UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number 1-13783

Integrated Electrical Services, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (713) 860-1500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o          No þ

      If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     Yes o          No þ

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

      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 checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

      As of December 9, 2005, there were outstanding 39,280,637 shares of common stock of the Registrant. The aggregate market value of the voting stock of the Registrant on March 31, 2005 held by non-affiliates was approximately $97 million.

FORM 10-K

INTEGRATED ELECTRICAL SERVICES, INC.

Table of Contents

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      This Annual Report on Form 10-K includes certain statements that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company’s expectations and involve risks and uncertainties that could cause the Company’s actual results to differ materially from those set forth in the statements. Such risks and uncertainties include, but are not limited to, the Company’s inability to complete a financial restructuring on terms acceptable to the Company or at all, the Company’s ability to continue as a going concern, the inherent uncertainties relating to estimating future operating results or our ability to generate sales, operating income, or cash flow, potential difficulty in addressing a material weakness in the Company’s accounting systems that has been identified by the Company and its independent auditors, potential limitations on our ability to access the credit line under our credit facility, litigation risks and uncertainties, fluctuations in operating results because of downturns in levels of construction, inaccurate estimates used in entering into and executing contracts, difficulty in managing the operation of existing entities, the high level of competition in the construction industry both from third parties and ex-employees, changes in interest rates that could effect the level of construction, the general level of the economy, increases in costs or limitations on availability of labor, steel, copper and gasoline, limitations on the availability and the increased costs of surety bonds required for certain projects, inability to reach agreements with our surety companies to provide sufficient bonding capacity, risk associated with failure to provide surety bonds on jobs where we have commenced work or are otherwise contractually obligated to provide surety bonds, loss of key personnel, business disruption and costs associated with the Securities and Exchange Commission investigation, class-action litigation or shareholder derivative action now pending, unexpected liabilities associated with warranties or other liabilities attributable to the retention of the legal structure or retained liabilities of business units where we have sold substantially all of the assets, inability to fulfill the terms or meet the required financial covenants of the credit facility, difficulty in integrating new types of work into existing subsidiaries, inability of subsidiaries to incorporate new accounting, control and operating procedures, inaccuracies in estimating revenues and percentage of completion on contracts, disruptions or inability to effectively manage work related to Hurricane Katrina and Rita and the expected increase in construction, the Company’s failure to satisfy the listing requirements of the NYSE, the suspension from trading of the Company’s common stock on the NYSE the NYSE’s commencement of efforts to de-list the Company’s common stock and the Company’s potential failure to appeal these efforts successfully, inability to reach agreement with our senior lender on amendments to the credit facility before December 31, 2005, if delisted from the NYSE and the senior unsecured noteholders demand repayment of their notes the Company’s potential inability to pay the debt and accrued interest, inability to modify, restructure or replace the Company’s substantial debt; inability to successfully restructure our operations to reduce operating losses; a material default in one or more of the Company’s credit agreements which is not waived or rectified and unexpected weather interference. You should understand that the foregoing as well as other risk factors discussed in this document, including those listed under the heading “Risk Factors” could cause results to differ materially from those expressed in such forward looking statements. We undertake no obligation to publicly update or revise information concerning the Company’s restructuring efforts, borrowing availability, its cash position or any forward-looking statements to reflect events or circumstances that may arise after the date of this report.

PART I

      In this annual report, the words “IES”, the “Company”, “we”, “our”, “ours”, and “us” refer to Integrated Electrical Services, Inc. and, except as otherwise specified herein, to our subsidiaries. Our fiscal year ends on September 30.

      We are a leading provider of electrical contracting services in the United States. We provide a broad range of services including competitive bid design, building, maintaining and servicing electrical, data communications and utilities systems for commercial, industrial and residential customers.

      Our electrical contracting services include design of the electrical distribution systems within a building or complex, procurement and installation of wiring and connection to power sources, end-use equipment and fixtures as well as long-term contract maintenance. We service commercial, industrial, and residential markets and have a diverse customer base including: general contractors; property managers and developers; corporations; government agencies and municipalities; and homeowners. We provide services for a variety of projects including: high-rise residential and office buildings, power plants, manufacturing facilities, municipal infrastructure and health care facilities and residential developments. We also offer low voltage contracting services as a complement to our electrical contracting business. Our low voltage services include design and installation of external cables for corporations, universities, data centers and switching stations for data communications companies as well as the installation of fire and security alarm systems. Our utility services consist of overhead and underground installation and maintenance of electrical and other utilities transmission and distribution networks, installation and splicing of high-voltage transmission and distribution lines, substation construction and substation and right-of-way maintenance. Our maintenance services generally provide recurring revenues that are typically less affected by levels of construction activity. We focus on projects that require special expertise, such as design-and-build projects that utilize the capabilities of our in-house engineers or projects that require specific market expertise such as hospitals or power generation facilities, as well as service, maintenance and certain renovation and upgrade work, which tends to either be recurring, have lower sensitivity to economic cycles, or both.

      Since our incorporation in 1997, we have expanded to approximately 140 locations currently serving the continental 48 states through acquisition and internal growth. From 1995 to 2005, revenues for our businesses increased at a compounded annual growth rate of approximately 4.6%. Since 2003, we continued to focus internally on integrating to our information systems and established a regionally based management structure to enhance operating controls at all levels of our organization, as well as integrating a consolidated procurement program and structure to manage customers and vendors on a national basis.

Going Concern

      Our independent registered public accounting firm, Ernst & Young LLP, included a going concern modification in its unqualified audit opinion on our consolidated financial statements for the fiscal year ended September 30, 2005 included in this Form 10-K as a result of our operating losses during fiscal 2005 and our potential non-compliance with certain debt covenants subsequent to September 30, 2005. We did not include any adjustments to the financial statements included in this Form 10-K to reflect the possible future effects that may result from the uncertainty of our ability to continue as a going concern. We are currently undertaking the following efforts to address this uncertainty, each of which efforts is described in more detail below:

Update on Financial Restructuring

      During 2005, we announced our intention to strengthen and de-lever our balance sheet to improve our overall capital structure. As part of this initiative, we are seeking to reduce our long term debt, which will result in an increase in our free cash flow. By strengthening the balance sheet in this manner, we expect to free up additional liquidity, improve our credit ratings and enhance our surety bonding capability. To facilitate these efforts, on November 2, 2005, we announced that we had retained Gordian Group, LLC as a financial advisor. Gordian Group, LLC is a New York-based investment bank with national expertise in developing capital markets alternatives and providing financial advisory services.

      As a result of the foregoing, we commenced discussions with an ad hoc committee of holders of a substantial portion of our senior subordinated notes due 2009 and our senior convertible notes regarding a consensual restructuring of our debt obligations. On December 14, 2005, we announced that we had reached a non-binding agreement in principle with an ad hoc committee of holders of approximately $101 million, or 58%, of our $172.9 million principal amount of our senior subordinated notes for a potential restructuring pursuant to which the senior subordinated noteholders would receive in exchange for all of their notes shares representing approximately 82% of the common stock of the reorganized company. Holders of our outstanding common stock and management would retain or receive shares representing approximately 15% and 3%, respectively, of the common stock of the reorganized company.

      The agreement in principle contemplates that our customers, vendors and trade creditors would not be impaired by the restructuring and would be paid in full in the ordinary course of business, and that our senior convertible notes with a current aggregate principal amount outstanding of approximately $50 million, would be reinstated or the holders otherwise provided the full value of their note claims. It is also contemplated that our senior bank credit facility would be reinstated or refinanced at the time of the restructuring. Discussions have already begun with the bank with respect to the proposed restructuring.

      If the proposed restructuring were to be consummated, the proposed plan currently contemplates the filing of a pre-packaged Chapter 11 plan of reorganization in order to achieve the exchange of all of the senior subordinated notes for equity. Approval of a proposed plan in a pre-packaged proceeding would require the consent of the holders of at least two-thirds in claim amount and one-half in number of the senior subordinated notes that vote on the plan. We would seek to enter into a plan support agreement with the members of the ad hoc committee and then formally solicit consents to the proposed restructuring from the holders of our senior subordinated notes. We expect to begin the out-of-court solicitation process in January of 2006.

      There is no assurance that we will successfully complete the restructuring contemplated by the agreement in principle, or any other restructuring. At this time neither the agreement in principle nor any other proposed restructuring terms have been agreed to by the requisite holders of the senior subordinated notes, and the senior subordinated noteholders can withhold these consents for any or no reason. The agreement in principle is subject to the negotiation of definitive documentation, approval by the requisite noteholders and a court in a Chapter 11 proceeding and customary closing conditions. Because the agreement in principle is not binding and because there is no assurance it will be consummated, we continue to evaluate other alternatives for restructuring our capital structure. In addition, we may be forced by our creditors to seek the protection of federal bankruptcy law. If we consummate any restructuring, we may do so outside of bankruptcy, or in a pre-packaged Chapter 11 proceeding or in another proceeding under federal bankruptcy law. Any restructuring could cause the holders of our outstanding securities, including our common stock, senior subordinated notes and senior convertible notes, to lose some or all of the value of their investment in our securities. Furthermore, such restructuring could result in material changes in the nature of our business and material adverse changes to our financial condition and results of operations.

      In addition, we have previously announced that, as of December 5, 2005, our 30-trading day average stock price was below $1.00, that we have has failed or may fail to meet other published requirements for the

continued listing of its common stock on the NYSE, including the exchange’s market capitalization requirements. On December 15, 2005, the NYSE suspended trading of our common stock, and notified us that it intends to de-list our common stock, subject to our right to appeal in accordance with the NYSE’s rules. We currently intend to appeal this determination by the NYSE, which process would likely take in excess of 35 business days from December 16, 2005, which is the day we received written notice from the NYSE of its intent to de-list our common stock. If we do not succeed in appealing this determination by the NYSE, the NYSE has indicated that it will promptly request the SEC to de-list our common stock. If our common stock is de-listed from the NYSE, the holders of our senior convertible notes would have the right, beginning 35 business days after de-listing, to put their notes back to us. We would likely not be able to pay the principal and accrued interest on those notes if put to us. Additionally, our new credit facility restricts our ability to repurchase these notes. Our inability to repurchase these notes and the limitations in our new credit facility to repurchase these notes could affect the success of any plan of reorganization contemplated by us without an agreement with the holders of the senior convertible notes. Absent an agreement with the holders of the senior convertible notes to any pre-packaged Chapter 11 plan that may be filed, we would seek to reinstate their notes or give them property equal to the full value of their note claims. We do not presently have an agreement with any of the holders of the senior convertible notes to the agreement in principle or any other proposed restructuring plan.

     Amendments to the New Credit Facility

      It has been necessary for us to seek amendments of our new credit facility in order to avoid our non-compliance with the fixed coverage ratio set forth in the agreement relating to the new credit facility. We are currently seeking an additional amendment to the new credit facility before December 31, 2005, for the purpose of further amending the applicability of the fixed coverage ratio. We expect to obtain an amendment prior to December 31, 2005.

      Our debt instruments and agreements, including the credit facility, the senior subordinated notes, the senior convertible notes and our agreement with our primary surety bonding company, contain cross-default provisions whereby an uncured and unwaived event of default under one will result in an event of default under each of the others. In such event, the lenders under these instruments and agreements may exercise their remedies thereunder, including causing all outstanding indebtedness to accelerate and become due. If our indebtedness were to become due, as a result of the circumstances described above or any other reason, we do not have the necessary cash to repay our indebtedness. This may cause our creditors to force us into an involuntary bankruptcy under the federal bankruptcy laws, or may cause us to seek protection from our creditors under these laws unless we reach an agreement with these creditors to the restructuring plan described above or to another mutually agreeable restructuring plan. In accordance with Emerging Issues Task Force (EITF) 86-30, “Classifications of Obligations When a Violation is Waived by the Creditor,” we have classified the long-term portion of senior convertible notes and senior subordinated notes as current liabilities on the balance sheet due to the need to amend our credit facility prior to December 31, 2005 and the potential for cross-defaults described above if we are unsuccessful.

Industry Overview

      Using the most recently available data from McGraw Hill Construction Analytics, (“McGraw Hill”) and historical data from EC&M Magazine, we estimate the electrical contracting industry will generate annual revenues in excess of $100 billion in 2005. Data from EC&M Magazine indicates that the electrical contracting industry is highly fragmented, with more than 70,000 companies, most of which are small, owner-operated businesses. This data also indicates that there are only 14 U.S. electrical contractors with revenues in excess of $200 million. McGraw Hill data indicates total construction industry revenues have grown at an average compound rate of approximately seven percent from 1998 through 2004. McGraw Hill forecasts total construction revenues for 2005 through 2010 to continue to grow at a more conservative pace of approximately four percent annually.

      During the last decade, electrical contractors have experienced a growing demand for their services as a result of more stringent electrical codes, increased use of electrical power, increased demand for bandwidth,

demand for bundled services, and construction of smart houses with integrated audio, video, computer, temperature control and security systems. Additionally, residential construction spending continues to achieve record levels. This overall construction market, while up in 2005 over the past three years, had been depressed due to decreased commercial and industrial construction spending.

Competitive Strengths

      Our competitive strengths include the following:

Strategy

      Prior to fiscal 2005, we had been implementing a three-phase strategy.

      Phase one, “Back to Basics”, emphasized basic business fundamentals of increasing backlog, controlling costs and generating positive cash flow. We continue to focus on these fundamentals.

      Phase two, “One Company. One Plan.”, focused on processes and systems necessary to integrate various decentralized business units. This phase included additional financial reporting and planning processes through the implementation of a common information system that is now substantially complete. We also created company wide employee programs such as healthcare, incentive compensation and project manage-

ment training. This was in addition to promoting a culture of safe work practices improving our recordable accidents to less than half the industry average and tracking procurement spending with national vendors centrally for negotiated savings. We are focused on developing stronger national customer relationships.

      Phase three, “Continued Growth”, was designed to expand the businesses internally and via selective acquisitions. This phase was to be achieved primarily through internal growth in select markets and by increasing service offerings and market share. We did purchase one company in February 2003. However, we do not currently intend to grow through external growth. We have put our growth strategy on hold to focus on our core profitability and capital efficiency.

      In fiscal 2005, we turned our strategy to the operating and capital efficiency of our units and the overall capital structure of the firm.

      During October 2004 we began a process to strategically review the performance of each of our 49 business units over the last three years. We analyzed the financial performance of each unit with particular emphasis on the relative consistency of its results, returns on invested capital (unit level working capital and fixed assets), the required invested capital at each unit including capital costs associated with surety bonding, construction spending and growth trends in each geographical market, and management strength.

      Based on this review, we determined that certain businesses did not meet our criteria. We decided to sell or close these units in order to improve the overall profitability and capital efficiency of the company. During fiscal 2005, we sold 13 units and closed two others. These units produced revenues and operating income during fiscal 2004 of approximately $244.3 million and $8.6 million (before considering the impact of goodwill), respectively. The sales generated $54.1 million in total consideration comprised of $48.0 million in cash, $2.3 million in notes receivable and $3.8 million in retained assets and receivables.

      Additionally in fiscal 2005, we began the implementation of a process known to us as Successful Projects to bring consistency and standardization to the bidding, execution and estimates to completion processes surrounding our work. Successful Projects is designed to position the company for profitable growth and more consistent earnings.

      In the third quarter of fiscal 2005, we initiated Successful Projects and began to use an internally developed process for estimating and job tracking by breaking larger jobs into smaller components. By estimating jobs in smaller components, using expected material usage to determine expected labor needs, we expect to realize the following benefits:

      The Successful Projects program has been initiated in all business units as of the fiscal year end 2005 and is being utilized for estimating new jobs. Successful Projects is also expected to improve the quality of backlog. Our ability to estimate more accurately should improve our ability to realize margin as projected.

      As further described above under “Update on Financial Restructuring,” during fiscal 2005, we announced our plan to strengthen and de-lever our balance sheet to improve our overall capital structure. We expect that any restructuring of our capital structure would de-lever, and therefore strengthen, our balance sheet, including the proposed restructuring set forth in our non-binding agreement in principle with the ad hoc committee of noteholders described above. The proposed restructuring, if consummated, would result in our $172.9 million principal amount senior subordinated notes being exchanged for common stock, for our senior convertible notes to be reinstated or the holders otherwise provided the full value of their note claim and for the reinstatement or refinancing of our bank credit facility. In addition, as described above, the agreement in principle contemplates that our customers, vendors and trade creditors would not be impaired by the

restructuring and would be paid in full in the ordinary course of business. Although we expect to begin an out-of-court solicitation process in January 2006, there is no certainty as to when or if any financial restructuring will be consummated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Update on Financial Restructuring” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Outlook” below for a further discussion of the proposed financial restructuring and its potential impact on our business, financial condition and results of operation.

The Markets We Serve

      Commercial and Industrial Market. Our commercial and industrial work consists primarily of electrical, communications, utility installations and upgrade, renovation, replacement and service and maintenance work in:

      Our commercial and industrial customers include:

      Demand for our commercial and industrial services is driven by construction and renovation activity levels, as well as more stringent local and national electrical codes. From fiscal 1995 through 2005, our pro forma combined revenues from commercial and industrial work has grown at a compound annual rate of approximately 2.7% per year. According to McGraw Hill data the non-residential construction industry has grown from 1995 to 2005 at a compound annual rate of approximately 4.0% per year. Commercial and industrial work represented approximately 79%, 76% and 71% of our revenues for the years ended September 30, 2003, 2004 and 2005, respectively. Pro forma combined revenues include revenues generated by our subsidiaries prior to acquisition by us. For additional segment information for each of the three years ended September 30, 2005, see Note 9 to the Consolidated Financial Statements.

      New commercial and industrial work begins with either a design request or engineer’s plans from the owner or general contractor. Initial meetings with the parties allow us to prepare preliminary, detailed design specifications, engineering drawings and cost estimates. Projects we design and build generally provide us with higher margins. “Design and build” gives full or partial responsibility for the design specifications of the installation. Design and build is an alternative to the traditional “plan and spec” model, where the contractor builds to the exact specifications of the architect and engineer. We prefer to perform design and build work, because it allows us to use past experience to install a more cost effective project for the customer with higher profitability to us. Once a project is awarded, it is conducted in scheduled phases and progress billings are rendered to our customer for payment, less retention of 5% to 10% of the construction cost of the project. We

generally provide the materials to be installed as a part of these contracts, which vary significantly in size from a few hundred dollars to several million dollars and vary in duration from less than a day to more than a year. Actual fieldwork is coordinated during this time, including:

      Our size enables us to effectively prefabricate significant portions of certain projects at an alternative site and drop ship materials in specific sequences. Prefabrication allows us to optimize materials management and minimize the amount of time specialized employees spend on the job site, as well as minimizing the overall time it takes to complete a project because working in a controlled assembly environment is more efficient than preparing all materials on site.

      Our service and maintenance revenues are derived from service calls and routine maintenance contracts, which tend to be recurring and less sensitive to economic fluctuations. Service and maintenance is supplied on a long-term and per-call basis. Long-term service and maintenance is provided through contracts that require the customer to pay an annual or semiannual fee for periodic diagnostic services at a specific discount from standard prices for repair and replacement services. Per-call service and maintenance is initiated when a customer requests emergency repair service. Service technicians are scheduled for the call or routed to the customer’s residence or business by the dispatcher. We will then follow up with the customer to schedule periodic maintenance work. Most service work is warranted for thirty days. Service personnel work out of our service vehicles, which carry an inventory of equipment, tools, parts and supplies needed to complete the typical variety of jobs. The technician assigned to a service call:

      We design and install communications and utility infrastructure systems and low voltage systems for the commercial and industrial market as a complement to our primary electrical contracting services. We believe the demand for our communications services is driven by the following factors: the pace of technological change; the overall growth in voice and data traffic; and the increasing use of personal computers and modems, with particular emphasis on the market for broadband internet access. Demand for our utilities services is driven by industry deregulation, limited maintenance or capital expenditures on existing systems and increased loads and supply and delivery requirements. Demand for our low voltage systems is driven by the construction industry growth rate and our ability to cross-sell among our customers.

      Residential Market. Our work for the residential market consists primarily of electrical installations in new single-family housing and low-rise, multi-family housing, for local, regional and national homebuilders and developers. We believe demand for our residential services is dependent on the number of single-family and multi-family home starts in the markets we serve. Single-family home starts are affected by the level of interest rates and general economic conditions. A competitive factor particularly important in the residential market is our ability to develop relationships with homebuilders and developers by providing services in multiple areas of their operations. This ability has become increasingly important as consolidation has occurred in the residential construction industry and homebuilders and developers have sought out service providers that can provide consistent service in all of their operating regions.

      We are currently one of the largest providers of electrical contracting services to the U.S. residential construction market. Our residential business has experienced significant growth. Our pro forma combined revenues from residential electrical contracting have grown at a compound annual rate of approximately 11.3% from fiscal 1995 through 2005 compared to an industry average of approximately 11.1% over the same period

according to McGraw Hill. Residential electrical contracting represented approximately 21%, 24% and 29% of our revenues for the years ended September 30, 2003, 2004 and 2005, respectively.

      New residential installations begin with a builder providing potential subcontractors the architectural or electrical drawings for the residences within the tract being developed. We typically submit a bid or contract proposal for the work. Our personnel analyze the plans and drawings and estimate the equipment, materials and parts and the direct and supervisory labor required to complete the project. We deliver a written bid or negotiate an arrangement for the job. The installation work is coordinated by our field supervisors and the builders’ personnel. Payments for the project are generally obtained within 30 days, at which time any mechanics’ and materialmen’s liens securing these payments are released. Interim payments are often obtained to cover labor and materials costs on larger projects.

      The residential business is generally more profitable and less capital intensive than our commercial and industrial business and has a much lower surety bonding need. For additional segment information for each of the three years ended September 30, 2005, see Note 9 to the Consolidated Financial Statements. Our results of operations from residential construction are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues during fall and winter.

Customers

      We have a diverse customer base. We intend to continue our emphasis on developing and maintaining relationships with our customers by providing superior, high-quality service. During the years ended September 30, 2003, 2004, and 2005, no single customer accounted for more than 10% of our revenues.

Company Operations

      Employee Screening, Training and Development. We are committed to providing the highest level of customer service through the development of a highly trained workforce. Employees are encouraged to complete a progressive training program to advance their technical competencies and to ensure that they understand and follow the applicable codes, our safety practices and other internal policies. We support and fund continuing education for our employees, as well as apprenticeship training for technicians under the Bureau of Apprenticeship and Training of the Department of Labor and similar state agencies. Employees who train as apprentices for four years may seek to become journeymen electricians and, after additional years of experience, master electricians. We pay progressive increases in compensation to employees who acquire this additional training, and more highly trained employees serve as foremen, estimators and project managers. Our master electricians are licensed in one or more cities or other jurisdictions in order to obtain the permits required in our business. Some employees have also obtained specialized licenses in areas including security systems and fire alarm installation. In some areas, licensing boards have set continuing education requirements for maintenance of licenses. Because of the lengthy and difficult training and licensing process for electricians, we believe that the number, skills and licenses of our employees constitute a competitive strength in the industry.

      We actively recruit and screen applicants for our technical positions and have established programs in some locations to recruit apprentice technicians directly from high schools and vocational technical schools. Prior to hiring new employees, we assess their technical competence level, confirm background references and conduct drug testing.

      Materials and Supplies. As a result of economies of scale, we believe we have been able to purchase equipment, parts and supplies at discounts to prices made available to our smaller competitors. In addition, as a result of our size, we are able to lower our costs for (i) the purchase or lease of vehicles; (ii) property, casualty and liability insurance; (iii) health insurance and related benefits; (iv) retirement benefits administration; and (v) office and computer equipment.

      Substantially all the equipment and component parts we sell or install are purchased from manufacturers and other outside suppliers. We are not materially dependent on any one of these outside sources for our supplies.

      Control and Information Systems. We are committed to performing those controls and procedures that improve our efficiency and the monitoring of our operations. We are substantially complete in deploying a standard Enterprise Resource Planning (“ERP”) software to all of our operating companies. We believe ERP applications are paramount to a growing business with our diverse geographic platform. Additionally, we have implemented a financial reporting and planning application to complement the ERP application that provides a uniform structure and analytical tools for the reporting process. This application was utilized for our 2003, 2004 and 2005 planning processes. We now have only two operating companies to implement the ERP and we expect to be completed by the end of the second quarter of fiscal year 2006. Implementation of this ERP system and the complementary financial reporting application allows us to obtain more timely results of operating performance and perform more detailed analyses. In addition to our ERP system, other controls and procedures we have in place include:

Successful Projects

      We implemented the process known to us as Successful Projects to bring consistency and standardization to the bidding, execution and estimates to completion processes surrounding our contracts. Successful Projects is designed to position the company for profitable growth and more consistent earnings.

      The Company began to use a system developed within partner companies to implement an estimating and job tracking system to break larger jobs into smaller components. By estimating jobs in smaller components, first based on expected material usage and then determining expected labor needs, we expect to realize the following benefits:

      Our goal with Successful Projects is to improve consistency of earnings by raising both the accuracy of estimates and resolving shortfalls in profitability early in the project. The Successful Projects program has been initiated in all partner companies as of the fiscal year end 2005 and is being utilized for estimating new jobs. Successful Projects is also expected to improve the quality of backlog. Our ability to estimate more accurately should improve our ability to realize margin as projected.

Competition

      The electrical contracting industry is highly fragmented and competitive. Most of our competitors are small, owner-operated companies that typically operate in a limited geographic area. There are few public

companies focused on providing electrical contracting services. In the future, we may encounter competition from new market entrants. Competitive factors in the electrical contracting industry include:

Regulations

      Our operations are subject to various federal, state and local laws and regulations, including:

      We believe we have all licenses required to conduct our operations and are in substantial compliance with applicable regulatory requirements. Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses or an inability to perform government work.

      Many state and local regulations governing electricians require permits and licenses to be held by individuals. In some cases, a required permit or license held by a single individual may be sufficient to authorize specified activities for all our electricians who work in the state or county that issued the permit or license. It is our policy to ensure that, where possible, any permits or licenses that may be material to our operations in a particular geographic area are held by multiple IES employees within that area.

Risk Management and Insurance

      The primary risks in our operations include health, bodily injury, property damage and injured workers’ compensation. We maintain automobile and general liability insurance for third party health, bodily injury and property damage and workers’ compensation coverage, which we consider appropriate to insure against these risks. Our third-party insurance is subject to large deductibles for which we establish reserves and, accordingly, we effectively self-insure for much of our exposures.

Employees

      At September 30, 2005, we had approximately 8,900 employees. We are not a party to any collective bargaining agreements with our employees. We believe that our relationship with our employees is satisfactory.

Available Information

      We file our interim and annual financial reports, as well as other reports required by the Securities Exchange Act of 1934 with the United States Securities and Exchange Commission (the “SEC”). Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports are free of charge through our website at www.ies-co.com as soon as it is reasonably practicable after we file them with, or furnish them to, the SEC.

      We have adopted a Code of Ethics for Financial Executives, a Code of Business Conduct and Ethics for directors, officers and employees (the legal Compliance and Corporate Policy Manual) and established Corporate Governance Guidelines and adopted charters outlining the duties of the Company’s Audit, Human Resources, and Compensation and Nominating/ Governance Committees, copies of which may be found on our website at www.ies-co.com. Paper copies of these documents are also available free of charge upon written request to us. We have designated an “audit committee financial expert” as that term is defined by the SEC. Further information about this designee may be found in the Proxy Statement for the Annual Meeting of Stockholders of the Company.

RISK FACTORS

      You should consider carefully the risks described below, as well as the other information included in this document before making an investment decision. Our business, results of operations or financial condition could be materially and adversely affected by any of these risks, and the value of your investment may decrease due to any of these risks.

      We have reached a non-binding agreement in principle with an ad hoc committee of holders of approximately 58% of outstanding principal amount of our senior subordinated notes for a potential restructuring, pursuant to which our senior subordinated notes would be exchanged for approximately 82% of the common stock of the reorganized company. While our negotiations with these noteholders is ongoing and their outcome is uncertain this exchange could be materially adverse to the holders of such notes. In addition, holders of our outstanding common stock would be substantially diluted pursuant to the proposed restructuring and may lose a significant portion of the value of their investment in our common stock.

      The completion of our initiative to de-lever our balance sheet will require support from our creditors. If it is implemented pursuant to a bankruptcy proceeding, as currently proposed, consummation of any plan of reorganization will require a favorable vote by certain impaired classes of creditors, satisfaction of certain bankruptcy law requirements and confirmation by the bankruptcy court, which, as a court of equity, may exercise substantial discretion and choose not to confirm the plan. If the proposed restructuring, our initiative and/or any plan of reorganization does not receive the requisite support, our financial condition and the value of our securities will likely be materially adversely affected.

      Because the agreement in principle for the proposed restructuring is not binding and because there is no assurance it will be consummated, we continue to evaluate other alternatives for restructuring our capital structure. The uncertainty as to whether, how and when our restructuring may be consummated may cause concern in the marketplace among customers or vendors. If that concern results in the changing of payment or credit terms to us or our subsidiaries then our results from operations may be significantly affected. If a sufficient percentage of such constituencies were to make changes the Company may be forced to seek protection of the federal bankruptcy laws to manage the exposure. If we consummate any restructuring, we may do so outside of bankruptcy, or in a pre-packaged Chapter 11 proceeding or in another proceeding under federal bankruptcy law. As compared to a pre-packaged Chapter 11 proceeding, a non pre-packaged bankruptcy proceeding would likely be lengthier, involve more contested issues with creditors and other parties in interest and result in significantly increased administrative expenses, a negative impact on cash flow due to weakened trade and customer relations and a corresponding reduction in the consideration received by holders of unsecured or undersecured claims. Any of these alternatives may be potentially materially adverse to the holders of our common stock and our other securities, including our senior convertible notes and our senior subordinated notes, and may cause holders of our common stock and our other securities to lose a significant portion of the value of their investment in us.

      We have a substantial amount of indebtedness outstanding under our senior subordinated notes, senior convertible notes and new credit facility. If we are unable to service our indebtedness or refinance our indebtedness on acceptable terms, it may be necessary for us to seek protection from our creditors under federal bankruptcy laws unless we reach an agreement with our creditors to the proposed restructuring plan or to another mutually agreeable restructuring plan. We cannot assure you that we will be able to consummate a

restructuring plan on terms acceptable to us or at all. Our next interest payment on our senior subordinated notes is February 1, 2006, on which date we will owe approximately $8.1 million in accrued interest to the holders of these notes, and there is no assurance that we will be able to make this interest payment when due. It has been necessary for us to seek amendments of our new credit facility in order to avoid our non-compliance with the fixed coverage ratio set forth in the agreement relating to the new credit facility. We will need to seek an additional amendment to the new credit facility before December 31, 2005, for the purpose of further amending the applicability of the fixed coverage ratio. If we are not able to satisfy the fixed coverage ratio or secure further amendments when necessary, we will be in default under the new credit facility. A default under the credit facility that is not cured or waived within 30 days would also result in defaults under our senior subordinated notes and senior convertible notes, which would cause the outstanding indebtedness under the new credit facility, senior subordinated notes and senior convertible notes to accelerate and become due. It would also be a default under our agreement with our primary surety bonding company. We do not have the necessary cash to repay our indebtedness if it were to become due and would likely have to seek protection from our creditors under federal bankruptcy laws unless we reach an agreement with our creditors to the proposed restructuring plan or to another mutually agreeable restructuring plan. Filing of bankruptcy would also be a “Fundamental Change” under our senior convertible notes. Please see “Management’s Discussion and Analysis — Liquidity and Capital Resources.” Whether or not we file for protection in connection with a pre-package bankruptcy proceeding or otherwise, it is likely that the current holders of our equity securities will lose a significant portion of their value as a result of the dilution that will result from the claims of our more senior stakeholders.

      As of December 5, 2005, our 30-trading day average stock price was below $1.00 and we had failed to meet other published requirements for the continued listing of our common stock on the NYSE, including the exchange’s market capitalization requirement. On December 15, 2005, the NYSE suspended trading of our common stock, and notified us orally that it intended to de-list our common stock, subject to our right to appeal in accordance with the NYSE’s rules. We intend to appeal this determination by the NYSE, which process would likely take in excess of 35 business days from December 16, 2005, which is the day we received written notice from the NYSE of its intent to de-list our common stock. If we do not succeed in appealing this determination by the NYSE, the NYSE has indicated that it will promptly request the SEC to de-list our common stock. If our common stock is de-listed from the NYSE, the holders of our senior convertible notes would have the right, beginning 35 business days after de-listing, to put their notes back to us. We would likely not be able to pay the principal and accrued interest on those notes if put to us. Additionally, our new credit facility restricts our ability to repurchase these notes. Our inability to repurchase these notes and the limitations in our new credit facility to repurchase these notes could affect the success of any plan of reorganization contemplated by us without an agreement with the holders of the senior convertible notes. Absent an agreement with the holders of the senior convertible notes to any pre-packaged Chapter 11 plan that may be filed, we would seek to reinstate their notes or give them property equal to the full value of their note claims. We do not presently have an agreement with any of the holders of the senior convertible notes to the agreement in principle or any other proposed restructuring plan.

      Although we do not believe that implementation of our initiative to de-lever our balance sheet will itself result in significant tax liability, the impact on our ability to use existing net operating loss carryovers, built-in losses and other favorable tax attributes following completion of the initiative is uncertain. Limitations on our ability to use such favorable tax attributes could adversely affect our financial position.

      The initiative to de-lever our balance sheet requires a significant percentage of management’s time and attention which distracts them from focusing on the operation of our business. We are incurring additional

costs related our initiative to de-lever our balance sheet, including the fees of the legal and financial advisors we have retained to assist us with this initiative. We will continue to incur additional costs associated with the de-levering of our balance sheet and these costs will negatively impact our cash flows from operations.

      Our independent registered public accounting firm, Ernst & Young LLP, included a going concern modification in its audit opinion on our consolidated financial statements for the fiscal year ended September 30, 2005 included in this Form 10-K as a result of our operating losses during fiscal 2005 and our potential non-compliance with certain debt covenants subsequent to September 30, 2005. The auditors “going concern” opinion will continue at least until they consent to the incorporation by reference of their issued opinion. That may not occur until the next 10-K filing in twelve months. The “going concern” opinion may cause concern in one or more of our constituencies of employees, shareholders, debt holders, customers, vendors, or trade creditors. If any customer’s, vendor’s or trade creditor’s concern changes their business relations with us by stopping work, ceasing sales, requiring sales on cash terms or other changes, these changes may materially adversely affect our cash flows and results of operations.

      Receiving a “Going Concern” opinion is one criteria considered by the NYSE in determining the appropriateness of a delisting.

      Evaluations are made of our internal control over financial reporting and our disclosure controls and procedures, which include a review of the objectives, design, implementation and effect of the controls and the information generated for use in our periodic reports. In the course of our controls evaluation, we sought (and seek) to identify data errors, control problems and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation is conducted on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our periodic reports.

      In connection with management’s evaluation of the effectiveness of our internal control over financial reporting, we determined that a material weakness existed with our internal control over financial reporting which arose from high turnover in an already limited accounting staff and the significant demands on that accounting staff resulting from the issues facing the Company.

      A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be satisfied. Internal control over financial reporting and disclosure controls and procedures are designed to give a reasonable assurance that they are effective to achieve their objectives. We cannot provide absolute assurance that all possible future control issues within our company have been detected. These inherent limitations include the real world possibility that judgments in our decision-making can be faulty, and that isolated breakdowns can occur because of simple human error or mistake. The design of our system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed absolutely in achieving our stated goals under all potential future or unforeseeable conditions. Because of the inherent limitations in a cost-effect control system, misstatements due to error could occur and not be detected.

      Resulting from our inability to file a 10-Q for the quarter ended June 30, 2004 and the associated decline in the trading price of our stock, a series a of class action securities claims were filed and later consolidated into one action pending in Houston, Texas. The case has been fully briefed on the Motion to Dismiss and we are awaiting a ruling by the judge. If the judge does not dismiss the action then further discovery and expenses

would likely occur. We have Directors and Officers insurance that provides coverage for this action. It is difficult to predict liability or any potential range of damages that we might incur in connection with this action. An adverse result could have a material adverse effect on our business, financial condition or cash flows.

      More than half of our business involves the installation of electrical systems in newly constructed and renovated buildings, plants and residences. The construction industry is cyclical and downturns in levels of construction or housing starts could have a material adverse effect on our business, financial condition and results of operations. Our ability to maintain or increase revenues from new installation services will depend on the number of new construction starts and renovations, which will likely correlate with the cyclical nature of the construction industry. The number of new building starts will be affected by local economic conditions, and other factors, including the following:

      Additionally, a majority of our business is focused in the southeastern and southwestern portions of the United States, concentrating our exposure to local economic conditions in those regions. Downturns in levels of construction or housing starts in these geographic areas could result in a material reduction in our activity levels.

      The electrical contracting industry is served by many small, owner-operated private companies, public companies and several large regional companies. We could also face competition in the future from new competitors entering these markets. Electrical contracting has a relatively low capital requirement for entry. Some of our competitors offer a greater range of services, including mechanical construction, facilities management, plumbing and heating, ventilation and air conditioning services. Competition in our markets depends on a number of factors, including price. Some of our competitors may have lower overhead cost structures and may, therefore, be able to provide services comparable to ours at lower rates than we do. If we are unable to offer our services at competitive prices or if we have to reduce our prices to remain competitive, our profitability would be impaired.

      There is a shortage of qualified electricians in the United States. In order to conduct our business, it is necessary to employ electricians and have those electricians qualified in the states where they do business. While overall economic growth has diminished, our ability to increase productivity and profitability may be limited by our ability to employ, train and retain skilled electricians required to meet our needs. Accordingly there can be no assurance, among other things, that:

      Our business is subject to seasonal variations in operations and demand that affect the construction business, particularly in residential construction. Untimely weather delay from rain, ice, cold or snow can not only delay our work but can negatively impact our schedules and profitability by delaying the work of other trades on a construction site. Our quarterly results may also be affected by regional economic conditions that affect the construction market. Accordingly, our performance in any particular quarter may not be indicative of the results that can be expected for any other quarter or for the entire year.

      We currently generate, and expect to continue to generate, more than half of our revenues under fixed price contracts. The cost of gasoline, labor and materials, however, may vary from significantly from the costs we originally estimate. Variations from estimated contract costs along with other risks inherent in performing fixed price contracts may result in actual revenue and gross profits for a project differing from those we originally estimated and could result in losses on projects. Depending upon the size of a particular project, variations from estimated contract costs can have a significant impact on our operating results.

      In order to grow internally, we must expect to expend significant time and effort managing and expanding existing operations. We cannot guarantee that our systems, procedures and controls will be adequate to support expanding operations, including the timely receipt of financial information. Growth imposes significant added responsibilities on our senior management, such as the need to identify, recruit and integrate new senior managers and executives. If we are unable to manage our growth, or if we are unable to attract and retain additional qualified management, our operations could be materially adversely affected. As we have sold companies and consolidated some support functions of human resources, payroll, estimating, safety, accounting, and other administrative support functions it has offered some cost savings. Those savings only arise after the consolidations and after additional time and effort managing that consolidation. The divestitures also result in some increase in non-productive costs such as unused lease facilities and equipment that must be re-deployed or sold.

      Our billings under fixed price contracts are generally based upon achieving certain benchmarks and will be accepted by the customer once we demonstrate those benchmarks have been met. If we are unable to demonstrate compliance with billing requests, or if we fail to issue a project billing, our likelihood of collection could be delayed or impaired, which could have a materially adverse effect on our operations if this occurred over several large projects. As we have had limited surety bond availability some of our customers have increased the normal 5-10% retainage to a higher percentage. This results in a delay in receipt of not only the profit but also working capital expended on the jobs.

      Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to our operational performance, as well as general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

      We cannot provide assurance that our business will generate sufficient cash flow from operations or asset sales and that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before maturity. We cannot provide assurance that we will be able to

refinance any of our indebtedness on commercially reasonable terms or at all. Our inability to refinance our debt on commercially reasonable terms could materially adversely affect our business.

      Our indebtedness could have important consequences. For example, it could:

      We have a substantial amount of indebtedness outstanding under our senior subordinated notes, senior convertible notes and new credit facility. Our next interest payment on our senior subordinated notes is February 1, 2006, on which date we will owe approximately $8.1 million in accrued interest to the holders of these notes, and there is no assurance that we will be able to make this interest payment when due. If we are unable to service our indebtedness or refinance our indebtedness on acceptable terms, it may be necessary for us to seek protection from our creditors under federal bankruptcy law. We may also seek to consummate a restructuring through a pre-packaged Chapter 11 proceeding although we cannot assure you that we will be able to consummate a restructuring plan on terms acceptable to us or at all. In accordance with Emerging Issues Task Force (EITF) 86-30, “Classifications of Obligations When a Violation is Waived by the Creditor,” we have classified the long-term portion of our senior convertible notes and senior subordinated notes as current liabilities on the balance sheet due to the need to amend our credit facility prior to December 31, 2005 and the potential for cross-defaults described above if we are unsuccessful.

      To service our indebtedness, including trade payables, and working capital, we require a significant amount of cash flow, and we cannot assure you that we will have sufficient cash flow to service these liquidity needs and obligations.

      Our cash flow fluctuates seasonally and even daily, sometimes significantly. During our efforts to restructure the company, these fluctuations may increase in amount and may adversely affect our business and our cash flow. In connection with our efforts to restructure the company, some or all of our trade creditors may refuse to extend credit to us or do business with us. If we do not generate sufficient cash flow to pay our trade creditors or if our trade creditors refuse to do business with us on terms acceptable to us or at all, our business, financial condition and results of operations could be materially adversely affected. See “Risk Factors — To service our indebtedness and to fund working capital, we will require a significant amount of cash. Our ability to generate cash depends on many factors.”

      Surety market conditions are difficult as a result of significant losses incurred by many sureties in recent periods, both in the construction industry as well as in connection with certain large corporate bankruptcies particularly for large surety bond needs of a company the size of IES. As a result terms have become more restrictive. Further, under standard terms in the surety market, sureties issue bonds on a project by project basis, and can decline to issue bonds at any time. Historically, approximately 35% of our fixed price contract business has required bonds and presently only about 10% of our work is bonded. While we have enjoyed a longstanding relationship with our surety, current market conditions as well as changes in our surety’s assessment of our operating and financial risk could cause our surety to decline to issue bonds for our work on terms acceptable to IES or even at all. If that were to occur, our alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance such as letters of credit or

cash, providing other forms of assurance such as insurance products or parental guarantees and seeking bonding capacity from other sureties. There can be no assurance that we could achieve these alternatives. Accordingly, if we continue to experience less availability of bonding capacity, our operating results could be adversely impacted by a reduction of revenue.

      At this time, we do not have a commitment from our surety company that it will continue to write bonds for our projects. There are certain situations where, if we are unable to obtain a surety bond, we could be subject to claims or damages. Those situations include projects (i) where bonds are required on the job and we have already begun work and (ii) jobs where the terms of the contract allow the customer to later require a bond even if the bond was not required when work began. If we are unable to obtain a bond in connection with such a project, we could be subject to a damage claim by the customer for the costs of replacing us with another contractor. Customers, however, are often reluctant to replace an existing contractor and may be willing to waive the bonding requirement or, through negotiation, agree to different payment terms.

      In certain cases surety bond companies are willing to provide surety bonds only if cash or letters of credit are provided as collateral. This additional cost, when combined with the costs to perform the work and the practice in the industry of the customer retaining a percentage of the contract amount until the job is completed, can make projects that are subject to this type of collateral requirement not economically viable.

      Our effective tax rate and cash paid for taxes are impacted by numerous tax positions that we have adopted. Taxing authorities may not always agree with the positions we have taken. We believe that we have adequate reserves in the event that a taxing authority differs with positions we have taken, however, there can be no assurance that our results of operations will not be adversely affected.

      When we acquire a business, we record an asset called “goodwill” if the amount we pay for the business, including liabilities assumed, is in excess of the fair value of the assets of the business we acquire. Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” established accounting and reporting requirements for goodwill and other intangible assets. SFAS No. 142 requires that goodwill attributable to each of four reporting units be tested at least annually (absent any impairment indicators). The testing includes comparing the fair value of each reporting unit with its carrying value. Fair value is determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each of the reportable units. On an ongoing basis (absent any impairment indicators), we expect to perform impairment tests at least annually during the first fiscal quarter of each year. Impairment adjustments recognized after adoption, if any, generally are required to be recognized as operating expenses. We cannot assure that we will not have future impairment adjustments to our recorded goodwill.

      Hazards related to our industry include, but are not limited to, electrocutions, fires, machinery caused injuries, mechanical failures or transportation accidents. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and may result in suspension of operations. Our insurance does not cover all types or amounts of liabilities. Our third-party insurance is subject to deductibles for which we establish reserves and, accordingly, we effectively self-insure for much of our exposures. No assurance can be given either that our insurance or our provisions for incurred claims and incurred but not reported claims will be adequate to cover all losses or liabilities we may incur in our operations or that we will be able to maintain adequate insurance at reasonable rates.

      The loss of key personnel or the inability to hire and retain qualified employees could have an adverse effect on our business, financial condition and results of operations. Our operations depend on the continued efforts of our current and future executive officers, senior management and management personnel at the companies we have acquired. We cannot guarantee that any member of management at the corporate or subsidiary level will continue in their capacity for any particular period of time. During these volatile times we have an increased risk of employees departing. If we lose a group of key personnel, our operations could be adversely affected. We do not maintain key man life insurance.

      Our business is primarily driven by labor. The ability to perform contracts at acceptable margins depends on our ability to deliver substantial labor productivity. We cannot guarantee that productivity will continue at acceptable levels at our corporate office and our operating subsidiaries for a particular period of time. With the increased activity of de-levering our balance sheet and the uncertainty in the market there is an increased difficulty in maintaining morale and focus of employees. The loss of productivity could adversely affect the margins on existing contracts or the ability to obtain new contracts.

      In the construction business there are always claims and litigation. Latent defect litigation is a normal course for residential home builders in some parts of the country. There is also the inherent claims and litigation risk of the number of people that work on construction sites and the fleet of vehicles on the road everyday. Those claims and litigation risks are managed through safety programs, insurance programs, litigation management at the corporate office and the local level and a network of attorneys and law firms throughout the country. Nevertheless, claims are sometimes made and lawsuits filed and some for amounts in excess of their value or amounts for which they are eventually resolved. Claims and litigation normally follow a predictable course of time to resolution. Because of the large number of claims of a company with so many contracts and employees, there can be periods of time where a disproportionate amount of the claims and litigation may come to the point of resolution through the court system, arbitration, mediation, or settlement all in the same quarter or year. If these matters resolve near the same time then the cumulative effect can be higher than the ordinary level in any one reporting period.

      Independent of the normal litigation risks, as a result IES’ inability to timely file its third quarter Form 10-Q and the subsequent events, a class action lawsuit has been filed, a shareholder derivative action has been filed and a formal SEC investigation is ongoing. Those matters are discussed in more detail in Item 3 of this document.

      We determined to sell all or substantially all of the assets of certain wholly owned subsidiaries. Those sales were made to facilitate the business needs and purposes of the organization as a whole. Since we were a consolidator of electrical contracting businesses, often the best candidate to purchase those assets was a previous owner of those assets. That previous owner may sometimes still be associated with the subsidiary as an officer of that subsidiary. To facilitate the desired timing, the sales were being made with more than ordinary reliance on the representations of the purchaser, who is often the person most familiar with the business unit being sold. There is the potential in retaining the company structure that if the purchaser is unwilling or unable to perform the transferred liabilities, we may be forced to fulfill obligations that were assumed by others. We would then seek reimbursement from the parties that assumed those liabilities.

      We operate a fleet of approximately 2,900 owned and leased service trucks, vans and support vehicles. We believe these vehicles generally are adequate for our current operations.

      At September 30, 2005, we maintained branch offices, warehouses, sales facilities and administrative offices at approximately 140 locations. Substantially all of our facilities are leased. We lease our corporate office located in Houston, Texas.

      Our properties are generally adequate for our present needs, and we believe that suitable additional or replacement space will be available as required.

      In re Integrated Electrical Services, Inc. Securities Litigation, No. 4:04-CV-3342; in the United States District Court for the Southern District of Texas, Houston Division: Between August 20 and October 4, 2004, five putative securities fraud class actions were filed against IES and certain of its officers and directors in the United States District Court for the Southern District of Texas. The five lawsuits were consolidated under the caption In re Integrated Electrical Services, Inc. Securities Litigation, No. 4:04-CV-3342. On March 23, 2005, the Court appointed Central Laborer’ Pension Fund as lead plaintiff and appointed lead counsel. Pursuant to the parties’ agreed scheduling order, lead plaintiff filed its amended complaint on June 6, 2005. The amended complaint alleges that defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements during the proposed class period of November 10, 2003 to August 13, 2004. Specifically, the amended complaint alleges that defendants misrepresented the Company’s financial condition in 2003 and 2004 as evidenced by the restatement, violated generally accepted accounting principles, and misrepresented the sufficiency of the Company’s internal controls so that they could engage in insider trading at artificially-inflated prices, retain their positions at the Company, and obtain a $175 million credit facility for the Company.

      On August 5, 2005, the defendants moved to dismiss the amended complaint for failure to state a claim. The defendants argued, among other things, that the amended complaint fails to allege fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure and fails to satisfy the heightened pleading requirements for securities fraud class actions under the Private Securities Litigation Reform Act of 1995. Specifically, defendants argue that the amended complaint does not allege fraud with particularity as to numerous GAAP violations and opinion statements about internal controls, fails to raise a strong inference that defendants acted knowingly or with severe recklessness, and includes vague and conclusory allegations from confidential witnesses without a proper factual basis. Lead plaintiff filed its opposition to the motion to dismiss on September 28, 2005, and defendants filed their reply in support of the motion to dismiss on November 14, 2005. The Company does not anticipate any additional briefing on defendants’ motion.

      The Company intends to vigorously contest this action. An adverse outcome in this action could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

      Radek v. Allen, et al., No. 2004-48577; in the 113th Judicial District Court, Harris County, Texas: On September 3, 2004, Chris Radek filed a shareholder derivative action in the District Court of Harris County, Texas naming Herbert R. Allen, Richard L. China, William W. Reynolds, Britt Rice, David A. Miller, Ronald P. Badie, Donald P. Hodel, Alan R. Sielbeck, C. Byron Snyder, Donald C. Trauscht, and James D. Woods as individual defendants and IES as nominal defendant. On July 15, 2005, plaintiff filed an amended shareholder derivative petition alleging substantially similar factual claims to those made in the putative class action, and making common law claims against the individual defendants for breach of fiduciary duties, misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. On September 16, 2005, defendants filed special exceptions or, alternatively, a motion to stay the derivative action. On November 11, 2005, Plaintiff filed a response to defendants’ special exceptions and motion to stay. Defendants’ special exceptions and motion to stay are currently set for hearing on January 9, 2006.

      The Company intends to vigorously contest this action. An adverse outcome in this action could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

      SEC Investigation — On August 31, 2004, the Fort Worth Regional Office of the SEC sent a request for information concerning IES’s inability to file its 10-Q in a timely fashion, the internal investigation conducted by counsel to the Audit Committee of the company’s Board of Directors, and the material weaknesses identified by IES’s auditors in August 2004. In December 2004, the Commission issued a formal order authorizing the staff to conduct a private investigation into these and related matters. The investigation is still ongoing, and the Company is cooperating with the SEC. An adverse outcome in this matter could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

      Cynthia People v. Primo Electric Company, Inc., Robert Wilson, Ray Hopkins, and Darcia Perini; In the United States District Court for the District of Maryland; C.A. No. 24-C-05-002152: On March 10, 2005, one of IES’ wholly-owned subsidiaries was served with a lawsuit filed by an ex-employee alleging thirteen causes of action including employment, race and sex discrimination as well as claims for fraud, intentional infliction of emotional distress, negligence and conversion. On each claim plaintiff is demanding $5-10 million in compensatory and $10-20 million in punitive damages; attorney’s fees and costs. This action was filed after the local office of the EEOC terminated their process and issued plaintiff a right-to-sue letter per her request. IES will vigorously contest any claim of wrongdoing in this matter and does not believe the claimed damages bear any likelihood of being found in this case. However, if such damages were to be found, it would have a material adverse effect on consolidated financial condition and cash flows.

      We are involved in various other legal proceedings that have arisen in the ordinary course of business. While it is not possible to predict the outcome of any of these proceedings with certainty and it is possible that the results of legal proceedings may materially adversely affect us, in our opinion, these proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability which would have a material adverse effect on our financial position, liquidity or results of operations.

      None.

PART II

      Prior to December 15, 2005, the Company’s common stock traded on the NYSE under the symbol “IES.” On December 15, 2005, the Company’s common stock was suspended from trading on the NYSE and now trades over-the-counter on the pink sheets under the symbol “IESR.” The following table presents the quarterly high and low sales prices for the Company’s Common Stock on the NYSE since October 1, 2003:

      As of December 9, 2005, the closing market price of the Company’s Common Stock was $0.75 per share and there were approximately 1,309 holders of record. As of December 16, 2005, the closing market price of the Company’s Common Stock was $0.41 per share.

      We do not anticipate paying cash dividends on or repurchasing our common stock in the foreseeable future. We expect that we will utilize all available earnings generated by our operations, proceeds from sales of operations and borrowings under our credit facility for the development and operation of our business. Any future determination as to the payment of dividends will be made at the discretion of our Board of Directors and will depend upon the Company’s operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. Our debt instruments restrict us from paying cash dividends on the common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Issuer Purchases of Equity Securities (1)

      The following selected consolidated historical financial information for IES should be read in conjunction with the audited historical consolidated financial statements of Integrated Electrical Services, Inc. and subsidiaries and the notes thereto included in Item 8, “Financial Statements and Supplementary Data.”

      The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in the Form 10-K. See “Disclosure Regarding Forward-Looking Statements.”

General

     Going Concern

      Our independent registered public accounting firm, Ernst & Young LLP, included a going concern modification in its audit opinion on our consolidated financial statements for the fiscal year ended September 30, 2005 included in this Form 10-K as a result of our operating losses during fiscal 2005 and our expected non-compliance with certain debt covenants subsequent to September 30, 2005. We did not include any adjustments to the financial statements included in this Form 10-K to reflect the possible future effects that may result from the uncertainty of our ability to continue as a going concern. We are currently undertaking the following efforts to address this uncertainty, each of which efforts is described in more detail below:

     Update on Financial Restructuring

      During 2005, we announced our intention to strengthen and de-lever our balance sheet to improve our overall capital structure. As part of this initiative, we are seeking to reduce our long term debt, which will result in an increase in our free cash flow from a reduction in cash interest expense. By strengthening the balance sheet in this manner, we expect to improve our credit ratings and enhance our surety bonding capability. To facilitate these efforts, on November 2, 2005, we announced that we had retained Gordian Group, LLC as a financial advisor. Gordian Group, LLC is a New York based investment bank with expertise in developing capital markets alternatives and providing financial advisory services.

      As a result of the foregoing, we commenced discussions with an ad hoc committee of holders of a substantial portion of our senior subordinated notes due 2009 regarding a consensual restructuring of our debt obligations. On December 14, 2005, we announced that we had reached a non-binding agreement in principle with an ad hoc committee of holders of approximately $101 million, or 58%, of our $172.9 million principal amount of our senior subordinated notes for a potential restructuring pursuant to which the senior subordinated noteholders would receive in exchange for all of their notes shares representing approximately 82% of the common stock of the reorganized company. Holders of our outstanding common stock and management would retain or receive shares representing approximately 15% and 3%, respectively, of the common stock of the reorganized company.

      The agreement in principle contemplates that our customers, vendors and trade creditors would not be impaired by the restructuring and would be paid in full in the ordinary course of business, and that our senior convertible notes with a current aggregate principal amount outstanding of approximately $50 million, would be reinstated or the holders otherwise provided the full value of their note claims. It is also contemplated that our senior bank credit facility would be reinstated or refinanced at the time of the restructuring. Discussions have already begun with the bank with respect to the proposed restructuring.

      If the proposed restructuring were to be consummated, the proposed plan currently contemplates the filing of a pre-packaged Chapter 11 plan of reorganization in order to achieve the exchange of all of the senior

subordinated notes for equity. Approval of a proposed plan in a pre-packaged proceeding would require the consent of the holders of at least two-thirds in claim amount and one-half in number of the senior subordinated notes that vote on the plan. We would seek to enter into a plan support agreement with the members of the ad hoc committee and then formally solicit consents to the proposed restructuring from the holders of our senior subordinated notes. We expect to begin the out-of-court solicitation process in January of 2006.

      There is no assurance that we will successfully complete the restructuring contemplated by the agreement in principle, or any other restructuring. At this time neither the agreement in principle nor any other proposed restructuring terms have been agreed to by the requisite holders of the senior subordinated notes, and the senior subordinated noteholders can withhold these consents for any or no reason. The agreement in principle is subject to the negotiation of definitive documentation, approval by the requisite noteholders and a court in a Chapter 11 proceeding and customary closing conditions. Because the agreement in principle is not binding and because there is no assurance it will be consummated, we continue to evaluate other alternatives for restructuring our capital structure. In addition, we may be forced by our creditors to seek the protection of federal bankruptcy law. If we consummate any restructuring, we may do so outside of bankruptcy, or in a pre-packaged Chapter 11 proceeding or in another proceeding under federal bankruptcy law. Any restructuring could cause the holders of our outstanding securities, including our common stock, senior subordinated notes and senior convertible notes, to lose some or all of the value of their investment in our securities. Furthermore, such restructuring could result in material changes in the nature of our business and material adverse changes to our financial condition and results of operations.

     Suspension of Trading on NYSE

      In addition, we have previously announced that, as of December 5, 2005, our 30-trading day average stock price was below $1.00, that we have has failed or may fail to meet other published requirements for the continued listing of its common stock on the NYSE, including the exchange’s market capitalization requirements. On December 15, 2005, the NYSE suspended trading of our common stock, and notified us orally that it intends to de-list our common stock, subject to our right to appeal in accordance with the NYSE’s rules. We currently intend to appeal this determination by the NYSE, which process would likely take in excess of 35 business days from December 16, 2005 which is the day we received written notice from the NYSE of its intent to de-list our common stock. If we do not succeed in appealing this determination by the NYSE, the NYSE has indicated that it will promptly request the SEC to de-list our common stock. If our common stock is de-listed from the NYSE, the holders of our senior convertible notes would have the right, beginning 35 business days after de-listing, to put their notes back to us. We would likely not be able to pay the principal and accrued interest on those notes if put to us. Additionally, our new credit facility restricts our ability to repurchase these notes. Our inability to repurchase these notes and the limitations in our new credit facility to repurchase these notes could affect the success of any plan of reorganization contemplated by us without an agreement with the holders of the senior convertible notes. Absent an agreement with the holders of the senior convertible notes to any pre-packaged Chapter 11 plan that may be filed, we would seek to reinstate their notes or give them property equal to the full value of their note claims. We do not presently have an agreement with any of the holders of the senior convertible notes to the agreement in principle or any other proposed restructuring plan.

     Amendments to the New Credit Facility

      It has been necessary for us to seek amendments of our new credit facility in order to avoid our non-compliance with the fixed coverage ratio set forth in the agreement relating to the new credit facility. We are currently seeking an additional amendment to the new credit facility before December 31, 2005, for the purpose of further amending the applicability of the fixed coverage ratio. We expect to obtain an amendment prior to December 31, 2005.

      Our debt instruments and agreements, including the credit facility, the senior subordinated notes, the senior convertible notes and our agreement with our primary surety bonding company, contain cross-default provisions whereby an uncured and unwaived event of default under one will result in an event of default under

each of the others. In such event, the lenders under these instruments and agreements may exercise their remedies thereunder, including causing all outstanding indebtedness to accelerate and become due. If our indebtedness were to become due, as a result of the circumstances described above or any other reason, we do not have the necessary cash to repay our indebtedness. This may cause our creditors to force us into an involuntary bankruptcy under the federal bankruptcy laws, or may cause us to seek protection from our creditors under these laws unless we reach an agreement with these creditors to the restructuring plan described above or to another mutually agreeable restructuring plan. In accordance with Emerging Issues Task Force (EITF) 86-30, “Classifications of Obligations When a Violation is Waived by the Creditor,” we have classified the long-term portion of senior convertible notes and senior subordinated notes as current liabilities on the balance sheet due to the need to amend our credit facility prior to December 31, 2005 and the potential for cross-defaults described above if we are unsuccessful.

     Strategy

      Prior to fiscal 2005, we had been implementing a three-phase strategy.

      Phase one, “Back to Basics”, emphasized basic business fundamentals of increasing backlog, controlling costs and generating positive cash flow. We continue to focus on these fundamentals.

      Phase two, “One Company. One Plan.”, focused on processes and systems necessary to integrate various decentralized business units. This phase included additional financial reporting and planning processes through the implementation of a common information system that is now substantially complete. We also created company wide employee programs such as healthcare, incentive compensation and project management training. This was in addition to promoting a culture of safe work practices improving our recordable accidents to less than half the industry average and tracking procurement spending with national vendors centrally for negotiated savings. We are focused on developing stronger national customer relationships.

      Phase three, “Continued Growth”, was designed to expand the businesses internally and via selective acquisitions. This phase was to be achieved primarily through internal growth in select markets and by increasing service offerings and market share. We did purchase one company in February 2003, we do not intend to grow through external growth. We have put our growth strategy on hold to focus on our core profitability and capital efficiency.

      In fiscal 2005, we turned our strategy to the operating and capital efficiency of our units and the overall capital structure of the firm.

      During October 2004 we began a process to strategically review the performance of each of our 49 business units over the last three years. We analyzed the financial performance of each unit with particular emphasis on the relative consistency of its results, returns on invested capital (unit level working capital and fixed assets), the required invested capital at each unit including capital costs associated with surety bonding, construction spending and growth trends in each geographical market, and management strength.

      Based on this review, we determined that certain businesses did not meet our criteria. We decided to sell or close these units in order to improve the overall profitability and capital efficiency of the company. During fiscal 2005, we sold 13 units and closed two others. These units produced revenues and operating income during fiscal 2004 of approximately $244.3 million and $8.6 million (before considering the impact of goodwill), respectively. The sales generated $54.1 million in total consideration comprised of $48.0 million in cash, $2.3 million in notes receivable and $3.8 million in retained assets and receivables.

     Successful Projects

      Additionally in fiscal 2005, we began the implementation of a process known to us as Successful Projects to bring consistency and standardization to the bidding, execution and estimates to completion processes surrounding our work. Successful Projects is designed to position the company for profitable growth and more consistent earnings.

      In the third quarter of fiscal 2005, we initiated Successful Projects and began to use an internally developed process for estimating and job tracking by breaking larger jobs into smaller components. By estimating jobs in smaller components, using expected material usage to determine expected labor needs, we expect to realize the following benefits:

      The Successful Projects program has been implemented in all business units as of the fiscal year end 2005 and is being utilized for estimating new jobs.

      Successful Projects is also expected to improve the quality of backlog. Our ability to estimate more accurately should improve our ability to realize margin as projected. The recent improvement in margin in backlog comes at the same time as the implementation of Successful Projects so we believe that the margin as presented should improve in the coming fiscal year.

      We believe that additional business opportunities and our ability to meet them will improve. We expect to be able to provide additional bonds for jobs in the marketplace, further improving backlog. We also expect to be awarded additional business by customers due to our increased financial strength. Additional attention paid to working capital will provide additional resources to meet these increased business opportunities.

     Basis of Presentation

      Our electrical contracting business is operated in two segments: (1) commercial and industrial and (2) residential. See Note 9 of “Notes to Consolidated Financial Statements” for a description of these reportable segments.

      In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have identified the accounting principles which we believe are most critical to our reported financial status by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to revenue recognition, the assessment of goodwill impairment, our allowance for doubtful accounts receivable, the recording of our self-insurance liabilities and our estimation of the valuation allowance for deferred tax assets. These accounting policies, as well as others, are described in the Note 2 of “Notes to Consolidated Financial Statements.”

      We enter into contracts principally on the basis of competitive bids. We frequently negotiate the final terms and prices of those contracts with the customer. Although the terms of our contracts vary considerably, most are made on either a fixed price or unit price basis in which we agree to do the work for a fixed amount for the entire project (fixed price) or for units of work performed (unit price). We also perform services on a cost-plus or time and materials basis. We are generally able to achieve higher margins on fixed price and unit price than on cost-plus contracts. We currently generate, and expect to continue to generate, more than half of our revenues under fixed price contracts. Our most significant cost drivers are the cost of labor, the cost of materials and the cost of casualty and health insurance. These costs may vary from the costs we originally estimated. Variations from estimated contract costs along with other risks inherent in performing fixed price and unit price contracts may result in actual revenue and gross profits or interim projected revenue and gross profits for a project differing from those we originally estimated and could result in losses on projects. Depending on the size of a particular project, variations from estimated project costs could have a significant impact on our operating results for any fiscal quarter or year. We believe our exposure to losses on fixed price

contracts is limited in aggregate by the high volume and relatively short duration of the fixed price contracts we undertake. Additionally, we derive a significant amount of our revenues from new construction and from the southern part of the United States. Downturns in new construction activity in the southern part of the United States could negatively affect our results.

      We complete most projects within one year. We frequently provide service and maintenance work under open-ended, unit price master service agreements which are renewable annually. We recognize revenue on service and time and material work when services are performed. Work performed under a construction contract generally provides that the customers accept completion of progress to date and compensate us for services rendered measured in terms of units installed, hours expended or some other measure of progress. Revenues from construction contracts are recognized on the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Percentage-of-completion for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total costs for each contract at completion. We generally consider contracts to be substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income and the effects of these revisions are recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined.

      We evaluate goodwill for potential impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Included in this evaluation are certain assumptions and estimates to determine the fair values of reporting units such as estimates of future cash flows, discount rates, as well as assumptions and estimates related to the valuation of other identified intangible assets. Changes in these assumptions and estimates or significant changes to the market value of our common stock could materially impact our results of operations or financial position.

      In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, we periodically assess whether any impairment indicators exist. If we determine impairment indicators exist, we conduct an evaluation to determine whether any impairment has occurred. This evaluation includes certain assumptions and estimates to determine fair value of asset groups including estimates about future cash flows, discount rates, among others. Changes in these assumptions and estimates or significant changes to the market value of our common stock could materially impact our results of operations or financial projections.

      We provide an allowance for doubtful accounts for unknown collection issues in addition to reserves for specific accounts receivable where collection is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, our customers’ access to capital, our customers’ willingness to pay, general economic conditions and the ongoing relationships with our customers. In addition to these factors, our business and the method of accounting for construction contracts requires the review and analysis of not only the net receivables, but the amount of billings in excess of costs and costs in excess of billings integral to the overall review of collectibility associated with our billings in total. The analysis management utilizes to assess collectibility of its receivables includes detailed review of older balances, analysis of days sales outstanding where we include in the calculation, in addition to accounts receivable balances net of any allowance for doubtful accounts, the level of costs in excess of billings netted against billings in excess of costs, and the ratio of accounts receivable, net of any allowance for doubtful accounts plus the level of costs in excess of billings, to revenues. These analyses provide an indication of those amounts billed ahead or behind the recognition of revenue on our construction contracts and are important to consider in understanding the operational cash flows related to our revenue cycle.

      We are insured for workers’ compensation, automobile liability, general liability, employment practices and employee-related health care claims, subject to large deductibles. Our general liability program provides coverage for bodily injury and property damage that is neither expected nor intended. Losses up to the

deductible amounts are accrued based upon our estimates of the liability for claims incurred and an estimate of claims incurred but not reported. The accruals are derived from actuarial studies, known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of the ultimate expected loss. We believe such accruals to be adequate. However, self-insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. Therefore, if actual experience differs from than the assumptions used in the actuarial valuation, adjustments to the reserve may be required and would be recorded in the period that the experience becomes known.

      We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation at least annually at the end of each fiscal year. The estimation of required valuation allowances includes estimates of future taxable income. In assessing the realizability of deferred tax assets at September 30, 2005, we considered whether it was more likely than not that some portion or all of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Results of Operations

      The following table presents selected historical results of operations of IES and subsidiaries with dollar amounts in thousands. These historical statements of operations include the results of operations for businesses acquired through purchases beginning on their respective dates of acquisition.

YEAR ENDED SEPTEMBER 30, 2005 COMPARED TO YEAR ENDED SEPTEMBER 30, 2004

Revenues

      Revenues decreased $79.5 million, or 6.7%, from $1,182.3 million for the year ended September 30, 2004 to $1,102.8 million for the year ended September 30, 2005. This decrease in revenues is primarily the result of a decrease in revenues of $114.3 million in certain commercial markets resulting from the decrease in the award of bonded projects offset by an increase of $34.8 million in residential revenues.

      Commercial and industrial revenues decreased 12.7%, from $899.6 million for the year ended September 30, 2004 to $785.3 million for the year ended September 30, 2005. The decline is due to a decrease of $45.3 million in industrial revenues, a decrease of $16.5 million in service and maintenance revenues and a decrease in commercial revenues of $52.5 million. Included in the decrease in industrial revenues is a decline of $18.9 million in revenue from plant and utility work at a subsidiary. The decrease is also a result of a decrease in the award of bonded projects.

      Residential revenues increased 12.3% from $282.7 million for the year ended September 30, 2004 to $317.5 million for the year ended September 30, 2005, primarily as a result of increased demand for new single-family housing in the South and West.

Gross Margin

      Gross profit decreased $18.2 million, or 12.6% from $145.1 million for the year ended September 30, 2004 to $126.9 million for the year ended September 30, 2005. Gross profit margin as a percentage of revenues decreased from 12.3% to 11.5% for the year ended September 30, 2004 compared to the year ended September 30, 2005. Had we earned last year’s gross margin of 12.3%, gross profit for the year ended September 30, 2005 would have been $135.6 million, an increase of $8.7 million. The decline in gross margin was primarily due to increased competition and costs of materials that have not fully been passed to customers in our residential segment, decreased profitability due to closing utility and plant work at one subsidiary and decreased award of bonded projects in our commercial and industrial segment. These utility projects lost $7.4 million during the year ended September 30, 2005 on $15.4 million in revenues as compared to losses on utility projects of $0.3 million during the year ended September 30, 2004 on $34.3 million in revenues. During the year ended September 30, 2005, we recorded $0.2 million additional accumulated amortization in cost of revenues for leasehold improvements. These costs were incurred to correct errors from prior periods where we

amortized leasehold improvements over a period longer than the original lease term. We do not believe these errors or the related correction is material to any affected period.

      The decline in commercial and industrial gross profit from $84.4 million for the year ended September 30, 2004, to $61.4 million for the year ended September 30, 2005, was due to gross profit on a lower revenue base earned year over year of approximately $8.9 million and increased costs associated with the procurement of copper wire, steel products and fuel. Included in the decrease in industrial gross profit is a decline of $7.1 million from utility and plant work at a subsidiary. Also contributing to the decline in gross profit is a reduction in gross profit of four subsidiaries of $13.9 million.

      The increase in residential gross profit from $60.7 million for the year ended September 30, 2004, to $65.6 million for the year ended September 30, 2005, was due to gross profit on a higher revenue base earned year over year of approximately $7.2 million, offset by increased costs associated with the procurement of copper wire, steel products and fuel.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased $13.7 million, or 9.8%, from $139.9 million for the year ended September 30, 2004 to $153.6 million for the year ended September 30, 2005. During the year we recorded a $2.3 million charge to settle a lawsuit during the fourth quarter ended September 30, 2005. There was also an increase in legal fees of $2.2 million, increased accounting fees of $1.8 million related to the annual audit, $2.1 million related to Sarbanes-Oxley implementation and $0.8 million related to tax and internal audit. Selling, general and administrative expenses also include $4.9 million incurred during the year ended September 30, 2005 that were not incurred during the year ended September 30, 2004. During the year ended September 30, 2005, we recorded $0.5 million in additional accumulated amortization in selling, general and administrative expenses for leasehold improvements. These costs were incurred to correct errors from prior periods where we amortized leasehold improvements over a period longer than the original lease term. We do not believe these errors or the related correction is material to any affected period. Additionally, we incurred $0.6 million in lease exit costs during the quarter ended September 30, 2005. As a result of these charges, selling, general and administrative expenses as a percent of revenue increased from 11.8% for the year ended September 30, 2004 to 13.9% for the year ended September 30, 2005.

Goodwill Impairment Charge

      During the years ended September 30, 2004 and 2005, we recorded non-cash charges of $88.6 and $57.3 million, respectively, related to impairments to the carrying value of goodwill. These charges were entirely associated with those regions that do not include Houston Stafford Electric, our largest residential subsidiary. See “Liquidity and Capital Resources” below for further information.

Income From Operations

      Loss from operations decreased $0.7 million, or 0.8%, from an $83.3 million operating loss for the year ended September 30, 2004 to a $84.0 million operating loss for the year ended September 30, 2005. As a percentage of revenues, income from operations decreased from a 7.0% operating loss for the year ended September 30, 2004, to a 7.6% operating loss for the year ended September 30, 2005. This decrease in income from operations was primarily attributed to the goodwill impairment to the carrying value of goodwill of $88.6 million at September 30, 2004 and $57.3 million at September 30, 2005. There was also an accrual of $2.3 million for the settlement of a lawsuit included in selling, general and administrative offset by the settlement found in the Company’s favor included in revenue for $2.7. Additional impact was the $18.2 million decline in gross profits earned during the year ended September 30, 2005 as compared to the year ended September 30, 2004. Excluding the impact of the goodwill impairment charge recorded during the year ended September 30, 2004 and 2005, the income (loss) from operations as a percent of revenues decreased from 0.4% for the year ended September 30, 2004 to a loss of 2.4% for the year ended September 30, 2005.

Interest and Other Expense, net

      Interest and other expense, net increased by $1.9 million or 2.1%, from $29.1 million for the year ended September 30, 2004 to $29.7 million for the year ended September 30, 2005. Cash paid for interest decreased $2.8 million, or 12.0% from $23.4 million for the year ended September 30, 2004 to $20.6 million for the year ended September 30, 2005. This decrease is primarily attributable to a permanent reduction in our senior subordinated debt of $75.0 million offset by a $50.0 million increase in senior secured debt in March 2004 and the timing of interest payments on the senior convertible notes. Other expense decreased by $3.3 million, or 56.9%, from $5.8 million for the year ended September 30, 2005 to $2.5 million for the year ended September 20, 2005. This decrease is primarily attributable to a $5.2 million loss incurred on early extinguishment of debt during the year ended September 30, 2004 offset by an increase in write-offs of an investment during the year ended September 30, 2005 of $1.3 million as compared to the year ended September 30, 2004.

      Costs incurred during the inception of or amendment to a credit facility or senior note, require the payments of fees upon the execution of the agreement. These fees are capitalized as deferred financing costs and amortized over the life of the facility to interest expense. During the year ended September 30, 2005, we incurred non-cash write-offs to interest expense of deferred financing costs of $7.4 million of this, we recorded a non-cash charge in the quarter ended September 30, 2005 of approximately $0.6 million to write off the remaining deferred financing costs related to the prior credit facility.

      During the year ended September 30, 2005, we issued $50.0 million of 6.5% senior convertible notes. The senior convertible notes are a hybrid instrument comprised of two components: (1) a debt instrument and (2) certain embedded derivatives. These derivatives will be market-to-market each reporting period.

      During the three months ended December 31, 2004, we were required to also value the portion of the notes that would settle in cash because of shareholder approval of the notes had not yet been obtained. The initial value of this derivative was $1.4 million and the value at December 31, 2004 was $4.0 million, and consequently, a $2.6 million mark to market loss was recorded. The value of this derivative immediately prior to the affirmative shareholder vote was $2.0 million and accordingly, we recorded a mark to market gain of $2.0 million during the three months ended March 31, 2005. There was no mark to market gain or loss during the three months ended June 30, 2005. At the end of September 30, 2005 there was a mark to market loss of $0.1 million recorded. The calculation of the fair value of the conversion option was performed utilizing the Black-Scholes option pricing model with the following assumptions effective over the year ended September 30, 2005: expected dividend yield of 0.00%, expected stock price volatility of 40.00%, weighted average risk free interest rate ranging from 3.67% to 4.15% for four to ten years, respectively, and an expected term of four to ten years. The valuation of the other embedded derivatives was derived by other valuation methods, including present value measures and binomial models. At September 30, 2005, the fair value of the two remaining derivatives was $1.5 million. Additionally, we had recorded at March 31, 2005 a net discount of $0.9 million which is being amortized over the remaining term of the notes.

Provision for Income Taxes

      Our effective tax rate decreased from a negative 6% for the year ended September 30, 2004 to negative 1% for the year ended September 30, 2005. The decease is attributable to a pretax net loss, permanent differences required to be added back for income tax purposes, the impairment of non-deductible goodwill, additional valuation allowance against certain federal and state deferred tax assets and a change in contingent tax liabilities.

      As of September 30, 2005, we had available approximately $146.0 million of federal net tax operating loss carry forwards for federal income tax purposes including $82.0 million resulting from the additional amortization of tax goodwill. This carry forward, which may provide future tax benefits, will begin to expire in 2011. We also had available approximately $255.2 million of net tax operating loss carry forwards for state income tax purposes including $52.8 million resulting from the additional amortization of tax goodwill which begin to expire in 2006. Due to recent trading activity in the Company’s stock, a change of control as defined by the Internal Revenue Code Section 382 may have occurred. If a change of control has occurred, the

Company will be limited in the amount of federal net operating loss carry forwards that may be utilized in future tax years. However, the Company has fully valued the federal net operating loss carry forwards and any reduction in future net operating loss carry forwards would be offset by a reduction in the corresponding valuation allowances.

      In assessing the realizability of deferred tax assets at September 30, 2005, we considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. Our realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. However, SFAS 109, “Accounting for Income Taxes” places considerably more weight on historical results and less weight on future projections when there is negative evidence such as cumulative pretax losses in recent years. We incurred a cumulative pretax loss for September 30, 2003, 2004 and 2005 including goodwill impairment. In the absence of specific favorable evidence of sufficient weight to offset the negative evidence of the cumulative pretax loss, we have provided valuation allowances of $42.7 million for certain federal deferred tax assets and $9.2 million for certain state deferred tax assets. We believe that $3.5 million of federal deferred tax assets will be realized by offsetting reversing deferred tax liabilities. We believe that $0.1 million of state deferred tax assets will be realized for certain non-unitary, non-consolidated and non-combined state tax returns and valuation allowances were not provided for these assets. We will evaluate the appropriateness of its remaining deferred tax assets and valuation allowances on a quarterly basis.

      Our effective tax rate from discontinued operations decreased from negative 327% for the year ended September 30, 2004 to negative 7% for the year ended September 30, 2005. The decrease is attributable to a pretax net loss, permanent differences required to be added back for income tax purposes, the impairment of non-deductible goodwill, additional valuation allowance substantially all federal and state deferred tax assets and a change in contingent tax liabilities.

      In the absence of specific favorable evidence of sufficient weight to offset the negative evidence of the cumulative pretax loss, we have provided $0.1 million of valuation allowances for certain federal and state deferred tax assets from discontinued operations in the year ended September 30, 2005.

YEAR ENDED SEPTEMBER 30, 2004 COMPARED TO YEAR ENDED SEPTEMBER 30, 2003

Revenues

      Revenues decreased $35.7 million, or 2.9% from $1,218.0 million for the year ended September 30, 2003 to $1,182.3 million for the year ended September 30, 2004. The decrease in total revenues is the result of a $63.2 million decrease in commercial and industrial revenues offset by an increase of $27.5 million in residential revenues. The decline in commercial and industrial revenues is primarily attributable to declines in the commercial and industrial construction market in Texas and for our traveling companies offset by increases in commercial and industrial revenues from our markets on the East Coast. The increase in residential revenues is attributable to the strong housing environment resulting from low interest rates and good execution by our residential management where we have seen increases at all of our subsidiaries focused primarily on residential electrical contracting.

Gross Margin

      Gross profit decreased $24.4 million, or 14.3% from $169.5 million for the year ended September 30, 2003 to $145.1 million for the year ended September 30, 2004. The decline in commercial and industrial gross profit from $110.0 million for the year ended September 30, 2003, to $84.4 million for the year ended September 30, 2004, was due to gross profit on a lower revenue base earned year over year of approximately $5.9 million, a decline in gross profit margin at one subsidiary of $6.0 million, increased costs associated with the procurement of copper wire, steel products and fuel, as well as overall declines in margins as a result of increased competition in markets we serve. The increase in residential gross profit from $59.5 million for the year ended September 30, 2003, to $60.7 million for the year ended September 30, 2004, was due to gross profit on a higher revenue base earned year over year of approximately $5.9 million, offset by increased costs associated with the procurement of copper wire, steel products and fuel.

      Overall gross margin as a percentage of revenues decreased from 13.9% for the year ended September 30, 2003 to 12.3% for the year ended September 30, 2004. Had we earned last year’s gross margin of 13.9%, gross profit for the year ended September 30, 2004 would have been $164.3 million, an increase of $19.2 million. The decline in gross margin during the year ended September 30, 2004 was primarily due to increased competition for available commercial and industrial work, the decline in gross profit margin at one subsidiary of $6.0 million and increased costs associated with the procurement of copper wire, steel products and fuel.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased $5.4 million, or 4.0%, from $134.5 million for the year ended September 30, 2003 to $139.9 million for the year ended September 30, 2004. This increase is due primarily to an $8.0 million charge to settle a lawsuit taken during the fourth quarter ended September 30, 2004. This increase is also due to increased legal fees of $3.7 million, increased bad debt expense of $1.2 million due to receivable write-offs and $1.1 million in severance expenses recorded during the year ended September 30, 2004 as compared to the year ended September 30, 2003. These increased selling general and administrative expenses were offset by approximately $7.8 million of reduced employment related expenses including employee paid medical insurance, bonuses and commissions and other variable expenses. As a result of these charges, selling, general and administrative expenses as a percent of revenue increased from 11.0% for the year ended September 30, 2003 to 11.8% for the year ended September 30, 2004.

Goodwill Impairment Charge

      During the year ended September 30, 2004, we recorded a charge of $88.6 million related to impairments to the carrying value of goodwill. This charge was entirely associated with those regions that do not include Houston Stafford Electric, our largest residential subsidiary. See “Liquidity and Capital Resources” which follows for further information.

Income From Operations

      Income from operations decreased $118.2 million, or 339%, from $34.9 million for the year ended September 30, 2003 to an $83.3 million operating loss for the year ended September 30, 2004. As a percentage of revenues, income from operations decreased from 3% for the year ended September 30, 2003, to a 7%

operating loss for the year ended September 30, 2004. This decrease in income from operations was primarily attributed to the $88.6 million of goodwill impairment to the carrying value of goodwill, the accrual of $8.0 million for the settlement of a lawsuit included in selling, general and administrative and the $24.4 million decline in gross profits earned during the year ended September 30, 2004 as compared to the year ended September 30, 2003.

Interest and Other Expense, net

      Interest and other expense, net increased $3.2 million, or 12.3%, from $25.9 million in 2003 to $29.1 million in 2004. This increase is primarily due to $5.2 million in costs incurred during the year ended September 30, 2004 associated with the early extinguishment of $75.0 million of high-yield subordinated debt. This increase was offset by a $3.3 million decrease in interest expense during the year ended September 30, 2004 due to a lower amount of average debt outstanding during the year ended September 30, 2004 compared to the year ended September 30, 2003, and a shift to lower cost senior secured debt from subordinated debt during the year ended September 30, 2004.

Provision for Income Taxes

      Our effective tax rate decreased from 4% for the year ended September 30, 2003 to negative 6% for the year ended September 30, 2004. The decease is attributable to a pretax net loss, permanent differences required to be added back for income tax purposes, the impairment of non-deductible goodwill, additional valuation allowance against certain federal and state deferred tax assets and a change in contingent tax liabilities.

      As of September 30, 2004, we had available approximately $55.7 million of federal net tax operating loss carry forwards for federal income tax purposes including $40.6 million resulting from the additional amortization of tax goodwill. This carry forward, which may provide future tax benefits, will begin to expire in 2011. We also had available approximately $143.8 million of net tax operating loss carry forwards for state income tax purposes including $26.0 million resulting from the additional amortization of tax goodwill which begin to expire in 2005.

      In assessing the realizability of deferred tax assets at September 30, 2004, we considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. Our realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. However, SFAS 109, “Accounting for Income Taxes” places considerably more weight on historical results and less weight on future projections when there is negative evidence such as cumulative pretax losses in recent years. We incurred a cumulative pretax loss for September 30, 2002, 2003 and 2004 including goodwill impairment. In the absence of specific favorable evidence of sufficient weight to offset the negative evidence of the cumulative pretax loss, we have provided valuation allowances of $22.0 million for certain federal deferred tax assets and $5.6 million for certain state deferred tax assets. We believe that $4.2 million of federal deferred tax assets will be realized by offsetting reversing deferred tax liabilities. We believe that $0.4 million of state deferred tax assets will be realized for certain non-unitary, non-consolidated and non-combined state tax returns and valuation allowances were not provided for these assets. We will evaluate the appropriateness of its remaining deferred tax assets and valuation allowances on a quarterly basis.

      Our effective tax rate from discontinued operations decreased from 40% for the year ended September 30, 2003 to negative 327% for the year ended September 30, 2004. The decease is attributable to a pretax net loss, permanent differences required to be added back for income tax purposes, the impairment of non-deductible goodwill, additional valuation allowance against certain federal and state deferred tax assets and a change in contingent tax liabilities.

      In the absence of specific favorable evidence of sufficient weight to offset the negative evidence of the cumulative pretax loss, we have provided $1.6 million of valuation allowances for certain federal and state deferred tax assets from discontinued operations.

Cost Drivers

      As a service business, our cost structure is highly variable. Our primary costs include labor, materials and insurance. Approximately 48% of our costs are derived from labor and related expenses. For the years ended September 30, 2003, 2004 and 2005, our labor-related expenses totaled $506.3 million, $499.7 million and $463.9 million, respectively. As of September 30, 2005, we had approximately 8,900 employees. Approximately 7,295 employees were field electricians, the number of which fluctuates depending upon the number and size of the projects undertaken by us at any particular time. Approximately 1,585 employees were project managers, job superintendents and administrative and management personnel, including executive officers, estimators or engineers, office staff and clerical personnel. We provide a health, welfare and benefit plan for all employees subject to eligibility requirements. We have a 401(k) plan pursuant to which eligible employees may make contributions through a payroll deduction. We make matching cash contributions of 25% of each employee’s contribution up to 6% of that employee’s salary. We also had an employee stock purchase plan that provided eligible employees the opportunity to contribute up to 100% of their cash compensation up to $21,250 annually, toward the annual purchase of our common stock at a discounted price; 561 employees participated in this plan during the year ended September 30, 2005. The employee stock purchase plan was suspended effective January 1, 2005.

      Approximately 49% of our costs incurred are for materials installed on projects. This component of our expense structure is variable based on the demand for our services. We generally incur costs for materials once we begin work on a project. We generally order materials when needed, ship them directly to the jobsite, and install them within 30 days. Materials consist of commodity-based items such as conduit, wire and fuses as well as specialty items such as fixtures, switchgear and control panels. For the years ended September 30, 2003, 2004 and 2005, our materials expenses totaled $464.0 million, $524.7 million and $477.1 million, respectively.

      We are insured for workers’ compensation, employer’s liability, auto liability, general liability and health insurance, subject to large deductibles. Losses up to the deductible amounts are accrued based upon actuarial studies and our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. The accruals are based upon known facts and historical trends and management believes such accruals to be adequate. Expenses for claims administration, claims funding and reserves funding totaled $40.8 million, $37.1 million and $40.5 million for the years ended September 30, 2003, 2004 and 2005, respectively.

      During October 2004, we announced plans to begin a strategic realignment including the planned divestiture of certain subsidiaries within our commercial segment. This plan included management actively seeking potential buyers of the selected companies among other activities necessary to complete the sales. As of September 30, 2005, the planned divestitures had been substantially completed. In addition, during the year ended September 30, 2005 we closed two business units. The discontinued operations disclosures include only those identified subsidiaries qualifying for discontinued operations treatment for the periods presented; therefore, other subsidiaries included in our divestiture plan will be included in future periods as they qualify for discontinued operations treatment. Depreciation expense associated with discontinued operations for the years ended September 30, 2003, 2004 and 2005 was $3.0 million, $2.3 million and $1.4 million, respectively.

      During the year ended September 30, 2005, we completed the sale of all the net assets of thirteen of its operating subsidiaries for $54.1 million in total consideration. Including goodwill impairment, the sales generated an pre-tax loss of $14.1 million and have been recognized as discontinued operations in the consolidated statement of operations for the year ended September 30, 2005 and the results of operations for

the prior years ended September 30, 2003 and 2004 have been reclassified. Summarized financial data for discontinued operations are outlined below:

      In connection with the dispositions discussed above, the net pre-tax loss was determined as follows for the year ended September 30, 2005 (in thousands):

      During the year ended September 30, 2005, we recorded a net goodwill impairment charge of $12.8 million related to certain subsidiaries which were held for disposal by sale. This impairment charge is

included in the net loss from discontinued operations caption in the consolidated statement of operations. The impairment charge was calculated based on the assessed fair value ascribed to the subsidiaries identified for disposal less the net book value of the assets related to those subsidiaries. The fair value utilized in this calculation was the same as that discussed in the preceding paragraph addressing the impairment of discontinued operations. Where the fair value did not exceed the net book value of a subsidiary including goodwill, the goodwill balance was impaired. This impairment of goodwill was determined prior to the disclosed calculation of any additional impairment of the identified subsidiary disposal group as required pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We utilized estimated gross proceeds to calculate the fair values associated with the goodwill impairment charge. There have not been any significant differences between those estimates and the actual proceeds received upon the sale of the subsidiaries.

      In accordance with the Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, during the year ended September 30, 2005, we recorded an impairment charge of $1.5 million related to the identification of certain subsidiaries for disposal by sale. The impairment was calculated as the difference between the fair values, less costs to sell, assessed at the date the companies individually were selected for sale and their respective net book values after all other adjustments had been recorded. In determining the fair value for the disposed assets and liabilities, we evaluated past performance, expected future performance, management issues, bonding requirements, market forecasts and the carrying value of such assets and liabilities and received a fairness opinion from an independent consulting and investment banking firm in support of this determination for certain of the subsidiaries included in the assessment. The impairment charge was related to subsidiaries included in the commercial and industrial segment of our operations.

Working Capital

      Total current assets decreased $91.3 million, or 21%, from $443.1 million as of September 30, 2004 to $351.8 million as of September 30, 2005. This decrease is primarily the result of a $96.5 million decline in assets held for sale as the related businesses that were divested during fiscal 2005 and the sale of the assets completed. Additionally, trade receivables and retainage declined $10.2 million and $10.1 million, respectively. These declines were driven by jobs completing during the year, lower volume of projects and improved collections. Costs and estimated earnings in excess of billings on uncompleted contracts decreased $6.0 million. These declines were partially offset by increases in cash and cash equivalents of $6.1 million, an increase in restricted cash of $9.6 million, an increase in inventories of $3.6 million and an increase in prepaids and other current assets of $12.0 million. Restricted cash at September 30, 2005 represents cash collateral held by our bank to secure outstanding letters of credit. The increase in inventories is primarily related to our residential segment which experienced increased demand for services during fiscal 2005. The increase in prepaids and other current assets is mostly attributable to deposits held by our surety provider to secure outstanding surety bonds. The increase in prepaid expenses and other current assets is primarily due to a $10.0 million increase in deposits, to collateralize our surety program. At September 30, 2005, we had $17.9 million in deposits and accumulated interest thereon with our surety provider.

      Total current liabilities increased $154.3 million or 67% from $231.0 million at September 30, 2004 to $385.3 million at September 30, 2005. This increase is primarily attributable to a net increase in debt classified as current of $180.9 million, a decrease in accounts payable and accrued expenses of $8.6 million and a decrease in liabilities related to assets held for sale of $24.3 million. In November 2004 and February 2005, we issued an aggregate $50.0 million in convertible notes due in 2014. The proceeds from this issuance were primarily used to repay the current indebtedness outstanding under our credit facility in effect at that time. As of September 30, 2005, we expect that we will not be in compliance with certain debt covenants subsequent to September 30, 2005. Therefore, in accordance with EITF 86-30, “Classifications of Obligations When a Violation is Waived by a Creditor,” we classified the long-term portion of our senior convertible notes and our senior subordinated notes as current. Liabilities related to assets held for sale decreased because the related business were divested during fiscal 2005. These declines were partially offset by an increase of $6.3 million in billings in excess of costs and estimated earnings on uncompleted contracts.

      As of September 30, 2005, the status of our costs in excess of billings versus our billings in excess of costs improved over that at September 30, 2004; and days sales outstanding improved 5 days from 81 days at September 30, 2004 to 76 days at September 30, 2005. Our receivables and costs and earnings in excess of billings on uncompleted contracts as compared to annual revenues decreased from 24.7% at September 30, 2004 to 23.6% at September 30, 2005, when adjusted for a balance of $5.2 million as of September 30, 2005 in long-standing receivables also outstanding at September 30, 2004, but not fully collected by September 30, 2005. As is common in the construction industry, some of these receivables are in litigation or require us to exercise our contractual lien rights and are expected to be collected. These receivables are primarily associated with a few operating companies within our commercial and industrial segments. Some of our receivables are slow pay in nature or require us to exercise our contractual or lien rights. We believe that our allowances for doubtful accounts are sufficient to cover any uncollectible accounts.

Liquidity and Capital Resources

      As described above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Update on Financial Restructuring”, our independent registered public accounting firm, Ernst & Young LLP, included a going concern modification in its unqualified audit opinion on our consolidated financial statements for the fiscal year ended September 30, 2005 included in this Form 10-K as a result of our operating losses during fiscal 2005 and our potential non-compliance with certain debt covenants subsequent to September 30, 2005. Each of the efforts that we are currently undertaking to address this uncertainty, a financial restructuring, an amendment to our new credit facility and implementation of our Successful Projects process (each of which is described in more detail above) is expected to have an impact on our liquidity and capital resources.

      We expect that any restructuring of our capital structure would de-lever, and therefore strengthen, our balance sheet, including the proposed restructuring set forth in our non-binding agreement in principle with the ad hoc committee of noteholders described above. The proposed restructuring, if consummated, would result in our $172.9 million principal amount senior subordinated notes being exchanged for common stock, for our senior convertible notes to be reinstated or the holders otherwise provided the full value of their note claim and for the reinstatement or refinancing of our bank credit facility. In addition, as described above, the agreement in principle contemplates that our customers, vendors and trade creditors would not be impaired by the restructuring and would be paid in full in the ordinary course of business. Our liquidity may not improve or may be adversely affected, however, until our financial restructuring is consummated. Although we expect to begin an out-of-court solicitation process in January 2006, there is no certainty as to when or if any financial restructuring will be consummated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Update on Financial Restructuring” above for a further discussion of the proposed financial restructuring.

      While we expect to reach consensual agreement with the holders of our $50 million senior convertible notes or refinance their facility, we may be de-listed from the NYSE. If our common stock is de-listed from the NYSE and we have not reached agreement with these noteholders, the holders of our senior convertible notes would have the right, beginning 35 business days after de-listing, to put their notes back to us. We would likely not be able to pay the principal and accrued interest on those notes if put to us. Additionally, our new credit facility restricts our ability to repurchase these notes. Our inability to repurchase these notes and the limitations in our new credit facility to repurchase these notes could affect the success of any plan of reorganization contemplated by us without an agreement with the holders of the senior convertible notes. Absent an agreement with the holders of the senior convertible notes to any pre-packaged Chapter 11 plan that may be filed, we would seek to reinstate their notes or give them property equal to the full value of their note claims. We do not presently have an agreement with any of the holders of the senior convertible notes to the agreement in principle or any other proposed restructuring plan.

      In addition, our liquidity may be negatively affected by a failure to obtain an amendment to our new bank credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Amendments to New Credit Facility” above for a further discussion of the amendments we must seek. If we are unable to obtain an amendment to our credit facility prior to December 31, 2005, we will be in default on that instrument which if uncured in 30 days will result in cross-defaults under our senior convertible notes, our senior subordinated notes and under our agreement with our bonding company.

      Finally, our liquidity may be improved by our Successful Projects process. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Successful Projects” above for a further discussion of this process. While we believe that Successful Projects will have a positive impact on liquidity, it is possible that liquidity could be negatively impacted by revised estimates to complete on uncompleted projects.

      As of September 30, 2005, we had cash and cash equivalents of $28.3 million, restricted cash of $9.6 million, working capital of $(33.5) million, no outstanding borrowings under our credit facility, $172.9 million principal amount of senior subordinated notes, $50.0 million principal amount of senior convertible notes, $46.3 million in letters of credit outstanding and available borrowing capacity under our credit facility of $16.3. We also had letters of credit outstanding with J.P. Morgan Chase of $33.6 million. At September 30, 2005, $34.9 million in letters of credit issued by Bank of America to J.P. Morgan Chase were to protect our previous lender, J.P. Morgan Chase, in the event that a letter of credit they issued, but has not been replaced by us, is drawn on.

      During the year ended September 30, 2005, we used $15.4 million of net cash from operating activities. This net cash from operating activities was comprised of a net loss of $129.6 million, decreased by a $15.1 million net loss from discontinued operations, decreased by $87.3 million in non-cash charges including a goodwill impairment charges during the year of $57.3 million, an impairment charge of $6.0 million related to long-lived assets, working capital changes of $3.8 million and $8.1 million of operating cash flow from discontinued operations. Net cash provided by investing activities was $35.8 million, consisting primarily of

$48.0 million in proceeds received for the sale of thirteen business units during fiscal 2005 included in net cash provided by investing activities related to discontinued operations, partially offset by an increase of $9.6 million in restricted cash and $3.7 million in capital expenditures. Net cash used in financing activities was $14.3 million which is comprised of $67.9 million of repayments made on our credit facility and term loan, debt issuance costs of $7.4 million related to the issuance of $50.0 million in convertible notes during the year and costs related to the refinancing of our credit facility. These were largely offset by $60.0 million in borrowings during the year including proceeds from the issuance of the $50.0 million in convertible notes and $10.0 million of additional drawings on our credit facility.

      On August 13, 2004, we announced that it would not timely file results for the three months ended June 30, 2004 on Form 10-Q. There was also a possibility that factors surrounding certain material weaknesses in internal control may require a restatement of prior periods. Following this announcement, the Company’s stock price declined 40 percent to $3.93 on August 16, 2004. We believe that this decline in stock price plus the jury verdict and uncertainties surrounding its ability to obtain surety bonds was reflective of a change in its operations that indicated that a possible impairment of the carrying amount of goodwill existed at September 30, 2004. Therefore, we performed a test for impairment and consequently recorded a charge of $88.6 million. This charge is included in arriving at income (loss) from operations for the year ended September 30, 2004. The impairment detailed by our operating regions follows (amounts in millions):

      During the first quarter of fiscal 2005, we recorded a goodwill impairment of $0.6 million related to a subsidiary that at the time was intended to be divested. Subsequently, it was decided not to divest this subsidiary. At September 30, 2005, we performed a test for impairment and consequently recorded a charge of $56.7 million. The total goodwill impairment charge of $57.3 million is included in arriving at income (loss) from continuing operations for the year ended September 30, 2005. The impairment detailed by our operating regions follows (amounts in millions).

      There was no goodwill impairment charge in the HSE region for the year ended September 30, 2005.

      In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate the recoverability of property and equipment or other assets, if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such property has occurred. The effect of any impairment would be to expense the difference between the fair value of such property and its carrying value. At September 30, 2005, we determined that certain impairment indicators were present that may indicate an impairment existed under SFAS 144. Those indicators included a goodwill impairment as of September 30, 2005, coupled with cash flow losses incurred during fiscal 2005 in its commercial and industrial segment. Accordingly, we evaluated the ongoing value of its long-lived assets. Based on this evaluation, we determined that certain long-lived assets in our commercial and industrial segment with a carrying amount $8.5 million were no longer recoverable and were impaired. Accordingly, we recorded a non-cash impairment charge of $6.0 million to write these assets down to their estimated fair value of $2.5 million.

      On August 1, 2005, we entered into a three-year $80 million asset-based revolving credit facility with Bank of America, N.A., as administrative agent. The new credit facility replaced our existing revolving credit facility with JPMorgan Chase Bank, N.A., which was scheduled to mature on August 31, 2005. We and each of our operating subsidiaries are co-borrowers and are jointly and severally liable for all obligations under the credit facility. Our other subsidiaries have guaranteed all of the obligations under the credit facility. The obligations of the borrowers and the guarantors are secured by a pledge of substantially all of our assets and of our subsidiaries, excluding any assets pledged to secure surety bonds procured by us and our subsidiaries in connection with their operations.

      The credit facility allows us and the other borrowers to obtain revolving credit loans and provides for the issuance of letters of credit. The amount available at any time under the credit facility for revolving credit loans or the issuance of letters of credit is determined by a borrowing base calculated as a percentage of accounts receivable, inventory and equipment. The borrowing base is limited to $80 million, reduced by a fixed reserve which is currently $15.9 million. We have also deposited $9.6 million in an account pledged to Bank of America designed to collateralize letters of credit. The amount in the collateral account can be used to increase borrowing capacity.

      Generally, outstanding borrowings under the credit facility are priced at LIBOR plus a margin that varies from 2.5% to 3.5%, or at our option, a domestic bank rate plus a margin that varies between 0.5% and 1.5%. The Company is charged a fronting fee equal to 0.25% of each letter of credit issued and is charged a letter of credit fee equal to the margin applicable to LIBOR based loans, unless the letters of credit are cash collateralized, in which case the fee is reduced by 0.75%.

      The credit facility contains covenants restricting the ability to: (1) incur indebtedness; (2) grant liens; (3) enter into certain merger or liquidation transactions; (4) dispose of assets; (5) make capital expenditures; (6) pay dividends; (7) enter into certain other agreements and (8) make payments on our subordinated debt. The credit facility also includes customary covenants regarding reporting obligations and requires us to maintain a consolidated fixed charge coverage ratio. In addition to customary events of default, the credit facility provides that an event of default will occur if: (1) we or our subsidiaries default on any debt in excess of $500,000; (2) certain changes of control occur; (3) an event of default occurs with respect to our 9³/8% Senior Subordinated Notes due 2009, the Company’s Series A 6.5% Senior Convertible Notes or our Series B 6.5% Senior Convertible Notes if such default is not cured within the applicable grace period; (4) an event of default occurs under our agreements with Federal Insurance Company (“Chubb”) and as a result thereof Chubb (a) has ceased issuing surety bonds on our behalf , (b) has made demand for performance thereunder or (c) has otherwise commenced exercising any remedies thereunder, or if any claim is made on Chubb related to any bonded contract against the issuer of any surety bond or (6) an event or condition occurs which has a material adverse effect on us and our subsidiaries taken as a whole. If an event of default occurs under the credit facility, then the lenders may: (1) terminate their commitments under the credit facility; (2) declare any outstanding indebtedness under the credit facility to be immediately due and payable; and (3) foreclose on the collateral pledged to secure the obligations.

      As of September 30, 2005, we had no outstanding borrowings under the revolving credit line, we had letters of credit outstanding with Bank of America of $46.3 million, and had available borrowing capacity of $16.3 million under our credit facility. We also had letters of credit outstanding with J.P. Morgan Chase of $33.6 million. As of December 16, 2005, available borrowing capacity under our credit facility was $5.6 million.

      We have amended the credit facility twice. The amendments provided relief for the fixed charge covenant for the months of August and September, and eliminated the requirement for a fixed charge covenant test to be performed in September and October. Because of the cumulative effect of the fixed charge coverage ratio, we will have to obtain another amendment on or before December 31, 2005. The second amendment resulted in limited availability under the facility by requiring us to have at least $12.0 million in excess funds availability at all times. These amendments required the payments of fees upon their execution. These fees are capitalized as deferred financing costs and amortized over the life of the facility.

      On August 1, 2005 the Bank of America and Chubb entered into a letter agreement which sets forth certain agreements among the parties thereto with respect to the commingling of cash proceeds from collateral granted to Chubb to secure our surety obligations and the cash proceeds from collateral granted to Bank of America in connection with the credit facility. We provided Chubb with an additional $5 million letter of credit which will be held by Chubb as additional security for our surety obligations.

      On September 30, 2005, we and Bank of America entered into a letter agreement whereby we would make ratable monthly payments to increase the amount of cash collateral held by the lender as security for our obligations under the credit facility to $17.6 million by January 31, 2006. The balance in the account as of September 30, 2005 was $9.6 million and is recorded as restricted cash on the balance sheet.

      On November 24, 2004, we entered into a purchase agreement for a private placement of $36.0 million aggregate principal amount of its 6.5% Senior Convertible Notes due 2014. Investors in the notes agreed to a purchase price equal to 100% of the principal amount of the notes. The notes require payment of interest semi-annually in arrears at an annual rate of 6.5%, have a stated maturity of November 1, 2014, constitute senior unsecured obligations, are guaranteed on a senior unsecured basis by our significant domestic subsidiaries, and are convertible at the option of the holder under certain circumstances into shares of our common stock at an initial conversion price of $3.25 per share, subject to adjustment. On November 1, 2008, we have the option to redeem the Senior Convertible Notes, subject to certain conditions. The net proceeds from the sale of the notes were used to prepay a portion of our senior secured credit facility and for general corporate purposes. The notes, the guarantees and the shares of common stock issuable upon conversion of the notes to be offered have not been registered under the Securities Act of 1933, as amended, or any state securities laws and, unless so registered, the securities may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. A default under the credit facility or the senior subordinated notes resulting in acceleration that is not cured within 30 days is also a cross default under the senior convertible notes. In addition, other events of default under the senior convertible notes indenture include, but are not limited to, a change of control, the de-listing of the Company’s stock from a national exchange or the commencement of a bankruptcy proceeding.

      On December 5, 2005, the Company announced that it had received a notice from the NYSE that the Company’s 30-day trading average stock price was below $1.00 and that the Company had failed or may fail to meet other published requirements for continued listing of its common stock on the NYSE, including the exchange’s market capitalization requirements. On December 15, 2005, the NYSE suspended trading of the Company’s common stock and notified the Company of its intent to de-list the common stock, subject to the Company’s right to appeal in accordance with the NYSE’s rules.

      On December 14, 2005, the Company announced it had reached a non-binding agreement in principle with an ad hoc committee of holders of approximately $101 million of 58% of its $172.9 million principal amount of senior subordinated notes for a potential restructuring pursuant to which the senior subordinated noteholders would receive in exchange for all of their notes, shares representing 82% of the common stock of the reorganized company. If the proposed restructuring were to be consummated, the proposed plan contemplates the filing of a pre-packaged Chapter 11 plan of reorganization.

      On February 24, 2005 and following shareholder approval, we sold $14 million in principal amount of its Series B 6.5% Senior Convertible Notes due 2014 (the Notes), pursuant to separate option exercises by the holders of the aforementioned $36 million aggregate principal amount of Notes issued by the us in an initial private placement on November 24, 2004. The senior convertible notes are a hybrid instrument comprised of two components: (1) a debt instrument and (2) certain embedded derivatives. The embedded derivatives include a redemption premium and a make-whole provision. In accordance with the guidance that Statement of Financial Accounting Standards No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, (“SFAS 133”) and Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”)

provide, the embedded derivatives must be removed from the debt host and accounted for separately as a derivative instrument. These derivative instruments will be marked-to-market each reporting period. During the three months ended December 31, 2004, we were required to also value the portion of the Notes that would settle in cash because of shareholder approval of the Notes had not yet been obtained. The initial value of this derivative was $1.4 million and the value at December 31, 2004 was $4.0 million, and consequently, a $2.6 million mark to market loss was recorded. The value of this derivative immediately prior to the affirmative shareholder vote was $2.0 million and accordingly, we recorded a mark to market gain of $2.0 million during the three months ended March 31, 2005. There was no mark to market gain or loss during the three months ended June 30, 2005. During the quarter ending September 30, 2005 there was a mark to market loss of $0.1 million recorded. The calculation of the fair value of the conversion option was performed utilizing the Black-Scholes option pricing model with the following assumptions effective at the year ended September 30, 2005: expected dividend yield of 0.00%, expected stock price volatility of 40.00%, weighted average risk free interest rate ranging from 3.67% to 4.15% for four to ten years, respectively, and an expected term of four to ten years. The valuation of the other embedded derivatives was derived by other valuation methods, including present value measures and binomial models. At September 30, 2005, the fair value of the two remaining derivatives was $1.5 million. Additionally, we recorded at March 31, 2005 a net discount of $0.8 million which is being amortized over the remaining term of the Notes. We did not cause a registration statement to become effective on or before November 23, 2005, to register the underlying shares for the notes and liquidated damages began to accrue at the rate of 0.25% per annum.

      We have outstanding two different issues of senior subordinated notes with similar terms. The notes bear interest at 9³/8% and will mature on February 1, 2009. Interest is paid on the notes on February 1 and August 1 of each year. The notes are unsecured senior subordinated obligations and are subordinated to all other existing and future senior indebtedness. The notes are guaranteed on a senior subordinated basis by all our subsidiaries. Under the terms of the notes, we are required to comply with various affirmative and negative covenants including (1) restrictions on additional indebtedness, and (2) restrictions on liens, guarantees and dividends. During the year ended September 30, 2004, we redeemed $75.0 million principal amount of its senior subordinated notes, paying a call premium of 4.688%, or $3.5 million. This premium along with a write off of previously capitalized deferred financing costs of $1.6 million was recorded as a loss in other income and expense in accordance with SFAS No. 145. At September 30, 2004 and 2005, the Company had $172.9 million in outstanding senior subordinated notes. Our next interest payment date on our senior subordinated notes is February 1, 2006, on which date we will owe approximately $8.1 million in accrued interest to the holders of these notes, and there is no assurance that we will be able to make this interest payment when due.

Off-Balance Sheet Arrangements

      As is common in our industry, we have entered into certain off balance sheet arrangements that expose us to increased risk. Our significant off balance sheet transactions include commitments associated with noncancelable operating leases, letter of credit obligations and surety guarantees.

      We enter into noncancelable operating leases for many of our vehicle and equipment needs. These leases allow us to retain our cash when we do not own the vehicles or equipment and we pay a monthly lease rental fee. At the end of the lease, we have no further obligation to the lessor. We may determine to cancel or terminate a lease before the end of its term. Typically we are liable to the lessor for various lease cancellation or termination costs and the difference between the then fair market value of the leased asset and the implied book value of the leased asset as calculated in accordance with the lease agreement.

      Some of our customers and vendors require us to post letters of credit as a means of guaranteeing performance under our contracts and ensuring payment by us to subcontractors and vendors. If our customer has reasonable cause to effect payment under a letter of credit, we would be required to reimburse our creditor for the letter of credit. Depending on the circumstances surrounding a reimbursement to our creditor, we may have a charge to earnings in that period. To date we have not had a situation where a customer or vendor has

had reasonable cause to effect payment under a letter of credit. At September 30, 2005, $1.3 million of our outstanding letters of credit were to collateralize our customers and vendors.

      Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral. This is common in the insurance industry. To date we have not had a situation where an underwriter has had reasonable cause to effect payment under a letter of credit. At September 30, 2005, $32.3 million of our outstanding letters of credit were to collateralize our insurance program.

      Many of our customers require us to post performance and payment bonds issued by a surety. Those bonds guarantee the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. In the event that we fail to perform under a contract or pay subcontractors and vendors, the customer may demand the surety to pay or perform under our bond. Our relationship with our sureties is such that we will indemnify the sureties for any expenses they incur in connection with any of the bonds they issues on our behalf. To date, we have not incurred significant costs to indemnify our sureties for expenses they incurred on our behalf. As of September 30, 2005, our cost to complete projects covered by surety bonds was approximately $92.4 million and we utilized a combination of cash and letters of credit totaling $29.3 million to collateralize our bonding program.

      At September 30, 2005, we had an additional $34.9 million in letters of credit issued by Bank of America to our previous lender. These letters of credit are issued to protect our previous lender in the event that a letter of credit they issued, but has not been replaced by us, is drawn on. To date, no letters of credit issued by our old lender have been drawn on. As of December 12, 2005, these outstanding letters of credit had been reduced to $1.5 million.

Other Commitments

      In April 2000, we committed to invest up to $5.0 million in EnerTech Capital Partners II L.P. (EnerTech). EnerTech is a private equity firm specializing in investment opportunities emerging from the deregulation and resulting convergence of the energy, utility and telecommunications industries. Through September 30, 2005, we had invested $3.9 million under our commitment to EnerTech. The carrying value of this EnerTech investment at September 30, 2004 and 2005 was $3.0 million and $3.1 million, respectively. This investment is accounted for on the cost basis of accounting and accordingly, we do not record unrealized losses for the EnerTech investment that it believes are temporary in nature. As of September 30, 2005, the unrealized losses related to the Company’s share of the Enertech fund amounted to approximately $0.7 million, which we believe are temporary in nature. If facts arise that lead us to determine that such unrealized losses are not temporary, we would write down our investment in EnerTech through a charge to other expense during the period of such determination.

      Our future contractual obligations include (in thousands)(1):

      Our other commercial commitments expire as follows (in thousands):

Outlook

      As described above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Update on Financial Restructuring”, our independent registered public accounting firm, Ernst & Young LLP, included a going concern modification in its audit opinion on our consolidated financial statements for the fiscal year ended September 30, 2005 included in this Form 10-K as a result of our operating losses during fiscal 2005, our non-compliance with certain debt covenants as of September 30, 2005 and our potential non-compliance with certain debt covenants subsequent to September 30, 2005. Each of the efforts that we are currently undertaking to address this uncertainty, a financial restructuring, an amendment to our new credit facility and implementation of our Successful Projects process (each of which is described in more detail above) is expected to have an impact on our liquidity and capital resources.

      We expect that any restructuring of our capital structure would de-lever, and therefore strengthen, our balance sheet, including the proposed restructuring set forth in our non-binding agreement in principle with the ad hoc committee of noteholders described above. The proposed restructuring, if consummated, would result in our $172.9 million principal amount senior subordinated notes being exchanged for common stock, and for the reinstatement or refinancing of our $50 million principal amount senior convertible notes and our bank credit facility. In addition, as described above, the agreement in principle contemplates that our customers, vendors and trade creditors would not be impaired by the restructuring and would be paid in full in the ordinary course of business. Our liquidity may not improve or may be adversely affected, however, until our financial restructuring is consummated. Although we expect to begin an out-of-court solicitation process in January 2006, there is no certainty as to when or if any financial restructuring will be consummated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Update on Financial Restructuring” above for a further discussion of the proposed financial restructuring.

      While we expect to reach consensual agreement with the holders of our $50 million senior convertible notes or refinance their facility, we may be de-listed from the NYSE. If our common stock is de-listed from the NYSE and we have not reached agreement with these noteholders, the holders of our senior convertible notes would have the right, beginning 35 business days after de-listing, to put their notes back to us. We would likely not be able to pay the principal and accrued interest on those notes if put to us. Additionally, our new credit facility restricts our ability to repurchase these notes. Our inability to repurchase these notes and the limitations in our new credit facility to repurchase these notes could affect the success of any plan of reorganization contemplated by us without an agreement with the holders of the senior convertible notes. Absent an agreement with the holders of the senior convertible notes to any pre-packaged Chapter 11 plan that may be filed, we would seek to reinstate their notes or give them property equal to the full value of their note claims. We do not presently have an agreement with any of the holders of the senior convertible notes to the agreement in principle or any other proposed restructuring plan.

      In addition, our liquidity may be negatively affected by a failure to obtain an amendment to our new bank credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Amendments to New Credit Facility” above for a further discussion of the amendments we must seek. If we are unable to obtain an amendment to our credit facility prior to December 31, 2005, we will be in default on that instrument which if uncured in 30 days will result in cross-defaults under our senior convertible notes, our senior subordinated notes and under our agreement with our bonding company.

      Finally, our liquidity may be improved by our Successful Projects process. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Successful Projects” above for a further discussion of this process. While we believe that Successful Projects will have a positive impact on liquidity, it is possible that liquidity could be negatively impacted by revised estimates to complete on uncompleted projects.

      Economic conditions across the country have been challenging although construction industry spending is expected to increase by 2.2% in 2005 according to McGraw Hill. McGraw Hill expects construction industry spending to increase by 2.8% in 2006. We continue to focus on collecting receivables and reducing days sales outstanding. We will continue to take steps to reduce our costs. We have made significant reductions in administrative overhead at the home office and in the field. We are also committed to reducing the working capital committed in our business by focusing on cash collections. We currently expect revenues of $0.95 billion to $1.0 billion, operating income of $13–$16 million and EBITDA of $22-$25 million in fiscal 2006. The difference between operating income and EBITDA is depreciation and amortization. Management believes EBITDA provides useful information to investors as a measure of comparability to peer companies. However, these calculations may vary from company to company, so our calculations may not be comparable to other companies. EBITDA is one of the measures that is used in determining compliance with our credit facility.

      During fiscal 2005, we sold 13 units and closed two others. These units produced revenues and operating income during fiscal 2004 of approximately $244.3 million and $8.6 million (before considering the impact of goodwill), respectively. The sales generated $54.1 million in total consideration comprised of $48.0 million in cash, $2.3 million in notes receivable and $3.8 million in retained assets and receivables. As a result of these sales, the revenue and income (loss) contributions are no longer included in our results of operations and the sales proceeds were used to reduce our indebtedness.

      If we successfully complete the proposed restructuring, we believe that additional business opportunities and our ability to meet them would improve. We expect we would be able to provide additional bonds for jobs in the marketplace, further improving backlog. We also expect we would be awarded additional business by customers due to our increased financial strength. Additional attention paid to working capital would provide additional resources to meet these increased business opportunities. We expect that the results from the divestiture program, the implementation of Successful Projects best practices and the strengthening of the balance sheet would lead to significantly improved operating results in the coming years. As we continue to cut costs and utilize Successful Projects our outlook will change.

      We expect to generate cash flow from operations, sales of businesses and our credit facility. Our cash flows from operations tend to track with the seasonality of our business and historically have improved in the latter part of our fiscal year. We anticipate that these combined cash flows including those resulting from successful completion of the proposed restructuring will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. We expect capital expenditures of approximately $6.0 million for the fiscal year ended September 30, 2006. Our ability to generate cash flow is dependent on our successful completion of the proposed restructuring and many other factors, including demand for our products and services, the availability of projects at margins acceptable to us, the ultimate collectibility of our receivables, the ability to consummate transactions to dispose of businesses and our ability to borrow on our credit facility. See “Disclosure Regarding Forward-Looking Statements.”

Seasonality and Cyclical Fluctuations

      Our results of operations from residential construction are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues during fall and winter. The commercial and industrial aspect of our business is less subject to seasonal trends, as this work generally is performed inside structures protected from the weather. Our service and maintenance business is generally not affected by seasonality. In addition, the construction industry has historically been highly cyclical. Our volume of business may be adversely affected by declines in construction projects resulting from adverse regional or

national economic conditions. Quarterly results may also be materially affected by the timing of new construction projects, acquisitions and the timing and magnitude of acquisition assimilation costs. Accordingly, operating results for any fiscal period are not necessarily indicative of results that may be achieved for any subsequent fiscal period.

Inflation

      Due to the relatively low levels of inflation experienced in fiscal 2002 and 2003, inflation did not have a significant effect on our results in those fiscal years or on any of the acquired businesses during similar periods. During fiscal 2004 and 2005, however, we experienced significant increases in the commodity prices of copper products, steel products and fuel. Over the long-term, we expect to be able to pass these increased costs to our customers.

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires companies to account for stock-based compensation awards based on the fair value of the awards at the date they are granted. The resulting compensation cost is shown as an expense in the consolidated statements of operations. This statement was effective for the Company beginning on October 1, 2005. SFAS No. 123(R) permits adoption using one of two methods: 1) a “modified prospective” method, in which compensation cost is recognized beginning on the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date and 2) a “modified retrospective” method that includes the requirements above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures of all prior periods presented. We intend to adopt SFAS No. 123(R) using the “modified prospective” method. As discussed above, we currently account for share-based payments to employees using the intrinsic value method and, as such, generally recognize no compensation cost for stock option awards and stock issued pursuant to our Employee Stock Purchase Plan (ESPP). Accordingly, the adoption of SFAS No. 123(R) could have a significant impact on our reported results of operations and cash flows; however, the ultimate impact of the adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on the levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in the periods presented, the impact on results of operations would have approximated the impact of SFAS No. 123 as presented in note 2. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

      Management is actively involved in monitoring exposure to market risk and continues to develop and utilize appropriate risk management techniques. Our exposure to significant market risks include outstanding borrowings under our floating rate credit facility and fluctuations in commodity prices for copper products, steel products and fuel. Commodity price risks may have an impact on our results of operations due to fixed nature of many of our contracts, however, over time this cost is passed to our customers. As of September 30, 2005, the Company had no outstanding borrowings under the revolving credit line, although the outstanding amount varies throughout the fiscal year as working capital needs change. The company has two senior convertible notes that are hybrid instruments comprised of two components: (1) debt instruments and (2) certain embedded derivatives. Refer to Note 6 of “Notes to Consolidated Financial Statements” for a description of these derivatives.

      As a result, our exposure to changes in interest rates results from our short-term and long-term debt with both fixed and floating interest rates. The following table presents principal or notional amounts (stated in thousands) and related interest rates by year of maturity for our debt obligations and their indicated fair market value at September 30, 2005:

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of

Integrated Electrical Services, Inc.

      We have audited the accompanying consolidated balance sheets of Integrated Electrical Services, Inc. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Electrical Services, Inc. and subsidiaries as of September 30, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.

      The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred operating losses and is not expected to be in compliance with certain of its debt covenants. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 19, 2005 expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

Houston, Texas

December 19, 2005

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, Except Share Information)

The accompanying notes are an integral part of these consolidated financial statements.

INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES

Consolidated Statements of Operations

(In Thousands, Except Share Information)