e10vq

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 1-11471

Bell Industries, Inc.

(Exact name of Registrant as specified in its charter)


California		95- 2039211

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

8888 Keystone Crossing, Suite 1700, Indianapolis, Indiana		46240

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (317) 704-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

Yes o No þ

As of the close of business on August 13, 2007, there were 8,650,224 outstanding shares of the Registrant’s Common Stock.

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)


	Three months ended						Six months ended
	June 30,						June 30,
	2007			2006			2007			2006
Net revenues:
Products	$	23,708		$	24,302		$	43,064		$	41,395
Services		32,242			6,859			59,083			14,729

Total net revenues		55,950			31,161			102,147			56,124


Costs and expenses:
Cost of products sold		19,261			19,466			35,589			33,156
Cost of services provided		21,569			5,220			39,406			11,877
Selling, general and administrative expenses		19,316			7,481			34,438			14,015
Interest expense (income), net		624			(134	)		994			(209	)
Gain on sale of assets								(1,976	)

Total costs and expenses		60,770			32,033			108,451			58,839

Loss from continuing operations before income taxes		(4,820	)		(872	)		(6,304	)		(2,715	)
Income tax expense (benefit)		8			(892	)		31			(877	)

Income (loss) from continuing operations		(4,828	)		20			(6,335	)		(1,838	)


Discontinued Operations:
Income from discontinued operations, net of tax					39						577
Gain on sale of discontinued operations, net of tax					5,153						5,153

Discontinued operations, net of tax					5,192						5,730

Net income (loss)	$	(4,828	)	$	5,212		$	(6,335	)	$	3,892


Share and per share data:
Basic Income (loss) from continuing operations	$	(0.56	)	$	0.00		$	(0.74	)	$	(0.22	)
Discontinued operations					0.61						0.67

Net income (loss)	$	(0.56	)	$	0.61		$	(0.74	)	$	0.45

Weighted average common shares outstanding		8,629			8,565			8,615			8,564

Share and per share data:
Diluted
Income (loss) from continuing operations	$	(0.56	)	$	0.00		$	(0.74	)	$	(0.22	)
Discontinued operations					0.61						0.67

Net income (loss)	$	(0.56	)	$	0.61		$	(0.74	)	$	0.45

Weighted average common shares outstanding		8,629			8,593			8,615			8,590

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)


	June 30			December 31
	2007			2006
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	1,374		$	3,637
Accounts receivable, less allowance for doubtful accounts of $3,594 and $547		27,069			16,835
Inventories		10,479			9,548
Assets held for sale		12,526
Prepaid expenses and other		6,925			2,761

Total current assets		58,373			32,781

Fixed assets, net of accumulated depreciation of $14,634 and $14,113		17,144			3,553
Intangible assets, net of accumulated amortization of $274		2,977
Other assets		2,765			1,641
Acquisition deposit					3,450
Acquisition related costs					1,689

Total assets	$	81,259		$	43,114


LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Floor plan payables	$	287		$	213
Revolving credit facility		12,912
Accounts payable		19,991			12,419
Deferred revenue		6,928
Accrued payroll		3,042			1,922
Accrued other liabilities		8,612			6,684

Total current liabilities		51,772			21,238

Convertible note		8,554
Other long-term liabilities		7,399			3,622

Total liabilities		67,725			24,860


Commitments and contingencies

Shareholders’ equity:
Preferred stock
Authorized 1,000,000 shares, outstanding none
Common stock
Authorized 35,000,000 shares, outstanding 8,650,224 and 8,593,224 shares		34,875			33,400
Accumulated deficit		(21,616	)		(15,421	)
Accumulated other comprehensive income		275			275

Total shareholders’ equity		13,534			18,254

Total liabilities and shareholders’ equity	$	81,259		$	43,114

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six months ended
	June 30
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	(6,335	)	$	3,892
Net income from discontinued operations					(577	)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of assets		(1,976	)		(5,153	)
Depreciation, amortization and accretion		3,075			1,040
Stock-based compensation		202			169
Non-cash interest expense		398
Provision for losses on accounts receivable, net		2,339			51
Changes in assets and liabilities, net of acquisitions and disposals:
Accounts receivable		1,986			(1,273	)
Inventories		736			1,477
Accounts payable		7,017			1,139
Accrued payroll		191			(134	)
Accrued liabilities and other		289			(217	)

Net cash provided by operating activities for continuing operations		7,922			414
Net cash used in operating activities for discontinued operations					(695	)

Net cash provided by (used in) operating activities		7,922			(281	)


Cash flows from investing activities:
Purchases of fixed assets and other		(2,615	)		(296	)
Purchase of business, and related costs		(31,805	)
Proceeds from sale of assets		2,016			7,945

Net cash used in investing activities for continuing operations		(32,404	)		(296	)
Net cash provided by investing activities for discontinued operations					7,945

Net cash provided by (used in) investing activities		(32,404	)		7,649


Cash flows from financing activities:
Net borrowings under revolving credit facility		12,912
Proceeds from issuance of convertible note		10,000
Debt acquisition costs		(804	)
Net proceeds (payments) of floor plan payables		74			(11	)
Employee stock plans		98			14
Principal payments on capital leases		(61	)		(247	)

Net cash provided by (used in) financing activities		22,219			(244	)


Net increase (decrease) in cash and cash equivalents		(2,263	)		7,124
Cash and cash equivalents at beginning of period		3,637			7,331

Cash and cash equivalents at end of period	$	1,374		$	14,455

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 — Accounting Principles

The accompanying consolidated condensed financial statements of Bell Industries, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements have not been audited by an independent registered public accounting firm, but include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial condition, results of operations and cash flows for such periods. However, these results are not necessarily indicative of results for any other interim period or for the full year. The accompanying consolidated condensed balance sheet as of December 31, 2006 has been derived from audited financial statements, but does not include all disclosures required by GAAP.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to guidelines of the Securities and Exchange Commission (the “SEC”). Management believes that the disclosures included in the accompanying interim financial statements and footnotes are adequate for a fair presentation, but the disclosures contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Note 2 — Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. This statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”), which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The impact of adoption of FIN No. 48 is disclosed in Note 16 to these financial statements.

Note 3 — SkyTel Acquisition

On January 31, 2007, the Company completed the acquisition of substantially all of the assets and the assumption of certain liabilities of SkyTel Corp. (“SkyTel”), an indirect subsidiary of Verizon Communications Inc. (“Verizon”), for a total purchase price of $23.0 million, plus a $7.4 million post closing adjustments paid to Verizon in April 2007 and approximately $4.3 million in deal costs. SkyTel, based in Clinton, Mississippi, is a provider of wireless data and messaging services including email, interactive two-way messaging, wireless telemetry services and traditional text and numeric paging to Fortune 1000 and government customers throughout the United States.

The following table summarizes the aggregate estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):


Accounts receivable, net	$	14,400
Inventory		1,666
Prepaid expenses		3,202
Asset held for sale		13,468
Fixed assets		13,848
Intangible assets		3,251
Accrued exit costs		(3,479	)
Accrued tower termination costs		(3,071	)
Deferred revenue		(7,444	)
Other		(1,150	)

Net assets acquired	$	34,691

The amounts allocated to intangible assets are as follows (in thousands):


Trademarks	$	1,132
Patents		888
Licenses		843
Customer relationships		388

Total intangible assets		3,251

The Company is continuing to evaluate the initial purchase price allocation and will adjust the allocations as additional information relative to the estimated integration costs of SkyTel and the fair market values of the assets and liabilities of the business become known. On June 15, 2007, the Company entered into a definitive agreement to sell certain assets purchased in the SkyTel acquisition (see Note 5.) These assets have been valued at the sum of their anticipated net proceeds and are recorded in the Consolidated Balance Sheet and in the table above as Assets held for sale. The assets held for sale were recorded as part of the purchase accounting for the SkyTel acquisition resulted in a reduction in the fixed assets and intangibles on a pro-rata basis due to the net assets acquired being greater than the purchase price. The resulting negative goodwill is allocated to the long lived assets on a pro-rata basis.

In connection with the acquisition, the Company assessed and formulated a plan related to the future integration of SkyTel. The Company accrued estimates for certain costs, related primarily to personnel reductions, tower lease reductions and facility closures, anticipated at the date of acquisition, in accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” Adjustments to these estimates are made up to one year from the acquisition date as plans are finalized. To the extent these accruals are not utilized for the intended purpose, the excess is recorded as a reduction of the purchase price. Costs incurred in excess of the recorded accruals are expensed as incurred. The Company is still finalizing its integration plans with respect to its acquisition. Accrued liabilities associated with these integration activities are included in other accrued liabilities in the Consolidated Condensed Balance Sheet.

The unaudited pro forma information for the periods set forth below gives effect to the SkyTel acquisition as if it had occurred on January 1, 2006. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have occurred had the acquisition been consummated at that time or of results in the future (in thousands, except per share amounts):


	Three months ended June 30					Six months ended June 30
	2007			2006		2007			2006
Net revenues	$	55,950		$	61,455	$	110,409		$	118,817
Loss from continuing operations		(4,828	)		2,146		(6,054	)		834
Basic earnings per share from continuing operations		(0.56	)		0.25		(0.70	)		0.10
Diluted earnings per share from continuing operations		(0.56	)		0.25		(0.70	)		0.10

Note 4- Summary of Accounting Policies

Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2006 includes a summary of the accounting policies for the Company’s Technology Solutions and Recreational Products business segments. The accounting policies for each of those two segments have not changed from what was previously disclosed. A summary of the distinct accounting policies for SkyTel follows:

Accounts Receivable

The Company extends trade credit to its customers for wireless services. Service to customers is generally suspended if payment has not been received within approximately 60 days of billing. Once service is suspended, accounts are subject to internal collection activities. Service to customers is generally disconnected if payment has not been received within approximately 90 days of billing. Once service is disconnected, accounts are subject to external collection activities. The Company records two allowances against its gross accounts receivable balance; an allowance for doubtful accounts; and an allowance for service credits. Provisions for these allowances are recorded on a monthly basis and are included as a component of selling and administrative expense and a reduction of revenue, respectively. Estimates are used in determining the allowance for doubtful accounts and are based on historical collection experience, current and forecasted trends and a percentage of the accounts receivable aging categories. The allowance for service credits and related provisions is based on historical credit percentages, current credit and aging trends and actual credit experience.

Inventory

Inventory is carried at the lower of cost or fair market value based on a weighted average cost basis.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the following estimated useful lives:


Paging network equipment		7 years
Furniture, fixtures and other		5 years

The Company calculates depreciation on messaging devices deployed as rental units using the straight-line group life method over a period of one year.

Intangible Assets

Intangible assets are carried at cost and amortized over their estimated useful lives. All of the Company’s intangible assets are subject to amortization.

Licenses — SkyTel owns rights to domestic wireless licenses that provide its wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication services. Licenses are issued for a fixed time period, generally ten years, and are subject to renewal by the Federal Communications Commission (“FCC”). The licenses are amortized on a straight-line basis over a period of five years.

Trademarks — The Company utilizes trademarks for SkyTel, SkyGuard and FleetHAWK. The trademarks are amortized on a straight line basis over a period of ten years.

Patents — The Company owns the rights to patents on certain technology used in the provisioning of its wireless services. The patents are amortized on a straight line basis over a period of six to fourteen years depending on the lives of the underlying patents.

Customer Relationships — Customer relationships are amortized over a period of five years on a straight line basis.

Revenue Recognition

Revenue consists primarily of monthly service and device rental fees charged to customers on a monthly, quarterly, semi-annual or annual basis. Revenue also includes the sale of devices directly to customers and other companies that resell the Company’s services. The Company recognizes service revenue over the period the service is performed and revenue from product sales is recognized at the time of shipment. The Company has a variety of billing arrangements with its customers resulting in deferred revenue for advance billing and accounts receivable for in-arrears arrangements.

SkyTel’s customers may subscribe to services for a monthly service fee which is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. Equipment loss and maintenance protection may be added to services for an additional monthly fee. Equipment loss protection allows subscribers who rent devices to limit their cost of replacement upon loss or destruction of a messaging device. Maintenance services are offered to subscribers who own their devices.

Sales and Use Taxes

Sales and use taxes imposed on the ultimate consumer are excluded from revenue where the Company is required by law or regulation to act as collection agent for the taxing jurisdiction.

Universal Service Fund

The FCC also has a body of rules implementing the universal service provisions of the Telecommunications Act of 1996, including rules governing support to rural and non-rural high-cost areas, support for low income subscribers, and support for schools, libraries and rural health care. The Company passes through the cost to subscribers with the amount collected from customers recorded in revenue and the amount remitted recorded as expense.

Note 5 — Assets Held for Sale

On June 15, 2007, the Company entered into two stock purchase agreements (the “Purchase Agreements”) with Sprint Nextel Corporation (“Sprint”). Pursuant to the Purchase Agreements, the Company agreed to sell the shares of stock (the “Shares”) held by the Company in two corporations that hold certain FCC licenses for the operation of Broadband Radio Service channels. The aggregate consideration payable to the Company for the Shares is approximately $13.5 million in cash. On the closing of the sale of the Shares, approximately, $940,000 of the cash consideration payable to the Company will be withheld by Sprint for eighteen months to fund certain reserves to secure the indemnification obligations. The sale of the Shares pursuant to the Purchase Agreements is subject to review and approval by the FCC, the closing of certain other related transactions in which the Company is not a party and certain other closing conditions.

Note 6 — Sale of J.W. Miller Division

On April 28, 2006, the Company completed the sale of substantially all of the assets of the Company’s J. W. Miller division to Bourns, Inc. pursuant to an Asset Purchase Agreement (the “JWM Agreement”). Pursuant to the JWM Agreement, the Company received $8.5 million in cash at the closing in April 2006 and approximately $0.2 million in July 2006 attributable to post closing adjustments. The sale resulted in a gain of approximately $6.1 million ($4.0 million net of tax). The results of the J. W. Miller division have been classified as discontinued operations in the accompanying financial statements. For the six months ended June 30, 2006, the J.W. Miller division had sales of approximately $3.0 million.

Note 7 — Sale of Asset

During February 2007, the Company completed the sale of a building. The carrying value of this property was not material as of December 31, 2006. The net proceeds from this sale totaled approximately $2.0 million, and the gain on disposition is included in gain on sale of assets in the Consolidated Condensed Statements of Operations.

Note 8 — Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents.

Note 9 — Shipping and Handling Costs

Shipping and handling costs, consisting primarily of freight paid to carriers, Company-owned delivery vehicle expenses and payroll related costs incurred in connection with storing, moving, preparing, and delivering products totaled approximately $1.5 million and $1.1 million during the three months ended June 30, 2007 and 2006, respectively and $2.4 million and $1.8 million during the six months ended June 30, 2007 and 2006, respectively. These costs are included within selling and administrative expenses in the Consolidated Condensed Statements of Operations.

Note 10 — Floor Plan Arrangements

The Company finances certain inventory purchases through floor plan arrangements with two finance companies. At June 30, 2007 and December 31, 2006, the Company had outstanding floor plan obligations of $287,000 and $213,000, respectively.

Note 11 — Accrued Liabilities

The Company accrues for liabilities associated with disposed businesses, including amounts related to legal, environmental and contractual matters. In connection with these matters, the recorded liabilities include an estimate of legal fees to be incurred. These legal fees are charged against the recorded liability when incurred. Accrued liabilities include approximately $4.0 million and $4.2 million of amounts attributable to disposed businesses at June 30, 2007 and December 31, 2006, respectively.

Note 12 — Asset Retirement Obligations

The Company adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations” (“SFAS No. 143”) as a result of the SkyTel acquisition. SFAS No. 143 requires the recognition of liabilities and corresponding assets for future obligations associated with the retirement of assets. The Company has network assets, principally transmitters and receivers that are located on leased locations. The underlying leases generally require the removal of equipment at the end of the lease term; therefore, a future obligation exists. The Company recognized long-term cumulative asset retirement obligations of $3.1 million as of January 31, 2007, which were recorded as a liability assumed in purchase accounting. The related tower assets were recorded at their appraised value as described in the SkyTel acquisition footnote (Note 3).

The long-term cost associated with the original assessment is discounted at a credit adjusted risk free interest rate of 10% to calculate the present value of the asset retirement obligation. The Company believes that the $3.1 million and 10% interest rate used are reasonable at the present time and have been established based on an estimate of the removal and repair costs and assumptions regarding the number of tower leases to be terminated in future periods.

The components of the changes in the asset retirement obligation balances since the SkyTel acquisition are as follows (in thousands):


Balance at January 31, 2007	$	3,071
Accretion		114

Balance at June 30, 2007	$	3,185

The asset retirement obligation is recorded as a component of other long term liabilities on the consolidated condensed balance sheet.

Note 13 — Debt and Liquidity

On January 31, 2007, the Company secured financing to complete the SkyTel acquisition by entering into (i) a credit agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc. (“WFF”), as administrative agent, pursuant to which WFF provided the Company with a revolving line of credit with a maximum credit amount of $30 million (the “Revolving Credit Facility”); and (ii) a purchase agreement with Newcastle Partners, L.P. (“Newcastle”) pursuant to which the Company issued and sold in a private placement to Newcastle a convertible subordinated pay-in-kind promissory note (the “Convertible Note”) in the principal amount of $10 million.

Revolving Credit Facility

Pursuant to the Credit Agreement, the Company borrowed approximately $10.3 million in the form of an initial advance under a the Revolving Credit Facility (the “Initial Advance”). The proceeds of the Initial Advance, together with existing cash on hand and the funds received pursuant to the sale of the Convertible Note, were used to finance the acquisition of SkyTel as well as related fees and expenses. Additional advances under the Revolving Credit Facility (collectively, the “Advances”) will be available to the Company, up to the aggregate $30 million credit limit, subject to restrictions based on the Borrowing Base (as such term is defined in the Credit Agreement). The Advances may be used to finance ongoing working capital, capital expenditures and general corporate needs of the Company. Advances made under the Credit Agreement bear interest, in the case of base rate loans, at a rate equal to the “base rate,” which is the rate of interest per annum announced from time to time by WFF as its prime rate in effect at it principal office in San Francisco, California, plus a 0.75% margin. In the case of LIBOR rate loans, amounts borrowed bear interest at a rate equal to the LIBOR Rate (as defined in the Credit Agreement) plus a 2.25% margin. The Advances made under the Credit Agreement are repayable in full on January 31, 2012. The Company may prepay the Advances (unless in connection with the prepayment in full of all of the outstanding Advances) at any time without premium or penalty. If the Company prepays all of the outstanding Advances and terminates all commitments under the Credit Agreement, the Company is obligated to pay a prepayment premium as set forth in the Credit Agreement. In connection with the Credit Agreement, on January 31, 2007, the Company entered into a security agreement with WFF, pursuant to which the Company granted WFF a security interest in and a lien against certain assets of the Company. As of June 30, 2007, $12.9 million ($10.0 million in LIBOR rate loans at an annual interest rate of 7.57% and $2.9 million in base rate loans at an annual interest rate of 9.0%) was outstanding under the Revolving Credit Facility.

On August 13, 2007, the Company and its subsidiary entered into Amendment Number Two to Credit Agreement, Consent and Waiver (the “Second Amendment”), with WFF. The Second Amendment amends the Company’s Credit Agreement and provides the Company with an incremental $2 million of availability through October 31, 2007. Also pursuant to the Second Amendment, the lenders provided their consent to complete the sales of Shares held by the Company in two corporations that hold certain FCC licenses for the operation of Broadband Radio Service channels to Sprint and waived the Company’s default of its compliance with a covenant in the Credit Facility requiring a certain level of profitability for the six month period ended June 30, 2007. The Second Amendment also amends the profitability covenants for the nine month period ended September 30, 2007 and the twelve month period ended December 31, 2007 and reduces the amount of the Credit Facility available for borrowing upon completion of the sales of Shares to Sprint. The Company anticipates that the proceeds from the sales of Shares to Sprint will pay down a significant majority of the indebtedness outstanding under the Credit Facility. As a result of the Second Amendment and the use of the proceeds from the sale of assets at the Springfield facility described in Note 22 to pay down the Credit Facility, the entire balance outstanding at June 30, 2007 has been classified as a current liability.

Liquidity

In addition to the sale of the Shares to Sprint and the Second Amendment described above, the Company continues to evaluate cost reduction opportunities and additional financing opportunities to ensure that it has adequate cash flow to meet its liquidity needs.

Convertible Note

The outstanding principal balance and/or accrued but unpaid interest on the Convertible Note is convertible at any time by Newcastle into shares of common stock of the Company at a conversion price of $3.81 per share, subject to adjustment (the “Conversion Price”). The Convertible Note accrues interest at 8%, subject to adjustment in certain circumstances, which interest accretes as principal on the Convertible Note as of each quarterly interest payment date beginning March 31, 2007. The Company also has the option (subject to the consent of WFF) to pay interest on the outstanding principal balance of the Convertible Note in cash at a higher interest rate following the first anniversary if the weighted average market price of the Company’s common stock is greater than 200% of the Conversion Price ($7.62 per share). The Convertible Note matures on January 31, 2017. The Company has the right to force conversion of the Convertible Note at an amount equal to 105% of outstanding principal following the third anniversary of the issuance of the convertible Note so long as a weighted average market price of the Company’s common stock is greater than 150% of the Conversion Price ($5.72 per share). In connection with the purchase of the Convertible Note, the Company and Newcastle also entered into a registration rights agreement pursuant to which Newcastle was granted demand and piggyback registration rights in respect of shares of common stock that may be issued under the Convertible Note. In March 2007, the Company granted Newcastle a second priority lien in certain assets of the Company in order to secure the obligations under the Convertible Note.

As this debt is convertible at the option of Newcastle at a beneficial conversion rate of $3.81 per share (closing market price of the Company’s common stock as of January 31, 2007 was $4.49 per share), the embedded beneficial conversion feature is recorded as a debt discount with the credit charged to shareholders equity net of tax and amortized using the effective interest method over the life of the debt in accordance with Emerging Issue Task Force No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments.” A summary of the initial recording of the debt and debt discount and activity through June 30, 2007 follows (in thousands):


Convertible note at January 31, 2007	$	10,000
Beneficial conversion feature		(1,844	)
Accretion of beneficial conversion feature		69
Accrued interest		329

Convertible note at June 30, 2007	$	8,554

Interest expense recorded on the Convertible Note, including amortization of beneficial conversion feature, totaled $241,000 and $398,000 during the three and six month periods ended June 30, 2007.

Note 14 — Stock-Based Compensation

In May 2007 the Company’s shareholders approved the 2007 Stock Option Plan (“2007 Plan”) which amends and succeeds the 2001 Stock Option Plan (“2001 Plan”). The 2007 plan provides for the issuance of common stock to be available for purchase by employees, consultants and by non-employee directors of the Company. Under the 2007 Plan, incentive and nonqualified stock options, stock appreciation rights and restricted stock may be granted. Options outstanding have terms of between five and ten years, vest over a period of up to four years and may be issued at a price equal to or greater than fair value of the shares on the date of grant.

On June 15, 2007, the Company entered into a consulting agreement with an outside firm that assisted the Company in completing the SkyTel acquisition to provide ongoing services through December 31, 2008 (the “Consulting Agreement.”) As part of the Consulting Agreement, the Company granted a principal of the outside firm an option to purchase up to 150,000 shares of Company common stock from the 2007 Plan. The options have a per share exercise price equal to the Company’s market share price on the date of grant. The options vest over the period of the Consulting Agreement.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) using the modified prospective transition method and, as a result did not retroactively adjust results from prior periods. Under this transition method, stock-based compensation expense for the year ended December 31, 2006 includes compensation expense for all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and expense related to all stock options granted on or subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123 (revised 2004). Stock-based compensation expense totaled $84,000 and $5,000 for the three months ended June 30, 2007 and 2006, respectively.

The Company utilizes the Black-Scholes valuation model in determining the fair value of stock-based grants. The resulting compensation expense is recognized over the requisite service period, which is generally the option vesting term of up to four years. The weighted average fair value at the grant date for options issued during the three months ended June 30, 2007 was $1.37 per option. The fair value of options at the date of grant was estimated using the following assumptions during the three months ended June 30, 2007: (a) no dividend yield on the Company’s stock, (b) expected stock price volatility of approximately 45%, (c) a risk-free interest rate of approximately 4.95%, and (d) an expected option term of 2.87 years.

The expected term of the options granted in 2007 is calculated using the simplified method as prescribed by Staff Accounting Bulletin No. 107. The expected term for each option grant represents the vesting term plus the original contract term divided by two. For 2007, expected stock price volatility represent the three year historical annualized volatility calculated using weekly closing market prices for the Company’s common stock. The risk-free interest rate is based on the five year U.S. Treasury yield at the date of grant. The Company has not paid dividends in the past and does not currently anticipate paying any dividends in the near future.

The following summarizes stock option activity during the six months ended June 30, 2007:


						Weighted
				Weighted		average
				average		remaining
				exercise		contractual term		Aggregate
	Shares			price		(in years)		intrinsic value
Outstanding at December 31, 2006		1,933,000		$	4.29
Granted		275,000			4.50
Exercised		(57,000	)		2.12
Canceled or expired		(8,000	)		2.58

Outstanding at June 30, 2007		2,143,000		$	4.38		7.64	$	2,349,000

Exercisable at June 30, 2007		812,100		$	4.36		7.08	$	962,100

The following summarizes non-vested stock options as of December 31, 2006 and changes for the three months ended June 30, 2007:


				Weighted
				average
				grant date
	Shares			fair value
Non vested at December 31, 2006		1,152,400		$	0.90
Granted		275,000			1.40
Vested		(88,500	)		1.16
Canceled		(8,000	)		1.03

Non vested at June 30, 2007		1,330,900		$	0.98

The aggregate intrinsic value in the table above represents the intrinsic value (the difference between the Company closing stock price on June 30, 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2007. The total intrinsic value of options exercised during the three and six month periods ended June 30, 2007 was approximately $74,000 and $140,000. The total fair value of shares vesting during the three month and six month periods ended June 30, 2007 was approximately $113,000 and $533,000. As of June 30, 2007, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $1.3 million, which is expected to be recognized over a weighted average period of approximately 4.4 years. As of June 30, 2007, there were 1 million shares of common stock available for issuance of future stock option grants under the 2001 Plan.

Under the Bell Industries Employees’ Stock Purchase Plan (the “ESPP”), 750,000 shares were authorized for issuance to Bell employees. Eligible employees may purchase Bell stock at 85% of market value through the ESPP at various offering times during the year. During the third quarter of 2002, the Company suspended the ESPP. At June 30, 2007, 419,450 shares were available for future issuance under the ESPP.

Note 15 — Per Share Data

Basic earnings per share data are based upon the weighted average number of common shares outstanding. Diluted earnings per share data are based upon the weighted average number of common shares outstanding plus the number of common shares potentially issuable for dilutive securities such as stock options and convertible debt. The weighted average number of common shares outstanding for each of the three and six month periods ended June 30, 2007 and 2006 is set forth in the following table (in thousands):


	Three Months ended					Six Months ended
	June 30,					June 30,
	2007			2006		2007			2006
Basic weighted average shares outstanding		8,629			8,565		8,615			8,564
Potentially dilutive stock options and convertible debt		3,011			28		2,994			26
Anti-dilutive due to net loss in period		(3,011	)		0		(2,994	)		0

Diluted weighted average shares outstanding		8,629			8,593		8,615			8,590

For the three and six month periods ended June 30, 2007, the number of stock option shares not included in the table above, because the impact would have been anti-dilutive based on the exercise price, totaled 610,000.

Note 16 — Income Taxes

The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of implementation, the Company recognized a $132,000 decrease in the liability for unrecognized tax benefits, which has been accounted for as a reduction in accumulated deficit. As of June 30, 2007 and January 1, 2007, the Company had $376,000 and $358,000 of unrecognized tax benefits, respectively, all of which would affect the Company’s effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest related to uncertain tax positions as of June 30, 2007 and January 1, 2007 was $107,000 and $89,000, respectively. Tax years 2002 through 2006 remain open to examination by major taxing jurisdictions to which the Company is subject.

Note 17 — Shareholders’ Equity

The changes to shareholders’ equity during the six months ended June 30, 2007 are as follows (in thousands):


Shareholders equity at December 31, 2006	$	18,254
Net loss		(6,335	)
Cumulative effect of FIN No. 48 adoption		132
Stock option exercises		120
Stock based compensation		254
Beneficial conversion feature, net of tax		1,109

Shareholders equity at June 30, 2007	$	13,534

Note 18 — Environmental Matters

Reserves for environmental matters primarily relate to the cost of monitoring and remediation efforts, which commenced in 1998, at the site of a former leased facility of the Company’s electronics circuit board manufacturing business (“ESD”). The ESD business was closed in the early 1990s. At June 30, 2007 and December 31, 2006, estimated future remediation and related costs for this matter totaled approximately $2.6 million and $2.9 million, respectively. At June 30, 2007, approximately $1.6 million (estimated current portion) is included in accrued liabilities and $1.0 million (estimated non-current portion) is included in other long term liabilities in the Consolidated Condensed Balance Sheets. At June 30, 2007 and December 31, 2006, the estimated future amounts to be recovered from insurance totaled $1.9 million and $2.2 million, respectively. At June 30, 2007, approximately $1.9 million (estimated current portion) is included in prepaid expenses and other.

Note 19 — Litigation

Williams Electronic Games litigation: In May 1997, Williams Electronics Games, Inc. (“Williams”) filed a complaint in the United States District Court for the Northern District of Illinois (“US District Court”) against a former Williams employee and several other defendants alleging common law fraud and several other infractions related to Williams’ purchase of electronic components at purportedly inflated prices from various electronics distributors under purported kickback arrangements during the period from 1991 to 1996. In May 1998, Williams filed an amended complaint adding several new defendants, including Milgray Electronics, Inc., a publicly traded New York corporation (“Milgray”), which was acquired by Bell in a stock purchase completed in January 1997. The complaint sought an accounting and restitution representing alleged damages as a result of the infractions. Bell has not been named in any complaint and was not a party to the alleged infractions. Bell, as the successor company to Milgray, has vigorously defended the case on several grounds and continues to assert that Milgray did not defraud Williams, and that Williams suffered no damages as electronic components were purchased by Williams at prevailing market prices.

The case proceeded to trial, which commenced and ended in March 2002, with a jury verdict resulting in Milgray having no liability to Williams. In July 2002, Williams appealed the jury verdict and, in April 2004, the United States Court of Appeals for the 7th Circuit (“US Appellate Court”) rendered its decision. The US Appellate Court concluded that jury instructions issued by the US District Court were in error and the case was ordered for retrial of Williams’ fraud and restitution claims. The case was remanded to the US District Court and a new judge was assigned. In September 2005, the US District Court entered its order declining to exercise supplemental jurisdiction over Williams’ claims and dismissing Williams’ case without prejudice. The US District Court noted in its order that Williams could pursue its claims in Illinois State Court. In October 2005, Williams filed a Notice of Appeal to the US Appellate Court from the judgment of dismissal entered by the US District Court. In March 2007, the US Appellate Court affirmed the judgment of the US District Court. Accordingly, the Company anticipates that the action will now proceed in Illinois State Court. Williams’ claim for compensatory damages is approximately $8.7 million, not including an additional claim for pre-judgment interest. While the Company cannot predict the outcome of this litigation, a final judgment favorable to Williams could have a material adverse effect on the Company’s results of operations, cash flows or financial position. Management intends to continue a vigorous defense.

Other litigation: The Company is involved in other litigation, which is incidental to its current and discontinued businesses. The resolution of the other litigation is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial position.

Note 20 — Business Segment Information

The Company operates in three reportable business segments: Technology Solutions, a provider of integrated technology solutions, Recreational Products, a wholesale distributor of aftermarket parts and accessories for the recreational vehicles and other leisure-related vehicle market (including marine, snowmobile, cycle and ATV) and, as of January 31, 2007, SkyTel, a nationwide provider of wireless data and messaging services, including email, interactive two-way messaging, wireless telemetry services and traditional text and numeric paging.

The following summarizes financial information for the Company’s reportable segments (in thousands):


	Three months ended						Six months ended
	June 30						June 30
	2007			2006			2007			2006
Net revenues:
Technology Solutions
Products	$	9,744		$	9,803		$	18,989		$	16,239
Services		8,799			6,859			18,427			14,729

		18,543			16,662			37,416			30,968
SkyTel		23,442						40,094
Recreational Products		13,965			14,499			24,637			25,156

Total net revenues	$	55,950		$	31,161		$	102,147		$	56,124


Operating income (loss):
Technology Solutions	$	(2,791	)	$	(458	)	$	(3,839	)	$	(1,325	)
SkyTel		9						714
Recreational Products		593			958			214			1,216
Corporate costs		(2,007	)		(1,506	)		(4,375	)		(2,815	)

Total operating loss		(4,196	)		(1,006	)		(7,286	)		(2,924	)

Gain on sale of assets								(1,976	)
Interest expense (income), net		624			(134	)		994			(209	)
Income tax expense (benefit)		8			(892	)		31			(877	)

Loss from continuing operations	$	(4,828	)	$	20		$	(6,335	)	$	(1,838	)

Certain reclassifications within the segments have been made to prior year to conform to current year presentation.

Note 21 — Related Party Transactions

Newcastle is a private investment firm and one of the Company’s largest shareholders. Mr. Mark E. Schwarz, the Chairman of the Company’s Board of Directors, serves as the General Partner of Newcastle, through an entity controlled by him. Under the supervision of our Board of Directors (other than Mr. Schwarz), members of management, with the assistance of counsel, negotiated the terms of Newcastle’s purchase of the Convertible Note directly with representatives of Newcastle. After final negotiations concluded, the Company’s Board of Directors, excluding Mr. Schwarz, approved the Newcastle transaction. Mr. Schwarz did not participate in any of the Board of Directors’ discussions regarding the Newcastle transaction or the vote of the Board of Directors to approve the same.

As disclosed in Note 22, Clinton J. Coleman also a Vice President of Newcastle was appointed Interim Chief Executive Officer.

Note 22 — Subsequent Events

On July 13, 2007, John A. Fellows submitted his written notice of resignation as a director and President and Chief Executive Officer of the Company to the Company’s Board of Directors, effective immediately and the Company has no further severance or other obligations. The Company’s Board of Directors appointed Clinton J. Coleman as Interim Chief Executive Officer of the Company.

On July 17, 2007 the Company announced that it was closing its Springfield, Missouri call center after receiving notification that the Company’s sole customer in the call center, SunRocket, an internet phone services provider, was ceasing most of its operations and no longer sending customer calls to the facility. As a result, the Company recorded $2.3 million in bad debt expense for the three months ended June 30, 2007 to fully reserve for the balance owed by SunRocket as of June 30, 2007. The Company billed SunRocket $350,000 in July for services provided through July 17, 2007 and will record a bad debt expense to fully reserve for this amount in the third quarter of 2007. Additionally, the Company eliminated 246 jobs and will record $128,000 in severance expense in connection with closing the call center. Effective August 1, 2007 the Company reached an agreement with a third party to assume the lease on the Springfield call center facility and to purchase certain assets at the call center facility for $900,000 in cash. The call center facility assets sold had a book value of approximately $500,000 and there were additional assets at the call center facility with a book value of approximately $500,000 that management is currently evaluating for other uses within the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by, the consolidated condensed financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, and within other filings with the SEC. This discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, regarding, among other things, our plans, strategies and prospects, both business and financial. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Many of the forward looking statements contained in this Quarterly Report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” and “estimated,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements that we make in this Quarterly Report are set forth below, are set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and are set forth in other reports or documents that we file from time to time with the SEC. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, the critical accounting policies were identified which affect the more significant estimates and assumptions used in preparing the consolidated financial statements. These policies have not changed from those previously disclosed other than the following new policy associated with the amortization of intangible assets.

Intangible assets resulting from the SkyTel acquisition were estimated by management based on the fair value of assets received and appraisals received from a third party. These include licenses, trademarks, patents and customer relationships. Intangible assets are amortized over the estimated useful ranging from five to fourteen years on a straight-line basis.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. This statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with

any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

In June 2006, the FASB issued FIN No. 48, which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of implementation, the Company recognized a $132,000 decrease in the liability for unrecognized tax benefits, which has been accounted for as a reduction to accumulated deficit.

Results of Operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

The Company has provided a summary of its consolidated operating results for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 followed by an overview of its business segment performance below:

Net revenues

Net revenues were $56.0 million for the second quarter of 2007 as compared to $31.2 million in the second quarter of 2006, representing an increase of $24.8 million or 79.6%. The increase is primarily the result of the acquisition of SkyTel on January 31, 2007, which had revenue of $23.4 million for the second quarter of 2007 and an increase in revenues in the Technology Solutions segment of $1.9 million during the second quarter of 2007.

Gross profit

Gross profit was $15.1 million, or 27.0% of net revenues, in the second quarter of 2007, compared to $6.5 million, or 20.8% of net revenues, in the second quarter of 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had gross profit of $7.8 million, or 33.1% of net revenues for the second quarter of 2007 and an increase in gross profit in the Technology Solutions segment of $1.2 million during the second quarter of 2007, partially offset by declines in gross profit dollars and as a percentage of net revenues in the Recreational Products segment in the second quarter of 2007.

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) were $19.3 million, or 34.5% of net revenues, in the second quarter of 2007, compared to $7.5 million, or 24.0% of net revenues, in the second quarter of 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had SG&A of $6.7 million, or 28.6% of net revenues in the second quarter of 2007, and increases in SG&A of $3.4 million in the Technology Solutions segment, including bad debt expense of $2.3 million related to recording a full reserve on the receivable from its Springfield call center customer, SunRocket, which ceased operations in July 2007.

Interest and other, net

Net interest expense was $624,000 in the second quarter of 2007 compared to net interest income of $134,000 in the second quarter of 2006. The increase in net interest expense is the result of the outstanding balances under the revolving credit facility and convertible note. The debt was issued to provide the majority of the funding for the acquisition of SkyTel on January 31, 2007. The interest income earned in 2006 was attributable to earnings on cash and cash equivalents held during the period.

Income taxes

Income tax expense was $8,000 in the second quarter of 2007 compared to an income tax benefit of $892,000 in second quarter of 2006. The income tax expense in the second quarter of 2007 primarily relates to state income taxes. The income tax benefit in the second quarter of 2006 includes a benefit totaling $923,000 related to the discontinued operations of the J.W. Miller division, partially offset by a provision for state income taxes of $31,000. As of June 30, 2007, the Company continues to record a full valuation allowance against net deferred tax asset balances.

Discontinued operations

In April 2006, the Company sold its J.W. Miller division. Accordingly, the results of the J. W. Miller division have been classified as discontinued operations in the accompanying financial statements. In the second quarter of 2006, the Company recorded a gain on the sale of discontinued operations, net of tax, of $5.2 million and had income from discontinued operations, net of taxes, of $39,000.

Business Segment Results

related vehicle market (including marine, snowmobile, cycle and ATV) and, as of January 31, 2007, SkyTel, a nationwide provider of wireless data and messaging services, including email, interactive two-way messaging, wireless telemetry services and traditional text and numeric paging. The company also separately records expenses related to corporate overhead which supports the business lines. Note 20 to Consolidated Condensed Financial Statements includes a tabular summary of results of operations by business segment for the three and six month periods ended June 30, 2007 and 2006.

Technology Solutions: Technology Solutions revenues of $18.5 million for the three months ended June 30, 2007 represented an 11.3% increase from the $16.7 million in the second quarter of 2006. Product revenues of $9.7 million for the three months ended June 30, 2007 were relatively flat with the $9.8 million in the second quarter of 2006. Service revenues of $8.8 million for the three months ended June 30, 2007 represented a 28.3% increase from the $6.9 million in the second quarter of 2006. The service revenue increase in the second quarter of 2007 is primarily attributable to $2.3 million in revenue related to a customer relationship management engagement at the Company’s Springfield call center that commenced in the summer of 2006, partially offset by the loss of revenues related to the termination of an unprofitable repair depot project at the end of 2006.

Technology Solutions segment operating loss totaled $2.8 million for the three months ended June 30, 2007 compared to an operating loss of $458,000 in the second quarter of 2006. The increase in operating losses in the second quarter of 2007 is primarily the result of bad debt expense of $2.3 million related to recording a full reserve on a receivable from a Springfield call center customer, SunRocket, which ceased operations in July 2007.

SkyTel: SkyTel’s revenues for the three months ended June 30, 2007 totaled $23.4 million. SkyTel’s segment operating income for the three period ended June 30, 2007 was $9,000. Depreciation, amortization, and accretion expense for the three months ended June 30, 2007 totaled $966,000.

Recreational Products: Recreational Products revenues of $14.0 million for the three months ended June 30, 2007 represented a 3.6% decrease from the $14.5 million in the second quarter of 2006.

Recreational Products segment operating income totaled $592,000 for the three months ended June 30, 2007 compared to $958,000 in the second quarter of 2006. The decrease in operating income is primarily attributable to a decrease in gross margin from 25.4% in the second quarter of 2006 to 23.7% in the second quarter of 2007 and a $490,000 increase in selling, general and administrative expenses in the second quarter of 2007. The decline in gross margin is primarily the result of unfavorable market conditions due to high fuel prices and unfavorable product mix with a higher volume of revenues from low margin marine electronics products. The increase in selling, general and administrative expenses is the result of costs associated with increased selling and administrative staff and increased freight costs.

Corporate: Corporate overhead costs totaled $2.6 million for the three month period ended June 30, 2007 versus $1.4 million in the second quarter of 2006. The increase is the result of several factors including increased interest costs on the credit facility and convertible note, costs associated with the move of the corporate headquarters from Los Angeles to Indianapolis, additional corporate staff to support the larger organization after the completion of the SkyTel acquisition and stock-based compensation expense recorded based on the adoption of SFAS No. 123 (revised 2004.)

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

The Company has provided a summary of its consolidated operating results for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 followed by an overview of its business segment performance below:

Net revenues

Net revenues were $102.1 million for the six months ended June 30, 2007 compared to $56.1 million for the six months ended June 30, 2006, representing an increase of $46.0 million or 82.0%. The increase is primarily the result of the acquisition of SkyTel on January 31, 2007, which had revenues of $40.1 million for the five months SkyTel was included in the Company’s 2007 results and an increase in revenues in the Technology Solutions segment of $6.4 million during the six months ended June 30, 2007.

Gross profit

Gross profit was $27.2 million, or 26.6% of net revenues, for the six months ended June 30, 2007, compared to $11.1 million, or 19.8% of net revenues, for the six months ended June 30, 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had gross profit of $13.8 million or 34.5% of net revenues for the five months SkyTel was included in the Company’s 2007 results, and an increase in gross profit in the Technology Solutions segment of $2.8 million during the six month period ended June 30, 2007, partially offset by declines in gross profit dollars and as a percentage of net revenues in the Recreational Products segment during the six month period ended June 30, 2007.

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) were $34.4 million, or 33.7% of net revenues, for the six months ended June 30, 2007, compared to $14.0 million, or 25.0% of net revenues, for the six months ended June 30, 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had SG&A of $11.1 million, or 27.7% of net revenues, for the five months SkyTel was included in the Company’s 2007 results, and increases in SG&A of $5.2 million in the Technology

Solutions segment, $1.5 million in the Corporate segment and $490,000 in the Recreational Products segment for the six months ended June 30, 2007.

Interest and other, net

Net interest expense was $994,000 for the six months ended June 30, 2007 compared to net interest income of $209,000 for the six months ended June 30, 2006. The increase in net interest expense is the result of the outstanding balances under the revolving credit facility and convertible note. This debt was issued to provide the majority of the funding for the acquisition of SkyTel on January 31, 2007. The interest income earned in 2006 was attributable to earnings on cash and cash equivalents held during the period. The gain on sale of assets of $2.0 million for the six months ended June 30, 2007 related to the sale of a company owned facility in the first quarter of 2007.

Income taxes

Income tax expense was $31,000 for the six months ended June 30, 2007 compared to an income tax benefit of $877,000 for the six months ended June 30, 2006. The income tax expense in 2007 primarily relates to state income taxes. The income tax benefit for the six months ended June 30, 2006 includes a benefit totaling $923,000 related to the discontinued operations of the J.W. Miller division, partially offset by a provision for state income taxes of $31,000. As of June 30, 2007, the Company continues to record a full valuation allowance against net deferred tax asset balances.

Discontinued operations

In April 2006, the Company sold its J. W. Miller division. Accordingly, the results of the J. W. Miller division have been classified as discontinued operations in the accompanying financial statements. For the six months ended June 30, 2006, the Company recorded a gain on the sale of discontinued operations, net of tax, of $5.2 million and had income from discontinued operations, net of taxes, of $577,000.

Business Segment Results

Technology Solutions: Technology Solutions revenues of $37.4 million for the six months ended June 30, 2007 represented a 20.8% increase from the $31.0 million for the six months ended June 30, 2006. Product revenues of $19.0 million for the six months ended June 30, 2007 represented a 16.9% increase from the $16.2 million for the six months ended June 30, 2006, which is primarily the result of several high dollar, low gross profit product sales during the first quarter of 2007. Service revenues of $18.4 million for the six months ended June 30, 2007 represented a 25.1% increase from the $14.7 million for the six months ended June 30, 2006. The service revenue increase is primarily attributable to $5.4 million in revenue for the six month period ended June 30, 2007 related to a customer relationship management engagement at the Company’s Springfield call center that commenced in the summer of 2006, partially offset by the loss of revenues related to the termination of an unprofitable repair depot project at the end of 2006.

Technology Solutions segment operating loss totaled $3.8 million compared to $1.3 million in 2006. The increase in operating losses in the second quarter of 2007 is primarily the result of bad debt expense of $2.3 million related to recording a full reserve on a receivable from a Springfield call center customer, SunRocket, which ceased operations in July 2007.

SkyTel: SkyTel’s results are included in the Company’s results from January 31, 2007, the date the acquisition was completed. SkyTel’s revenues for the five months ended June 30, 2007 totaled $40.1 million. SkyTel’s segment operating income for the five months ended June 30, 2007 was $714,000. Depreciation, amortization, and accretion expense for the six months ended June 30, 2007 totaled $2.0 million.

Recreational Products: Recreational Products revenues of $24.6 million for the six months ended June 30, 2007 represented a 2.1% decrease from the $25.2 million for the six months ended June 30, 2006.

Recreational Products segment operating income totaled $214,000 for the six months ended June 30, 2007 compared to $1.2 million for the six months ended June 30, 2006. The decrease in operating income is primarily attributable to the decrease in revenue, a decrease in gross margin from 25.4% for the six months ended June 30, 2006 to 23.7% for the six months ended June 30, 2007 and a $490,000 increase in SG&A expenses. The decline in gross margin is primarily the result of unfavorable market conditions due to high fuel prices, unfavorable product mix with a higher volume of low margin marine electronics product sales and a lower volume of high margin snowmobile and recreational vehicle product sales. The increase in selling, general and administrative expenses is the result of costs associated with increased selling and administrative staff, increased freight costs and costs associated with the move to a new distribution facility in Milwaukee, Wisconsin.

Corporate: Corporate overhead costs of $3.4 million for the six month period ending June 30, 2007 represented a 27.5% increase from $2.7 million in 2006. The increase is the result of several factors including increased interest costs on the credit facility and convertible note, costs associated with the move of the corporate headquarters from Los Angeles to Indianapolis, additional corporate staff to support the larger organization after the completion of the SkyTel acquisition and stock-based compensation expense recorded based on the adoption of SFAS No. 123 (revised 2004.) Increase is offset slightly due to the gain on sale of assets of $2.0 million related to the sale of a company owned facility in the first quarter of 2007.

Changes in Financial Condition

Liquidity and Capital Resources

Selected financial data are set forth in the following tables (dollars in thousands, except per share amounts):


	June 30			December 31
	2007			2006
Cash and cash equivalents	$	1,374		$	3,637
Working capital	$	6,601		$	11,543
Current ratio		1.13			1.54
Debt to total capitalization		61.33	%		0	%
Shareholders equity per share	$	1.56		$	2.13
Days sales in receivables		52			58

On January 31, 2007, the Company secured financing to complete the SkyTel acquisition by entering into (i) a credit agreement with Wells Fargo Foothill, Inc. (“WFF”), as administrative agent, pursuant to which WFF provided the Company with a revolving credit facility with a maximum credit amount of $30 million (the “Revolving Credit Facility”); and (ii) a purchase agreement with Newcastle Partners, L.P. (“Newcastle”) pursuant to which the Company issued and sold in a private placement to Newcastle a convertible subordinated payment-in-kind note (the “Convertible Note”) in the principal amount of $10 million.

During the six months ended June 30, 2007, net cash provided by operating activities was $7.9 million, primarily the result of an increase in accounts payable of $7.0 million, primarily at SkyTel as very little accounts payable was assumed as part of the SkyTel acquisition on January 31, 2007 and a decrease in accounts receivable of $2.0 million, driven by focused collection efforts and timing of payments. Net cash used in investing activities was $32.4 million, primarily the result of the acquisition of SkyTel and purchase of fixed assets, partially offset by the sale of a building during the first quarter of 2007. Net cash provided by financing activities totaled $22.2 million, primarily the result of the proceeds received from the Revolving Credit Facility and the Convertible Note in conjunction with the acquisition of SkyTel.

During the six months ended June 30, 2006, net cash provided by operating activities totaled $414,000 which is primarily the result of a decrease in inventory and an increase in accounts payable partially offset by an increase in accounts receivable. Net cash provided by investing activities of $7.6 million is primarily the result of the proceeds received from the sale of the J.W. Miller business partially offset by purchases of fixed assets.

As of June 30, 2007, the total debt outstanding was $23.2 million, consisting of $12.9 million outstanding under the Revolving Credit Facility and $10.3 million outstanding on the Convertible Note, prior to the accounting for the beneficial conversion feature and the Company had $5.1 million available for future borrowings under the Revolving Credit Facility.

The Company’s ability to maintain an adequate amount of borrowing availability under its Revolving Credit Facility depends upon its ability to comply with the terms and conditions of the loan agreement and its ability to generate cash flows from operations. The Company is subject to certain financial covenants as a part of the Revolving Credit Facility including (i) achieving certain levels of earnings before taxes, interest, depreciation and amortization (“EBITDA”), as defined by the loan agreement with WFF; and (ii) complying with limitations on capital expenditures.

On August 13, 2007, the Company and its subsidiary entered into Amendment Number Two to Credit Agreement, Consent and Waiver (the “Second Amendment”), with WFF. The Second Amendment amends the Company’s Credit Agreement dated January 31, 2007 (the “Credit Facility”) and provides the Company with an incremental $2 million of availability through October 31, 2007. Also pursuant to the Second Amendment, the lenders provided their consent to complete the sales of Shares held by the Company in two corporations that hold certain FCC licenses for the operation of Broadband Radio Service channels to Sprint and waived the Company’s default of its compliance with a covenant in the Credit Facility requiring a certain level of profitability for the six month period ended June 30, 2007. The Second Amendment also amends the profitability covenants for the nine month period ended September 30, 2007 and the twelve month period ended December 31, 2007 and reduces the amount of the Credit Facility available for borrowing upon completion of the sales of Shares to Sprint. The Company anticipates that the proceeds from the sales of Shares to Sprint will pay down a significant majority of the indebtedness outstanding under the Credit Facility.

The Company believes that sufficient cash resources exist for the foreseeable future to support its operations and commitments through cash generated from operations, proceeds from the sale of the Shares to Sprint and advances under the Revolving Credit Facility. Management continues to evaluate its options in regard to obtaining additional financing to support future growth.

Consolidated Balance Sheet

The increase in certain accounts on the consolidated balance sheet is driven by the SkyTel acquisition described in Note 3 to the consolidated financial statements.

Off-Balance Sheet Arrangements

The Company does not have any material off-balance sheet arrangements.

Contractual Obligations and Commercial Commitments

Approximately $15 million in lease commitments were assumed in connection with the SkyTel acquisition. SkyTel has operating leases related to locations on radio towers and building rooftops for placing network equipment in service. The leases have terms ranging from one month to six years. During 2007, the Company entered into a five year facility lease with an aggregate commitment of $2.5 million related to the SkyTel operations. On August 2, 2007, the Company reached an agreement with a third party to assume a lease in Springfield, Missouri that had a remaining lease term of 29 months and a commitment of approximately $3.0 million. Other than these new SkyTel leases, there have been no material changes to the Company’s contractual obligations and commercial commitments as previously disclosed in the Company’s Annual Report on From 10-K for the year ended December 31, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates on variable rate debt. Under the Credit Agreement with WFF, advances bear interest based on WFF’s prime rate plus a margin or at LIBOR Rate plus a margin. Based on the Company’s average outstanding variable rate debt during the quarter ended June 30, 2007, a 1% increase in the variable rate would increase annual interest expense by approximately $100,000.

Item 4. Controls and Procedures

Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2007. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Note — 18 to Consolidated Condensed Financial Statements, included in Part I of this report, is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the Company’s Annual Report on Form 10-K, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition and/or operating. You should carefully consider the risks described in Company’s Annual Report on Form 10-K before deciding to invest in the Company’s common stock. In assessing these risks, you should also refer to the other information in this Quarterly Report on Form 10-Q and within the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, including the Company’s financial statements and the related notes. Various statements in this Quarterly Report on Form 10-Q constitute forward-looking statements.

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

	(a)		None

	(b)		None

	(c)		None

	(d)		None

Item 3. Defaults Upon Senior Securities

None

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

The Annual Meeting of Shareholders was held on May 23, 2007 to vote on the election of five directors to hold office until the next Annual Meeting of Shareholders. All of management’s nominees for director as listed in the proxy statement were elected with the following vote:


Director	Votes for	Votes against	Votes withheld

Clinton J. Coleman	7,349,407	—	124,394

John A. Fellows	7,378,440	—	95,361

L. James Lawson	7,353,076	—	120,725

Michael R. Parks	7,348,704	—	125,097

Mark E. Schwarz	7,314,666	—	159,135

The Bell Industries, Inc 2007 Stock Incentive Plan was approved with the vote of 1,936,062 for, 791,244 against, 26,445 abstained and 4,720,050 non-votes.

The potential issuance of shares of common stock under a Convertible Promissory Note issued in a private placement was approved with 2,523,705 for, 183,714 against, 46,332 abstained and 4,720,050 non-votes.

The vote to ratify the appointment of BKD LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2007 was approved by a vote of 7,434,741 for, 22,958 against, and 16,102 abstained.

Item 5. Other Information

None

Item 6. Exhibits


10.1		Agreement dated June 5, 2007 between Vehicle Manufacturers Services, Inc and Bell Industries.*

31.1		Certification of Clinton J. Coleman, Interim Chief Executive Officer of Registrant pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Kevin J. Thimjon, Chief Financial Officer of Registrant pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Clinton J. Coleman, Interim Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Kevin J. Thimjon, Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*		Confidential treatment requested for portions of this exhibit.


	Page
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2007 and 2006 (unaudited)		3
Consolidated Condensed Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006		4
Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)		5
Notes to Consolidated Condensed Financial Statements (unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23
PART II OTHER INFORMATION
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		24
Item 4. Submission of Matters to a Vote of Security Holders		24
Item 5. Other Information		24
Item 6. Exhibits		24
SIGNATURES		25
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


	BELL INDUSTRIES, INC.
Dated: August 14, 2007	By:	/s/ Clinton J Coleman
		Clinton J. Coleman
		Interim Chief Executive Officer (authorized officer of registrant)


Dated: August 14, 2007	By:	/s/ Kevin J. Thimjon
		Kevin J. Thimjon
		Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

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