**UNITEDSTATES**

###### **SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

**FORM 10-Q**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended June 30, 2006**

**OR**

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

**For the transition period from                         to                       **

**CommissionFile No. 0-28582**

**CHANNELL COMMERCIAL CORPORATION**

(Exact name ofRegistrant as 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 ofprincipal executive offices)

**92591**

(Zip Code)

**(951) 719-2600**

(Registrant’stelephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes x   No o

Indicate by checkmark whether the registrant is a large accelerated filer, or a non-acceleratedfiler.  See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Large AcceleratedFiler  o**             **AcceleratedFiler  o**                 **Non-accelerated Filer    x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o**  **No x

9,543,584 shares ofcommon stock of the registrant were outstanding at August 10, 2006.

 

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**PART 1 - FINANCIAL INFORMATION**

ITEM 1.            FINANCIALSTATEMENTS

CHANNELL COMMERCIALCORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME(LOSS)

(UNAUDITED)

*(amountsin thousands, except per share data)*

 
| ** **                                          | ** ** | **Six months ended June 30,** | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                          | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Net sales                                           |       | $                                                 | 53,626     |                                                | $          | 63,738 |   | $ | 29,106 |   | $ | 32,360 |   |
| Cost of goods sold                                  |       | 37,175                                            |       | 43,776                                              |       | 19,612 |   | 21,632 |   |
| Gross profit                                        |       | 16,451                                            |       | 19,962                                              |       | 9,494 |   | 10,728 |   |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Operating expenses                                  |       |                                              |       |                                                |       |   |   |   |   |
| Selling                                             |       | 9,600                                             |       | 9,907                                               |       | 4,893 |   | 5,064 |   |
| General and  administrative                         |       | 6,178                                             |       | 5,564                                               |       | 2,963 |   | 2,675 |   |
| Research and  development                           |       | 1,198                                             |       | 1,506                                               |       | 610 |   | 833 |   |
| Impairment of  goodwill                             |       | 4,829                                             |       | —                                              |       | 4,829 |   | — |   |
|                                                |       | 21,805                                            |       | 16,977                                              |       | 13,295 |   | 8,572 |   |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Income (loss)  from operations                      |       | (5,354                                            | )          | 2,985                                               |       | (3,801 | ) | 2,156 |   |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Interest expense, net                               |       | 286                                               |       | 230                                                 |       | 184 |   | 123 |   |
| Income (loss)  before income tax expense            |       | (5,640                                            | )          | 2,755                                               |       | (3,985 | ) | 2,033 |   |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Income tax expense  (benefit)                       |       | (278                                              | )          | 926                                                 |       | (260 | ) | 711 |   |
| Net income  (loss) before minority interest         |       | (5,362                                            | )          | 1,829                                               |       | (3,725 | ) | 1,322 |   |
| Minority  interest in income (loss) of subsidiaries |       | (1,420                                            | )          | 126                                                 |       | (1,339 | ) | 45 |   |
| Net income  (loss)                                  |       | $                                                 | (3,942     | )                                                   | $          | 1,703 |   | $ | (2,386 | ) | $ | 1,277 |   |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Net income  (loss) per share                        |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                               |       | $                                                 | (0.41      | )                                                   | $          | 0.18 |   | $ | (0.25 | ) | $ | 0.13 |   |
| Diluted                                             |       | $                                                 | (0.41      | )                                                   | $          | 0.17 |   | $ | (0.25 | ) | $ | 0.13 |   |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Net income (loss)                                   |       | $                                                 | (3,942     | )                                                   | $          | 1,703 |   | $ | (2,386 | ) | $ | 1,277 |   |
| Other comprehensive  income (loss), net of tax      |       |                                              |       |                                                |       |   |   |   |   |
| Foreign currency  translation adjustment            |       | (142                                              | )          | (473                                                | )          | 200 |   | (208 | ) |
|                                                |       |                                              |       |                                                |       |   |   |   |   |
| Comprehensive income (loss)                         |       | $                                                 | (4,084     | )                                                   | $          | 1,230 |   | $ | (2,186 | ) | $ | 1,069 |   |

 

The accompanying notesare an integral part of these financial statements.

2

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CHANNELL COMMERCIALCORPORATION

CONDENSED CONSOLIDATEDBALANCE SHEETS

(UNAUDITED)

*(amountsin thousands)*

* *
| ** **                                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2006**     | ** ** | **2005**         | ** ** |
| ASSETS                                                                                                                                                                                            |       |         |       |             |       |
| Current assets                                                                                                                                                                                    |       |         |       |             |       |
| Cash and cash  equivalents                                                                                                                                                                        |       | $            | 3,227      |             | $          | 3,148 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $160 at June 30, 2006  and $396 at December 31, 2005                                                                              |       | 13,035       |       | 8,317            |       |
| Inventories, net                                                                                                                                                                                  |       | 12,475       |       | 11,411           |       |
| Prepaid expenses  and other current assets                                                                                                                                                        |       | 993          |       | 1,000            |       |
| Income taxes  receivable                                                                                                                                                                          |       | 955          |       | 67               |       |
| Deferred income  taxes, net                                                                                                                                                                       |       | 953          |       | 948              |       |
| Total current  assets                                                                                                                                                                             |       | 31,638       |       | 24,891           |       |
|                                                                                                                                                                                              |       |         |       |             |       |
| Property and equipment,  net                                                                                                                                                                      |       | 17,553       |       | 18,929           |       |
| Goodwill                                                                                                                                                                                          |       | 9,190        |       | 13,947           |       |
| Intangible assets, net                                                                                                                                                                            |       | 2,053        |       | 2,132            |       |
| Other assets                                                                                                                                                                                      |       | 703          |       | 807              |       |
| Total assets                                                                                                                                                                                      |       | $            | 61,137     |             | $          | 60,706 |   |
|                                                                                                                                                                                              |       |         |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                        |       |         |       |             |       |
| Current liabilities                                                                                                                                                                               |       |         |       |             |       |
| Accounts payable                                                                                                                                                                                  |       | 12,209       |       | 8,677            |       |
| Short term debt  (including maturities of long term debt)                                                                                                                                         |       | 9,925        |       | 7,459            |       |
| Current  maturities of capital lease obligations                                                                                                                                                  |       | 63           |       | 87               |       |
| Accrued expenses                                                                                                                                                                                  |       | 5,313        |       | 5,494            |       |
| Total current  liabilities                                                                                                                                                                        |       | 27,510       |       | 21,717           |       |
|                                                                                                                                                                                              |       |         |       |             |       |
| Capital lease  obligations, less current maturities                                                                                                                                               |       | 33           |       | 78               |       |
| Deferred gain on sale  leaseback transaction                                                                                                                                                      |       | 363          |       | 393              |       |
| Deferred income taxes,  net                                                                                                                                                                       |       | 78           |       | 77               |       |
| Commitments and  contingencies, (notes 9 and 12)                                                                                                                                                  |       | —       |       | —           |       |
| Minority interest                                                                                                                                                                                 |       | 1,092        |       | 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 June  30, 2006 and December 31, 2005, outstanding 9,543 shares at June 30, 2006 and  December 31, 2005 |       | 98           |       | 98               |       |
| Additional  paid-in capital                                                                                                                                                                       |       | 30,936       |       | 30,750           |       |
| Treasury stock -  244 shares in 2006 and 2005                                                                                                                                                     |       | (1,871       | )          | (1,871           | )          |
| Retained  earnings                                                                                                                                                                                |       | 2,727        |       | 6,669            |       |
| Accumulated  other comprehensive income (loss) -                                                                                                                                                  |       |         |       |             |       |
| Foreign currency  translation                                                                                                                                                                     |       | 171          |       | 313              |       |
| Total  stockholders’ equity                                                                                                                                                                  |       | 32,061       |       | 35,959           |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                  |       | $            | 61,137     |             | $          | 60,706 |   |

 

The accompanying notesare an integral part of these financial statements.

3

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CHANNELL COMMERCIALCORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

*(amountsin thousands)*

 
| ** **                                                                            | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                                                                  |       |                                              |       |   |   |
| Cash flows from  operating activites:                                                 |       |                                              |       |   |   |
| Net income (loss)                                                                     |       | $                                                 | (3,942     | ) | $ | 1,703 |   |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                         |       | 2,354                                             |       | 2,306 |   |
| Stock-based compensation                                                              |       | 186                                               |       | — |   |
| (Gain) Loss on disposal of fixed assets                                               |       | (2                                                | )          | (6 | ) |
| Amortization of deferred gain on sale leaseback                                       |       | (30                                               | )          | (30 | ) |
| Impairment of goodwill                                                                |       | 4,829                                             |       | — |   |
| Deferred income taxes                                                                 |       | —                                            |       | 849 |   |
| Provision for doubtful accounts                                                       |       | 1                                                 |       | 48 |   |
| Provision for inventory obsolescence                                                  |       | —                                            |       | 597 |   |
| Minority interest in income (loss) of subsidiaries                                    |       | (1,420                                            | )          | 126 |   |
| Changes in operating assets and liabilities:                                          |       |                                              |       |   |   |
| Accounts receivable                                                                   |       | (4,488                                            | )          | (196 | ) |
| Inventories                                                                           |       | (1,020                                            | )          | (445 | ) |
| Prepaid expenses and other current assets                                             |       | 8                                                 |       | (193 | ) |
| Income taxes receivable                                                               |       | (900                                              | )          | (158 | ) |
| Other assets                                                                          |       | 20                                                |       | 179 |   |
| Accounts payable                                                                      |       | 3,475                                             |       | (4,728 | ) |
| Restructuring liability                                                               |       | —                                            |       | (91 | ) |
| Accrued expenses                                                                      |       | (209                                              | )          | 184 |   |
| Net cash provided by (used in) operating activities                                   |       | (1,138                                            | )          | 145 |   |
|                                                                                  |       |                                              |       |   |   |
| Cash flows from  investing activities:                                                |       |                                              |       |   |   |
| Purchase of property and equipment                                                    |       | (866                                              | )          | (2,428 | ) |
| Proceeds from the sales of property and equipment                                     |       | 42                                                |       | 24 |   |
| Net cash used in investing actitivites                                                |       | (824                                              | )          | (2,404 | ) |
|                                                                                  |       |                                              |       |   |   |
| Cash flows from  financing activites:                                                 |       |                                              |       |   |   |
| Repayment of debt                                                                     |       | (1,066                                            | )          | (963 | ) |
| Borrowings from credit facilites                                                      |       | 3,519                                             |       | 1,286 |   |
| Repayment of obligations under capital lease                                          |       | (69                                               | )          | (18 | ) |
| Exercise of employee stock options                                                    |       | —                                            |       | 185 |   |
| Net cash provided by financing activities                                             |       | 2,384                                             |       | 490 |   |
|                                                                                  |       |                                              |       |   |   |
| Effect of  exchange rates on cash                                                     |       | (343                                              | )          | (80 | ) |
| Increase (decrease) in cash and cash equivalents                                      |       | 79                                                |       | (1,849 | ) |
| Cash and cash  equivalents, beginning of period                                       |       | 3,148                                             |       | 5,453 |   |
| Cash and cash  equivalents, end of period                                             |       | $                                                 | 3,227      |   | $ | 3,604 |   |
| Cash paid during  the period for:                                                     |       |                                              |       |   |   |
| Interest                                                                              |       | $                                                 | 364        |   | $ | 261 |   |
| Income taxes                                                                          |       | $                                                 | 235        |   | $ | 217 |   |
| Non-cash  investing activities:                                                       |       |                                              |       |   |   |
| Purchases of  property and equipment which are included in accounts payable           |       | $                                                 | 46         |   | $ | — |   |

 

The accompanying notesare an integral part of these financial statements.

4

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CHANNELLCOMMERCIAL CORPORATION

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY

Sixmonths ended June 30, 2006

*(amounts in thousands)*

* *
| ** **                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **              | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**          | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **other**              | ** ** | **Total**  | ** ** |
| ** **                    | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **Treasury stock** | ** ** | **Retained** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**             | ** ** | **Shares**   | ** ** | **Amount**        | ** ** | **earnings**           | ** ** | **income (loss)** | ** ** | **equity** | ** ** |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |                   |       |       |       |
| Balance, January  1, 2006     |       | 9,787                 |       | $           | 98         |                    | $          | 30,750       |       | 244               |       | $                      | (1,871     | )                      | $          | 6,669      |       | $ | 313 |   | $ | 35,959 |   |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |                   |       |       |       |
| Stock-based  compensation     |       | —                |       | —      |       | 186                     |       | —       |       | —            |       | —                 |       | —                 |       | $          | 186        |   |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |                   |       |       |       |
| Foreign currency  translation |       | —                |       | —      |       | —                  |       | —       |       | —            |       | —                 |       | (142                   | )          | $          | (142       | ) |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |                   |       |       |       |
| Net loss for the  period      |       | —                |       | —      |       | —                  |       | —       |       | —            |       | (3,942                 | )          | —                 |       | $          | (3,942     | ) |
|                          |       |                  |       |        |       |                    |       |         |       |              |       |                   |       |                   |       |       |       |
| Balance, June 30, 2006        |       | 9,787                 |       | $           | 98         |                    | $          | 30,936       |       | 244               |       | $                      | (1,871     | )                      | $          | 2,727      |       | $ | 171 |   | $ | 32,061 |   |

 

The accompanying notesare an integral part of these financial statements.

5

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CHANNELL COMMERCIALCORPORATION

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2006 and 2005

*(amountsin 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 ChannellCommercial Corporation (the “Company”) as of June 30, 2006 and the results ofits operations for the three months and six months ended June 30, 2006 and 2005and cash flows for the six months ended June 30, 2006 and 2005.  The results of operations for the threemonths and six months ended June 30, 2006 and cash flows for the six monthsended June 30, 2006 are not necessarily indicative of the results to beexpected for any other interim period or the full year.  These consolidated financial statements shouldbe read in combination with the audited consolidated financial statements andnotes thereto for the year ended December 31, 2005.

**2.**              ***Change in Accounting forStock-Based Compensation****.*  Effective January 1, 2006 the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123R, *Share-Based Payment*, utilizing the “modified prospective”method as described in SFAS No. 123R.  Inthe “modified prospective” method, compensation cost is recognized for allshare-based payments granted after the effective date and for all unvested awardsgranted prior to the effective date.  Inaccordance with SFAS No.123R, prior period amounts were not restated.  SFAS No. 123R also requires cash retained asa result of excess tax benefits associated with these share-based payments tobe classified as financing activities in the Consolidated Statements of CashFlows, rather than as operating cash flows as required under previousaccounting principles. The Company recorded no excess tax benefits for the sixmonth and three  month periods ended June30, 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 recognizedin our condensed consolidated statements of operations for the three month andsix month periods ended June 30, 2006 included compensation expense forshare-based payment awards granted prior to, but not yet vested as of, December31, 2005 based on the grant date fair value estimated in accordance with thepro forma provisions of SFAS No. 123 and share-based payment awards grantedsubsequent to December 31, 2005 based on the grant date fair value estimated inaccordance with SFAS No. 123R. For share awards granted in 2006, expenses areamortized under the straight-line attribution method over the requisite serviceperiod. For share awards granted prior to 2006, expenses are amortized underthe straight-line single option method prescribed 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 Stock Plan was approved at the Annual Meetingof Stockholders on April 25, 2003.  Theauthorized shares under the 2003 Incentive Stock Plan are 3,100.

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 old options,and the vested status and vesting schedule of the old options was preserved andcontinued.  The exercise price of the newoptions was equal to the closing sale price of the Company’s common stock asreported on the Nasdaq National Market on the grant date of the new options.

At June 30, 2006, under the two plans described above, the Company hadtotal unvested stock-based compensation expense of $395.  The unvested stock options will vest atvarious intervals over the next 2.9 years. Total stock-based compensation expense, recognized in general andadministrative expenses during the second quarter and first half of 2006 isshown in the following table:

6

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|                                                          | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **June 30, 2006**    | ** ** | **June 30, 2006**      | ** ** |
|                                                     |       |                           |       |                             |       |
| Stock-based  compensation expense included in net income |       | $                              | 186        |                             | $          | 105 |   |
|                                                     |       |                           |       |                             |       |
| Effect on diluted  income (loss) per share               |       | $                              | (0.02      | )                                | $          | (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, *Accounting for Stock Based Compensation,*during the second quarter and first half of 2005, is illustrated in thefollowing table:
|                                                                                                   | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                                                        | ** ** | **June 30, 2005**    | ** ** | **June 30, 2005**      | ** ** |
|                                                                                              |       |                           |       |                             |       |
| Reported net  income                                                                              |       | $                              | 1,703      |                             | $          | 1,277 |   |
| Add stock-based  compensation expense reported in net income                                      |       | —                         |       | —                           |       |
| Less total  stock-based compensation expense, determined under the fair value method, net  of tax |       | (243                           | )          | (132                             | )          |
| Pro forma net  income                                                                             |       | $                              | 1,460      |                             | $          | 1,145 |   |
|                                                                                              |       |                           |       |                             |       |
| Reported basic  net income per share                                                              |       | $                              | 0.18       |                             | $          | 0.13 |   |
| Add stock-based  compensation expense reported in net income                                      |       | —                         |       | —                           |       |
| Less total  stock-based compensation expense, determined under the fair value method              |       | (0.02                          | )          | (0.01                            | )          |
| Pro forma basic  net income per share                                                             |       | $                              | 0.16       |                             | $          | 0.12 |   |
|                                                                                              |       |                           |       |                             |       |
| Reported diluted  net income per share                                                            |       | $                              | 0.17       |                             | $          | 0.13 |   |
| Add stock-based  compensation expense reported in net income                                      |       | —                         |       | —                           |       |
| Less total  stock-based compensation expense, determined under the fair value method              |       | (0.02                          | )          | (0.01                            | )          |
| Pro forma diluted net  income per share                                                           |       | $                              | 0.15       |                             | $          | 0.12 |   |

 

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 year:
|                           | ** ** | **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%                 |       | 3.90%                      |       |
| Expected  volatility      |       | 65%                         |       | 50%                        |       |
| Expected dividend yield   |       | —                      |       | —                     |       |

 

The weighted-averagegrant-date fair value of options granted during the six months ended June 30,2006 and June 30, 2005 was $2.50 and $3.19, respectively.  The expected volatility is based on thehistorical volatility of the Company’s common stock.

7

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A summary of option activity under the Company’s two stock plans, as ofJune 30, 2006 and changes during the six months then ended is presented below:
|                                 | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|---------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **Options**                     | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
|                            |       |       |       |          |       |            |       |          |       |
| Outstanding at  January 1, 2006 |       | 1,934      |       | $             | 5.10       |            |       |          |       |   |
| Granted                         |       | 14         |       | 4.28          |       |            |       |          |       |
| Exercised                       |       | —     |       | —        |       |            |       |          |       |
| Forfeited or  expired           |       | (132       | )          | 7.75          |       |            |       |          |       |
| Outstanding at  June 30, 2006   |       | 1,816      |       | $             | 4.90       |            | 7.4        |          | $          | — |   |
| Exercisable at June 30,  2006   |       | 1,492      |       | $             | 4.89       |            | 7.3        |          | $          | — |   |

 

A summary of the status of the Company’s nonvested shares as of June30, 2006 and changes during the six months then ended is presented below:
|                               | ** ** | ** ** | ** ** | **Weighted-**       | ** ** |
|-------------------------------|------------|------------|------------|---------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Grant-Date**      | ** ** |
| **Nonvested Shares**     | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|                          |       |       |       |                |       |
| Nonvested at  January 1, 2006 |       | 563        |       | $                   | 1.96       |   |
| Granted                       |       | 14         |       | 2.50                |       |
| Vested                        |       | (203       | )          | 1.68                |       |
| Forfeited or  expired         |       | (50        | )          | 3.59                |       |
| Nonvested at June 30,  2006   |       | 324        |       | $                   | 1.91       |   |

 

**3.*****              Inventories****. *Inventories stated at the lower ofcost (first-in, first-out method) or market are summarized as follows:
|                                   | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                              |       |                        |       |                            |       |
| Raw Materials                     |       | $                           | 5,483      |                            | $          | 5,567 |   |
| Work-in-Process                   |       | 2,348                       |       | 2,642                           |       |
| Finished Goods                    |       | 5,818                       |       | 4,926                           |       |
|                              |       | 13,649                      |       | 13,135                          |       |
| Less inventory  valuation reserve |       | (1,174                      | )          | (1,724                          | )          |
|                              |       | $                           | 12,475     |                            | $          | 11,411 |   |

 

**4.****              *Income (loss) per share****.*  Basic income (loss) per share excludesdilution and is computed by dividing net income (loss) available to commonstockholders by the weighted average number of common shares outstanding forthe six month and three month periods ended June 30, 2006 and 2005*.   *Diluted incomeper share reflects the potential dilution that could occur if dilutive optionsto acquire common stock were exercised, the proceeds of which are then presumedto have been used to repurchase outstanding stock using the treasury stockmethod.  The following is areconciliation of the number of shares (denominator) used in the basic anddiluted income (loss) per share computations for the six month and three monthperiods ended June 30, 2006 and 2005:

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|                                   | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                        | ** ** | **Per Share** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                        | ** ** | **Shares**                                        | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic income  (loss) per share    |       | 9,543                                             |       | $ | (0.41 | ) | 9,386 |   | $ | 0.18 |   |
| Effect of  dilutive stock options |       | —                                            |       | — |   | 415 |   | 0.01 |   |
| Diluted income (loss)  per share  |       | 9,543                                             |       | $ | (0.41 | ) | 9,801 |   | $ | 0.17 |   |

 
|                                   | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                        | ** ** | ** **                                          | ** ** | **Per Share** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                        | ** ** | **Shares**                                          | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic income  (loss) per share    |       | 9,543                                               |       | $ | (0.25 | ) | 9,394 |   | $ | 0.13 |   |
| Effect of  dilutive stock options |       | —                                              |       | — |   | 327 |   | — |   |
| Diluted income (loss)  per share  |       | 9,543                                               |       | $ | (0.25 | ) | 9,721 |   | $ | 0.13 |   |

 

The following options were not included in the computation of dilutedincome (loss) per share due to their antidilutive effect.
|                                             | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| * *                                    | * *   | * *                                          | * *   | * * | * * |
| Options to  purchase shares of common stock | * *   | 1,816                                             |       | 68 | * * |
| Exercise prices                             | * *   | $3.25 - $13.75                                    |       | $10.06 - $13.75 | * * |
| Expiration dates                            | * *   | July 2006 – May 2016                         |       | July 2006 – July 2010 | * * |

 
|                                             | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| * *                                    | * *   | * *                                            | * *   | * * | * * |
| Options to  purchase shares of common stock |       | 1,816                                               |       | 71 |   |
| Exercise prices                             |       | $3.25 - $13.75                                      |       | $6.65 - $13.75 |   |
| Expiration dates                            |       | July 2006 – May 2016                           |       | July 2006 – May 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 six months and three months endedJune 30, 2006 and 2005:

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|                                          | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                     |       |                                              |       |   |   |
| Revenues from  unrelated entitities (1): |       |                                              |       |   |   |
| Americas                                 |       | $                                                 | 29,702     |   | $ | 38,376 |   |
| International                            |       | 23,924                                            |       | 25,362 |   |
|                                     |       | $                                                 | 53,626     |   | $ | 63,738 |   |
| Income (loss)  from operations:          |       |                                              |       |   |   |
| Americas                                 |       | $                                                 | 380        |   | $ | 1,943 |   |
| International                            |       | (5,734                                            | )          | 1,042 |   |
|                                     |       | $                                                 | (5,354     | ) | $ | 2,985 |   |
| Interest  expense, net:                  |       |                                              |       |   |   |
| Americas                                 |       | $                                                 | 177        |   | $ | 102 |   |
| International                            |       | 109                                               |       | 128 |   |
|                                     |       | $                                                 | 286        |   | $ | 230 |   |

 

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(1) Note:   Revenuesfrom Australia exceeded 10% of total revenues for the six month periods endedJune 30, 2006 and 2005.  Revenues fromAustralia totaled $21,375 and $21,170 for the six month periods in 2006 and2005, respectively.

 
|                                         | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                    |       |                            |       |   |   |
| Revenues from unrelated entitities (1): |       |                            |       |   |   |
| Americas                                |       | $                               | 16,849     |   | $ | 18,836 |   |
| International                           |       | 12,257                          |       | 13,524 |   |
|                                    |       | $                               | 29,106     |   | $ | 32,360 |   |
| Income (loss) from operations:          |       |                            |       |   |   |
| Americas                                |       | $                               | 1,576      |   | $ | 1,554 |   |
| International                           |       | (5,377                          | )          | 602 |   |
|                                    |       | $                               | (3,801     | ) | $ | 2,156 |   |
| Interest expense, net:                  |       |                            |       |   |   |
| Americas                                |       | $                               | 92         |   | $ | 54 |   |
| International                           |       | 92                              |       | 69 |   |
|                                    |       | $                               | 184        |   | $ | 123 |   |

 

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(1) Note:   Revenuesfrom Australia exceeded 10% of total revenues for the three month periods endedJune 30, 2006 and 2005.  Revenues fromAustralia totaled $10,814 and $11,326 for the three month periods in 2006 and2005, respectively.

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The Company has revenues from external customers from the followingproduct lines:
|                        | ** ** | **Six months ended June 30,** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                   |       |                                              |       |   |   |
| Product lines:         |       |                                              |       |   |   |
| Enclosures             |       | $                                                 | 25,711     |   | $ | 28,505 |   |
| Water related products |       | 23,500                                            |       | 30,395 |   |
| Connectivity           |       | 3,954                                             |       | 4,565 |   |
| Other                  |       | 461                                               |       | 273 |   |
|                   |       | $                                                 | 53,626     |   | $ | 63,738 |   |

 
|                        | ** ** | **Three months ended June 30,** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                   |       |                            |       |   |   |
| Product lines:         |       |                            |       |   |   |
| Enclosures             |       | $                               | 14,449     |   | $ | 14,769 |   |
| Water related products |       | 12,342                          |       | 14,899 |   |
| Connectivity           |       | 1,963                           |       | 2,533 |   |
| Other                  |       | 352                             |       | 159 |   |
|                   |       | $                               | 29,106     |   | $ | 32,360 |   |

 

***6.******              Recent AccountingPronouncements****.*  In July 2006, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes*,which becomes effective for fiscal years beginning after December 15,2006.  FIN No. 48  prescribes a recognition threshold andmeasurement process for recording in the financial statements uncertain taxpositions taken or expected to be taken in a tax return. Additionally, FIN No.48 provides 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.

InMay 2005, the FASB issued SFAS No. 154, “*Accounting Changes andError Corrections — a replacement of APB Opinion No. 20 and FASB Statement No.3.”*  SFAS No. 154 replaces APB Opinion No. 20, “*Accounting Changes,”* and FASB Statement No. 3, “*Reporting Accounting Changes in Interim Financial Statements”*and changes the requirements for the accounting for and reporting of a changein accounting principle.  This statement applies to all voluntary changesin accounting principle.  It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions.  When a pronouncement includesspecific transition provisions, those provisions should be followed.  SFASNo. 154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 31, 2005.   The Company adoptedSFAS No. 154 on January 1, 2006, and its implementation did not have a materialeffect on the Company’s consolidated financial position, results of operationsor cash flows.

In March 2005, the FASB issued InterpretationNo. 47, “*Accounting for ConditionalAsset Retirement Obligations*,” an interpretation of FASB StatementNo. 143. This Interpretation clarifies that the term “conditional assetretirement obligation” as used in FASB No. 143, “*Accounting for Asset Retirement Obligations,”*refers to a legal obligation to perform an asset retirement activity in whichthe timing and (or) method of settlement are conditional on a future event thatmay or may not be within the control of the entity. Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation, when incurred, if the fair value of the liability can bereasonably estimated. The Interpretation became effective for the Company as ofDecember 31, 2005. The implementation of this Interpretation did not havea material effect on the Company’s consolidated financial position, results ofoperations 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

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fixed overhead costs be allocated to inventories basedon normal production capacity.  Theguidance in SAFS No. 151 is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151 on January 1, 2006, and itsimplementation did not have a material impact on its consolidated financialcondition, 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 June 30, 2006, such balance was $363.  The Company recorded income of $30 and $30 inthe first six months of 2006 and 2005, respectively, related to the amortizationof the deferred gain.

**8.****              *Income Taxes.***  Theeffective tax rate was 4.9% for the six months ended June 30, 2006 compared tothe statutory rate of 34%. The effective rate is calculated by applying thestatutory tax rates of the foreign entities to their respective income or lossand combining the resulting amounts.  Thelargest impact to foreign income or loss was $4,829 related to the impairmentof goodwill, which is a non-deductible item for determining income taxes and wastreated as a permanent difference in the quarter ended June 30, 2006, resultingin a decrease in the effective tax benefit rate for the quarter of (29.4%).  The $278 tax benefit for the six months endedJune 30, 2006 was solely related to the foreign entities as there was no tax benefitrecorded for the domestic losses, as explained 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 Companyhas had cumulative losses in recent years in its domestic operations, theCompany is unable to support the realizability of domestic deferred tax assetsbased on forecasted future earnings.  Asa result, management has concluded that a full valuation allowance against netdomestic deferred tax assets is necessary. As such, no tax benefit has been recorded for the domestic losses of theCompany in the six months ended June 30, 2006.

**9.*****              Commitments andContingencies*.**   *Employment Agreements**—***In December, 2003, the Company entered into a five yearemployment agreement, renewable every five years, with William H. Channell,Jr.   Mr. Channell, Jr.’s annual salaryfor 2005 was $760.  Mr. Channell, Jr. isentitled to participate in the Company’s stock plans, the Company’s 401(k) Planand the Company’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**—***The Federal income tax returns of theCompany for the years ended December 31, 1997, 1999, 2000, 2001 and 2002 arecurrently under examination by the Internal Revenue Service (“IRS”).  As of June 30, 2006, the Company and the IRShave resolved all outstanding issues except for the credit for increasingresearch and development expenditures. The amount of the credit under dispute is approximately $500.  As the Company has established a fullvaluation allowance on the net benefit to be obtained from this credit, theresolution of the research and development tax credit will not have a materialadverse impact on the Company’s results of operations or financialposition.  In addition, the credit hasnot been utilized on the Company’s tax returns. Also, on August 4,

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2006the Company received notification from the IRS that its income tax returns forthe years ended December 31, 2003 and 2004 have been selected forexamination.  The Company expects thatthe results of these examinations will not have a material impact on theCompany’s results of operations or financial condition.

In2001, the State of Texas issued a report assessing the Company additional salesand use tax of $1,600, including interest for the period of January 1, 1996through December 31, 1999. The Company appealed the assessment and provided theState of Texas with documentation to support the Company’s contention that thetransactions did not require the Company to remit sales and use tax to theState of Texas. The State of Texas agreed to a reduction of the amount owed to$587 plus interest of $330. The Company has paid the State of Texas the entireamount of the assessment and interest owed of $917. Also, the Company hasreceived and paid sales and use tax assessments from the state of California ofapproximately $25, and the Company has accrued an additional $134 for otherpotential state tax liabilities.

*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 Carson approximately$70 of inventory previously purchased by the Company.  Carson agreed to indemnify the Companyagainst certain product warranty claims for five years from the date ofsale.  The Company had $307 accrued forthis liability 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 deemed appropriatefor such litigation matters.  Managementbelieves that no presently pending litigation matters are likely to have amaterial adverse effect on the Company’s financial statements or results ofoperations, 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 storagetanks.  Bushman Tanks currently operatesout of six leased facilities in Australia, located in Sydney, Dalby, Orange,Terang, Townsville, and Adelaide.  Thepurchase price was $16,838.  The originalShare and Asset Purchase Agreement provided for total contingent considerationof approximately $2,900 if the Bushman Tanks business was to achieve certainsales and cost reduction targets.  Anyamounts paid as contingent consideration were to result in additionalgoodwill.  Management assessed that an earnout of approximately $760 was earned for achieving the 2005 sales targets as ofJuly 31, 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 exceed 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.  Subsequent to December 31, 2005 the Companyand the sellers entered into an agreement that modified the original terms ofthe contingent consideration.  Pursuantto the agreement, the Company paid approximately $148 to the sellers to settleall current claims between the parties. The sellers will forgo any additional earn out payments, and the Companywill forgo any future warranty claims. As a result of the settlement agreement, a net amount of $86 wasrecorded as a reduction to goodwill. The Company believes that any impact ofthis agreement will not have a material effect on its financial condition orresults of 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 wasrecorded. RMS Communications, Inc. paid the Company $125 in cash at the time ofsale, and the remaining $675 was payable in monthly installments through June 30,2003, bearing interest at 7% per annum. The account is currently in arrears. Arevised secured promissory note superseding the previous promissory

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note with RMS Communications, Inc. and Gary Napolitano personally hasbeen entered into with RMS Communications, Inc. and Gary Napolitano personally.The revised secured promissory note is dated December 31, 2005 and called forthe balance owed to the Company of $206 plus accrued interest of $46 to be paidin monthly installments of $3.5 until the entire amount of the note ispaid.  The Company has security interestin the inventory and a personal guarantee from Mr. Napolitano.  A reserve of approximately $123 has beenrecorded against the receivable as of June 30, 2006 according to the Company’spolicy for accounts receivable allowances. The Company continues to purchase RF devices from Mr. Napolitano andfrom other sources depending on price and supply of product. The RF devicespurchased from Mr. Napolitano’s firm in 2005 and 2004 approximated $10 and $87,respectively, and were used in the Company’s product lines. The purchases in2005 and 2004 did not result in a cash payment to Mr. Napolitano as the amountswere used to reduce the accounts receivable. The balance owed at June 30, 2006 was $242.  There were no purchases from Mr. Napolitano’scompany in the six month and three months ended June 30, 2006.

In the first half of2006, the Company paid Carolyn Channell $35. On June 1, 2005, Mrs. Channell was hired as an employee to handlespecific insurance matters for the Company. Prior to being hired as an employeeof the Company, Mrs. Channell consulted on insurance matters for theCompany.  In the first half of 2005, Mrs.Channell was paid $31 for consulting services. Mrs. Channell is the wife of William H. Channell, Jr., the Company’sPresident and Chief Executive Officer.

The Company’s facilities in Orange, Dalby, Terang and Adelaide,Australia, are leased from stockholders of the Company.  These stockholders are former owners ofBushman Tanks. The facilities comprise 94,000 square feet of manufacturing,warehouse and office space.  The leaseterm on all four facilities is through February 28, 2010 with a five-yearrenewal option.  The rent expense paidunder the leases in the six months ended June 30, 2006 was $184.   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 is $152accrued for purchase accounting related to these unfavorable leases.

**11.****       *Concentrations.***  Sales to Verizon of $5,558 in the first sixmonths of 2006 represented 10.4% of the Company’s sales in the period.  Sales to Verizon of $16,172 in the first sixmonths of 2005 represented 25.4% of the Company’s sales.  Sales to Comcast of $4,328 in the first sixmonths of 2006 represented 8.1% of the Company’s sales in the period.  Sales to Comcast of $4,530 in the first sixmonths of 2005 represented 7.1% of the Company’s sales for the period.

Sales to Verizon of $3.2 million in the second quarter of 2006represented 11.0% of the Company’s sales in the period.  Sales to Verizon of $6.7 million in thesecond quarter of 2005 represented 20.7% of the Company’s sales.  The second largest customer in the secondquarter of 2006 was Comcast with sales of $2.4 million, representing 8.3% ofthe Company’s sales.  Sales to Comcast of$2.5 million in the second quarter of 2005 represented 7.9% of the Company’ssales for the period.

Accounts receivable from Verizon of $1,313 and from Comcast of $1,338represented 9.9% and 10.1%, respectively, of Company accounts receivable atJune 30, 2006.  Accounts receivable fromVerizon of $307 and from Comcast of $404 represented 3.7% and 4.9%, respectively,of Company accounts 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 June 30, 2006, the outstanding loan balance subject to the guaranteetotaled approximately $537.  The ChannellFamily Trust does not qualify as a “variable interest entity” subject toconsolidation under FIN46 or FIN 46(R) 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.  Effective January 1, 2002, the Companyadopted SFAS No. 142, “*Goodwill and OtherIntangible Assets.*”  SFAS 142requires that goodwill and certain intangibles no longer be amortized, butinstead be reviewed at least annually for impairment.

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The Company tests the value of goodwill for impairment annually(December 31 for the Canadian reporting unit and June 30 for the Bushman Tanksreporting unit) or whenever events or changes in circumstance indicate that acondition of impairment may exist.  Assuch, the goodwill for the Bushman Tanks reporting unit was reassessed forimpairment on June 30, 2006.  The testinvolves significant judgment in estimating projections of fair value generatedthrough future performance of the operating segment.  In calculating the fair value, the Companyrelies on 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, whichresulted in 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 theexpected present value of future cash flows. Measurement of the impairment lossis an estimate, and continued increases in raw materials costs in excess of theexpectations of management, or other negative events or circumstances, couldresult in additional impairment of goodwill in future reporting periods. Therewas no impairment to 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    |       | 31           |       | 127               |       |
| Balance at June 30,  2006                  |       | $            | 705        |              | $          | 8,485 |   |

 

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 Tanks business.  The Company performed an evaluation of thenon-compete agreement and determined the fair value at the date of the BushmanTanks acquisition to be $1,600.  Thenon-compete agreement is recorded in the reporting unit of Bushman Tanks, whichis part of the International segment, as a separately identifiable intangibleasset and is being amortized over the ten-year contractual term on astraight line basis.  No indication ofimpairment of the non-compete intangible asset was identified during the annual goodwill impairment test performed asof June 30, 2006.

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 Tanks reporting unit,which is part of the International segment.

Amortization expense for the six months ended June 30, 2006 was$86.  The estimated amortization expensebased on current intangible balances and the June 30, 2006 foreign currencyexchange rates, is $169 a year for the next five fiscal years, and $551thereafter.

**14.**       ***Loan and SecurityAgreements.***  The Companyhas a Loan and Security Agreement with an asset-based lender in the UnitedStates.  This Agreement contains a termloan and a revolving credit facility.  OnFebruary 28, 2006, the Loan and Security Agreement was amended, among otherthings, to extend the term of the loans through March 31, 2007; to eliminatethe fixed charge coverage ratio financial covenant; and to reduce the maximumrevolver borrowings to $10,000.  Therevolver under this Agreement has a $1,000 sub-limit for letters of credit.  As of June 30, 2006, outstanding letters ofcredit totaled $986.  The Agreementcontains various financial and operating covenants that impose limitations onthe Company’s ability, among other things, to incur additional indebtedness,merge or consolidate, sell assets except in the ordinary course of business,make certain investments, enter into

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leases and pay dividends.  TheAgreement requires the Company to maintain a lockbox on the revolving creditfacility.  The Agreement also contains asubjective acceleration clause should the Company come into a default, whichallows the asset-based lender to terminate the facility and require that anyoutstanding obligation to be repaid.  Thebalance outstanding at June 30, 2006 under the revolving line of credit was$2,732 and under the term loans was $1,413. The revolving line of credit and the term loan have been classified as acurrent 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 hasfrom time to time entered into new Loan and Security Agreements with the bank,which have amended and superseded the prior Loan and Security Agreements.Channell Bushman Group signed a new Loan and Security Agreement with the bankdated as of April 26, 2006 that amended (and superseded) the Loan And SecurityAgreement then in place.  That agreement,among other things, revised the financial covenants and increased the maximumborrowings under the revolving credit facility to AUD$3,200. As of June 30,2006, the facilities under the current Loan and Security Agreement included thefollowing: a term loan that expires in July 2009; a revolving credit facilitywith maximum borrowings of AUD$3,200 that expires in November 2006; a facilityto fund future “earn-out” payments to the sellers of Bushman Tanks that expiresin July 2008; a capital expenditure facility that expires in July 2009; and amaster asset finance agreement facility that expires in November 2006.  The Loan and Security Agreement containsvarious financial and operating covenants that (a) 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 and(b) require Channell Bushman Group to comply with an interest coverage ratioand certain other financial covenants. In addition, the Agreement contractually obligates Channell BushmanGroup to repay the revolving credit facility as it receives payments from itscustomers.  The Agreement also contains asubjective acceleration clause should Channell Bushman Group come into adefault, which allows the bank to terminate the facility and require anyoutstanding obligations to be repaid.  The balance outstanding under the revolving line of credit, “earn-out”facility, and capital expenditure facility at June 30, 2006 was $2,275. As ofJune 30, 2006, Channell Bushman Group was not in compliance with variousfinancial covenants and has not received a waiver of noncompliance from thebank.  The Company is currentlyrenegotiating the financial covenants under its current Australian Loan andSecurity Agreement and expects the borrowing limits and the terms other thanthe financial covenants to generally remain the same.  As the renegotiations have not beencompleted, the Company has reclassified approximately $3.4 million of long termdebt to short term debt.

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

### **Introductionand Overview**

Channell Commercial Corporation (the “Company”) is a designer andmanufacturer of telecommunications equipment supplied to communications networkoperators worldwide and water storage tanks distributed in consumer marketsthroughout Australia.  Major productlines include a complete line of thermoplastic and metal fabricated enclosures,advanced copper termination and connectorization products, fiber-optic cablemanagement systems and polyethylene water related products.

 

During the last fiveyears, demand for communications infrastructure equipment has fluctuateddramatically.  At various times in thepast there have been significant slowdowns in capital spending by wireless networkoperators due to delays in the expected deployment of infrastructure equipmentand financial difficulties on the part of the network operators who were forcedto consolidate and reduce spending to strengthen their balance sheets andimprove their profitability.  Thesechanges had a significant negative impact on overall demand for infrastructureproducts, and at various times, have directly reduced demand for our productsand increased price competition within our industry, which has led to reductionsin our revenues and contributed to our reported operating 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.  Recently, portions of Australiahave experienced significant rainfall which, if continued, could negativelyaffect the sales of our product.

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Within both thecommunications infrastructure market and water storage market, the increasingprice of oil has had a negative impact on our gross margins.  The products manufactured in both of themarkets in which we operate are primarily composed of polyethylene resins,which are derived from oil.  The Companyis limited in its ability to pass on incremental price increases to itscustomers.  Continued increases in theprice of oil will have a negative impact 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 measures its success bymonitoring net sales and gross margins with a short-term goal of maintainingpositive cash flows, while striving to achieve long-term operating profits.  The Company believes that there continues tobe long-term growth opportunities within both the communications infrastructureequipment and water tank markets.

### **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 six months ended June 30, 2006 and June30, 2005.  A minority interest has beenrecorded for the 25% equity owned by ANZ Private Equity, a unit of Australiaand New Zealand Banking Group Ltd.

**Comparison of the Six MonthsEnded June 30, 2006 with the Six Months Ended June 30, 2005**

***NetSales*.**  Net salesin the first half of 2006 were $53.6 million, a decrease of $10.1 million or15.9% compared to the first half of 2005. The decrease is due to lower product volume in both the Americas andInternational segments.

Americas net sales were$29.7 million in the first half of 2006, a decrease of $8.7 million or 22.7%over the same period in 2005. The decrease was due primarily to lower volume ofsales to Verizon.  Sales to largecustomers fluctuate period to period based on the status of such customers’infrastructure projects, and therefore are difficult to predict.

International net sales were$23.9 million, a decrease of $1.5 million or 5.9%.  The decrease is due to ongoing competitivesales pressure in overseas markets.

Sales to Verizon of $5.6million in the first six months of 2006 represented 10.4% of the Company’ssales in the period.  Sales to Verizon of$16.2 million in the first six months of 2005 represented 25.4% of the Company’ssales.  The second largest customer inthe first six months of 2006 was Comcast, with sales of $4.3 millionrepresenting 8.1% of the Company sales. Sales to Comcast of $4.5 million in the first six months of 2005represented 7.1% of the Company’s sales for the period.

***GrossProfit*.**  Grossprofit in the first half of 2006 was $16.5 million, a decrease of $3.5 millionor 17.5% compared to the first half of 2005. The decrease was primarily due tothe reduction in sales volume in the Americas segment along with a lower grossprofit percentage in the International segment. Gross profit dollars in the Americas segment decreased $1.8 million from$10.5 million in the first half of 2005 to $8.7 million in the first half of2006.  Gross profit of $7.7 million inthe first half of 2006 in the International segment was $1.7 million lower thanin the 2005 period.

As a percentage of netsales, gross profit decreased from 31.3% in the first six months of 2005 to30.7% in the first half of 2006.  Thedecline is primarily due to a lower gross profit percentage in theInternational segment from 37.3% in the first half of 2005 to 32.2% in thefirst half of 2006.  This decline isprimarily due to higher raw material costs related to higher oil prices.  Offsetting the decrease in the Internationalsegment was an increase in the gross profit percentage in the Americas segmentfrom 27.4% in the first half of 2005 to 29.5% in the first half of 2006.  This increase was primarily due to areduction of $0.5 million in the slow and obsolete inventory reserve as aresult of the sale of previously written down excess inventory.

***Selling*.** Selling expenses were $9.6 million in the first six months of 2006, adecrease of $0.3 million or 3.0% from the first six months of 2005.

As a percentage of net sales, selling expense increased from 15.5% inthe 2005 period to 17.9% in the 2006 period. The higher percentage is primarily due to the increase in freight costs.

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***General and Administrative*.**  General and administrative expenses were $6.2million in the first half of 2006, an increase of $0.6 million or 10.7% fromthe first half of 2005.  The increase isdue primarily to stock-based compensation expense of $0.2 million, accruedseverance expenses, and other various expenses.

As a percentage of netsales, general and administrative expense increased from 8.7% in the 2005period to 11.5% 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 $1.2million in the first six months of 2006, a decrease of $0.3 million or 20.0%from the first six months of 2005. Spending on new product development programs was slightly less than theprevious year.

As a percentage of net sales, research and development expensesdecreased from 2.4% in the first half of 2005 to 2.2% in the first half of2006.

***Impairmentof Goodwill.*** Goodwill impairment expense was $4,829 in the first six months of 2006compared to no impairment in same 2005 period. The impairment was related to the Company’s Bushman Tanks operations inAustralia.  The primary cause for thisimpairment of goodwill was the decrease in gross margins and operating incomein the Bushman Tanks business, which have been negatively impacted byincreasing prices in raw materials.  Theprimary raw materials used in the manufacture of Bushman Tanks products arepetroleum-based resins.  The price ofthese resins has been continually increasing as the price of oil increases.

As a percentage of sales,goodwill impairment was 9.0% in the first six months of 2006.

***Incomefrom Operations*.**  Asa result of the items discussed above, income (loss) from operations was ($5.4)million in the first six months of 2006 compared to income from operations of$3.0 million in the first six months of 2005. Operating margin as a percent of sales was (10.0%) in the 2006 periodcompared to 4.7% in the 2005 period.

***InterestExpense, Net*.** Interest expense, net of interest income was $0.3 million in the firsthalf of 2006 and $0.2 million in the first half of 2005.

***Income Taxes*.** There was an income tax benefit of $0.3 million in the first six monthsof 2006 compared to an income tax expense of $0.9 million in the first sixmonths of 2005.  The effective tax ratewas 4.9% in the first six months of 2006 and 33.6% for the same period in2005.  Since the Company has a fullvaluation allowance on the realization of the domestic net deferred tax asset,no tax expense is currently being recorded on the operations in the US.  The tax benefit recorded in the current yearwas a result of the loss in foreign operations. The largest impact to foreign income or loss was $4,829 related to theimpairment of goodwill, which is a non-deductible item for determining incometaxes.

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

***NetSales*.**  Net salesin the second quarter of 2006 were $29.1 million, a decrease of $3.3 million or10.2% compared to the second quarter of 2005. The decrease is due to lower product volume in both the Americas andInternational segments.

Americas net sales were$16.8 million in the second quarter of 2006, a decrease of $2.0 million or10.6% compared to the same period in 2005. The decrease was due primarily tolower volume of sales to Verizon.  Salesto large customers fluctuate period to period based on the status of suchcustomers’ infrastructure projects, and therefore are difficult to predict.

International net saleswere $12.3 million in the second quarter of 2006, a decrease of $1.2 million or8.9% compared to the same period in 2005. The decrease is due to competitive sales pressure in the internationalmarkets.

Sales to Verizon of $3.2 million in the second quarter of 2006represented 11.0% of Company sales in the period.  Sales to Verizon of $6.7 million in thesecond quarter of 2005 represented 20.7% of the Company’s sales.  The second largest customer in the secondquarter of 2006 was Comcast with sales of $2.4 million, representing 8.3% ofthe Company’s sales.  Sales to Comcast of$2.5 million in the second quarter of 2005 represented 7.9% of the Company’ssales for the period.

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***GrossProfit*.**  Grossprofit in the second quarter of 2006 was $9.5 million, a decrease of $1.2million or 11.2% compared to the second quarter of 2005. The decrease wasprimarily due to the reduction in sales volume along with a lower gross profitpercentage in the International segment. Gross profit dollars in the Americas segment decreased $0.1 million from$5.7 million in the second quarter of 2005 to $5.6 million in the secondquarter of 2006.  Gross profit of $3.9million in the second quarter of 2006 in the International segment was $1.1lower than in the 2005 period.

As a percentage of netsales, gross profit decreased from 33.2% in the second quarter of 2005 to 32.6%in the second quarter of 2006.  Thedecline is primarily due to a lower gross profit percentage in theInternational segment from 37.1% in the second quarter of 2005 to 31.4% in thesecond quarter of 2006.  This decline isprimarily due to higher raw material costs related to higher oil prices.  Offsetting the decrease in the Internationalsegment was an increase in the gross profit percentage in the Americas segmentfrom 30.3% in the second quarter of 2005 to 33.5% in the second quarter of2006.  This increase was primarily due toa reduction of $0.4 million in the slow and obsolete inventory reserve as aresult of the sale of previously written down excess inventory.

***Selling*.**  Selling expenses were $4.9 million in thesecond quarter of 2006, a decrease of $0.2 million or 3.9% from the secondquarter of 2005.

As a percentage of netsales, selling expenses increased from 15.6% in the 2005 period to 16.8% in the2006 period.  The higher percentage isprimarily due to the increase in freight costs.

***Generaland Administrative*.** General and administrative expenses were $3.0million in the second quarter of 2006, an increase of $0.3 million or 11.1%from the second quarter of 2005.  Theincrease is due primarily to stock-based compensation expense of $0.1 million.

As a percentage of netsales, general and administrative expenses increased from 8.3% in the 2005period to 10.2% in the 2006 period.  Theincrease is due to the decreased sales volume without a proportional decreasein the relatively fixed general and administrative expenses.

***Researchand Development*.** Research and development expenses were $0.6 million in the secondquarter of 2006, a decrease of $0.2 million or 25.0% from the second quarter of2005.  The decrease is due to lowerspending on new product development programs in the current year.

As a percentage of netsales, research and development expenses decreased from 2.6% in the secondquarter of 2005 to 2.1% in the second quarter 2006.

***Impairmentof Goodwill.*** Goodwill impairment expense was $4,829 in the second quarter of 2006compared to no impairment in same 2005 period. The impairment was related to the Company’s Bushman Tanks operations inAustralia.  The primary cause for thisimpairment of goodwill was the decrease in gross margins and operating incomein the Bushman Tanks business, which have been negatively impacted by increasingprices in raw materials.  The primarymaterial used in the manufacture of Bushman Tanks products are petroleum-basedresins.  The price of these resins hasbeen continually increasing as the price of oil increases.

As a percentage of sales,goodwill impairment was 16.6% in the first three months of 2006.

***Incomefrom Operations*.** As a result of the items discussed above, income (loss) from operationswas ($3.8) million in the second quarter of 2006 compared to income fromoperations of $2.2 million in the second quarter of 2005.  Operating margin as a percent of sales was13.1% in the 2006 period compared to 6.7% in the 2005 period.

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

***Income Taxes*.** There was an income tax benefit of $0.3 million in the second quarter of2006 compared to an income tax expense of $0.7 million in the second quarter of2005.  The effective tax rate was 6.5% inthe second quarter of 2006 and 35.0% for the same period in 2005.  Since the Company has a full valuationallowance on the realization of the domestic net deferred tax asset, no taxexpense is currently being recorded on the operations in the US.  The tax benefit recorded in the current yearwas a result of the loss in foreign operations. The largest impact to foreign income or loss was $4,829 related to theimpairment of goodwill, which is a non-deductible item for determining incometaxes.

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**Liquidity and Capital Resources**

Net cash used inoperating activities was ($1.1) million for the six months ended June 30, 2006,compared to net cash provided by operating activities of $0.1 million in sameperiod ended 2005.   The cash used in operatingactivities in 2006 is primarily due to the net loss of $3.9 million, anincrease in accounts receivable and inventories of $5.5 million and an increasein the income tax receivable of $0.9 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 previous year.  This increasewas offset by approximately $5.9 million in non-cash deductions, includingdepreciation and goodwill impairment, and a net increase in accounts payableand accrued expenses of $3.3 million.

Net cash used ininvesting activities was ($0.8) million for the six months ended June 30, 2006,compared to ($2.4) million in the 2005 period. The decrease in 2006 is due to a decrease in the acquisition of propertyand equipment resulting from the Company’s efforts to reduce non-critical cashexpenditures in the 2006 period.

Net cash provided byfinancing activities was $2.4 million for the six months ended June 30, 2006,compared to net cash provided by financing activities of $0.5 million in thesame period of 2005.  The increase is dueto additional borrowings under the Company’s credit facilities needed to fundthe operations in the 2006 period.

Cash and cash equivalentson June 30, 2006 were $3.2 million, compared to $3.1 million at December 2005.

Net accounts receivableincreased to $13.0 million at June 30, 2006 from $8.3 million at December 31,2005.  In terms of days salesoutstanding, accounts receivable increased from 33 days at December 31, 2005 to40 days at June 30, 2006.  The increasein days sales outstanding is due to a higher percentage of sales occurring atthe end of the second quarter.

Inventories increased to$12.5 million at June 30, 2006 from $11.4 million at December 31, 2005.  Days inventory decreased from 60 days atDecember 31, 2005 to 57 days at June 30, 2006.

Accounts payableincreased from $8.7 million at December 31, 2005 to $12.2 million at June 30,2006.  The increase is primarily due toan increase in the volume of activity at the end of the second quarter comparedto the end of the previous year.  Dayspayables were 46 days at December 31, 2005 and 56 days at June 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 a positive return to long-term cashflow.  In addition, the Company ispursuing market opportunities and designing products that will consume idle orslow moving inventory to further reduce the need for current and long-term cashflow.  The Company believes that cashflow from operations coupled with available borrowings under the creditfacilities described in Note 14 will be sufficient to fund the Company’scapital expenditure 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 2007.

As of June 30, 2006 theCompany’s Channell Bushman Group was not in compliance with various financialcovenants under its Australian Loan and Security Agreement.  The Channell Bushmans Group has not receiveda waiver of noncompliance from the bank. The Company is currently renegotiating the financial covenants underthat Agreement and expects the borrowing limits and terms other than thefinancial covenants to generally remain the same. Accordingly, relatedborrowings are classified as current liabilities as of June 30, 2006.

**Off-BalanceSheet 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 unsecuredguarantee is expected to decline before expiring in 2017.  The Company does not anticipate that it willincur losses as a result of this guarantee and has not recorded aliability.  If the Channell Family Trustwere to default on the outstanding loan balance, the Company might be requiredto repay the remaining principal balance. The maximum potential amount the Company would be required to pay isequal to the outstanding principal and interest balance of the loan to theChannell Family Trust.  At June 30, 2006,the outstanding loan balance subject to the guarantee totaled $537,000.

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**CriticalAccounting 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 these financial statements requires the Companyto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand 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 theuncertainty inherent in these matters, actual results could differ from theestimates the Company uses in applying the critical accounting policies.Certain of these critical accounting policies affect working capital accountbalances, including the policies for revenue recognition, the reserve for uncollectibleaccounts receivable and inventory reserves. These policies require that theCompany make estimates in the preparation of its financial statements as of agiven 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-LookingStatements**

Certain statementscontained herein are “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 (the “Act”), which provides certain “safeharbor” 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 events andresults may differ materially from those expressed or forecasted in forward-lookingstatements due to a number of factors including, among others: (1) thecommunications industry is in a state of rapid technological change, which canrender the Company’s products obsolete or unmarketable; (2) any failure by theCompany to anticipate or respond to technological developments or changes inindustry 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 a substantialportion of its total sales, and the demand for products within this industrydepends 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.      QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

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

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**InterestRate 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 extended through March 31, 2007.  The agreement contains a term loan and arevolving line of credit.   In August2004, the Company’s two subsidiaries jointly entered into a five-year Loan andSecurity Agreement which contains a term loan, revolving line of credit, an “earn-out”facility, and a capital expenditure facility with a commercial bank inAustralia.  The loan and securityagreements allow for the outstanding balance to bear interest at a variablerate based on the lender’s base rate. The credit facilities expose the Company to changes in short-terminterest rates since the interest rates on the 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 $0.02 million.  This analysis does not consider the effectsof economic activity on the Company’s sales and profitability in such anenvironment.

**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.

**ITEM4.      CONTROLS AND PROCEDURES**

**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 our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  As of June 30, 2006, themanagement of the Company carried out an assessment of the Company’s disclosurecontrols and procedures and concluded that they were not effective because ofthe material weaknesses described below.

Due to the materialweaknesses described below, 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, managementbelieves that the consolidated financial statements included in this QuarterlyReport, fairly present in all material respects, the Company’s financialcondition, results of operations, and cash flows for all periods presented.

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 have effective controls to monitor thedifference between the income tax basis and the financial reporting basis ofassets and liabilities and reconcile the difference to its deferred income taxasset 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 theeffect on 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 had determined that this control deficiencyconstituted a material weakness.

22

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During the first half of2006, the Company identified and gathered the necessary financial informationand set up a procedure to accurately prepare and review its accounting forincome taxes and the determination of income taxes payable, deferred income taxassets 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 half of2006, the Company has continued to employ the same accounting personnelinvolved 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 operating 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.

**Changesin Internal Control Over Financial Reporting**

The Company continues toimplement enhancements and changes to its internal control over financialreporting to remediate the material weaknesses described above.

These improvementsinclude further formalization of policies and procedures, improved segregationof duties, improved information technology system controls, and additionalmonitoring controls.

The Company has enhancedthe competence of the organization by hiring staff competent in accountingprinciples generally accepted in the United States of America, and the Companywill continue to enhance its financial accounting and reporting competencies byrecruiting additional qualified staff and further developing its existing staffby reinforcing existing continuing education program.  However, as the Company recently announced inits Form 8-K dated August 2, 2006, its Chief Financial Officer, Jerry Collazo,has submitted his resignation to pursue other interests.  A search has been initiated to find areplacement.

Other than the changesdescribed above, there has been no change in the Company’s internal controlover financial reporting that occurred in the quarterly period covered by thisreport that has materially affected, or is reasonably likely to materiallyaffect the Company’s internal control over financial reporting.

**PARTII - OTHER INFORMATION**

**ITEM 1.****                                     LEGALPROCEEDINGS**

***Legal Proceedings.**** Carson Industries LLC v. Channell CommercialCorporation (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 $360,000 for product sold to the Company butnot yet 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.

23

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During court ordered mediation on March 21, 2006, the parties agreed tosettle the lawsuit.  The final agreementwas signed on April 17, 2006 whereby the Company paid to Carson $290,000 andreturned to Carson approximately $70,000 of inventory previously purchased bythe Company.  Carson agreed to indemnifythe Company against certain product warranty claims for five years from thedate of sale.

In addition, the Companyis from time to time involved in ordinary routine litigation incidental to theconduct of its business.  The Companyregularly reviews all pending litigation matters in which it is involved andestablishes reserves 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.****                            RISKFACTORS**

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

***PriceFluctuations of Raw Materials.***Our cost of sales, gross margins andresults of operations have been and may continue to be materially affected byincreases in the market prices of the raw materials used in our manufacturingprocesses. In particular, the products we manufacture for sale in both ourcommunications infrastructure market and our water storage market are primarilycomposed of polyethylene 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 topass on incremental price increases to our customers, and because we do notengage in hedging transactions for our raw materials, we may not be able toeffectively offset increases in the prices of raw materials.  Accordingly, continued increases in these costs,particularly continued increases in the cost of oil, will continue to reduceour gross margins and negatively impact our results of operations.

***Availabilityof Complementary Products.***In order to position ourselves as afull-line product supplier, we rely on certain manufacturers to supply products,including grade level boxes, that complement the products manufactured by us.Although we believe there are multiple sources of supply for these products,disruptions or delays in the supply of such products could have a materialadverse effect on sales of our own products.

**ITEM 2.****                                     UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

Not applicable.

# **ITEM 3.****                                     DEFAULTSUPON SENIOR SECURITIES**

Not applicable.

**ITEM 4.****                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

On May 22, 2006, the Company held its Annual Meeting of Stockholders inTemecula, California.  William H.Channell, Jr. and Jacqueline M. Channell were re-elected to the Company’s boardof directors.  The term of office for thefollowing directors continued after the Annual Meeting: William H. Channell,Sr., Dana Brenner, Guy Marge, David Iannini and Stephen Gill.

At the Annual Meeting, the stockholders of the Company approved theproposal to elect the following two directors to serve on the Company’s boardof directors, each to hold office for a term of three years:

|                           | ** ** | **Number of Votes for** | ** ** | **Number of Votes Withheld** |
|---------------------------|------------|-------------------------|------------|------------------------------|
|                      |       |                    |       |                         |
| William H.  Channell, Jr. |       | 7,526,992               |       | 1,883,764                    |
|                      |       |                    |       |                         |
| Jacqueline M.  Channell   |       | 7,539,092               |       | 1,871,664                    |

 

24

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| **ITEM 5.** | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** **                                                                                                                                                                                                                                                                                                                                                                             |
|        | Not applicable.                                                                                                                                                                                                                                                                                                                                                                        |
|        |                                                                                                                                                                                                                                                                                                                                                                                   |
| **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)                                                                                                                                                                                                                                                          |

 

25

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| 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) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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(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(19)                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.32  | Lease dated July 13, 2006 between Channell Pty Ltd  and Ing Management Ltd(20)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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(20)                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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(20)                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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 Jerry Collazo, CFO(20)                                                                                                                                                                                                                                                                                                                                                                               |

 

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* Management contract or, compensatory plan or arrangement.
| (1)    | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Registration Statement on Form S-1  (File No. 333-03621). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                       |
| (2)    | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on May 18, 1998.                                 |
|   |                                                                                                                                                       |
| (3)    | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-K on March 31, 1999.                              |
|   |                                                                                                                                                       |
| (4)    | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-K on April 2, 2001.                               |
|   |                                                                                                                                                       |
| (5)    | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on August 12, 2002.                             |
|   |                                                                                                                                                       |
| (6)    | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on October 1, 2002.                              |

 

26

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| (7)    | Incorporated by reference to Appendix B filed in  connection with the Company’s Definitive Proxy Statement on March 26, 2003. |
|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                               |
| (8)    | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-K on March 5, 2004.       |
|   |                                                                                                                               |
| (9)    | Incorporated by reference to Appendix B filed in  connection with the Company’s Definitive Proxy Statement on April 16, 2004. |
|   |                                                                                                                               |
| (10)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on August 6, 2004.       |
|   |                                                                                                                               |
| (11)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on November 15, 2004.   |
|   |                                                                                                                               |
| (12)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on June 15, 2005.        |
|   |                                                                                                                               |
| (13)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on June 28, 2005.        |
|   |                                                                                                                               |
| (14)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on August 15, 2005.     |
|   |                                                                                                                               |
| (15)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on September 9, 2005.    |
|   |                                                                                                                               |
| (16)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on November 21, 2005.   |
|   |                                                                                                                               |
| (17)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-K/A on November 21, 2005. |
|   |                                                                                                                               |
| (18)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on March 6, 2006.        |
|   |                                                                                                                               |
| (19)   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on May 15, 2006.        |
|   |                                                                                                                               |
| (20)   | Filed herewith.                                                                                                                    |

 

27

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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: August 17, 2006 |   |                                              |
|------------------------|--------|---------------------------------------------------|
|                   |   | CHANNELL COMMERCIAL CORPORATION                   |   |
|                   |   | (Registrant)                                      |   |
|                   |   |                                              |
|                   |   |                                              |
|                   | By     | /s/ Jerry  Collazo                                |   |
|                   |   | Jerry Collazo                                     |
|                   |   | Chief Financial Officer                           |
|                   |   | (Duly authorized  officer and principal financial |
|                   |   | officer of the Registrant)                        |
|                        |        |                                                   |  |  |

 

28

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