
| 10.33* |   | Employment  Letter dated August 31, 2006 between the Company and Patrick E. McCready  (Exhibit 10.1)(21)                                                                                                                                                                                                                                                                                                        |
| 10.34  |   | Loan and  Security Agreement dated August 11, 2006 and effective August 25, 2006, by  and among Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, certain other  subsidiaries of the Company, and National Australia Bank Ltd (Exhibit  10.1)(22)                                                                                                                                                               |
| 14     |   | Channell  Commercial Corporation Code of Business Conduct and Ethics (Exhibit 14)(8)                                                                                                                                                                                                                                                                                                                            |
| 21     |   | Subsidiaries of  the Company (Exhibit 21)(17)                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the  Securities and Exchange Act of 1934(23)                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities  and Exchange Act of 1934(23)                                                                                                                                                                                                                                                                          |
| 32.1   |   | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes- Oxley Act of 2002 by William H. Channell, Jr., CEO and Patrick E.  McCready, CFO(23)                                                                                                                                                                                                                     |

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*                                         Managementcontract or, compensatory plan or arrangement.

(1)                                  Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Registration Statement on FormS-1 (File No. 333-03621).

(2)                                  Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on May 18, 1998.

(3)                                  Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on March 31, 1999.

(4)                                  Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on April 2, 2001.

(5)                                  Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on August 12, 2002.

(6)                                  Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on October 1, 2002.

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(7)                                  Incorporated by reference to Appendix B filedin connection with the Company’s Definitive Proxy Statement on March 26, 2003.

(8)                                  Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on March 5, 2004.

(9)                                  Incorporated by reference to Appendix B filedin connection with the Company’s Definitive Proxy Statement on April 16, 2004.

(10)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on August 6, 2004.

(11)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on November 15, 2004.

(12)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on June 15, 2005.

(13)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on June 28, 2005.

(14)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on August 15, 2005.

(15)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on September 9, 2005.

(16)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on November 21, 2005.

(17)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K/A on November 21,2005.

(18)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on March 6, 2006.

(19)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on May 15, 2006.

(20)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on August 17, 2006.

(21)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on September 8, 2006.

(22)                            Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on September 21, 2006.

(23)                            Filed herewith.

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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 theundersigned thereunto duly authorized.

Dated:  November 14, 2006
|        | CHANNELL  COMMERCIAL CORPORATION |
|--------|----------------------------------|
|   | (Registrant)                     |
|   |                             |   |
|   |                             |   |
|   | By                               | / s/ Patrick E. McCready |
|   |                             | Patrick E. McCready |
|   |                             | Chief Financial Officer |
|   |                             | (Duly authorized officer and principal financial  officer of the Registrant) |

 

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