e10vq

UNITED STATES
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 September 30, 2008


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


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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 November 13, 2008, there were 8,650,224 outstanding shares of the Registrant’s Common Stock.

BELL INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)


	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Net revenues:
Products	$	27,561		$	29,601		$	62,860		$	72,664
Services		6,208			6,826			20,151			25,815

Total net revenues		33,769			36,427			83,011			98,479


Costs and expenses:
Cost of products sold		23,080			24,996			51,353			60,584
Cost of services provided		4,442			4,537			14,128			17,686
Selling, general and administrative expense		6,584			7,519			18,445			28,831
Interest expense, net		225			—			671			—
Loss on extinguishment of debt		—			—			1,053			—
Gain on sale of assets		—			(39	)		—			(2,012	)

Total costs and expenses		34,331			37,013			85,650			105,089

Loss from continuing operations before provision for income taxes		(562	)		(586	)		(2,639	)		(6,610	)
Provision for (benefit from) income taxes		(393	)		8			(360	)		40

Loss from continuing operations		(169	)		(594	)		(2,279	)		(6,650	)
Discontinued operations:
Income (loss) from discontinued operations, net of tax		200			(1,166	)		(1,162	)		(1,440	)
Loss on sale of discontinued operations, net of tax		—			—			(500	)		—

Income (loss) from discontinued operations, net of tax		200			(1,166	)		(1,662	)		(1,440	)

Net income (loss)	$	31		$	(1,760	)	$	(3,941	)	$	(8,090	)


Share and per share data
Basic:
Loss from continuing operations	$	(0.02	)	$	(0.07	)	$	(0.26	)	$	(0.77	)
Income (loss) from discontinued operations		0.02			(0.13	)		(0.19	)		(0.17	)

Net income (loss)	$	0.00		$	(0.20	)	$	(0.45	)	$	(0.94	)

Weighted average common shares outstanding		8,650			8,650			8,650			8,627

Diluted:
Loss from continuing operations	$	0.00		$	(0.07	)	$	(0.26	)	$	(0.77	)
Income (loss) from discontinued operations		0.00			(0.13	)		(0.19	)		(0.17	)

Net income (loss)	$	0.00		$	(0.20	)	$	(0.45	)	$	(0.94	)

Weighted average common shares outstanding		35,000			8,650			8,650			8,627

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)


	September 30			December 31
	2008			2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,331		$	409
Accounts receivable, less allowance for doubtful accounts of $1,067 and $730, respectively		13,223			12,304
Inventories, net		7,445			10,323
Notes receivable		1,500			—
Prepaid expenses and other current assets		3,898			1,982
Assets held for sale		—			27,814

Total current assets		27,397			52,832

Fixed assets, net of accumulated depreciation of $12,076 and $12,225, respectively		1,817			1,956
Assets held for sale		—			5,000
Other assets		697			2,231

Total assets	$	29,911		$	62,019


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Floor plan payables	$	298		$	1,064
Revolving credit facility		—			4,775
Accounts payable		6,969			10,438
Accrued payroll		2,407			1,639
Liabilities associated with assets held for sale		—			19,084
Other accrued liabilities		4,633			5,849

Total current liabilities		14,307			42,849

Convertible note		10,721			8,969
Other long-term liabilities		3,570			5,418

Total liabilities		28,598			57,236


Commitments and contingencies

Shareholders’ equity:
Preferred stock:
Authorized - 1,000,000 shares, outstanding — none
Common stock:
Authorized - 35,000,000 shares, outstanding —
8,650,244 shares		35,454			34,983
Accumulated deficit		(34,477	)		(30,536	)
Accumulated other comprehensive income		336			336

Total shareholders’ equity		1,313			4,783

Total liabilities and shareholders’ equity	$	29,911		$	62,019

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


	Nine months ended
	September 30
	2008			2007
Cash flows from operating activities:
Net loss	$	(3,941	)	$	(8,090	)
Loss from discontinued operations, net of tax		1,162			1,440
Loss on sale of discontinued operations, net of tax		500			—
Adjustments to reconcile net loss to net cash used in operating
activities for continuing operations:
Gain on sale of assets		—			(2,012	)
Depreciation, amortization and accretion expense		1,221			1,568
Non-cash interest expense		453			132
Stock-based compensation expense		112			158
Provision for losses on accounts receivable, net		337			2,660
Loss on extinguishment of debt		1,053			—
Changes in assets and liabilities, net of acquisitions and disposals:
Accounts receivable		(1,256	)		188
Inventories		2,878			1,408
Accounts payable		(3,469	)		(2,026	)
Accrued payroll		768			339
Accrued liabilities and other		(2,497	)		(1,344	)

Net cash used in operating activities for continuing operations		(2,679	)		(5,579	)
Net cash provided by (used in) operating activities for discontinued operations		(1,985	)		13,998

Net cash provided by (used in) operating activities		(4,664	)		8,419

Cash flows from investing activities:
Purchases of fixed assets and other		(765	)		(844	)
Proceeds from life insurance policy		488			—
Proceeds from sale of assets, net of costs		8			2,916

Net cash provided by (used in) investing activities for continuing operations		(269	)		2,072
Net cash provided by (used in) investing activities for discontinued operations		11,946			(36,936	)

Net cash provided by (used in) investing activities		11,677			(34,864	)

Cash flows from financing activities:
Net borrowings (payments) under revolving credit facility		(4,775	)		11,428
Proceeds from issuance of convertible note		—			10,000
Debt acquisition costs		(118	)		(810	)
Net proceeds (payments) of floor plan payables		(766	)		2,396
Employee stock plans		—			122
Principal payments on capital leases		(97	)		—

Net cash provided by (used in) financing activities for continuing operations		(5,756	)		23,136
Net cash used in financing activities for discontinued operations		(335	)		(74	)

Net cash provided by (used in) financing activities		(6,091	)		23,062


Net increase (decrease) in cash and cash equivalents		922			(3,383	)
Cash and cash equivalents at beginning of period		409			3,637

Cash and cash equivalents at end of period	$	1,331		$	254

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 — General

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 8 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, 2007 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, 2007.

Note 2 — Acquisition and Sale of SkyTel Division

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 adjustment paid to Verizon in April 2007 and approximately $4.2 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	$	14,101
Inventories, net		1,406
Prepaid expenses		3,544
Assets held for sale		13,690
Fixed assets		15,010
Intangible assets		3,524
Accrued exit costs		(5,096	)
Asset retirement obligation		(3,071	)
Deferred revenue		(7,444	)
Other		(1,070	)

Net assets acquired	$	34,594

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


Trademarks	$	1,227
Patents		963
Licenses		914
Customer relationships		420

Total intangible assets	$	3,524

In connection with the acquisition, the Company assessed and formulated a plan related to the future integration of SkyTel into the Company. The Company accrued estimates for certain costs, related primarily to personnel reductions, tower lease terminations 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 were made throughout the year ended December 31, 2007 as the plans were finalized.

On October 15, 2007, the Company sold its shares of stock (the “Shares”) in two corporations that held certain FCC licenses for the operation of broadband radio service channels to Sprint Nextel Corporation. The aggregate consideration for the Shares was approximately $13.5 million in cash, with approximately $943,000 payable to the Company in eighteen months (April 15, 2009) after certain indemnification obligations have been met.

During the fourth quarter of 2007, the Company committed to a plan to sell the SkyTel business segment and entered into letters of intent with two parties to sell the SkyTel business in two separate transactions. On February 14, 2008, the Company completed the sale of the SkyGuard and FleetHawk product lines to SkyGuard, LLC for $7 million in cash. On June 13, 2008, the Company completed the sale of the remainder of the SkyTel business to Velocita Wireless, LLC (“Velocita”) for total consideration of $7.5 million, consisting of $3 million in cash at closing, a $3.0 million secured note payable thirty days after closing and a $1.5 million unsecured note payable on the one year anniversary of the closing. The proceeds will be used to pay down outstanding balances on the Company’s credit facility and to provide working capital for the Company’s continuing operations. For the nine months ended September 30, 2008, the Company recognized an additional $500,000 loss on sale of the SkyTel business as reflected in the Consolidated Condensed Statements of Operations resulting from a reduction in the total consideration per the agreement versus the amount originally recorded during the year ended December 31, 2007.

Upon closing of the transactions, the Company no longer has any significant involvement and no longer generates cash flows from SkyTel operations. Therefore, at December 31, 2007, the SkyTel business has been reflected as assets held for sale in the Consolidated Balance Sheets and as discontinued operations in the Consolidated Statements of Operations and Cash Flows for the three and nine months ended September 30, 2008 and 2007. Summarized financial information in the Consolidated Condensed Statements of Operations for the discontinued SkyTel operations for the three and nine months ended September 30, 2008 and 2007 (SkyTel was acquired by the Company on January 31, 2007) are as follows (in thousands):


	Three Months ended					Nine months ended
	September 30,					September 30,
	2008		2007			2008			2007
Net revenues	$	—	$	22,229		$	35,088		$	62,323
Income (loss) before income taxes		200		(1,166	)		(1,662	)		(1,440	)
Provision for income taxes		—		—			—			—

Income (loss) from discontinued operations, net of tax	$	200	$	(1,166	)	$	(1,162	)	$	(1,440	)

In presenting discontinued operations, corporate overhead expenses have not been allocated. Interest expense was allocated to discontinued operations based upon the anticipated proceeds or debt balance attributable to those operations. For the three months ended September 2007, interest expense of $672,000 was allocated to discontinued operations and for the nine months ended September 30, 2008 and 2007, interest expense of $657,000 and $1,667,000, respectively, was allocated to discontinued operations. Income taxes have been allocated to discontinued operations in accordance with SFAS 109 intraperiod tax allocation resulting in no tax provision being provided given the Company’s full valuation allowance on its deferred tax assets.

For the nine months ended September 30, 2008, approximately $3.5 million of depreciation and amortization was not expensed due to the cessation of such expense upon the SkyTel business being classified as held for sale.

Note 3 — 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 $1.1 million and $1.2 million during the three months ended September 30, 2008 and 2007, respectively and $3.0 million and $3.7 million during the nine months ended September 30, 2008 and 2007, respectively. These costs are included within selling, general and administrative expenses in the Consolidated Condensed Statements of Operations.

Note 4 — Debt and Financing Obligations

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 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, 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 its principal office in San Francisco, California, plus a 1.25% 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 2.75% 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. The Credit Agreement includes certain covenants related to profitability and capital expenditures. 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.

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 amended the profitability covenants for the nine month period ended September 30, 2007 and the twelve month period ended December 31, 2007, blocked $10 million of the total Revolving Credit Facility and blocked $6 million of the amount of the Revolving Credit Facility available at any time to the Company.

On April 11, 2008, the Company and its subsidiary entered into Amendment Number Three to Credit Agreement (the “Third Amendment”) with WFF to give effect to the sale of the SkyTel division. The Third Amendment resulted in the modification of the calculation of the profitability covenants to exclude the results of the SkyTel division and amended the minimum profitability covenants as of December 31, 2007 and the four quarters of the year ended December 31, 2008.

On June 13, 2008, the Company and its subsidiary entered into Amendment Number Four to Credit Agreement, Consent and Partial Release Agreement (the “Fourth Amendment”), with WFF. As a result of the sale of the SkyTel division, the Fourth Amendment reduced the maximum revolver amount to $10 million from $20 million ($30 million Revolving Credit Facility with $10 million blocked per the Second Amendment), reduced the block on the amount of the Revolving Credit Facility available at any time from $6 million to $3.5 million for the period from August 1 through December 31, 2008 and revised the capital expenditure covenants for the years ended December 31, 2008 through 2012. As of September 30, 2008, the revolving credit facility had a zero balance.

Convertible Note

Through June 13, 2008, the outstanding principal balance and accrued but unpaid interest on the Convertible Note was 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 accrued interest at 8%, subject to adjustment in certain circumstances, which interest accreted as principal on the Convertible Note as of each quarterly interest payment date beginning March 31, 2007. The Company also had 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 had the right to prepay 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 was 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 was 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 was 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” (“EITF 00-27”.)

On June 13, 2008, the Company and Newcastle entered into the Second Amended and Restated Convertible Promissory Note (the “Amended Convertible Note”) with a principal amount of $11.1 million (which represented the original $10.0 million note plus payment-in-kind interest accreted as additional principal and accrued interest through June 13, 2008.) The Amended Convertible Note reflects a reduction in the conversion price from $3.81 per share down to $0.20 per share (subject to adjustment) and a reduction in the interest rate from 8% to 4% per annum. On or after January 31, 2010, the Company has the right to prepay the Amended 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 200% of the Conversion Price ($0.40 per share). The full conversion of the Amended Convertible Note is subject to the Company’s shareholders approving an increase in the number of authorized shares of common stock at the Company’s next annual meeting, which is scheduled for December 4, 2008. If the increase in authorized shares is not approved, the interest rate on the portion of the Amended Convertible Note for which there would not be shares available for issuance upon conversion would increase to 14%. As a result of the amendment, the remaining balance of the beneficial conversion feature recorded when the note was originally issued on January 31, 2007, net of income taxes, was written off resulting in a loss on extinguishment of debt of approximately $1.1 million. As the Amended Convertible Note is convertible at the option of Newcastle at a beneficial conversion rate of $0.20 per share (closing market price of the Company’s common stock as of June 13, 2008 was $0.21 per share), the embedded beneficial conversion feature was 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 EITF 00-27.

A summary of the initial recording of the Amended Convertible Note and debt discount and activity through September 30, 2008 follows (in thousands):


Convertible note at June 13, 2008	$	11,137
Beneficial conversion feature		(563	)
Accretion of beneficial conversion feature		13
Accrued interest		134

Convertible note at September 30, 2008	$	10,721

Interest expense recorded on the Convertible Note and the Amended Convertible Note, including accretion of beneficial conversion feature, totaled $126,000 and $243,000 during the three months ended September 30, 2008 and 2007, respectively and $527,000 and $640,000 during the nine months ended September 30, 2008 and 2007, respectively.

Floor Plan Arrangements

The Company finances certain inventory purchases through floor plan arrangements with two finance companies. At September 30, 2008 and December 31, 2007, the Company had outstanding floor plan obligations of $298,000 and $1,064,000, respectively.

Capital Lease

Note 5 — Stock-Based Compensation

The Company’s 2007 Stock Option 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.

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. Stock-based compensation expense totaled $39,000 for the three months ended September 30, 2008, represented income of $44,000 for the three months ended September 30, 2007, and represented expense of $112,000 and $158,000 for the nine months ended September 30, 2008 and 2007, respectively.

The following summarizes stock option share activity during the nine months ended September 30, 2008:


						Weighted
				Weighted		Average
	Stock			average		Remaining
	option			exercise		contractual term		Aggregate
	shares			price		(in years)		intrinsic value
Outstanding at December 31, 2007		1,093,000		$	3.74
Granted		—			—
Exercised		—			—
Canceled or expired		(533,000	)		3.16

Outstanding at September 30, 2008		560,000		$	4.29		4.3	$	—

Exercisable at September 30, 2008		409,250		$	4.08		3.5	$	—

The following summarizes non-vested stock options as of December 31, 2007 and changes during the nine months ended September 30, 2008:


				Weighted
	Stock			average
	option			grant date
	shares			fair value
Non vested at December 31, 2007		560,800		$	1.12
Granted		—			—
Vested		(105,250	)		1.20
Canceled or expired		(304,800	)		1.05

Non vested at September 30, 2008		150,750		$	1.13

The aggregate intrinsic value in the table above represents the intrinsic value (the difference between the Company closing stock price on September 30, 2008 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 September 30, 2008. The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2008 was zero as no options were exercised. The total fair value of options vesting during the three and nine month periods ended September 30, 2008 was approximately $25,000 and $126,000, respectively. As of September 30, 2008, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $109,000 which is expected to be recognized over a weighted average period of approximately 1.1 years. As of September 30, 2008, there were 850,000 shares of common stock available for issuance of future stock option grants under the 2007 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 September 30, 2008, 419,450 shares were available for future issuance under the ESPP.

Note 6 — 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 nine month periods ended September 30, 2008 and 2007 is set forth in the following table (in thousands):


	Three Months ended					Nine months ended
	September 30,					September 30,
	2008		2007			2008			2007
Basic weighted average shares outstanding		8,650		8,650			8,650			8,627
Potentially dilutive stock options and convertible debt		26,350		2,711			2,817			2,625
Anti-dilutive due to net loss in period		—		(2,711	)		(2,817	)		(2,625	)

Diluted weighted average shares outstanding		35,000		8,650			8,650			8,627

The potentially dilutive convertible debt converts into approximately 53.0 million shares of common stock as of the beginning of the three month period ended September 30, 2008, however, the Company currently only has 35.0 million shares of common stock authorized for issuance. The Company’s shareholders will be voting on a proposal to increase the number of authorized shares to 200.0 million at the Company’s annual meeting of shareholders scheduled for December 4, 2008. 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, for the three and nine months ended September 30, 2008 and 2007, totaled 560,000 and 610,000, respectively. The calculation of fully diluted earnings per share includes the add back of $56,000 of interest expense related to the potentially dilutive convertible debt during the three months ended September 30, 2008.

Note 7 — Income Taxes

As of June 30, 2008 and December 31, 2007, the Company had recorded $412,000 and $395,000 of FIN No. 48 unrecognized tax benefits, respectively, including accrued interest related to the uncertain tax position of $143,000 and $126,000, respectively. During the third quarter of 2008, the Company favorably resolved the uncertain tax matter and recognized $412,000 in tax benefits through the Company’s effective rate. As a result, there are no FIN No. 48 unrecognized tax benefits recorded at September 30, 2008. The benefit from income taxes for the three month period ended September 30, 2008 is primarily the result of the favorable resolution of the uncertain tax matter which resulted in the recognition of $412,000 in tax benefits, partially offset by a provision for state taxes. The provision for income taxes of $8,000 for the three months ended September 30, 2007 is primarily related to state taxes. The benefit from income taxes for the nine month period ended September 30, 2008 is primarily the result of the favorable resolution of the uncertain tax matter, partially offset by a provision for state taxes of $36,000. The provision for income taxes for the nine months ended September 30, 2007 of $40,000 is primarily related to state taxes. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Tax years 2003 through 2007 remain open to examination by major taxing jurisdictions to which the Company is subject to income tax. As of September 30, 2008, the Company continues to record a full valuation allowance against net deferred tax asset balances.

Note 8 — Shareholders’ Equity

The changes to shareholders’ equity during the nine months ended September 30, 2008 are as follows (in thousands):


Shareholders’ equity at December 31, 2007	$	4,783
Net loss		(3,941	)
Stock based compensation		112
Beneficial conversion feature, net of tax		359

Shareholders’ equity at September 30, 2008	$	1,313

Note 9 — 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 September 30, 2008 and December 31, 2007, estimated future remediation and related costs for this matter totaled approximately $2.8 million and $3.7 million, respectively. At September 30, 2008, approximately $1.0 million (estimated current portion) is included in accrued liabilities and $1.8 million (estimated non-current portion) is included in other long- term liabilities in the Consolidated Condensed Balance Sheets. At September 30, 2008 and December 31, 2007, the estimated future amounts to be recovered from insurance totaled $400,000 and $1.1 million, respectively, which are included in prepaid expenses and other.

Note 10 — Litigation

Williams Electronic Games litigation: In May 1997, Williams Electronics Games, Inc., et al. (“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, and the action is now proceeding in Illinois State Court. Williams’ claim for compensatory damages is approximately $8.7 million, not including an additional claim for pre-judgment interest.

In August 2008, the Company reached an agreement with Williams to settle this matter for a lump sum payment of $900,000 and paid the amount in full.

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 11 — Business Segment Information

As of September 30, 2008, the Company operates two reportable business segments: the Technology Solutions Group, a provider of a comprehensive portfolio of customizable and scalable technology solutions ranging from managed technology services to reverse logistics and mobile/wireless solutions and the Recreational Products Group, a wholesale distributor of aftermarket parts and accessories for the recreational vehicles and other leisure-related vehicle market (including marine, snowmobile, cycle and ATV.) The Company also separately records expenses related to corporate overhead which supports the business lines. The Company’s third division, SkyTel, was sold (Note 2) and has been reflected as a discontinued operation and is, therefore, not presented in this business segment results discussion. Each operating segment offers unique products and services and has separate management.

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


	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Net revenues:
Technology Solutions Group
Products	$	16,588		$	17,759		$	30,068		$	36,186
Services		6,208			6,826			20,151			25,814

Total Technology Solutions Group		22,796			24,585			50,219			62,000
Recreational Products Group		10,973			11,842			32,792			36,479

Total net revenues	$	33,769		$	36,427		$	83,011		$	98,479


Operating income (loss):
Technology Solutions Group	$	398		$	(142	)	$	856		$	(3,987	)
Recreational Products Group		341			574			1,217			788
Corporate costs		(1,076	)		(1,057	)		(2,988	)		(5,423	)

Total operating loss		(337	)		(625	)		(915	)		(8,622	)
Gain on sale of assets		—			(39	)		—			(2,012	)
Loss on extinguishment of debt		—			—			1,053			—
Interest expense, net		225			—			671			—

Loss from continuing operations before income taxes	$	(562	)	$	(586	)	$	(2,639	)	$	(6,610	)


	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Depreciation, amortization and accretion:
Technology Solution Group	$	318	$	360	$	979	$	1,182
Recreational Products Group		27		70		86		215
Corporate		54		53		156		171

	$	399	$	483	$	1,221	$	1,568


Capital expenditures:
Technology Solution Group	$	84	$	6	$	686	$	701
Recreational Products Group				8		22		113
Corporate		15		17		57		30

	$	99	$	31	$	765	$	844


	September 30,		December 31,
	2008		2007
Total assets:
Technology Solution Group	$	11,524	$	10,448
Recreational Products Group		10,765		13,557
Corporate		7,622		5,200
Discontinued operations		—		32,814

	$	29,911	$	62,019

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

Note 12 — 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. On July 13, 2007, Clinton J. Coleman, a Vice President of Newcastle, was appointed Interim Chief Executive Officer of the Company. Under the supervision of our Board of Directors (other than Mr. Schwarz and Mr. Coleman), members of management, with the assistance of counsel, negotiated the terms of Newcastle’s Convertible Note and Amended Convertible Note directly with representatives of Newcastle (Note 4). After final negotiations concluded, the Company’s Board of Directors, excluding Mr. Schwarz and Mr. Coleman, approved the Newcastle transactions. Mr. Schwarz and Mr. Coleman did not participate in any of the Board of Directors’ discussions regarding the Newcastle transactions or the votes of the Board of Directors to approve the same.

Note 13 — Retiree Medical Plan

The Company provides postretirement medical coverage for qualifying employees who were employed prior to January 1, 1998 (“Retiree Medical Plan”). Employees must meet age and years of service requirements and must also be participating in a Bell medical plan at the time of retirement to be eligible for the Retiree Medical Plan. The estimated liability for the Retiree Medical Plan is recorded as a liability in the Condensed Consolidated Balance Sheets. In July 2008, the Company notified participants in the Retiree Medical Plan that, effective December 31, 2008, the Company would be terminating the Retiree Medial Plan. The termination of the Retiree Medical Plan will eliminate any future obligation of the Company to provide cost sharing benefits to current or future retirees. The Company anticipates that the curtailment of the Retiree Medical Plan will result in a gain in the fourth quarter of 2008 once the amendment has become effective.

Note 14 — Subsequent Events

On October 24, 2008, the Company provided shareholders with notice of its annual meeting scheduled to be held on December 4, 2008. At the annual meeting, shareholders will consider and vote on the following matters:

	•		to elect four directors to our board of directors;

	•		to approve an amendment to the Company’s articles of incorporation to increase the number of the Company’s authorized shares of common stock from 35,000,000 shares to 200,000,000 shares;

	•		to approve an amendment to the Company’s bylaws to change the authorized range of number of directors of the Company from not less than six (6) nor more than eleven (11) to not less than four (4) nor more than seven (7);

	•		to approve an amendment to the 2007 Plan to increase the shares reserved for issuance under the 2007 Plan from 1,000,000 shares to 5,000,000 shares; and concurrently increase the number of stock options, direct stock issuances and share right awards that any one person participating in the 2007 Plan may receive in the aggregate in any calendar year from 1,000,000 to 2,000,000 shares;

	•		to ratify the appointment of Crowe Horwath LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008;

	•		to approve an amendment to the Company’s articles of incorporation to effect a one-for-twenty reverse stock split of the Company’s outstanding shares of common stock;

	•		to approve a proposal to adjourn the meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event that there are not sufficient votes to approve the amendment to the articles of incorporation to increase the authorized shares of common stock; and

	•		to transact any other business that may properly come before the annual meeting.


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 the consolidated condensed financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. 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, 2007 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, except as required by law.

Critical Accounting Policies

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, 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.

Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 supersedes the existing hierarchy contained in the U.S. auditing standards. The existing hierarchy was carried over to SFAS 162 essentially unchanged. The statement becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to the auditing literature. The new hierarchy is not expected to change current accounting practice in any area.

In May 2008, the FASB issued FSP APB 14-1, Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1) which impacts the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. The Company is currently evaluating the impact on our financial statements of applying the provisions of FSP APB 14-1.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS 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 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 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 did not elect the fair value option for any financial assets as of January 1, 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 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. On February 12, 2008, the FASB approved FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Although not required, the FSP encourages entities to early adopt SFAS 157 for nonrecurring measurements made for nonfinancial assets and

nonfinancial liabilities. The adoption of SFAS 157 as it relates to financial assets and financial liabilities had no impact on the Company’s consolidated financial position or results of operations. The Company has not determined the effect, if any, the adoption of SFAS 157-2 will have on the Company’s consolidated financial position or results of operations.

On October 10, 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, (“FSP 157-3”), which clarifies application of SFAS 157 in a market that is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of FSP 157-3 had no impact on the Company’s consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires reporting entities to present non-controlling (minority) interests as equity (as opposed to a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and non-controlling interests. SFAS 160 will apply prospectively and is effective as of the beginning of fiscal 2009, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented upon adoption. The Company has not begun implementation of SFAS 160 and therefore can not report the potential impact of the implementation.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

The Company has provided a summary of its consolidated operating results for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, followed by an overview of its business segment performance below:

Net revenues

Net revenues were $33.8 million for the third quarter of 2008 as compared to $36.4 million for the third quarter of 2007, representing a decrease of $2.6 million or 7.3%. The decrease consists of a $1.8 million decrease in net revenues in the Technology Solutions Group and a $0.8 million decrease in revenues in the Recreational Products Group.

Gross profit

Gross profit, which is net revenues less the costs of products sold and services provided, was $6.2 million, or 18.5% of net revenues, for the third quarter of 2008, compared to $6.9 million, or 18.9% of net revenues, for the third quarter of 2007. The decrease in gross profit of $0.7 million is primarily the result of a decrease in revenues in the Technology Solutions Group during the third quarter of 2008.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $6.6 million, or 19.5% of net revenues, for the third quarter of 2008, compared to $7.5 million, or 20.6% of net revenues, for the third quarter of 2007. The decrease in SG&A expenses of $0.9 million consists of a reduction in SG&A expenses of $1.1 million in the Technology Solutions Group partially offset by an increase in SG&A expenses in the Recreational Products Group of $0.2 million for the third quarter of 2008.

Interest and other, net

Net interest expense was $225,000 for the third quarter of 2008, compared to zero for the third quarter of 2007. The increase in net interest expense is the result of the allocation of all of the Company’s $672,000 of interest expense for the third quarter of 2007 to discontinued operations. The net interest expense is primarily the result of the outstanding balances under the convertible note and revolving credit facility.

Income taxes

The benefit from income taxes for the three month period ended September 30, 2008 is primarily the result of the favorable resolution of a FIN No. 48 uncertain tax matter which resulted in the recognition of $412,000 in tax benefits, partially offset by a provision for state taxes. The provision for income taxes for the three months ended September 30, 2007 of $8,000 is primarily related to state taxes. As of September 30, 2008, the Company continues to record a full valuation allowance against net deferred tax asset balances.

Discontinued operations

In late 2007, the Company entered into letters of intent with two companies to sell its SkyTel division in two separate transactions. On February 14, 2008, the Company completed the sale of the SkyGuard and FleetHawk product lines to SkyGuard, LLC, and on June 13, 2008, the Company completed the sale of the remainder of the SkyTel business to Velocita Wireless, LLC. Accordingly, the results of the SkyTel division have been classified as discontinued operations in the accompanying financial statements. The Company acquired the SkyTel division on January 31, 2007. For the three months ended September 30, 2008, the SkyTel division had income before income taxes of $200,000. For the three month period ended September 30, 2007, the SkyTel division had revenues of $22.2 million and a loss before income taxes of $1.2 million. For the year ended December 31, 2007, the Company recorded an estimated loss on the sale of discontinued operations (the SkyTel division), net of taxes, of $3.9 million and recorded an additional loss on the sale of discontinued operations, net of taxes, of $0.5 million in the second quarter of 2008.

Business Segment Results

The Company operates two reportable business segments: the Technology Solutions Group, a provider of a comprehensive portfolio of customizable and scalable technology solutions ranging from managed technology services to reverse logistics and mobile/wireless solutions and the Recreational Products Group, a wholesale distributor of aftermarket parts and accessories for the recreational vehicles and other leisure-related vehicle market (including marine, snowmobile, cycle and ATV.) The Company also separately records expenses related to corporate overhead which supports the business lines. The Company’s third division, SkyTel, has been reflected as a discontinued operation and is, therefore, not presented in this business segment results discussion.

Technology Solutions Group

Technology Solutions Group (“TSG”) revenues of $22.8 million for the third quarter of 2008 represented a 7.3% decrease from the $24.6 million of revenues for the third quarter of 2007. Product revenues of $16.6 million for the third quarter of 2008 represented a 6.6% decrease from the $17.8 million of product revenues for the third quarter of 2007, which is primarily the result of a $1.3 million decline in sales of a hardware product line, for which TSG was an authorized reseller, after the departure of TSG’s sales and operations team that was dedicated to supporting this product line in the third quarter of 2007. Service revenues of $6.2 million for the third quarter of 2008 represented a 9.1% decrease from the $6.8 million of service revenues for the third quarter of 2007. The service revenue decrease is primarily attributable to a $0.3 million decrease in revenue related to termination of a significant customer contract in July 2007 at the Company’s former Springfield, Missouri call center and a $0.3 million decrease in revenue related to a depot services project that was performed in the third quarter of 2007 but not performed in the third quarter of 2008.

TSG operating income of $398,000 for the third quarter of 2008 represents a $540,000 increase from the operating loss of $142,000 for the third quarter of 2007. This increase is primarily attributed to a $1.1 million reduction in SG&A expenses, partially offset by reductions in gross profit resulting from the decline in revenues. The decline in SG&A expenses was primarily the result of bad debt expense of $0.3 million recorded during the third quarter of 2007 related to recording a reserve on the receivable from its Springfield call center customer, SunRocket, which ceased operations in July 2007 and a large number of headcount reductions both at the call center in Springfield, which was closed in July 2007 and at the TSG divisional headquarters.

Recreational Products Group

Recreational Products Group (“RPG”) revenues of $11.0 million for the third quarter of 2008 represented a 7.3% decrease from the $11.8 million for the third quarter of 2007. This decrease is primarily related to lower sales in the marine and recreational vehicle product lines which can be attributed to a decline in general economic conditions including higher gas prices compared to the third quarter of 2007.

RPG operating income of $341,000 for the third quarter of 2008 represented a $233,000 decrease from the operating income of $574,000 for the third quarter of 2007. This decrease is primarily attributed to an increase in bad debt expense of $249,000 during the third quarter of 2008 versus the third quarter of 2007. This increase in bad debt expense is a direct result of a decline in the financial strength of the recreation products dealership base, including a few dealers that have gone out of business, as general economic conditions have deteriorated. Although revenues declined $0.8 million, or 7.3%, in the third quarter of 2008 versus the same period in 2007, gross profit margins increased from 26.3% in the third quarter of 2007 to 27.6% in the third quarter of 2008.

Corporate

Corporate overhead costs of $1.1 million for the third quarter of 2008 were relatively flat to the costs for the third quarter of 2007.

Nine months ended September 30, 2008 Compared to Nine months ended September 30, 2007

The Company has provided a summary of its consolidated operating results for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, followed by an overview of its business segment performance below:

Net revenues

Net revenues were $83.0 million for the nine months ended September 30, 2008 as compared to $98.5 million for the nine months ended September 30, 2007, representing a decrease of $15.5 million or 15.7%. The decrease consists of a $11.8 million decrease in net revenues in the Technology Solutions Group and a $3.7 million decrease in net revenues in the Recreational Products Group.

Gross profit

Gross profit was $17.5 million, or 21.1% of net revenues, for the nine months ended September 30, 2008, compared to $20.2 million, or 20.5% of net revenues, for the nine months ended September 30, 2007. The decrease in gross profit of $2.7 million is primarily the result of a decrease in revenues in the Technology Solutions Group during the nine months ended September 30, 2008.

Selling, general and administrative expenses

SG&A expenses were $18.4 million, or 22.2% of net revenues, for the nine months ended September 30, 2008, compared to $28.8 million, or 29.3% of net revenues, for the nine months ended September 30, 2007. The decrease in SG&A expenses of $10.4 million for the nine months ended September 30, 2008 consists of reductions in SG&A expenses of $7.3 million in the Technology Solutions Group, $2.4 million in the Corporate segment and $0.7 million in the Recreational Products Group.

Interest and other, net

Net interest expense was $671,000 for the nine months ended September 30, 2008, compared to zero for the nine months ended September 30, 2007. The increase in net interest expense is the result of the allocation of all of the Company’s $2.3 million of interest expense for the nine months ended September 30, 2007 to discontinued operations versus approximately 49% of the interest allocated to discontinued operations during the nine months ended September 30, 2008. The net interest expense is primarily the result of the outstanding balances under the revolving credit facility and convertible note. The loss on extinguishment of debt of approximately $1.1 million recorded during the nine months ended September 30, 2008 related to the amendment of the convertible notes which resulted in a reduction in the conversion price from $3.81 per share down to $0.20 per share. The loss represented the write-off of the net balance of the beneficial conversion feature which had been recorded at issuance of the note in January 2007. 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.

Income taxes

The benefit from income taxes for the nine month period ended September 30, 2008 is primarily the result of the favorable resolution of a FIN No. 48 uncertain tax matter which resulted in the recognition of $396,000 in tax benefits, partially offset by a provision for state taxes of $36,000. The provision for income taxes for the nine months ended September 30, 2007 of $40,000 is primarily related to state taxes. As of September 30, 2008, the Company continues to record a full valuation allowance against net deferred tax asset balances.

Discontinued operations

For the nine months ended September 30, 2008, the SkyTel division had revenues of $35.1 million and loss before income taxes of $1.7 million. The SkyTel division was acquired on January 31, 2007 and for the eight month period ended September 30, 2007, the SkyTel division had revenues of $62.3 million and loss before income taxes of $1.4 million. For the year ended December 31, 2007, the Company recorded an estimated loss on the sale of discontinued operations (the SkyTel division), net of taxes, of $3.9 million and recorded an additional loss on the sale of discontinued operations, net of taxes, of $0.5 million in the second quarter of 2008.

Business Segment Results

Technology Solutions Group

TSG revenues of $50.2 million for the nine months ended September 30, 2008 represented a 19.0% decrease from the $62.0 million of revenues for the nine months ended September 30, 2007. Product revenues of $30.1 million for the nine months ended September 30, 2008 represented a 16.9% decrease from the $36.2 million of product revenues for the nine months ended September 30, 2007, which is primarily the result of a $4.1 million decline in sales of a hardware product line, for which TSG was an authorized reseller, after the departure of TSG’s sales and operations team that was dedicated to supporting this product line in the third quarter of 2007 and a $2.0 million decline in other product sales due to timing of sales and a focus on improved gross profits. Service revenues of $20.2 million for the nine months ended September 30, 2008 represented a 21.9% decrease from the $25.8 million of service revenues for the nine months ended September 30, 2007. The service revenue decrease is primarily attributable to a $5.9 million decrease in revenue related to termination of a significant customer contract in July 2007 at the Company’s former Springfield, Missouri call center partially offset by an increase in other new service related projects.

TSG operating income of $856,000 for the nine months ended September 30, 2008 represents a $4.8 million increase from the operating loss of $4.0 million for the nine months ended September 30, 2007. This increase is primarily attributed to the closure of the unprofitable call center in Springfield, improved operational efficiencies on several service engagements and a significant reduction in SG&A costs in TSG since the nine months ended September 30, 2007. Although revenues declined $11.8 million in the nine months ended September 30, 2008 versus the same period in 2007, gross profit declined only $2.5 million and SG&A expenses decreased $7.3 million. The significant decline in SG&A expenses was primarily the result of bad debt expense of $2.7 million recorded during the nine months ended September 30, 2007 related to recording a full reserve on the receivable from its Springfield call center customer, SunRocket, which ceased operations in July 2007 and a large number of headcount reductions both at the call center in Springfield, which was closed in July 2007 and at the TSG divisional headquarters.

Recreational Products Group

RPG revenues of $32.8 million for the nine months ended September 30, 2008 represented a 10.1% decrease from the $36.5 million for the nine months ended September 30, 2007. This decrease is attributed primarily to lower sales in the marine and recreational vehicle product lines which can be attributed to a decline in general economic conditions including higher gas prices compared to the first nine months of 2007.

RPG operating income of $1.2 million for the nine months ended September 30, 2008 represents a $0.4 million increase from the operating income of $0.8 million for the nine months ended September 30, 2007. This increase is primarily attributed to $0.6 million in reductions in SG&A expenses at RPG compared to the nine months ended September 30, 2007 including reductions in headcount, freight and facility costs, partially offset by an increase in bad debt expense. Although revenues declined $3.7 million in the nine months ended September 30, 2008 versus the same period in 2007, gross profits were down only $0.2 million and gross profit margins increased from 24.5% in the nine months ended September 30, 2007 to 26.6% in the nine months ended September 30, 2008.

Corporate

Corporate overhead costs of $3.0 million for the nine months ended September 30, 2008 represented a 44.9% decease from $5.4 million for the nine months ended September 30, 2007. The decrease in costs of $2.4 million is primarily the result of headcount reductions and the related travel and benefits costs, closure of the Company’s former corporate headquarters in Los Angeles and reductions in marketing and telecommunications expenses. The Company also revised the settlement agreement related to the Williams matter which resulted in a reduction in expenses of $0.2 million

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):


	September 30		December 31
	2008		2007
Cash and cash equivalents	$	1,331	$	409
Net working capital	$	13,090	$	9,983
Current ratio		1.91		1.23
Long-term liabilities to capitalization		91.6		75.0	%
Shareholders’ equity per share	$	0.15	$	0.55
Days’ sales in receivables		50		54

The Company’s Statements of Cash Flows reflect the Company’s SkyTel division as discontinued operations. The SkyTel division was acquired on January 31, 2007, and therefore the cash flows from discontinued operations disclosed relate only to the SkyTel division.

For the nine months ended September 30, 2008, net cash used in operating activities totaled $4.7 million, consisting of $2.7 million used in operating activities for continuing operations and $2.0 million used in operating activities for discontinued operations (the Company’s SkyTel division). The net cash used in operating activities for continuing operations is primarily the result of a loss of $2.3 million, a decrease in accounts payable and accrued liabilities of $5.2 million and a decrease in accounts receivable of $1.3 million, partially offset by non-cash expenses of $3.2 million and an increase in inventory of $2.9 million. The net cash used in operating activities for discontinued operations is primarily the result of a loss from discontinued operations of $1.7 million, reductions in accounts payable and accrued liabilities of $7.8 million and an increase in inventory of $0.3 million, partially offset by non-cash expenses of $3.9 million and a reduction in accounts receivable of $3.9 million. Net cash provided by investing activities totaled $11.7 million, including $0.3 million used in investing activities for continuing operations and $11.9 million provided by investing activities for discontinued operations. Cash used in investing activities for continuing operations consisted of $0.8 million in purchases of fixed assets partially offset by $0.5 million in proceeds from a life insurance policy. Cash provided by investing activities for discontinued operations consisted of $13.0 million in cash proceeds, including $7.0 million from the sale of the SkyGuard and FleetHawk products lines to SkyGuard LLC in February 2008 and $6.0 million from the sale of the remainder of the SkyTel business to Velocita Wireless in June 2008, partially offset by $1.0 million in purchases of fixed assets (primarily pagers which are rented to customers.) Cash used in financing activities totaled $6.1 million, consisting of $5.8 million used in financing activities for continuing operations, including $4.8 million to pay down the revolving line of credit, $0.8 million for payments of floor plan payables $0.1 million in debt acquisition costs and $0.1 million in capital lease payments, and $0.3 million used in financing activities for discontinued operations related to payments of capital lease obligations.

For the nine months ended September 30, 2007, net cash provided by operating activities totaled $8.4 million, consisting of $5.6 million used in operating activities for continuing operations and $14.0 million provided by operating activities for discontinued operations. The cash used in operating activities for continuing operations is primarily the result of a loss of $8.7 million after the removal of a gain on sale of assets of $2.0 million and a reduction in accounts payable and accrued liabilities of $3.0 million, partially offset by an increase in non-cash expenses of $4.5 million (including an increase in the provision for losses on accounts receivable primarily related to the receivable from SunRocket), a decrease in inventory of $1.4 million and a reduction in accounts receivable of $0.2 million . Net cash used in investing activities totaled $34.8 million, consisting of $2.1 million provided by investing activities for continuing operations and $36.9 million used in investing activities for discontinued operations. The cash provided by investing activities for continuing operations consisted of $2.0 million in proceeds from the sale of a building and $0.9 million in cash proceeds from the sale of assets at the Springfield call center in the third quarter of 2007, partially offset by $0.8 million in purchases of fixed assets. The cash used in investing activities for discontinued operations consisted of $33.0 million related to the acquisition of SkyTel (including deal and restructuring costs and payment of a working capital adjustment) and $3.9 million in purchases of fixed assets (primarily pagers which are rented to customers.) Net cash provided by financing activities totaled $23.1 million, primarily the result of proceeds received from the revolving credit facility of $11.4 million and the convertible note of $10.0 million in conjunction with the acquisition of SkyTel and proceeds from floor plan facilities totaling $2.4 million, partially offset by debt issue costs of $0.8 million.

Secured Credit Facility with Wells Fargo Foothill

As of September 30, 2008, we had no balance outstanding under our revolving credit facility, as amended (the “Revolver”) with Wells Fargo Foothill, N.A. After the completion of the sale of remaining SkyTel business, we paid down all of the indebtedness under the Revolver using the funds received from the sale. The Revolver is secured by a lien on substantially all of our assets.

Additional advances under the Revolver (collectively, the “Advances”) will be available to the Company, up to the aggregate $10 million credit limit, subject to restrictions based on the borrowing base. The Advances may be used to finance ongoing working capital, capital expenditures and general corporate needs of the Company. Advances made under the Revolver 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, plus a 1.25% 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 2.75% 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, the Company is obligated to pay a prepayment premium.

Convertible Note Held By Newcastle

In order to complete the financing of the Company’s acquisition of SkyTel, the Company issued to Newcastle a convertible subordinated pay-in-kind promissory Note (the “Convertible Note”) with a principal amount of $10 million dollars on January 31, 2007. The Convertible Note was amended on June 13, 2008. The Convertible Note is secured by a junior lien on substantially all of our assets. The outstanding principal balance and/or accrued but unpaid interest on the Convertible Note is convertible at any time by Newcastle into shares of our common stock at a conversion price (the “Conversion Price”) of $0.20 per share, subject to adjustment. The Convertible Note accrues interest at 4%, subject to adjustment in certain circumstances, which interest accretes as principal on the Convertible Note as of each quarterly interest payment date. In connection with execution of the amended Convertible Note, and subject to certain conditions, the Company has agreed to appoint such number of director designees of Newcastle such that Newcastle’s designees constitute 50% of the then outstanding current members of the Company’s Board of Directors (or, if the number of members of the Board of Directors is an odd integer, such number of Newcastle designees equal to the lowest integer that is greater than 50% of the then outstanding members.) 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 (8%) following January 31, 2009 if the weighted average market price of the Company’s common stock is greater than 200% of the Conversion Price. The Convertible Note matures on January 31, 2017. The Company has the right to prepay the Convertible Note at an amount equal to 105% of outstanding principal after January 31, 2010 so long as a weighted average market price of the Company’s common stock is greater than 200% of the Conversion Price ($0.40). As of September 30, 2008, the outstanding principal balance and accrued but unpaid interest on the Convertible Note was $11.3 million.

The Company believes that sufficient cash resources exist for the foreseeable future to support its operations and commitments through cash generated by operations, additional proceeds from the sale of the SkyTel division and Advances under the Revolver. Management continues to evaluate its options in regard to obtaining additional financing to support future growth.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commercial Commitments

In the first quarter of 2008 the Company entered into two leases to finance the acquisition of hardware and software for a telephone system upgrade. These leases are accounted for as capital leases were recorded on the Consolidated Condensed Balance Sheet at approximately $253,000 (includes present value of interest payments). Other than the leases described in this paragraph and the modification to the debt agreement described in Note 4, 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 Form 10-K for the year ended December 31, 2007.


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 nine months ended September 30, 2008, a 1% increase in the variable rate would increase annual interest expense by approximately $23,000.


Item 4.		*Controls and Procedures*

Our management, with the participation of our Interim Chief Executive Officer and our President 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 September 30, 2008. Based on this evaluation, the Company’s Interim Chief Executive Officer and President and Chief Financial Officer concluded that, as of September 30, 2008, our disclosure controls and procedures are effective. Our disclosure controls and procedures are (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our Interim Chief Executive Officer and President and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) intended to 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 September 30, 2008 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 — 11 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, 2007. 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, 2007, 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

(d) None


Item 3.		*Defaults Upon Senior Securities*

None


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

None


Item 5.		*Other Information*

None


Item 6.		*Exhibits*

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, President and 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, President and 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.


	Page
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)		3
Consolidated Condensed Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007		4
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)		5
Notes to Consolidated Condensed Financial Statements (unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		22
PART II OTHER INFORMATION		22
Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Submission of Matters to a Vote of Security Holders		23
Item 5. Other Information		23
Item 6. Exhibits		23
SIGNATURES		24
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	BELL INDUSTRIES, INC.
Dated: November 14, 2008	By:	/s/ Clinton J Coleman
		Clinton J. Coleman
		Interim Chief Executive Officer (authorized officer of registrant)


Dated: November 14, 2008	By:	/s/ Kevin J. Thimjon
		Kevin J. Thimjon
		President and Chief Financial Officer (principal financial and accounting officer)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents